2013 and 2014 under the Affordable Care Act

by Sherman & Howard L.L.C.

With the close of 2012 approaching fast, employers should consider the following checklist of items as the nation moves ahead with compliance with the Affordable Care Act.

Effective in 2013:

The following list itemizes the changes that generally will become effective in 2013.  The effective date depends upon a number of factors, including whether the health plan is grandfathered, the first day of the plan year, and the number of employees.

  • Women's Preventive Health Care Mandates              
    Applicable To: Non-grandfathered plans only
    Effective:        Plan years beginning on or after August 1, 2012 (January 1, 2013 for calendar year plan years)
    Details:           Plans are required to provide in-network coverage with no cost sharing for preventive care such as coverage for contraceptives, contraceptive counseling, breastfeeding support, supplies and counseling, and screening for domestic violence. 
  • Reduction in the Maximum Employee Contributions to a Health Flexible Spending Accounts
    Applicable To: Only health flexible spending accounts (generally offered under a cafeteria plan)
    Effective:        January 1, 2013 for calendar year plan years
    Details:           The maximum amount that an employee can contribute to a health flexible spending account on a pre-tax basis cannot exceed $2,500 per taxable year.  While the reduced limit is effective January 1, 2013 (or the first day of the plan year beginning after January 1, 2013 for plans with fiscal years), employers have until December 31, 2014, to adopt amendments to reflect this reduced limit.
  • Annual Benefit Limits
    Applicable To: Health plans other than health flexible spending accounts, health reimbursement accounts, and medical savings accounts
    Effective:        Generally only for the 2013 plan year (see below for changes in 2014)
    Details:           The annual limit on the dollar value of essential health benefits cannot be less than $2 million. 
  • Reporting the Cost of Group Health Insurance Coverage on Forms W-2
    Applicable To: Employers that issued at least 250 Forms W-2 for 2012 (transition relief applies to exclude employers that issued fewer than 250 Forms W-2 for 2012, and certain types of plans)
    Effective:        For the 2012 W-2s to be issued by January 31, 2013
    Details:           The Forms W-2 issued by employers in early 2013 must report the value of any health coverage provided to each employee in 2012, regardless of who pays the premium for that coverage.  Employers should take steps to ensure that payroll departments or payroll providers are prepared for the new reporting requirement. 
  • Summary of Benefits and Coverage and Notices of Material Modification
    Effective:          For open enrollment periods beginning on or after September 23, 2012 and for plan years beginning after that date
    Details:             Employer health plans must provide a Summary of Benefits and Coverage (SBC) to all plan participants, as well as to all employees who are eligible to participate.  If the employer makes a mid-year change in the plan provisions that would change the terms of the SBC, the plan also must provide a Notice of Material Modifications at least 60 days before the change takes effect.
  • Additional Medicare Tax Withholding
    Effective:          January 1, 2013
    Details:             An employer is required to withhold an additional 0.9% Medicare tax on an employee's compensation in excess of $200,000.  The additional tax does not have an employer matching requirement. 
  • Notice of Exchange Availability
    Applicable To: Employers subject to the Fair Labor Standards Act
    Effective:        Required by March 1, 2013
    Details:           Employers must provide a notice to employees concerning the availability of health coverage through the state-wide exchanges.  The notices will explain some of the benefits and consequences to employees if they choose to purchase a qualified health plan through the state exchange instead of electing coverage under an employer-sponsored health plan.  Employers are still waiting for additional guidance regarding these requirements, and some are predicting that this requirement may be postponed.
  • Taxation of the Retiree Drug Subsidy
    Effective:          January 1, 2013
    Details:             Employers who were providing retirees with prescription drug coverage that was generous enough to qualify for a federal tax subsidy will no longer be allowed to deduct all of those expenses.
  • Patient-Centered Outcomes Research Comparative Effectiveness Fee
    Applicable To: Plan sponsors maintaining a self-insured plan (insurers will pay this for fully-insured plans)
    Effective:        First payment is due by July 31, 2013
    Details:           Plan sponsors must begin to pay a fee (the "PCORI Fee") to the Internal Revenue Service per average covered life ($1 for the first year, $2 for the second year, and increased as permitted in future years) per plan using Form 720.  These fees will be used to fund the new nonprofit corporation, the Patient-Centered Outcomes Research Institute, to support clinical effective ness research.  Some rules permit the limited aggregation of  plans.
  • Certification of Compliance to Health and Human Services (HHS)
    Effective:          By December 31, 2013
    Details:             Group health plans must file a certification statement with HHS certifying that their data and information systems for the plan are in compliance with the HIPAA standards and operating rules for health plan eligibility, electronic funds transfer, health claim status, health care payments, and remittance advice transactions.

Effective in 2014:

The following list itemizes the changes that generally will become effective in 2014.  The effective date depends upon a number of factors, including whether the health plan is grandfathered, the first day of the plan year, and the number of employees.

