Overview
What ever happened to the popularity of soap operas or novelas in case you watch Univision? I must admit I have a history with both the English and Spanish versions as well as living my own soap opera. Nevertheless, the Obamacare version might have more drama than any soap opera or novela (minus the good looking actresses on the Spanish versions!).
Just as everyone was getting ready to sign out for the Christmas holidays, the federal government published proposed regulations dealing with amendments to excepted benefits of the Affordable Care Act. These regulations have a fairly profound effect particularly on the ability to integrate individual coverage with “wrap around” coverage that was otherwise previously limited under Department of Labor Release 2013 -03.
Not that there wasn’t already enough confusion already! On one side of the equation, you have Fox News with its daily rundown and talking points of everything wrong with Obamacare. The range of complaints extends with the healthcare philosophy and reach of the legislation to problems with the federal website. On the other side of the equation, you have the Administration and its supporters hailing as the greatest federal legislation since civil rights and social security. Somewhere between these two polar opposites lies the truth.
This article is intended to outline the proposed regulations and their implications for small business owners. Furthermore, I will examine the impact of these regulations on a healthcare solution that I have previously outlined in past articles.
Obamacare Basics
In 2010, President Obama signed the “Patient Protection and Affordable Care Act” and companion “Health Care and Education Reconciliation Act of 2010.” 2014 requires individuals who aren’t covered through their employer will have to maintain “minimum essential coverage” or pay individual penalties.
The Individual Mandate requires all Americans have to maintain “minimum essential coverage.” If not, individual taxpayers face a penalty. That penalty starts at $95 per adult or $47.50 per child, up to a maximum of $285 per family or 1% of income in 2014. It rises to $695 per adult or $347.50 per child, up to a maximum of $2,085 per family or 2.5% of income in 2016. After 2016, those dollar amounts are indexed for inflation.
The President after much controversy grandfathered individual coverage until 2015 for those who those “who can keep their coverage if they want to” that failed to meet the minimum essential benefit requirement standards. The Obama administration has since postponed the Employer Mandate until 2015. This year is when the biggest insurance changes go into effect. Specifically:
(1) Insurance companies can’t deny coverage to anyone with pre-existing conditions.
(2) Plans can’t set annual limits on coverage.
Small business owners that provide coverage their employees may qualify for tax credits. In order to qualify for the credit, the business owner has to pay at least 50% of the “employee-only” premium amount for your employees’ coverage. The business owner can’t have more than 24 “full-time equivalent” employees, or FTEs.
Starting in 2014, the maximum credit goes up to 50% of premiums paid. If the credit is more than the business owes, the business owner can carry it back against previous taxes paid, or carry it forward to offset future taxes.
The penalty is assessed through the Internal Revenue Code and accounted for as an additional amount of Federal tax owed. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty.
The insurance exchanges offer four levels of coverage: bronze, silver, gold, and platinum. There will also be a bare-bones “catastrophic-only” plan for those under age 30.
(1) The bronze plan is designed to cover 60% of the average insured’s healthcare costs.
(2) The silver plan is designed to cover 70%.
(3) The gold plan is designed to cover 80%.
(4) Finally, the platinum plan is designed to cover 90%.
Each level offers different premiums, co-pays, deductibles, and other out-of-pocket expenses. The law limits out-of-pocket expenses to $6,350 for individuals and $12,700 for families.
Individuals will qualify for subsidies under two conditions:
(1) The insured’s “household income” has to be less than 400% of the federal poverty level, or “FPL.” For 2013, the FPL is $23,550 for a family of four, which means subsidies are available for incomes up to $94,200. “Household income” includes income from the employee, employee's spouse, and any dependents.
(2) Second, if the employee has an employer who offers coverage, the employee's share of the premium has to be more than 9.5% of your household income. So, if the employee's household income is $50,000, and the premium is more than $395.83/month, the employee will qualify.
The goal of the subsidy is to make sure the individual does not spend an unreasonably high percentage of personal income on health insurance. The range is 2 percent of income up to 133 percent of the FPL and 9.5 percent at 400 percent of the FPL. The subsidies are based on the cost of a “silver” plan. Premium will vary according to where the employee lives, and the subsidies will always cap your premium at the appropriate percentage.
The subsidy itself takes the form of a “refundable tax credit.” That means you can use the subsidy to offset your total tax bill for the year and, if the subsidy is more than your tax, the IRS will send you a check for the difference. The law lets the taxpayer apply for the tax credit when he applies for the insurance, and the government will pay the subsidy directly to the insurance company.
