March/April 2011
If the 2010 health care reform law survives ongoing legal and legislative challenges, how will it affect your company? That depends, in part, on the size of your workforce and what health benefits you provide.
By Kim Fernandez
The “Patient Protection and Affordable Care Act” might not ring any bells, but that’s the official name of the health care reform law more often called “Obamacare.” After months of back-and-forth among lawmakers and lobbyists in 2009 and 2010, this massive bill passed both houses of Congress, and President Obama signed it into law on March 23, 2010. Its advocates assert that the law will make health insurance and health care more affordable and accessible to millions of Americans; its critics maintain that the law is a government intrusion into the private health insurance market and health care system and that its mandate that almost every U.S. taxpayer purchase health insurance is unconstitutional.
The debate over the law did not end at the signing ceremony; instead, more than two dozen states, as well as business groups and individuals, have challenged the law in court on various grounds. At press time, district court judges had ruled on five such challenges, with three upholding the law and two ruling that parts of the law, or the entire law, is unconstitutional. The challenges are expected to work their way through the justice system to the Supreme Court, which ultimately will determine the law’s constitutionality.
With the media’s coverage of the law providing more heat than light, business owners, managers, and workers worry about what its real impact will be on them and their companies. Owners fret that they’ll be required to shell out big bucks for even more expensive coverage—or pay penalties of thousands of dollars per employee. Employees worry that the law will increase costs to the point that their employers will have to reduce wages, downsize, or outsource their jobs. Health insurance administrators and experts have waded in, trying to figure out exactly what the law requires.
Though it might be tempting to sit on the sidelines and wait until this entire drama plays out, certain parts of PPACA took effect in 2010, and other parts phase in between now and 2014—potentially before the law’s challengers and supporters exhaust their legal options. (See “Health Care Implementation Timeline” on page 166 for more details.) Experts say the law, though complicated and open to interpretation, is beginning to become clear, and companies can act now to prepare for specific future requirements or to take advantage of tax credits or other incentives in the law. Here’s a look at two of PPACA’s key provisions and how they will affect most companies.
Insurance Coverage Mandates
“A common fear of many small-business owners is the portion of the health care reform bill that forces employers to either offer their employees health insurance coverage or pay fines if they do not,” says Joel Ohman, a certified financial planner and founder of HealthInsuranceProviders.com. For the smallest companies, those fears are unfounded: Companies that employ fewer than 50 full-time-equivalent workers do not face any fines or fees under the law, nor does it force them to provide health insurance coverage to workers. (If they do provide health insurance coverage to their workers, the law sets certain requirements for those plans.) Instead, the law tries to help small companies afford health insurance coverage. Between now and 2013, companies might be eligible for a tax credit if they (1) have fewer than 25 FTEs; (2) pay average annual wages of less than $50,000; and (3) pay at least 50 percent of employees’ health insurance premiums or 50 percent of a benchmark cost. Eligible for-profit employers can receive credits for up to 35 percent of their contribution toward employees’ coverage, an amount that increases to 50 percent in 2014. Further, starting in 2014, employers with 50 or fewer workers will be eligible to shop for insurance in their state’s insurance exchange. (More about those exchanges in a moment.)
For larger employers, it’s a different story. “Beginning in 2014, all employers with 50 or more [FTE] employees will face a fine of $2,000 per employee for not offering health insurance coverage,” Ohman says. That’s $2,000 per employee per year, though the law does not assess the fine on a company’s first 30 workers. Companies will find the fines nothing to sneeze at, says Tom Lerche, national leader for health reform at Aon Hewitt (Chicago). “If you do not provide a plan or have one that fails two tests—either the benefits aren’t rich enough or you don’t pay enough toward the cost of coverage, and the employee receives subsidized coverage through the insurance exchange—you’ll be fined,” he says.
As Lerche mentions, it’s not enough to just provide a plan. The law also fines companies whose workers must pay “unaffordable” health insurance premiums—premiums that are high relative to their income—or whose plans are not acceptable in terms of what they cover. Specifically, companies who employ 50 or more FTE employees will pay a fine for each full-time worker who pays out-of-pocket premiums that are more than 9.5 percent of his or her income or if the health insurance plan pays less than 60 percent of covered health care expenses, on average.
There are some exceptions, however. “There is no requirement to offer coverage for individuals who work less than 30 hours per week,” says Nancy Taylor, an attorney with Greenberg Traurig (Washington, D.C.). “And you don’t have to cover people for the first 90 days of employment, or those who are seasonal or temporary employees.”