  • No Pre-Existing Condition Exclusions
    Effective:          For plan years beginning on or after January 1, 2014
    Details:             No plan can impose any pre-existing condition limitation on any participant, regardless of age (prior to 2014, pre-existing condition limitations were prohibited for children younger than 19).
  • New Incentive Standards for Wellness Plans
    Effective:          For plan years beginning on or after January 1, 2014
    Details:             Wellness program can increase incentives (rewards or penalties) provided for meeting health factor standards from 20% to 30% of the total cost of the applicable coverage.  Proposed rules would allow additional 20% incentive to be provided to the extent that the additional incentive is used in a program designed to prevent or reduce tobacco use.
  • No Annual Benefit Limits
    Effective:          For plan years beginning on or after January 1, 2014
    Details:             No plan may impose an annual limit on essential health benefits.
  • Coverage of Older Children
    Effective:          For plan years beginning on or after January 1, 2014
              Plans (including grandfathered plans) now will have to extend eligibility to all children through age 26, even if they were eligible for other employer-sponsored coverage.
  • Essential Health Benefits
    Applicable To: Non-grandfathered, fully-insured plans in the individual and small group markets only
    Effective:         For plan years beginning on or after January 1, 2014
    Details:            Plans will be required to cover essential health benefits, which include items and services in ten statutory benefit categories, and are equal in scope to a "typical" employer health plan.
  • 90-Day Limit on Eligibility Waiting Periods
    Effective:          For plan years beginning on or after January 1, 2014
    Details:             Plans no longer will be allowed to impose waiting periods for eligibility which are longer than 90 days.  An employee also must be allowed to enter the plan by the 91st day after satisfying that eligibility requirement.     
  • Transitional Reinsurance Payments
    Applicable To: Self-insured and insured group health plans other than excepted benefits
    Effective:        For calendar years in 2014-2016
    Details:           Insurers and third party administrators will be required to pay on an annual basis, a fee (in addition to the PCORI Fee) to support the transitional reinsurance program on behalf of insured and self-funded plans.  The transition reinsurance program is designed to help stabilize premiums for coverage in the individual health insurance market.  The fees will be distributed to insurers selling coverage on the Exchanges to offset the cost of covering individuals with high claims.  In recent guidance, HHS has proposed annual fees equal to $63 per covered individual for 2014.  Generally, payments will be made to HHS in December.  The fees are expected to decrease in 2015 and 2016. 
  • Pay or Play - The Shared Responsibility Penalty
    Applicable To: Employers with 50 or more full-time employees (including full-time equivalents) in the prior calendar year
    Effective:        For plan years beginning on or after January 1, 2014
    Details:           An employer will need to pay penalties if it either fails to offer health coverage to full-time employees or offers coverage that is either unaffordable or does not provide minimum value.  More information is provided below regarding this important requirement.

Focusing on the Pay or Play Mandate

Guidance has been issued that may help large employers determine how they will adapt to the Pay or Play Mandate beginning in 2014. 

These rules define a large employer as an employer who employed an average of at least 50 full time employees (including full-time equivalents) on business days during the preceding calendar year.  Regardless of how an employer has categorized its employees in the past, for purposes of these rules, full time employees are generally employees who are employed to work on average at least 30 hours per week.   These rules apply the traditional controlled group rules, so for purposes of determining whether the employer is subject to the Pay or Play Mandate, or for purposes of determining the amount of any penalty, the employees of all of the employers in the same controlled group or affiliated service group will be counted. 

Under the general rules, if the employer fails to offer its full-time employees and their dependents group health coverage and at least one full-time employee receives premium assistance to purchase health coverage through an exchange, the no-coverage penalty is $166.67 per month per full-time employee (but excluding the first 30 such employees from the calculation). 

If the employer offers health coverage that is unaffordable or does not provide minimum value and at least one full-time employee receives premium assistance to purchase health coverage through an exchange, the penalty is $250 per month for each full-time employee receiving premium assistance, but not to exceed the amount of the no-coverage penalty above.  For purposes of this rule, coverage is affordable if the employee's portion of self-only coverage for the employer's lowest-cost coverage that provides minimum value does not exceed 9.5% of the employee's household income for the taxable year.  Under current guidance, the IRS has said that the employer can use the employee's W-2 wages in Box 1 for this purpose.  For purposes of these rules, the IRS has offered three different methods for determining whether a plan provides the required minimum value:  (1)  a minimum value calculator (that has yet to be developed), (2) a design-based safe harbor based on checklists, and (3) actuarial certification.

The IRS has issued (optional) safe harbors to help employers determine who is a full-time employee for purposes of the Pay or Play Mandate.  The safe harbors depend upon whether the employee is a new or ongoing employee. 

  • If a new employee is reasonably expected to work full time (an average of at least 30 hours per week), then the employee will be counted for purposes of any applicable penalty, subject to the plan's waiting period.
  • For a newly hired variable or seasonal employee, the employers may use an initial measurement period to determine whether the employee is full time for the prospective period. The initial measurement period must be between three and 12 months. The employee's status then applies for a stability period.
  • For ongoing employees, the employer has to use look back period to determine status as a full time employee. If the employee is determined to be a full time employee during the standard measurement period, then that status will continue for the stability period.

Employers have some discretion in determining the length of the measurement periods, stability periods, and administrative periods for determining an employee's status.

While we still are waiting for additional guidance on a number of these different rules, employers can take some steps now to determine their options.  Those steps include:

Gather Information:

  • Identify whether employees would fit the definition of full time employees under these requirement, and determine whether those employees (and their dependents) are considered eligible for coverage now.
  • Identify whether the waiting periods applicable to the health plan may need to be reduced to less than 90 days.

Analyze and Evaluate:

  • Analyze the potential costs based on the following variables:
    • The cost of providing coverage to employees who now meet the requirement of full time employee (and their dependents)
    • The potential penalty amounts for no coverage and unaffordable coverage
    • Whether any employee would be required to pay a share of premiums for employee-only coverage that would exceed 9.5% of household income (this can be estimated by looking at the employee's W-2 wages)
    • Whether the coverage offered now meets the requirements for minimum value
    • The tax implications
    • Employee relations
    • The need for coverage due to the individual mandate that will apply
    • Recruiting/retention issues
  • Evaluate the current employment classifications and determine whether business needs can be met by reclassifying some employees by reducing work schedules

Circular 230 Notice
This advisory contains provisions concerning a federal tax issue or issues. This advisory is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on any taxpayer by the Internal Revenue Service. For information about this statement, contact Sherman & Howard L.L.C. or visit our website at


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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