UPDATE: After this article was published, the date by which employers with 50 or more employees are required to offer health insurance to employees or face fines was extended from January 2014 to January 2015. Penalties for those businesses that do not offer their employees health insurance will now take effect in 2015.
The Affordable Care Act (also called “Obamacare”) is one of the most complex and sweeping laws enacted since the Great Depression. Although it has been in effect since March 2010, the law is being phased in over many years. The cornerstone of the law takes effect on January 1, 2014, when individuals are required to have health insurance either through their employer or on their own.
There has been much confusion and misinformation about the law. The following overview provides guidance on how it will generally impact small, mid-sized and large businesses. Companies are encouraged to review their current situation, speak with professionals and determine how to proceed.
January 2014 is the deadline for individuals to obtain minimum levels of health insurance. It is also the deadline for larger companies (50 or more employees) to offer coverage or pay a penalty. How the law impacts companies and their workers can be summarized in two questions.
- Does your company offer health insurance?
- Is the size of your company 49 or fewer workers?
If your company is already offering health care insurance, nothing more may be required to meet the law’s Jan. 1, 2014 deadline. Here are a couple of items to double-check: ask your insurance carrier to confirm that the policy meets applicable federal and state requirements. Also, if your workers pay a portion of the premium, it must be an “affordable” amount or you may face a penalty. The definition is a bit complex and based on the federal poverty level. As a general guide, it is not affordable if it exceeds 9.5% of the worker’s household income.
As will be described, a primary mechanism for helping individuals and companies with 50 or fewer workers (and potentially 100 or fewer workers) find affordable coverage are health care “exchanges.” The states and federal government are in the process of setting up these marketplaces to allow employers and individuals to shop for coverage and compare competing plans. The exchanges are scheduled to be operating by January 1, 2014 and employers are expected to have access to the information by October 1, 2013.
To follow are brief summaries of the law’s major provisions. Below that is a timeline for implementation of the major provisions. Given that the law is being phased-in over a number of years and some rules have not yet been written, this report will be periodically updated.
Essential Health Benefits (EHB) Defined
As of 2014, all policies in the individual and small group market must include minimum levels of coverage in 10 categories deemed to be essential. The categories are:
- Ambulatory patient services
- Emergency services
- 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
- Pediatric services, including oral and vision care
For years, SEMA lobbied in favor of legislation that would allow small companies to purchase nationwide insurance or bargain collectively across state lines, thereby infusing competition into the marketplace. The Affordable Care Act provides a variation on that approach through “exchanges.” Individual states had until Feb. 15, 2013 to indicate whether they would establish their own exchange or defer to a federally-run option. 26 states opted-out in favor of a federal program.
The exchanges are set to be operational by Oct. 1, 2013, in order to enroll people in coverage that will take effect on Jan. 1, 2014. Under the exchange, small businesses and individuals will be offered a menu of private sector health plans that have been established under common rules regarding the offering and pricing of insurance. The exchange has the ability to pool a large number of potential consumers and thereby help organize a more competitive marketplace, especially if cost is a primary issue. Consumers will be provided with transparent information to help understand the options and differences between the plans (covered benefits, deductibles, premium costs, etc.).
The exchanges will determine eligibility and help enroll small businesses/individuals in appropriate plans. [Note: the federal government is delaying full implementation of its program and the 33 states where it will be running exchanges for one year. During 2014, small businesses in those areas will only have the option of selecting one plan rather than allowing their workers to select from multiple plans.) Exchanges will be administered by a government agency or a nonprofit organization. Many state exchanges will be open to all businesses with up to 100 employees. (The initial limit for the federal program and federally-operated state programs may be 50 or fewer.) Beginning in 2017, states will have the option of allowing companies with more than 100 workers to participate as well.
States may also form regional exchanges or allow more than one exchange to operate in a state as long as each exchange serves a distinct geographic area. The federal government will contract with private insurers to offer at least two national or multi-state plans in each exchange. There will be four benefit categories of exchange plans, plus a separate catastrophic plan. All of the plans will provide essential health benefits with an out-of-pocket limit equal to limits for Health Savings Accounts (currently $6,250 for individuals and $12,500 for families). The plans will differ in the amount of covered costs: 60% (bronze), 70% (silver), 80% (gold) and 90% (platinum).
Private health insurance exchanges may also appear in the marketplace, operated by a broker, insurer or third-party administrator. The private exchanges are designed to help employers and their workers find plans personalized to their specific health care needs and budget.
For the first time in American history, individuals will be required to obtain “essential minimum coverage” for themselves and their dependents, beginning in 2014. The rationale is to ensure that everyone participates in the system, thereby increasing the risk pool and potentially reducing overall costs. If individuals do not obtain coverage, a penalty will be assessed in 2014 in the amount of $95 or 1% of annual income, whichever is greater. This penalty will increase in 2015 to $325 or 2% of annual income and again in 2016 to $695 or 2.5% of annual income. Penalties for family coverage will be higher, but not exceed the annual income percentage caps listed above. After 2016, the penalties increase by a cost-of-living adjustment. The government will provide subsidies for lower-income and unemployed individuals. The Internal Revenue Service (IRS) will be responsible for verification and enforcement of this requirement.
The law imposes significant requirements on mid- and large-sized companies but is less restrictive on small businesses. Employers with 49 or fewer employees are not required to offer health insurance. However, very small companies (25 or fewer employees) are provided tax credits as a mechanism to voluntarily offer coverage. While there is no direct mandate, companies with 50 or more full-time (working 130+ hours/mo.) or “full-time equivalent” employees must effectively offer health insurance by 2014 since they will be penalized as soon as any full-time employee receives a government subsidy under the individual mandate. If the penalty is triggered, the government will impose a fee of $2,000 for all full-time employees, minus the first 30 full-time employees. For example, a company with 51 full-time employees would be assessed a fine of $42,000 annually.