State Exchanges
State exchanges are another significant—and confusing—provision of the law. Taylor compares the state insurance exchanges, scheduled to launch in 2014, to wholesale markets for health insurance. Their goal is to make insurance more affordable by sparking competition and reducing employers’ administrative costs. Each state must establish two different exchanges, Lerche explains. One will serve individuals who do not have access to affordable or sufficient employer coverage; the other will give smaller companies more options when purchasing health insurance for their workers. As mentioned above, states must open such exchanges to companies with 50 or fewer workers in 2014; they have the option of opening their exchanges to employers with up to 100 workers between 2014 and 2016 and to larger employers in 2017.
Lerche says he expects that some companies in industries with high employee turnover might opt to pay the fines instead of offering health insurance to their workers. “The fine is $2,000 per employee, per year, if you don’t offer group coverage,” he says. “The cost of group health insurance is about $8,000 to $10,000 [per person] per year.” That said, if a significant number of employers choose to drop coverage, “Congress may revisit the amount of the penalty and consider increasing it.” Taylor is more optimistic. She points out that “a majority of employers do offer health coverage because it’s something employees look for when they’re looking for jobs.” Indeed, 68 percent of firms with fewer than 200 workers and 99 percent of larger firms offered health benefits last year, according to an annual survey by the Kaiser Family Foundation (Menlo Park, Calif.) and Health Research & Educational Trust (Chicago).
The Bottom-Line Impact
Even though the new law has “affordable care” right there in its name, some experts say they expect insurance costs will continue to go up, even as more Americans receive coverage under the new law. “In the long term, I think we’re likely to see costs continue to increase 8 percent to 12 percent annually unless employers fundamentally revise their health care strategy,” Lerche says. In addition to the long-term medical trends that existed before PPACA became law, he says, employers will experience slightly higher costs due to insurance market reforms and potential cost-shifting from future excise taxes on insurance companies, pharmaceutical firms, and device manufacturers. Ohman agrees with that forecast. “Small and large companies alike should expect an increase in health care costs and an increase in taxes associated with the health care bill,” he says. Because of those increased costs, Lerche says he wouldn’t be surprised to see companies cut back on their full-time payroll, reducing workers’ hours to skirt insurance requirements in 2014. “Some employers are considering that,” he says. “If you reduce the workweek to 29 hours from 30 hours, you change the equation for offering coverage. We might see a restructuring of the employment model in some industries” to address the potential cost impact of the law on employers. Taylor disagrees, saying the benefits of the law far outweigh any threat to employment status. “I don’t hear people talking that way,” she says. “I mostly hear people saying they hope they have more health-insurance products to select from, but they don’t know how to build it all into their cost structure. They need to figure out what the pools are and what the costs may be. And they might have to pay more for certain kinds of benefits, but those are the issues they’ll have to work through.”
An analysis of PPACA’s impact on small, medium, and large employers by Linda Blumberg, a senior fellow at the nonpartisan Urban Institute (Washington, D.C.), finds that small employers that provide health insurance might save money under the new law due to the tax credits and their ability to shop for plans via the state exchanges. Large employers face fines if they don’t offer insurance or if their existing plans don’t meet the new standards of coverage and affordability. Further, more of their workers might opt to participate in their health plans due to the individual mandate that takes effect in 2014, which could increase their costs. It’s the medium-sized companies, those with 50 to 100 workers, that face the most unknowns. They will have access to the exchanges, which might lower their health insurance costs, but they also will face penalties if they offer no insurance or their plans don’t meet the new standards.
Taylor says companies must pay close attention to further developments in the evolution of the health care reform law and the regulations implementing it. “Educate yourself and figure out how you’re going to structure your workforce to maximize the opportunities this presents,” she says. “2013 is really when you have to make certain you’ve made your decisions, and March 2013 is when you have to notify employees what their obligations are and what yours are as an employer.”
Kim Fernandez is a Bethesda, Md.-based writer.
1099 Reporting Headache Might Find Relief
One way lawmakers attempted to cover the cost of implementing the Patient Protection and Affordable Care Act has raised the ire of many businesses, especially small businesses, and scrap companies were no exception. Under the 1099 reporting provision, businesses must file a 1099 form with the Internal Revenue Service whenever they spend more than $600 to purchase goods or services from another company or individual in one year. Small businesses nationwide have complained about the burden of time, money, and paperwork the rule creates. Even the Taxpayer Advocate Service, a part of the IRS, expressed concern that the rule could create a burden on about 40 million entities, including nonprofits, government agencies, and sole proprietorships.
Scrap companies are concerned, says Billy Johnson, ISRI’s director of political and public affairs, because to file a 1099, a company has to gather personal information its suppliers might not want to provide. “In order to issue a 1099, you have to get people’s Social Security numbers and home addresses,” he explains. With all the concerns regarding identity theft, people are trying to limit the dissemination of their personal information. Thus, faced with providing such information, certain suppliers might choose not to sell their scrap.
