A Look at Healthcare Reform’s Impact on Employers
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act. Along with the Health Care and Education Reconciliation Act of 2010, this legislation will make significant changes to our current health care system.
The Act adds new responsibilities for employers and insurance carriers. While most of the provisions will start in 2014 or later, some provisions are effective right away or within a short period of time after enactment.
- Small-Business Tax Credit. A tax credit of up to 35 percent of the employer’s health care contribution is available for qualified small employers (any employer with no more than 25 full-time employees and average wages of less than $50,000). This tax credit will increase to 50% starting in 2014 once exchanges are operational.
- Early Retirees. A temporary reinsurance program is provided to employers that offer coverage to early retirees between the ages of 55 and 64.
- Health Plan Changes. 1) Plans must offer unlimited lifetime benefits and annual benefit limits will be restricted. 2) Pre-ex conditions will be prohibited for children under 19. 3) Recissions are prohibited except in the case of fraud. 4) Plans must cover certain preventive health services at no cost to the insured. 5) Dependent coverage age limit extended to 26.
- Federal High Risk Pool. Temporary establishment of a high risk health insurance pool for individuals unable to find insurance elsewhere.
- W-2 Reporting. Employers must report value of health care benefits provided on employee w-2s, but not as taxable income.
- Higher Penalty Tax on Non-Qualified Health Savings Account (HSA) Withdrawals. Non-qualified withdrawals will be taxed at 20% versus the current 10% penalty.
- Cafeteria Plans. A new Simple Cafeteria Plan is created through which small employers (less than 100 employees) can easily provide tax-free benefits to their employees without the administrative burden of sponsoring a cafeteria plan.
- Standardized Definition of Qualified Medical Expenses. Costs for over-the-counter medications obtained without a prescription will no longer be considered a qualified medical expense.
- Flexible Spending Account Limits. Annual contribution limits are reduced to $2,500 per year, with CPI increases available in future years.
- Itemized Deduction for Medical Expenses. The Act increases the income threshold for claiming the itemized deduction for medical expenses from 7.5 percent to 10 percent. Individuals over age 65 would be able to claim the itemized deduction for medical expenses at 7.5 percent of adjusted gross income through 2016.
- Higher Payroll Taxes for High Income Earners. The hospital insurance tax rate will be increased 0.9 percentage points for wages over $200,000 for individuals and $250,000 for those filing jointly.
- Employer Coverage Mandates. Employers with 50 or more employees who do not offer employee health coverage will pay $2,000 annually for each full-time employee, excluding the first 30 full-time employees. The penalty is increased to $3,000 for any full-time employee receiving a federal tax credit for coverage, because his or her employer health coverage is considered “unaffordable.” Coverage is considered “unaffordable” where the employee contributes more than 9.8 percent of his or her income, or the employer contributes less than 60 percent of the actuarial value of the plan.
- Insurance Exchanges. Exchanges are created at the state level starting in 2014, where individuals and small employers can shop for health coverage. Initially, the exchanges would be available to individuals and small groups (less than 100 employees), unless the state opts to cover only groups with up to 50 employees. Starting in 2017, states could open the exchanges to larger groups.
- Wellness Programs. Employers can offer larger rewards, up to 30% of the cost of coverage, to employees for participation in a wellness program or for meeting certain health-related goals.
- Individual Tax Credits. Credits are available for people with incomes up to 400 percent of the poverty level for insurance purchased through an exchange.
- Health Plan Changes. 1) Insurers cannot refuse to issue coverage on any individual due to pre-existing conditions. 2) Higher rates cannot be charged to any individual based on health status, gender or other demographic factors. 3) Coverage cannot be non-renewed or dropped because an individual participates in a clinical trial.
- High Value Plan Excise Tax. A nondeductible excise tax of 40 percent is imposed on any health insurance plan with combined annual employer/employee premiums exceeding $10,200 for individual coverage and $27,500 for family coverage. The tax would only apply to premiums in excess of the threshold.