Following the United States Supreme Court’s 5 to 4 decision this summer in National Federation of Independent Business et al. v. Sebelius, __ U.S. __, 132 S. Ct. 2566 (2012) and the recent presidential election, it is now certain that the Patient Protection and Affordable Care Act (the “Affordable Care Act”) is going to be part of the employment landscape. It is impractical to think the law will be repealed or overturned in the next four years, if ever. Instead, employers should prepare to meet the challenges and opportunities that health care reform will bring.
Most of the lynchpin provisions of the Affordable Care Act are scheduled to begin on January 1, 2014. These include the play-or-pay mandate for employers with over 50 full-time employees, tax credits for small business who provide health care coverage to employees and the effect of state health insurance exchanges on the overall marketplace. Employers should be evaluating how these provisions will affect their businesses right now. But some of the provisions of the Affordable Care Act are set to begin in 2013 will have a substantial effect on employers. Here is a quick summary of those changes.
W-2 Reporting Requirements
The Affordable Care Act will require employers to provide information about the aggregate cost of employer-sponsored coverage on the W-2 Form for the 2012 tax year. 26 U.S.C. § 6051(a)(14). This new requirement does not apply to amounts contributed to any health savings account, salary reduction contributions to flexible spending accounts or Archer MSAs. This provision was originally set to begin for the tax year 2011, but the IRS pushed back the date by one year. IRS Notice 2010-69.
Effective after December 31, 2012, the Affordable Care Act will decrease the amount of money that can be aside for use in a flexible spending account (“FSA”) to reimburse qualified medical expenses from $5,000 to $2,500. 26 U.S.C. § 106(c). The main benefit of an FSA is that money set aside from an employee’s paycheck for this purpose is tax deductible to both the employee and the employer, neither of whom must pay income or payroll taxes on the amount deducted. The FSA can be used for medical expenses such as co-pays for doctor visits, prescription drugs and other types of medical expenses. Following 2013, the amount of the contribution limit will be tied to a cost-of-living adjustment.
Automatic Enrollment in Employer Sponsored Plans
Beginning in October 2013, employers with more than 200 full-time employees who offer one or more health benefit plans must automatically enroll new employees in one of the plans offered by the employer. The “automatic enrollment program shall include adequate notice and the opportunity for an employee to opt out of any coverage the individual or employee were automatically enrolled in.”
Increased Tax Withholdings on Higher Income Earners
The Affordable Care Act will increase the Medicare Hospital Insurance Tax (“HI”) on high-income employees by 0.9 percent on an individual’s income over a certain threshold amount after December 31, 2012. The HI tax is currently 1.45 percent of an employee’s wages, and it is matched by the employer at 1.45 percent. 26 U.S.C. § 3101(b). The new 0.9 percent increase in the HI tax will only apply to the following threshold amounts: $250,000 for married couples filing jointly, $200,000 for single individuals, and $125,000 for married couples filing separately. The Affordable Care Act does not increase the amount of taxes that the employer will pay for purposes of the HI tax. For example, if an employee makes $220,000/year, the employer will pay a matching 1.45 percent on all $220,000, but the employee will pay 1.45 percent on all income up to $200,000 and 2.35 percent on all income over $200,000. For withholding purposes, an employer may disregard the amount of wages earned by an employee’s spouse, and the employee is responsible for any owed amount that is not remitted by the employer.
Notice of State Exchange Rights for Employees
The Affordable Care Act also provides that, as of March 2013, employers must provide written notice to all full-time employees, including new employees at the time of hiring, regarding the existence of the state health insurance exchange (the “exchange”), availability of individual credits through the exchange and the effect that purchasing a health plan through the exchange will have on employer-provided health coverage. Exchanges are intended to be state-specific web-based insurance markets, similar to travel comparison websites (“Priceline.com”), in which an individual or small business is able to compare insurance coverage options and price, calculate available subsidies and tax credits, and purchase coverage.