Further, the volume of scrapyard customers makes the requirement a burden, Johnson says. “In this industry, [our members] process tens of thousands of transactions every day,” everything from one person with a pickup truck full of used beverage containers to huge corporate accounts. “This is going to require companies to upgrade their record-taking and -keeping systems, and that requires training. It’s not just a question of filling this form out.” Company owners are nervous about the costs, and “people are very concerned about what the data security requirements are going to be,” he adds.
Fortunately, the 1099 provision’s days seem to be numbered. Unlike the larger health care reform bill to which it was attached, the repeal of this provision has wide support in both political parties. “Staff in both parties are promising to get it done,” Johnson says. “It’s just a question of how they’ll do it.” In other words, how will Congress replace the revenue it is intended to generate? At press time, both the Senate and the House of Representatives had voted to repeal the provision, but the two bills differed substantially in how they would replace the revenue.
Health Care Implementation Timeline
Have you extended health insurance coverage to your employees’ children up to age 26? When do the penalties kick in if your company doesn’t provide insurance? When can you stop worrying about your or your children’s pre-existing conditions? Joel Ohman, a certified financial planner and head of HealthInsuranceProviders.com, a website for comparing health insurance plans, has broken down the Patient Protection and Affordable Care Act into a year-by-year list of what will happen when—assuming the law survives court challenges and legislative attempts to amend or repeal it. This is a partial list; see his complete timeline at www.healthinsuranceproviders.com/health-care-reform/ or the government’s own timeline at www.healthcare.gov/law/timeline/index.html.
2010
--Health insurance plans that offer coverage for workers’ children must cover those children through age 26.
--Health insurance companies can no longer exclude children from coverage due to pre-existing conditions.
--Adults who are uninsured due to pre-existing conditions are eligible for coverage in high-risk health insurance pools until state health insurance exchanges are up and running.
--Health insurance companies can no longer set annual limits and lifetime limits on coverage.
--All new health insurance plans must cover certain preventive services with no out-of-pocket costs. (This will apply to all health insurance plans by 2018.)
--Companies that offer health insurance to early retirees (ages 55 to 64), their spouses, and dependents can qualify for reimbursement for certain health expenses these participants incur from a temporary reinsurance program.
--All new health insurance plans must comply with new regulations that create an appeals process for health insurance claims denials.
--Businesses that employ fewer than 25 people may be eligible for a tax credit equal to 35 percent of their contribution toward health insurance premiums. (This increases to 50 percent in 2014.)
2011
--For those below age 65, the penalty tax on all distributions from a Health Savings Account for nonqualified medical expenses increases from 10 percent to 20 percent.
--Employers of 100 or fewer workers will be able to offer their employees a “simple cafeteria plan” for selecting tax-favored benefits. These plans will be exempt from certain rules that apply to other cafeteria plans.
--Those earning more than $200,000 (as an individual) or $250,000 (for married couples filing jointly) will see their Medicare payroll tax increase from the current 1.45 percent to 2.35 percent.
2013
--Contributions to flexible spending accounts will be capped at $2,500, with that amount indexed for inflation each subsequent year.
--Employers will no longer receive a tax deduction for subsidizing the prescription drug costs of retirees who are eligible for Medicare Part D.
--The Medicare Part A (hospital insurance) tax will increase 0.9 percent for those who earn more than $200,000 ($250,000 for married couples filing jointly).
--The minimum threshold for claiming itemized deductions for health care expenses increases from 7.5 percent to 10 percent of adjusted gross income.
2014
--All U.S. taxpayers must have health insurance coverage that the U.S. government considers acceptable or pay a fine. The fine is either a percentage of applicable income (1 percent in 2014; 2 percent in 2015; 2.5 percent thereafter) or a flat rate ($95 in 2014, $325 in 2015, and $695 in 2016), whichever is greater. All of the fines are per person per year, with a cap per family of 300 percent of the flat rate. Taxpayers with uninsured dependents pay half of the adult fine per child.
--States must launch health insurance exchanges where individuals and small businesses can buy health insurance in a competitive marketplace.
--Businesses with 50 or more employees that do not offer health insurance coverage—or offer coverage that is not considered adequate or affordable—face fines.
--The waiting period for joining a group health insurance plan can be no more than 90 days.
--Health insurance companies can no longer use an individual’s health status or pre-existing conditions to refuse to issue a policy or renew a policy. They cannot charge higher health insurance rates because of gender or health conditions other than tobacco use.
--Non-elderly Americans who earn less than 133 percent of the poverty level will be eligible for Medicaid.
2018
--An excise tax takes effect on “Cadillac” health insurance plans—employer-provided health insurance plans costing more than $27,500 for families or $10,200 for individuals, with increased limits for those in “high-risk” professions. The tax is charged on the amount such plans exceed set thresholds.
If the 2010 health care reform law survives ongoing legal and legislative challenges, how will it affect your company? That depends, in part, on the size of your workforce and what health benefits you provide.