Department of Labor Notice 2013-03
DOL Notice Technical Release 2013-03 provides guidance on the application of certain provisions of the Affordable Care Act to the following types of arrangements: (1) health reimbursement arrangements (HRAs), including HRAs integrated with a group health plan; (2) group health plans under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, such as a reimbursement arrangement described in Revenue Ruling 61-146, 1961-2 CB 25, or arrangements under which the employer used its funds to directly pay the premium for an individual health insurance policy covering the employee (collectively, an employer payment plan); and (3) certain health flexible spending arrangements (health FSAs).
IRC Sec 9831(a) (2) and ERISA § 732(a) provide that the Obamacare reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year. In accordance with IRC Sec 9831(b), and ERISA § 732(b), the market reforms also don’t apply to a group health plan in relation to its provision of excepted benefits. Under the DOL Notice, excepted benefits include accident-only coverage, disability income, certain limited-scope dental and vision benefits, certain long-term care benefits, and certain health FSAs.
The IRS and DOL both issued FAQs that address the application of the annual dollar limit prohibition to certain HRA arrangements. In the HRA FAQs, the Departments stated that an HRA is not integrated with primary health coverage offered by an employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage that is provided by the employer and that meets the annual dollar limit prohibition.
DOL 2013-03 indicated that:
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For purposes of the annual dollar limit prohibition that an employer-sponsored HRA can’t be integrated with individual market coverage or with individual policies provided under an employer payment plan. As a result, a HRA used to purchase coverage on the individual market under these arrangements will fail to comply with the annual dollar limit prohibition; and
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An employer-sponsored HRA is treated as integrated with other coverage only if the employee receiving the HRA is actually enrolled in the coverage. Any HRA that credits additional amounts to an individual, when the individual is not enrolled in primary coverage meeting the annual dollar limit prohibition provided by the employer, fails to comply with the annual dollar limit prohibition.
Amendments to Excepted Benefits – Reg 143172-13
It is my belief that the federal government through its limitation on the ability to integrate individual coverage with a health reimbursement account severely limited both the quality of coverage to the same people that it was trying to help as well as increase the cost of out of pocket expense.
As the Media (read Fox News) has quickly pointed out all day and every day, many individuals purchasing individual coverage on the Exchange, have that less generous benefits than group health coverage provided by the employer and a different and reduced network of service providers. The idea in the proposed regulations is to allow employers to provide employees with overall coverage that is comparable to group health coverage taking into account the health reimbursement account on the employer level and Exchange coverage.
The proposed regulations address four types of excepted benefits. The first category includes benefits that are generally not health benefits – automobile insurance, liability insurance, worker compensation and accidental death and dismemberment. The second category is limited excepted benefits such as benefits that provide a limited scope of coverage – vision or dental, long term care, nursing home care or home health care. The third category refers to non-coordinated excepted benefits such as coverage for a specified illness or disease such as cancer only policies and hospital indemnity coverage. The fourth category is supplemental excepted benefits as supplemental coverage to Medicare or VA coverage provided under a separate policy.
Obamacare requires non-grandfathered policies individual health plans to cover essential health benefits which are ten statutorily specified categories of coverage. The proposed regulations provide that wraparound coverage should be an excepted benefit if it is used to provide additional coverage to individuals with non-grandfathered individual coverage for whom the employer’s group health plan is unaffordable. The proposed regulations are designed to an employer to maintain comparable benefits for all employees – high and low income that enroll in non-grandfathered individual coverage.
Individual coverage can only wrap around individual coverage that provides minimum essential benefits. The coverage must be Bronze-level coverage at a minimum. The Bronze-level coverage must be designed to provide benefits that go beyond the individual health insurance coverage. The HRA as wrap around coverage must provide benefits that are in addition to essential health benefits or reimburse for the cost of health providers considered out of network under the individual health insurance. The wrap around benefits must be “material”.
The employer sponsoring the wrap around coverage must offer another group health plan meeting minimum value that must be affordable for a majority of the employees eligible for the primary plan. The threshold for affordability is the 9.5 percent of income test established in the ACA. The limited wrap around coverage must be limited in amount. The total cost of the coverage must not exceed 15 percent of the cost of the primary plan. Lastly the wrap around coverage must be non-discriminatory. The wrap around coverage can’t impose any pre-existing exclusion.
A second but less apparent avenue for wrap around coverage is the employee assistance plan (EAPs). Traditionally, EAP benefits have been limited to short term abuse and mental health counseling as well as legal services and financial counseling. From a healthcare standpoint, an EAP that offers healthcare benefits, it would be considered group healthcare coverage and subject to HIPAA and ACA provisions.
