Yesterday, President Barack Obama signed the “Health Care and Education Tax Credits Reconciliation Act of 2010” (the “Reconciliation Act”) that finalizes his health care overhaul and revamps the U.S. student loan system. The Reconciliation Act and the “Patient Protection and Affordable Care Act” signed by President Obama on March 23 (together, the “Health Care Reform Legislation”), will have a major impact on both individuals and employers for years to come. The Congressional Budget Office has estimated that the Health Care Reform Legislation will provide coverage to 97% of Americans at a cost of $940 billion over the next decade. Due to higher taxes and fees, and Medicare payment cuts, the Health Care Reform Legislation is purported to reduce the budget deficit by $138 billion over 10 years.
The Health Care Reform Legislation will profoundly alter the provision of health care in the U.S. Generally, all individuals who are not covered by Medicare or Medicaid will be required to obtain health care coverage, or be subject to government penalties. Individuals with lower incomes will be eligible to receive credits or vouchers to help pay for their health care coverage. Employers, while not required to offer health care coverage to their employees, will be penalized and subject to additional taxation for not providing such coverage. Small businesses with less than 50 employees will not be subject to such penalties. If individuals do not have access to, or choose not to participate in, an employer plan, health care “exchanges” will be available for health care coverage.
Highlights of the Health Care Reform Legislation
Effective for plan years beginning on or after January 1, 2014, employers will be subject to “free rider” penalties. If an employer with 50 or more full-time employees does not provide health care coverage to its employees, and at least one full-time employee is receiving federally subsidized health coverage through an exchange, the employer would be subject to a penalty equal to $2,000 per full-time employee (excluding the first 30 employees). If an employer with 50 or more full-time employees does provide health care coverage to its employees, and at least one full-time employee obtains federally subsidized health coverage through an exchange other than with the use of a “free choice voucher,” the employer will be subject to a penalty equal to $3,000 per full-time employee receiving such subsidized coverage (capped at an amount equal to $2,000 per full-time employee, excluding the first 30 employees).
Employees will be eligible for premium tax credits when employer-provided insurance costs 9.5% or more of their income or the employer’s share of benefits is less than 60%. Employers offering coverage to employees must also provide a “free choice voucher” to employees (1) with incomes of less than 400% of the Federal Poverty Level (“FPL”), (2) whose premium amounts exceed 8% but are less than 9.8% of their income, and (3) who choose to enroll in a plan in a health care exchange.
Employers with more than 200 employees must have automatic enrollment in health insurance plans. Flexible spending accounts (“FSAs”) will be limited to $2,500 beginning in 2013, and over-the-counter medication will not be eligible for reimbursement without a prescription beginning in 2011.
Excise Tax on “Cadillac Plans”
Beginning in 2018, a new 40% excise tax will be implemented on insured and self-insured group health coverage with premiums that are above a threshold of $10,200 for single coverage and $27,500 for family coverage (these amounts will be indexed for inflation beginning in 2020 and certain industries and retirees will have higher thresholds). The tax will apply to amounts above this threshold and the aggregate value of the coverage will include reimbursements under health FSAs, health reimbursement arrangements (“HRAs”), health savings accounts (“HSAs”), and supplementary health coverage (but excluding dental and vision coverage).
As stated above, under the Health Care Reform Legislation, U.S. citizens and legal residents will be required to maintain health coverage. Failure to maintain coverage will result in a penalty of $695 per year, up to a maximum of 3 times that amount ($2,085) per family, or 2.5% of household income. The penalty will phase-in over time as follows: (1) in 2014, the penalty will be $95 or 1% of income, (2) in 2015, the penalty will be $325 or 2% of income, (3) in 2016, the penalty will be $625 or 2.5% of income, and (4) after 2016, the penalty will be increased by cost of living adjustments.
There will be exemptions from this requirement for religious objections, financial hardship, American Indians, individuals without coverage for 3 months or less, prisoners, individuals for whom the lowest cost plan option exceeds 8% of income, and individuals with incomes below the filing threshold (in 2009, $9,350 for single filers and $18,700 for joint filers).
Coverage subsidies will also be available for individuals who can’t afford minimum affordable coverage based on the FPL. For example, a family of four with a household income between $29,327 (133% of the FPL) and $88,000 (400% of the FPL) would qualify for the subsidy.
The Health Care Reform Legislation also adds some additional consumer protections. For plan years beginning on or after March 23, 2010, a uniform summary of benefits must be provided to all health plan participants. Effective for plan years beginning on or after September 23, 2010, lifetime limits for essential health benefits will not be permitted. In addition, annual limits on certain “essential benefits” will be restricted. Pre-existing condition exclusions will also be phased out, beginning with dependents under age 19 for the first plan year beginning after September 2010, followed by a complete prohibition on pre-existing condition exclusions for all participants for plan years beginning on or after January 1, 2014.
Medicare and Medicaid Changes
Many changes were also made to Medicare and Medicaid. First, the Medicare “donut” hole will be reduced over time. In 2010, a rebate of $250 will be provided to retirees, who must pay for all prescription drugs on an out-of-pocket basis under the current Medicare Part D prescription drug program. In 2011, discounts on brand name drugs will begin, and the donut hole will be completely closed with 75% discounts on brand-name and generic drugs by 2020. In conjunction with this change, the Medicare subsidy provided to certain employers who provide health care for eligible retirees will no longer be deductible. Employers must adjust their balance sheets to reflect this loss of deductibility.
The ceiling for Medicaid eligibility will be raised to 133% of the FPL ($14,436 for one person and $29,393 for a family of four). A new category of individuals – “childless adults” – will become eligible for benefits under Medicaid. Federal Medicaid matching payments for the costs of newly-eligible individuals will begin at 100% for 2014 to 2016, and state’s share of costs will be reduced.
Medicare Advantage plans must spend at least 85% of their revenue on core health care by 2014, and freeze payments for other services in 2011. In addition, several fraud and abuse provisions are added to uncover and reduce fraud and abuse in the Medicare/Medicaid system.
New Revenue Producing Provisions
In order to pay for the benefits listed above, effective January 1, 2013, an additional 0.9% (from 1.45 to 2.35%) Medicare Hospital Insurance payroll tax on wages in excess of $200,000 (single) and $250,000 (family) will be implemented. A 3.8% tax on unearned income for higher-income taxpayers (in excess of $200,000 (single) and $250,000 (family)) will also become effective at that time. Additionally, the threshold for itemized deductions for unreimbursed medical expenses will increase from 7.5% of adjusted gross income (“AGI”) to 10% of AGI (but this requirement will be waived for individuals age 65 and older for tax years 2013 to 2016).
Fees will also be imposed on pharmaceutical manufacturers beginning with $2.8 billion in 2012 to 2013. An annual fee on heath insurance providers will begin in 2014. Effective July 1, 2010, there will be a 10% tax on amounts paid for indoor tanning services. An excise tax of 2.3% on the sale of any taxable medical devices will become effective for plan years after December 31, 2012.
More Detailed Analysis To Be Provided
Over the next few weeks, we will provide you with a series of client alerts detailing specific provisions of the comprehensive Health Care Reform Legislation. In addition, we will be sponsoring a webinar on April 22 to provide you with a more in-depth analysis of how the Health Care Reform Legislation will impact your company and your employees.
For more information on how health care reform may affect your organization, please contact your Executive Compensation and Employee Benefits counsel at Smith, Gambrell & Russell, LLP.