Reform Q&A

Paragraph (g)(1) of 26 CFR 54.9815-1251T, 29 CFR 2590.715-1251, and 45 CFR 147.140 of the interim final regulations issued jointly by the IRS and HHS, set forth requirements for determining when changes to the terms of a plan or health insurance coverage cause the plan or coverage to cease to be a grandfathered health plan. If the health plan does not meet the requirements for grandfathering, the health plan loses its grandfathered state. The rules do not specify what notifications must be made once a health plan loses its grandfathered status. There is only one section that mandates notifications and they do not become effective until 2 years after the enactment of the Act. However, pursuant to ERISA and state insurance statutes and regulations, the sponsor of the health plan is responsible for notifying the participants in the health plan of the terms and conditions that the sponsor would have otherwise made prior to the passage of the PPACA. This notification process is usually prepared for the plan sponsor by the plan administrator if it is a self-funded plan; or the insurance company, if the health plan is insured The new mandates that apply to all health plans would be considered to be benefit changes, nothing more, nothing less. There is no reference in PPACA or in the rules adopted by the IRS and HHS that apply to grandfathering that address notifications for non-grandfathered plans. To that extent, the old requirements remain in force. Note that pursuant to the new the § 2715 of the PHSA plan or the issuer (as applicable) must notify enrollees of material changes to the coverage reflected in the most recent summary no less than 60 days in advance of the effective date of such coverage. Failure to comply may result in a $1,000 penalty for each failure. (New § 2715 of the PHSA) There is one aspect of PPACA that will impact future plan descriptions distributed to plan participants. By March 20, 2012, the plan administrator or the insurance company must prepare and distribute a paper or electronic summary of coverage to all applicants and all enrollees, both at the time of initial enrollment and annual enrollment. This is in addition to the Summary Plan Description or Evidence of Coverage otherwise required by ERISA. The summary comply with specific uniform standards to be developed by the Secretary of HHS, including: : • A limit of no more than four pages in length. • Print no smaller than 12 point font. • Written in a culturally and linguistically appropriate manner,. • Consisting of specific content related to the covered benefits, exclusions, cost sharing, and continuation. HHS must establish these standards by March 20, 2011. As stated above, the summary must be provided by March 20, 2012.

First, we are only addressing self funded plans.  Until further notice, insured health plans were relieved of compliance with the Patient Protection and Affordable Care Act (PPACA) restrictions necessary to preserve grandfathered status by the IRS Notice 2011-1.   The grandfathering guidelines now only apply to self-funded health benefit plans.

In order to retain grandfathered status, a self-funded health benefit plan must make certain that changes, if any, remain within the guidelines set forth in the PPAC A.  Those guidelines are:

• Cannot Significantly Cut or Reduce Benefits.  For example, if a plan decides to no longer cover care for people with diabetes, cystic fibrosis or HIV/AIDS.
• Cannot Raise Co-Insurance Charges.  Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20% of a hospital bill).  Grandfathered plans cannot increase this percentage.
• Cannot Significantly Raise Co-Payment Charges.  Frequently, plans require patients to pay a fixed-dollar amount for doctor’s office visits and other services. Compared with the copayments in effect on March 23, 2010, grandfathered plans will be able to increase those co-pays by no more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points.  For example, if a plan raises its copayment from $30 to $50 over the next 2 years, it will lose its grandfathered status.
• Cannot Significantly Raise Deductibles.  Many plans require patients to pay the first bills they receive each year (for example, the first $500, $1,000, or $1,500 a year). Compared with the deductible required as of March 23, 2010, grandfathered plans can only increase these deductibles by a percentage equal to medical inflation plus 15 percentage points.  In recent years, medical costs have risen an average of 4-to-5% so this formula would allow deductibles to go up, for example, by 19-20% between 2010 and 2011, or by 23-25% between 2010 and 2012.  For a family with a $1,000 annual deductible, this would mean if they had a hike of $190 or $200 from 2010 to 2011, their plan could then increase the deductible again by another $50 the following year. 
• Cannot Significantly Lower Employer Contributions.  Many employers pay a portion of their employees’ premium for insurance and this is usually deducted from their paychecks. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points (for example, decrease their own share and increase the workers’ share of premium from 15% to 25%).
• Cannot Add or Tighten an Annual Limit on What the Insurer Pays.  Some insurers cap the amount that they will pay for covered services each year.  If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010.  Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees). 
• Note that the guidelines all address decreasing benefits or increasing costs to participants.  None of the guidelines prohibit increasing a benefit.  Therefore, it is reasonable to conclude that a health plan can decrease the deductible and maintain grandfathered status.  Under separate provisions, a grandfathered plan annually must notify the plan participants that the health plan is grandfathered and notify participants of any changes in benefits, favorable or otherwise.

