Supreme Court's Health Care Reform Decision: Most Immediate Impact on Employers and Employer-Sponsored Plans

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[authors: Beth Alcalde and Scott T. Silverman]

SUPREME COURT HAS UPHELD KEY PORTIONS OF LANDMARK HEALTH CARE REFORM LEGISLATION

The United States Supreme Court issued a historic holding today, June 28, 2012. The Court has ruled that the Patient Protection and Affordable Care Act of 2010, together with the Health Care and Education Tax Credits Reconciliation Act of 2010 (collectively, the "Health Reform Act"), which had been signed into law in late March of 2010, is almost entirely constitutional.

The Court, in a 5 to 4 decision, upheld the portions of the Health Reform Act that most directly impact employers, including the individual coverage mandate taking effect in 2014. The Court's rationale for upholding the individual mandate was not that Congress can force individuals to buy health insurance (as they found that the mandate would actually violate the Commerce Clause), but rather that Congress, under its power to "lay and collect taxes", is permitted to impose a tax on individuals for failing to have insurance.

This Practice Update focuses solely on the most immediate impact of the ruling on employers and the design and reporting obligations of employer-sponsored group health plans. Our discussion focuses on the requirements for employers and plan sponsors to consider in the coming months. Subsequent updates will provide details on important mandates and obligations that have application in later years or that are otherwise awaiting government interpretation.

This Update is not intended to discuss the impact of the ruling on health care organizations, other than in their role as plan sponsors of benefit programs for their employees. Similarly, this discussion does not touch on the portion of today's ruling regarding continued funding for States that do not agree to Medicaid expansion under the Health Reform Act. Also, Medicare Part D subsidies received by employers is beyond the scope of this summary.

In general, the direct effects of this decision on federal law that are described below will apply to employers, irrespective of the employer's industry or size. Also, while these observations apply to both self-funded and fully-insured plans, it is important to note that ERISA will not preempt State insurance laws, and so fully-insured plans will need to take into account State health insurance mandates before undertaking any plan design changes. For that reason, health insurance issuers, non-ERISA health plans, and fully-insured plan sponsors should all be prepared to analyze appropriate State legislation before making final decisions on plan design impacts of this Court decision.

All plan sponsors should remember that, notwithstanding the fact that the Court has issued its ruling, health care reform remains an incredibly fluid situation. As of the time of publication, we are not yet aware of actions that may be taken by governmental agencies or Congress in response to the holding that could considerably change the landscape. For that reason, employers are well advised to stay abreast of further developments in the coming weeks and months, as the next Presidential election nears.

MOST IMMEDIATE IMPACT OF DECISION ON EMPLOYERS

Implementation Proceeds According to Plan
Because the Court held that the primary portions of the Health Reform Act affecting employers sponsoring group health plans for their employees will stand, employers now need to move forward with all implementation efforts. Many of the fundamental requirements of the Health Reform Act, including the individual mandate, are slated to take effect in 2014. That said, there are a number of features of the law with more immediacy. A selection of some of the most immediate deadlines under the Heath Reform Act are listed below.

Summary of Benefits and Coverage
Group health plans and health insurance carriers will be required to comply with the requirements under the Health Reform Act, and subsequent regulations issued thereunder, to provide a summary of benefits and coverage ("SBC") and a glossary of terms to all participants and beneficiaries who enroll or re-enroll in group health coverage through an open enrollment period beginning on the first day of the first open enrollment period that begins on or after September 23, 2012 (with a different effective date for new hires). For calendar year plans, this means that SBCs must be prepared and distributed during the upcoming fall 2012 open enrollment period. Failure to comply with the requirements can result in significant penalties, ranging from $100 to $1,000 per employee, with the highest penalties facing employers with "willful" noncompliance.

In order to prepare for these new requirements, plan sponsors of fully-insured group health plans should check with their carriers and prepare to begin distributing the summaries starting in the fall of 2012. Sponsors of self-funded group health plans should consult with benefits counsel and their third party administrators to develop a summary of benefits and coverage that meets the content requirements of the regulations.

Form W-2 Reporting
For taxable years beginning in 2012 and thereafter, the Health Reform Act requires employers to include on every covered employee’s Form W-2 the aggregate cost of applicable employer-sponsor group health coverage. This does not mean that the cost of coverage is included in taxable income. Rather, this is purely a reporting mandate. This requirement first impacts the Form W-2s that will be distributed in January of 2013.

In the coming months, it will be important to ensure that employers' payroll systems are appropriately structured to report this cost of coverage in accordance with the regulations that have been issued to date.

Health Flexible Spending Account Limitation
For plan years beginning on or after January 1, 2013, the Health Reform Act puts in place a $2,500 annual spending limit on reimbursements under a health flexible spending account (“health FSA”). The IRS clarified, in helpful recent guidance within IRS Notice 2012-40, that non-calendar year health FSAs do not have to institute a mid-year change to comply with the rules (as had been previously feared).

In order to comply with these new limits, plan sponsors of cafeteria plans will need to adopt plan amendments to impose the $2,500 health FSA limitation no later than December 31, 2014. Best practice is to revise all participant communications during the fall of 2012, so that employees understand the new limit before they have to make 2013 health FSA elections.

Small Employer Tax Credit
Certain small employers remain eligible to receive tax credits for offering insurance. Employers with 25 or less full-time equivalent employees with average wages of less than $50,000, who pay at least 50% of the health insurance premium for their employees, may be eligible to receive income tax credits equal to a percentage of the premiums paid. Employers with questions about the tax credit that may be available for 2012 should consult with qualified tax experts.

Plan Mandates
Requirements under the Health Reform Act that have already been put into motion will continue to apply to employer-sponsored group health plans, in accordance with existing guidance. Such requirements include: (i) certain restrictions on pre-existing condition exclusions; (ii) the reduction/elimination of lifetime dollar limits and caps on annual limits on essential health benefits; (iii) the restrictions on rescission of coverage; and (iv) the extension of dependent coverage to age 26 (though this requirement does not apply to grandfathered plans if the dependent is otherwise eligible for another employer-sponsored health plan).

GOING FORWARD

Employers have already devoted significant time and resources to complying with the Health Reform Act, as originally passed and as continually interpreted through government regulation. As a result of today's Court decision upholding the key aspects of the legislation, employers and their advisors now must move forward in their efforts to comply with the Health Reform Act. Continued attention to developments in the coming months will be crucial, so that health plan sponsors will appropriately respond to this rapidly-changing health care landscape.