Health Care Reform Law: "Immediate" Concerns for Employers and Their Group Health Plans

Monique Warren, Lisa deFillipis, Melissa Ostrower, and Joe
April 28, 2010 — 2,379 views  

This update addresses key “immediate” concerns for employers and their group health plans as a result of changes mandated by the Health Care Reform Law (i.e., the Patient Protection and Affordable Care Act of 2010 and Health Care and Education Reconciliation Act of 2010).  These generally take effect as of the first day of the plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans). Subsequent updates will address mandates taking effect in later years, issues that affect higher income employees, “opportunities” for some employers, regulatory developments, expected additional legislation, and other matters.

This is the second in a series of updates from Jackson Lewis addressing the Health Care Reform Law.  The first update, on March 23, 2010, the day President Obama signed the Patient Protection and Affordable Care Act of 2010 into law, provided a general overview.  (See How The Health Care Reform Law Impacts Employers.)

Plans in effect on March 23, 2010, and plans maintained pursuant to one or more collective bargaining agreements ratified before March 23, 2010, are “grandfathered” in certain respects.  A plan in effect on that date, may be grandfathered indefinitely from specific mandates.  However, the law leaves open the question of whether design changes made to a plan that was in effect on March 23, 2010, will cause it to lose this grandfathered status.  Moreover, a plan maintained pursuant to one or more collective bargaining agreements is grandfathered only until the expiration of the last-to-expire of those collective bargaining agreements.  In any case, certain provisions apply even to otherwise grandfathered plans.


Expansion of Coverage for Young Adults
Plan Year beginning on or after Sept. 23, 2010

A plan (whether insured or self-funded) that provides dependent coverage for children must continue to make that coverage available to an adult child (whether or not married) until the child turns 26.  The plan is not required to make coverage available for a child of a child receiving dependent coverage.  The law is unclear as to whether a plan must permit first-time enrollment or reenrollment of an adult child under age 26 who is not covered under the plan when this provision takes effect. A literal interpretation (“shall continue to make such coverage available for an adult child”) would limit the requirement to a child who is covered when the provision takes effect.  However, it is assumed that this was not Congress’ intent.

Failure to comply could subject an employer to an excise tax of $100 per day per person to whom the failure relates.  ERISA’s civil enforcement rules also may apply to violations of this provision.

This mandate applies to grandfathered plans as well as non-grandfathered plans.  However, until January 1, 2014, a grandfathered plan can limit this “to age 26 coverage” to children who are not eligible to enroll in other employer-provided coverage.

The law amends the Internal Revenue Code to extend the individual federal income tax exclusion for medical care benefits under an employer-provided plan so that benefits provided to an employee’s child who has not turned 27 as of the end of the year are excludible, even if the child does not otherwise meet the Code’s definition of dependent.

Some states’ insurance laws already require insurers to continue coverage beyond the date that a child turns age 26 (regardless of whether the child meets the Code’s definition of dependent for purposes of the federal income tax exclusion).  For example, New York insurers must permit eligible young adults to continue or obtain coverage through a parent’s group policy up to age 29, and New Jersey insurers generally must extend coverage until the child attains age 30.


No More Lifetime and (after 2013) Annual Limits on Essential Benefits
Plan Year beginning on or after September 23, 2010

A plan (whether insured or self-funded) may not establish lifetime limits on the dollar value of “essential health benefits” for any participant or beneficiary. Also, a plan’s annual limits on the dollar value of essential health benefits will be restricted (in accordance with regulations yet to be issued). (The law prohibits these annual limits altogether after 2013.)

Failure to comply with this new requirement could subject an employer to an excise tax of $100 per day per person to whom the failure relates. ERISA’s civil enforcement rules may also apply to violations of this provision.

This prohibition applies to grandfathered plans as well as non-grandfathered plans.

“Essential health benefits” include ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, including behavioral health treatment, prescription drugs, rehabilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, and pediatric services, including oral and vision care. Regulations will further define essential health benefits.


Preventive Care Benefits
Plan Year beginning on or after Sept. 23, 2010

A plan (whether insured or self-funded) must cover preventive services without any cost-sharing (e.g., deductibles, co-payments).  Preventive services include, for example, immunizations and mammograms.

Failure to comply could subject an employer to an excise tax of $100 per day per person to whom the failure relates.  ERISA’s civil enforcement rules also may apply to violations of this provision.

This mandate does not apply to grandfathered plans.


Emergency Services
Plan Year beginning on or after Sept. 23, 2010

A plan (whether insured or self-funded) that provides emergency service benefits (e.g., emergency room visits) must do so without requiring pre-authorization and imposing a different cost-sharing amount if the emergency service provider is out-of-network.

Failure to comply could subject an employer to an excise tax of $100 per day per person to whom the failure relates.  ERISA’s civil enforcement rules also may apply to violations of this provision.

This mandate does not apply to grandfathered plans.


