Top 5 PPACA Issues Employers Need to Understand
On June 28, 2012, the United States Supreme Court issued its ruling on the constitutionality of the Patient Protection and Affordable Care Act (PPACA). The nation’s highest court upheld the law with the exception of certain Medicaid provisions that are non-binding on states. The five to four decision upholds the complex and oftentimes unclear tax provisions and health insurance reforms.
With this much awaited ruling, organizations are looking for answers. Those that have maintained an understanding of the act throughout the ruling process are now seeking clarification. Providers and employers that were sitting on the sidelines in hopes the law would be struck down are now scrambling to understand the implications. Although some are still hopeful the law will be repealed through the impending results of the national and state elections, the need to take action is imperative.
To assist in this process, we have addressed here the five most frequent questions we have been asked by our clients.
1. What is my responsibility under PPACA as an employer?
The answer to this question is far reaching and has too many scenario related answers to provide detailed information in one place.
The court’s decision means that several business and tax provisions that were part of PPACA will remain in place. These include the codification of the economic substance doctrine, an annual assessment on pharmaceutical manufacturers, as well as the new Medicare Hospital Insurance tax and net investment income on higher income taxpayers, which will take effect in 2013. The PPACA also imposes a $500,000 deduction limit on executive compensation paid by health insurance providers.
The most general concern is that the PPACA imposes a penalty on applicable employers (employers with more than 50 full-time employees) that do not provide affordable health coverage to their employees. The penalty is scheduled to take effect starting January 2014.
Companies will need to heighten their monitoring of hourly employees because those who work 130 or more hours per month will be automatically eligible for company health care benefits. If employers do not abide by this and exclude those employees, they will pay a steep penalty. This becomes particularly complicated with part-time and shift workers and in situations in which workers are picking up additional shifts, which may push them over 130 hours in a given month. Employers will need to carefully monitor employees’ time on a real-time basis and manage employees in terms of their monthly/hourly workloads. The legislation identifies a look back period and going forward stabilization period to be used in determining common company staffing and eligibility requirements. Companies will need to ensure they have systems in place to be able to track hours on a monthly basis.
Employers need to review their coverage to determine if it satisfies the minimum essential coverage and affordability requirements under the PPACA. Employers also should review their benefits packages for compliance with the PPACA.
2. Who is covered under PPACA?
According to the Congressional Research Service, all US citizens and “aliens who are lawfully present in the United States are subject to the health insurance mandate and are eligible, if otherwise qualified, to participate in the high-risk pools and the exchanges, and they are eligible for premium credits and cost-sharing subsidies. PPACA expressly exempts unauthorized (illegal) aliens from the mandate to have health coverage and bars them from a health insurance exchange. Unauthorized aliens are not eligible for the federal premium credits or cost-sharing subsidies. Unauthorized aliens are also barred from participating in the temporary high-risk pools.” However, an issue that may arise during discussions to amend PPACA is the eligibility of aliens (noncitizens) for some of the key provisions of the act.
To enforce the alien eligibility requirements under PPACA, the act requires the Secretary of Health and Human Services to establish a program to determine whether an individual who is to be covered in the individual market by a qualified health plan offered through an exchange, or who is claiming a premium tax credit or reduced cost-sharing, is a citizen or national of the United States or an alien lawfully present in the United States.
3. What is the “individual mandate”?
The individual mandate portion of the PPACA is technically a shared responsibility requirement for individuals. The provision requires individuals (regardless of employer availability or lack of coverage) to obtain minimum essential health coverage or pay an individual penalty starting in 2014. Many individuals, however, are exempt from the penalty. These include individuals covered by Medicare and Medicaid, individuals with coverage under military health plans, undocumented individuals, and others. A unique aspect of the mandate allows more individuals coverage under expanded Medicaid guidelines should the states agree to the Medicaid provisions of the PPACA. Additionally, individuals with employer-provided coverage generally are considered as having minimum essential coverage and are exempt from the penalty unless the cost of coverage is unreasonable.
4. Why did I receive a rebate from my insurance company?
The rebate amount is a direct result of the PPACA and what is commonly referred to as the medical loss ratio (MLR) rule. Insurance companies must spend at least 85% of premiums in the large group market and 80% of premiums in the small group or individual market on direct health care. If they spend less, the differential is refunded to the employers and employees that contributed premiums. All participants of the plan (defined as those paying some portion of the premium) will be notified of the rebates (including former employees who participated).
4A. What do I do with the rebate amount?
There are several options for the distribution of the rebate amount. Generally, employers that receive the rebate will have 90 days from receipt to adjudicate the funds. The overall guideline is to be fair and reasonable to participants. The following are suggested examples of disbursement:
- Employer paid 100% of premium – The employer is allowed to retain 100% of the rebate amount. However, the employer must look at the taxable implications of the premium amount and (working with your tax advisor) determine if it is subject to taxes based upon the tax treatment of the original expense.
- Employee paid 100% of premium – It is recommended the employer distribute the rebate on a pro-rata basis to the employees. Again, the tax treatment of the rebate must be determined.