  Source

No.  Each plan within a cafeteria style plan has to stand on its own merits.  If one of the plans in a cafeteria style benefit program changes to the point that it forfeits its grandfathered status, and the other options in the cafeteria style program change within the posted guidelines, only the one plan that exceeded the guidelines would forfeit  its grandfathered status.

First, let’s review what has not changed for 2011. The Internal Revenue Department released IRS Procedure 2010-22 (http://www.irs.gov/pub/irs-drop/rp-10-22.pdf) on 24 May 2010 which stated that the maximum contribution amounts for 2011 are unchanged from 2010 and remain at $3,050 for a single individual and $6,150 for a family.

The catch-up contribution of $1,000 for those aged 55 and older also remains the same. The deductibles and out of pocket maximum high deductible health insurance policies that are purchased in conjunction with an HSA that allow the account holder to deposit and invest funds that can be withdrawn and used for allowed health care expenses.

The minimum deductible for 2011 for a HDHP remains unchanged at $1,200 for self-only coverage and $2,400 for family coverage. The 2011 maximum out-of-pocket for HDHPs remains unchanged at $5,950/$11,900 for self/family coverage. The roll-over provision for HSAs remains in place. Funds not spent in 2010 in an HSA can be retained in the HAS for 2011. So what has changed? Starting in 2011, over-the-counter drugs will no longer be allowed to be paid via an HSA. The only drugs that will be included as covered drugs will be insulin and prescription drugs. This change does not affect the ability to use an HSA to pay for other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

Now, to the question at hand, the Health and Human Services website at (http://www.healthcare.gov/law/provisions/fsa_hra/index.html) provides the following “Beginning January 1, 2011, the costs of over-the-counter medications will be reimbursed under a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA) only if the medications are purchased with a doctor’s prescription.” Based upon that statement, in which there is no exclusion for existing HSAs, the answer to the question appears to be that the change is effective for all HSAs, not just those initiated on or after 1 Jan 2011. Any existing HSA will have to comply with the change effective on 1 Jan 2011.

On   January 31, 2010, Senior District Judge Roger Vinson of The United States District Court for the Northern District of Florida, Pensacola Division ruled in favor of the Attorney General of the State of Florida and 25 other state Attorneys General who had challenged the constitutionality of the Patient Protection and Affordable Care Act (PPACA).  Judge Vinson found that the provision of the PPACA that mandates that individuals must purchase health insurance to be an unconstitutional action on the part of the Federal Government.  He concurrently ruled that since the DOJ’s own testimony repeatedly had stated that the mandated purchase clause was inherent and integral to the overall success of the PPACA, and that the Severability Clause that had provided that if one part of the PPACA was found to be unconstitutional the remainder of the PPACA would continue in effect was deleted late in the hurried re-drafting process, Judge Vinson declared that all of the provisions of the PPACA to be void.  

The US Department of Justice (DOJ) initially took no action to respond to his order.  Then, over 4 weeks later, the DOJ attorneys asked Judge Vinson for a clarification of his order.

Judge Vinson responded to the request for clarification.   In his own words, “My order of January 31, 2011 (“Order”), granted summary judgment for the plaintiffs (in part); held the “individual mandate” provision of The Patient Protection and Affordable Care Act (the “Act”) unconstitutional; and declared the remainder of the Act void because it was not severable.