No Preexisting Condition Exclusions for Children Under Age 19
Plan Year beginning on or after Sept. 23, 2010

A plan (whether insured or self-funded) may not impose any preexisting condition exclusion on enrollees who are under 19 years of age.  (The law prohibits imposing preexisting condition exclusions altogether after 2013.)

Failure to comply could subject an employer to an excise tax of $100 per day per person to whom the failure relates.  ERISA’s civil enforcement rules also may apply to violations of this provision.

This prohibition applies to grandfathered plans as well as non-grandfathered plans.


W-2 Reporting
Plan Year beginning on or after Sept 23, 2010

Employers must disclose the aggregate cost of employer-sponsored health coverage on each employee’s IRS Form W-2.  This amount will not include any salary reduction contributions made to flexible spending accounts, health savings accounts or Archer MSAs.


No Rescission
Plan Year beginning on or after Sept. 23, 2010

A plan (whether insured or self-funded) may not rescind coverage with respect to an enrollee unless the enrollee has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of material fact as prohibited by the terms of the plan.  In any case, coverage may not be cancelled without prior notice to the enrollee and in compliance with other requirements.

Failure to comply could subject an employer to an excise tax of $100 per day per person to whom the failure relates. ERISA’s civil enforcement rules also may apply to violations of this provision.

This prohibition applies to grandfathered plans as well as non-grandfathered plans.

Generally, “rescission” means to deny coverage for claims incurred after an enrollee has become covered.  Though not clear, it is generally assumed this prohibition does not prevent an employer from terminating an existing plan prospectively.


No Over-the-Counter Drug Reimbursement
Plan Year beginning on or after Sept. 23, 2010

Distributions from health savings accounts, Archer MSAs, and health flexible spending accounts for medicine are not medical expenses excludable from income unless the medicine is prescribed or is insulin.

The law increases the penalty for nonqualified distributions from health savings accounts and Archer MSAs to 20%.

There is no grandfathering associated with this provision.


Limit on Health FSA Deferral Contribution
Tax Year After 2010

Annual salary reduction contributions to health flexible spending accounts are limited to $2,500 (an amount that may be adjusted for inflation after 2012).

There is no grandfathering associated with this provision.


Prohibition on Discrimination in Favor of Highly Compensated Individuals
Plan Year beginning on or after Sept. 23, 2010

An insured group health plan must comply with certain requirements in the Internal Revenue Code that prohibit discrimination in favor of certain highly compensated employees.  (Under prior law, only self-insured plans were subject to this nondiscrimination requirement.)

This prohibition does not apply to a grandfathered plan.


Appeals Process
Plan Year beginning on or after Sept. 23, 2010

A plan (whether insured or self-funded) must have written internal and external appeals procedures.  An internal process, at a minimum, must: (i) have in effect an internal claims appeal process, (ii) provide notice, in a culturally and linguistically appropriate manner, of available internal and external appeal procedures and the availability of any office of health insurance customer assistance or ombudsman to assist with the appeals process, and (iii) allow an enrollee to review his file, to present evidence and testimony and to receive continued coverage pending the outcome of his claim.  This internal process must initially incorporate the current ERISA claims procedures regulations and must update such process in accordance with Department of Labor guidance.

An external process must: (i) comply with applicable state external review procedures that, at a minimum, include the customer protections set up in the Uniform External Review Model Act (put in place by the National Association of Insurance Commissioners) or (ii) implement an effective external review process that meets minimum standards established by the Secretary and is similar to the guidance provided in (i) if the applicable state has not established a sufficient external review process or if the plan is self-funded (and therefore not subject to state regulation).

Failure to comply could subject an employer to an excise tax of $100 per day per person to whom the failure relates.  ERISA’s civil enforcement rules also may apply to violations of this provision.

These mandates do not apply to grandfathered plans.


Breast-feeding Breaks
Presumably effective Mar. 23, 2010, since the law does not specify any other date.

An employer must give an employee who is a nursing mother reasonable break times to express milk for her child each time she needs to do so during the one-year period after the child’s birth.  The employer must provide a private place, other than a bathroom, for this purpose.
 
(See our earlier article on this provision, Health Care Reform Act Requires Employers to Provide Breaks for Breastfeeding.)


The effective dates for some provisions are not clear.  For example, the Patient Protection and Affordable Care Act includes a provision that limits health flexible spending account contributions to $2,500 for taxable years beginning after 2010.  It appears that the House intended to change the effective date for this provision to tax years beginning after 2013, but the language and some commentators suggest that the Health Care and Education Reconciliation Act merely changed the effective date of the inflation adjustment provision related to the limit and not the effective date of the limit itself.  Also, the Health Care and Education Reconciliation Act includes a requirement that employers automatically enroll employees in the employer’s group health plan, but specifies no particular effective date for this requirement.  This has led some to take the position that the provision is effective immediately.  Presumably additional guidance will clarify the effective dates for these and other provisions.

Jackson Lewis attorneys are available to answer inquiries regarding this new law and assist employers in achieving compliance with its requirements.

IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)

Monique Warren, Lisa deFillipis, Melissa Ostrower, and Joe

Jackson Lewis LLP