- Employer and employee shared premiums – Generally, the rebate amount is again split between the employer and employees on a pro-rata basis. If the premium for the year to which the rebate applies was paid with pre-tax dollars through a cafeteria plan, as is most typically the case for employer plans, the rebate, generally, is taxable. However, if the rebate is used to provide a premium holiday, the tax consequence is benign in that it is simply handled by the increased salary that the individual receives by virtue of not having to pay a premium. If the rebate is paid in cash, it is taxable cash. For ERISA plans utilizing the rebate to provide benefit enhancements, if the benefits constitute health benefits, then the enhancements should be excludible from the employee’s income.
- Former employees’ rebates – The Department of Labor has provided that if an employer finds the cost of distributing rebates to former employees approximates the amount of the proceeds, the employer may properly decide to allocate the proceeds to current employees based upon a reasonable, fair and objective allocation method.
- Next steps – The plan document is the first place to look to determine how a rebate can be used. According to the Department of Labor Technical Release No. 2011-04, “Any portion of a rebate constituting plan assets must be handled in accordance with the fiduciary responsibility provisions of Title I of ERISA”. Some plan documents include specific guidance. In the absence of specific guidance, and given the administrative and tax issues that can arise, it may be most efficient to provide a premium holiday. If this is going to be done, it is very important to review any applicable cafeteria plan to ensure it allows election adjustments due to a change in cost of coverage. Most cafeteria plans do include a provision that allows salary reduction elections to be automatically increased or decreased due to a change in cost. If the change of cost is significant, many cafeteria plans allow a revocation of existing election and a new election to be made. If the plan does not specifically identify such provisions, the employer with that plan should consult with his tax and/or benefits advisor to make the appropriate plan adjustments for future years.
5. What is a health insurance exchange?
Exchanges will be the mechanism through which millions of low and moderate-income individuals receive premium and cost-sharing government subsidies to make private health coverage more affordable and where employees of small businesses will be able to purchase coverage. Exchanges will support individuals buying insurance on their own and small businesses with up to 100 employees, but states can allow larger employers in the future. States can elect: 1) to build a fully state-based exchange, 2) enter into a state-federal partnership exchange, or 3) default into a federally-facilitated exchange.
According to the Kaiser Family Foundation website, “to date, 15 states plus the District of Columbia have established state-based exchanges. Of those, three have done so via executive order: Rhode Island, New York, and Kentucky.
“As of July 30, 2012, three states, Arkansas, Delaware, and Illinois, are planning to pursue a state-federal partnership exchange. A state opting for a partnership exchange can choose to operate plan management functions, consumer assistance functions, or both, leaving the federal government to assume responsibility for all other exchange components in the state.
“To date, seven states have declared that they will not create a state-based exchange. Louisiana’s Governor made the announcement over a year ago. In April 2012, Maine’s Governor made clear the state would not pursue a state-based exchange in a letter to HHS. In June 2012, New Hampshire’s Governor signed a law prohibiting the state from participating in or enabling a state-based exchange. The Governors of Texas, Florida, South Carolina, and Alaska made their decisions public soon after the Supreme Court’s ruling on the ACA. For the most part, these states had not invested in the exchange planning process prior to the announcement.
“Another 16 states have not yet committed to a health insurance exchange strategy, but are continuing planning efforts. Some state officials continue to evaluate the policy options related to a state-based exchange in the absence of legislation. For example, in Minnesota, where there are numerous working groups and an exchange task force investigating key decisions, the Governor submitted a letter to HHS in July 2012, declaring the state’s intent to continue the planning and development of a state-based exchange. Other states, such as Alabama and Arizona have considered the use of an executive order or other non-legislative strategies to establish an exchange.
“Additionally, two states have taken steps to implement a state-based exchange using an existing government entity as an anchor. Specifically, Mississippi is utilizing an existing non-profit high risk pool association created in 1991, while New Mexico began building a state-based exchange using the New Mexico Health Insurance Alliance authorized by the legislature in 1994.
“Nine states have not shown significant exchange planning activity. Some of these states made progress in 2011, but ended their exchange planning efforts in the face of increasing political pressure. Planning initiatives in Kansas, Oklahoma, and Wisconsin were halted earlier this year to await the outcomes of the Supreme Court ruling and the November elections. Given the federal timetable for implementation, states with little planning activity to date face an increasing likelihood of defaulting to a federally facilitated exchange.
“In May 2012, the Missouri Legislature approved a ballot measure seeking voters’ input on whether the state can create a state-based health insurance exchange without approval from the Legislature; such a measure could prevent Governor Jay Nixon (D) from establishing an exchange via Executive Order. Legislation establishing a state-based health insurance exchange failed in both the 2012 and 2011 legislative sessions. In June 2011, the Senate had created the Senate Interim Committee on Health Insurance Exchanges to explore Missouri’s options to establish a state-based exchange.”
To learn more about health care reform and request a timeline for employers compliance with PPACA, click here.