The defendants have now filed a motion to “clarify” this ruling (doc. 156) (“Def. Mot.”).  During the four-plus weeks since entry of my order, the defendants have seemingly continued to move forward and implement the Act. In their response in opposition to the defendants’ motion, the plaintiffs have asserted that “[i]f the Government was not prepared to comply with the Court’s judgment, the proper and respectful course would have been to seek an immediate stay, not an untimely and unorthodox motion to clarify” (doc. 158 at 2)(‘Pl. Resp.’).”[1]

The primary argument on the part of the DOJ is that the mandate to purchase health insurance is a valid exercise of the Constitutional authority of Congress to regulate Interstate Commerce.[3]  The specific points that they raise in their request to overturn Judge Vinson’s findings are:[4]

·         The mandated coverage provision regulates the practice of obtaining health care services without insurance, a practice that shifts substantial costs to other participants in the health care market.

·         The mandated coverage provision is essential to the Act’s guaranteed-issue and community-rating insurance reforms.

·         The mandated coverage provision is a necessary and proper means of regulating interstate commerce. 

·         Congress can regulate participants in the health care market even if they are not currently “active” in the insurance market. 

·         The mandated coverage provision regulates economic activity as part of a broad regulation of interstate commerce. 

·         The interstate market for health care services differs from other markets in critical respects.

·         Private or government insurance is the principal means used to pay for health care services, and the federal government’s involvement in health

          care financing is pervasive.

·         As a class, people who endeavor to pay for health care services through means other than insurance shift significant costs to other participants in the interstate health care market.

·         Before the Affordable Care Act, the percentage of people with private health insurance steadily decreased.

·         The mandated coverage provision is also independently authorized by Congress’s taxing power to provide for the general welfare. 

·         The District Court impermissibly departed from controlling doctrine in declaring the PPACA invalid in its entirety and in awarding relief to parties without standing.

Both sides of this argument have precedent and merit.   The U.S. Supreme Court has held in the past that Congress can regulate activities that in essence are not part of interstate commerce if they have a substantial effect on interstate commerce. For example, in Wickard v. Filburn,[5] the Supreme Court held that Congress had the authority to regulate the cultivation of wheat that was not directly a part of interstate commerce that farmers grew for their own home consumption.  More recently in Gonzales v. Raich,[6] the Court ruled that Congress had the authority to prohibit the cultivation and possession of small amounts of medical marijuana for personal consumption. Even though these individuals were not personally engaged in commerce, the matter still fit within the overall commerce clause. 

In both of those cases, Congress sought to regulate individuals engaged in traditional agricultural/economic activities. The fact that they did so for personal consumption did not detract from the underlying economic nature of these activities, especially as Congress has sought to regulate them as a part of a comprehensive inter-state regulatory scheme.  Critics of this position maintain that the PPACA is not of that nature.

Balancing those two cases are two recent decisions, United States v. Lopez[7] and United States v. Morrison.[8]  In both cases, the Supreme Court rejected the notion that Congress has unlimited authority to regulate non-commercial behavior based upon the thin line of justification of simply calling it Interstate Commerce.  In both cases, the Supreme Court's stated reason for declaring the acts to be unconstitutional was the belief of a majority of Justices that the Commerce Clause is a limited grant of power and one that cannot be infinitely expanded.    This is a classic conservative approach to the limits of powers and authorities of the federal government.   It remains to be seen which of these arguments will be found to be more convincing at the 11th Circuit Appellate Court.  We will continue to follow this case for you.

On a tangential note, a request was filed by the plaintiffs with the U.S. Supreme Court to hear this case on an accelerated basis.   If the request had been approved, the case would have been immediately remanded to the Supreme Court and skipped the 11th Circuit Appellate Court review.  In order for this to happen, four Justices must to agree to approve the request.    As of last week, the U.S. Supreme Court Justices responded to other requests, but not this case.   Justices are generally very reluctant to approve a request to skip the appellate court review.   Only in cases of where time is of the essence are these requests approved.   While considerable sums of money and time is being spent
implementing many clauses of the PPACA, these activities by themselves as of yet have not been found to be a compelling argument to move the case to the U.S. Supreme Court on an expected basis. 

Stay tuned to this webpage for further developments.

After several hours of legal research, we cannot find any legal precedent in PPACA that would require “private equity control groups" to offer identical medical benefits to all the employees/employers under the umbrella group.  Unfortunately, PPACA itself does not appear address this nuisance in the final statutory language.  However, you need to proceed cautiously and seek out additional legal counsel before making any changes. 