The proposed regulations based on input to the federal government from healthcare experts and employers, see to treat EAPs as excepted benefits to Obamacare. It seems that the federal government by restricting the limited healthcare benefits was once again hurting the employees that it was trying to help. The DOL Notice treated EAPs as an excepted benefit in regard to healthcare providing that EAP did not offer “significant” benefits in the nature of medical care or treatment.
The proposed regulations which become effective in 2015 continue to treat an EAP as an excepted benefit. The benefit can’t be significant which remains undefined in the regulations for now. Secondly, the EAP health benefits must not be coordinated with benefits under a group health plan. The benefits of the EAP must not be financed by another group health plan. Eligibility in the EAP must not be dependent upon coverage in another group health plan. Lastly, an employee must not be required to exhaust benefits under the EAP before an individual is eligible for benefits under a group health plan.
Medical Expense Reimbursement Plans
IRC Sec 105 provides a small business owner with the ability to reimburse an employee and his family members for medical expenses not covered by health insurance. The business is able to deduct the reimbursement expense as a business expense while excluding the payment for the benefit of the employee without treating the payment as wages subject to income and the employer portion of FICA (7.655) and FUTA (0.8%) payments. The employee is not taxed on these reimbursement payments from the employer and not subject to the employee portion of FICA or the additional Medicare tax. .
The range of medical reimbursements can be quite comprehensive including dental and vision -related treatment expenses. The reimbursements may include prescription drugs as well medical equipment and travel and lodging. Additionally, long term care is fully deductible versus partial deductibility as an individual when taken as an itemized deduction. Generally, a C Corporation can provide reimbursements for the entire family. A LLC would need to hire the spouse in order to provide reimbursements for the spouse and dependents.
A Simple Solution
The best solution is for the small business with fewer than fifty employees (in my view) is for the business owner to get out of the group health insurance business. No more being held hostage by the amount of annual rate increases. No more haggling from employees that Mrs. Potts' medical claim didn't get paid and a collector is calling. Get out there on the insurance exchange and let your employee's purchase individual coverage. Of course, this assumes that you can actually get on the exchange website!
The best approach is for employees to purchase individual coverage on the Exchange and apply for premium subsidies where applicable. The business owner can establish a MERP as wrap around coverage pursuant to the proposed regulations to provide a level of benefits and reimbursement in order to supplement the cost and benefits of individual coverage purchased on the Exchange.
Example
A business owner in Dayton, Ohio previously provided group coverage for his twenty two employees. The monthly premium under the existing group are $23,900 per month or $1,086 per employee. Family rates were as high as $2,100 per month, Individual rates were as high as $762 per month. The existing plan provides for Out-of-Pocket expenses of $2,500 per family in.
The average age of employees is 45 with a $50,000 household income. The employer pays fifty percent of the individual employee cost of the group health coverage - $381 per month. The cost of family coverage exceeds the 9.5 percent affordability threshold by a large margin.
The premium under Obamacare for a family of four including two children is outlined in this paragraph. The average salary is 212 percent of the federal poverty level. The unsubsidized premium is $10,099 or $841 dollar. The maximum percentage of income to be spent on health insurance per employee is 6.73 percent.
The amount of the subsidy is $6,733 or 67 percent of the premium. The employee's cost for coverage after subsidies is $3,365 or $280 per month. Bronze coverage would drop the annual premium to $2,633 or $232 per month.
The business owner provides a MERP annual benefit of $7,500 per employee. The MERP will cover virtually all of the employee's out of pocket expenses. The bottom line is that the employee has a stronger benefit at a lower personal cost as does the business owner.
Summary
It is simply amazing how a health insurance debate can shut down the federal government and arouse such strong sentiment on either side of the isle. Health insurance premiums are the largest expense after payroll. Small business owners can control costs and eliminate financial risk by taking advantage of other tax-subsidized benefit programs such as IRC Sec 125 and IRC Sec 105 along with individual coverage tax subsidies.
Small business owner with very few employees, may integrate the MERP on top of the coverage may turn medical expenses that were previously non-deductible as medical expenses due to the phase out of miscellaneous itemized or the deduction threshold for medical expenses into deductible expenses without limitation.
The proposed regulations although effective in 2015 reflect a dramatic change in the federal government’s thinking from DOL Notice 2013-03 in regard to the integration of limited wrap around coverage at the employer level in combination with Exchange-purchased individual coverage in order to deliver employees
On a happier note, remember to count your blessings today!