The answer to this question may depend based upon how “controlling” and how much shared “ownership” there are between the various corporate entities that fall under this umbrella.  Additional factors that could influence the answer include:  do the businesses over-lap in terms of governance or services offered?; do they have different tax identification numbers or share the same EIN; and historically how have they offered health insurance to their employees in the past (e.g., separately, through a MEWA, etc.). 

The drafters of PPACA went to considerable lengths to try to prohibit the establishment or continuation of companies that have multiple benefit plans with differing levels of coverage and cost.  The concern was that there would be plans for the lower wage employees and plans for management and white collar employees.   There is no exemption in PPACA or in any of the rules issued by HHS/DOL/IRS that exempt holding companies from this prohibition, and specifically did not provide an exemption for private equity control companies.

One could argue that if one or more companies have over-lapping ownership, shared governance structures, and are related businesses, the companies might have to offer identical benefit plans – unless, perhaps, the companies can maintain their grandfather status.  I say perhaps, because neither the HHS/DOL/IRS have ruled on the issue. 

Given the original intent of the legislation, and the ideological leanings of the current administration, we don't see them ruling in favor of a holding company-private equity ownership company having one set of benefits/costs and the subsidiary having a different benefit plan/cost.  It just runs against the grain of what they have done to date.

It would be beneficial if the questioner could tell us if the benefit plans of the controlling companies and their respective subs are grandfathered.  Generally speaking, the federal government, the NAIC, and other key public policymakers need to hammer out the details on how the insurance reforms will apply to difference scenarios like yours.  It is difficult to provide you with a clear answer because some many co-founding variables needs to sorted through.  We hope that we have provided a couple insights that might help you definitely answer your question. 

BenefitMall will keep you posted if any additional details emerge on this subject. Please note that this is not legal advice, and we recommend that you seek legal counsel before implementing any of PPACA reforms. 

“PHS Act section 2715(d)(4) generally provides that if a group health plan or health insurance issuer makes any material modification in any of the terms of the plan or coverage involved (as defined for purposes of section 102 of the Employee Retirement Income Security Act (ERISA)) that is not reflected in the most recently provided summary of benefits and coverage, the plan or issuer must provide notice of such modification to enrollees not later than 60 days prior to the date on which such modification will become effective.

Accordingly, it is the view of the Departments that group health plans and health insurance issuers are not required to comply with the 60-day prior notice requirement for material modifications in PHS Act section 2715 (d)(4) until plans and issuers are required to provide the summary of benefits and coverage explanation pursuant to the standards issued by the Departments.(1) The Departments have not yet issued the standards.”

Therefore, the new regulation you are questioning is not yet required until the carriers are required to comply as well.

Resource: http://www.dol.gov/ebsa/faqs/faq-aca5.html

The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 eliminated new information reporting requirements that were created by previous legislation.

The Patient Protection and Affordable Care Act of 2010 expanded information reporting to include payments to corporations, “amounts in consideration of property,” and “other gross proceeds” made in the course of a trade or business (including operation of a governmental entity), beginning in 2012. The new law repeals these requirements. You are not required to file Form 1099-MISC for these payments for any year.
 

Existing information reporting requirements remain in effect. Payments of $600 or more for nonemployee compensation made in the course of a trade or business are generally required to be reported on Form 1099-MISC. Certain payments to corporations are required to be reported. See the Instructions for Form 1099-MISC for more information.

The Small Business Jobs Act of 2010 provided that anyone receiving rental income from real estate would be treated as receiving income from a trade or business of renting property; therefore, information return requirements applicable to small businesses would be in effect. This provision also is repealed; you are not considered to be in a trade or business solely because you receive rental income. See Publication 527 for more information on rental income and expenses.

The IRS Notice 2011-28  Interim Guidance on Informational Reporting to Employees of the Cost of Their Group Health Insurance Coverage is the current controlling authority on this topic. Employers will not have to report the cost of employer provided health insurance on their employee’s W-2s for the tax year 2011.  It is optional for tax year 2011 W-2s.

IRS Notice 2011-28 states, “As explained above, this notice provides interim guidance that generally is applicable beginning with 2012 Forms W-2. In addition, employers may rely on the guidance provided in this notice if they voluntarily choose to report the cost of coverage on 2011 Forms W-2, even though this reporting is not required for tax year 2011.“

There is an exemption for employers who issue less than 250 w-2s. 
The IRS Notice 2011-28 states, “This notice also provides additional transition relief for certain employers and with respect to certain types of employer-sponsored coverage. This transition relief will continue at least through the tax year 2012 Forms W-2 which are required to be furnished to employees in January 2013. In other words, those employers to which the additional transition relief applies (which includes smaller employers that are required to file fewer than 250 2011 Forms W-2) will not be required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2014. This transition relief will continue until the issuance of further guidance.”.  

The IRS has a FAQ page on this topic at:
http://www.irs.gov/pub/irs-drop/n-11-28.pdf
The IRS  notice can be found at:
http://www.irs.gov/pub/irs-drop/n-11-28.pdf

Yes, it appears that §1513 of the Patient Protection and Affordable Care Act (PPACA) that amended §4980 of the Internal Revenue Code could result in the non-deductible excise tax described above.   Beginning in 2014, irrespective of whether or not a large employer offers coverage, a large employer could be potentially liable for the tax penalty if one of its full-time employees obtains coverage through an exchange and receives a federal premium credit.  While the legislation does not specifically reference the scenario of an employee that rejects the employer sponsored health benefit it does specifically state that any full time employee of a large employer who accesses health insurance through a state health insurance exchange and receives a federal premium subsidy will result in the employer being taxed as part of the employer’s “shared responsibility”.

When does this provision become effective?

Beginning in 2014, individuals who are not offered employer-sponsored coverage and who are not eligible for Medicaid or other programs may be eligible for federal premium credits for health insurance coverage through a state health insurance exchange. These individuals will generally have income between 138 percent and 400 percent of the federal poverty level (FPL

Which employers are potentially subject to this provision?

For the purposes of this amendment, a large employer is generally defined as being an employer that employs 50 or more employees.  The determination of an employer’s status as an “applicable large employer” is made on a controlled group basis applying the aggregation rules of The Internal Revenue Code (IRS Code) §§ 414(b), (c), (m), and (o), and it is based on full-time equivalent employees. An employee who in any month works an average of at least 30 hours or more per week is counted as one employee. All other employees are counted on a pro-rated basis. As explained below, the amount of any excise tax penalty is determined based only on “full-time” employees. The number of full-time equivalent employees is important only for the purpose of establishing whether an employer is an applicable large employer.

As with most of the law, there are exceptions.   The IRS Code referenced in the PPACA defines a large employer as, “An employer (including any predecessor employer) is an “applicable large employer” if it employed an average of at least 50 full-time employees during the preceding calendar year.”   An employer is not an applicable large employer, however, if the employer’s workforce exceeds 50 full-time employees for 120 days or less during the calendar year and the employees that cause the employer’s workforce to exceed 50 full-time employees are “seasonal workers.” The Act defines a “seasonal worker” narrowly to mean “a worker who performs labor or services on a seasonal basis” (as defined by the Secretary of Labor). 1

Which employees are potentially covered under §1513?

Individuals who are full time employees are covered under the amendment in §1513.   The amendment covers full time employees.  A full-time employee is defined as those individuals working 30 hours per week or more.  It does not cover part time employees, even if that part-time worker receives a premium credit.   Note that part time employees are included in the total of employees that determines if an employer is a large employer (see above).   Seasonal employees are not included in the total to determine if an employer is a large employer, but are included in the definition of a full time employee for the period of time that a seasonal employee is employed full time (see above). Employees who are eligible for Medicaid are not subject to this provision.   Temporary agency employees are viewed as being employees of the agency unless the agency employee is covered by a contract directly between the employer and the temporary agency employee.

The Safe Harbor

Individuals who are offered employer-sponsored coverage can only obtain premium credits for exchange coverage if, in addition to the other criteria above, they also are not enrolled in their employer’s coverage, and their employer’s coverage meets either of the following criteria: the individual’s required contribution toward the plan premium for self-only coverage exceeds 9.5 percent of their household income OR the plan pays for less than 60 percent, on average, of covered health care expenses. 

We recently wrote a blog for BenefitMall recently on the interim final Safe Harbor rule that assists employers in determining which employees could be eligible for a federal premium subsidy in a state health insurance exchange.