The quick formula for determining “full-time equivalent” employees is adding the number of full-time employees (30 hours/week or more = 130 hours/month) and part-time employee equivalents (total monthly part-time hours divided by cap of 120 hours). For example, if a company employs 40 full-time workers and 20 part-timers working an average 20 hours per week or 80 hours per month, the 20 part-timers are the equivalent of 13 full-timers (20 X 80 / 120 = 13). Thus the employer has 40 + 13 = 53 full-time equivalents. (Note: while the number of part-time workers is used to determine whether a company has met the 50 “full-time equivalent” employee threshold for offering coverage, the $2,000 penalty is only imposed on full-time employees, not part-time workers.)
Even when offering insurance, a company is exposed to one other potential penalty based on “affordability.” If the worker is picking-up a portion of the premium cost, it must be affordable. It is not affordable if it exceeds 9.5% of the worker’s household income or it the plan does not cover at least 60% of medical costs (a “bronze” plan). Also, deductibles for fully-insured small group plans are limited to $2,000 for employee-only coverage and $4,000 for family coverage, (thereafter indexed to inflation). (Verifying affordability may require a complex computation but there are three employer safe harbor options for making determinations.) The issue of affordability is generally associated with lower-wage workers. It is consequential since the company will face a $3,000 penalty for each individual full-time worker that obtains a health care subsidy from the federal government.
The law includes a non-discrimination clause for employer-provided plans. Currently scheduled to begin in 2014, the benefit plan cannot discriminate in eligibility, waiting period, benefits or contributions in favor of highly-compensated employees. For example, some executives may receive a more generous coverage than other employees as part of a compensation package.
Small Business Tax Credits
The law provides an immediate tax credit to small employers that purchase insurance if they have no more than 25 employees and average annual wages of less than $50,000. The credit varies according to size, wages and the amount of employer contribution for the premium. Beginning in 2014, small businesses that purchase through an exchange will be eligible for a two-year tax credit, based on firm size and average annual wages.
In 2013, a new 0.9 percent surtax was added to the 1.45% Medicare payroll taxes paid by individuals earning more than $200,000 per year or joint filers earning more than $250,000 per year. An additional 3.8% Medicare tax on investment income from capital gains, interest, dividends, annuities, royalties and rent was imposed on these same individuals/couples. Neither tax is indexed to inflation so the number of people exposed to the tax will increase each year.
In 2013, the threshold for claiming medical expense deductions rose from 7.5% of adjusted gross income to 10%. (The threshold will remain at 7.5% for individuals 65 or older until 2016).
In 2013, contributions to health care flexible spending arrangements were limited to $2,500. The cap will be indexed to inflation beginning in 2014.
As of Jan. 1, 2014, health insurers are forbidden from turning away people with pre-existing conditions. The federal government is establishing a $25 billion fund to help insurance companies cover the costs of previously uninsured people with medical problems. The fund will be financed by a three-year fee imposed on employers for each person insured under a plan. The fee will start at $63 at the end of 2014 but decrease to about $40 in 2015 and $28 in 2016. Some employers are expected to pass along the fee to workers.
Health insurance providers will collectively pay a new tax, starting at $8 billion in 2014 and gradually increasing each year. In turn, the health providers may then pass it along to employers.
As of 2012, very large employers (250 or more workers) must report the value of the health plan coverage they provide on the workers’ W-2 forms, which may or may not include COBRA premiums. The requirement is currently optional for smaller employers but will eventually become mandatory. The reporting requirement includes both the employer and employee share of health coverage, but excludes dental and vision coverage that are under separate policies. Employer contributions to Health Savings Accounts or worker contributions to Flexible Savings Accounts (FSA) are excluded. However, employer contributions to Health FSA plans may be included if benefits are greater than employee contributions.
The law imposes a variety of restrictions on the insurance industry. It prohibits individual and group health plans from placing lifetime limits on the dollar value of coverage, or annual limits on the dollar value of coverage. It provides dependent coverage for children up to age 26 for all individual and group policies, and prohibits pre-existing condition exclusions for children. The law establishes a national high-risk pool to provide health coverage to other individuals with pre-existing conditions. The law provides grants for up to five years to small employers that establish wellness programs and allows companies to offer employee rewards to participate (premium discounts, waivers of cost-sharing requirements, etc.).
Health Insurance Premium Costs
Implementation of the new health care law has so many complexities and unknown variables, it is nearly impossible to predict its effect on the number one issue for companies: the cost of health care premiums. The exchanges are intended to stabilize prices through marketplace competition. However, it remains unclear whether companies and individuals will fully participate in the exchanges and whether the federal and state governments can create data hubs that will be easy for consumers to navigate. The law also contains many other mechanisms designed to reduce costs such as “accountable care organizations,” where primary care doctors, specialists, and hospitals work together to deliver patient services based on value rather than volume.
Educating Americans on all aspects of the new law remains a challenge. SEMA member companies are encouraged to review their current situation, speak with professionals and determine how to proceed. SEMA is working with a number of other organizations to pursue meaningful reforms that will help reduce the cost of health care premiums.
- Tax subsidies for very small businesses that provide coverage.
- Children permitted to stay on parents’ policies until 26th birthday.
- Lifetime limits on coverage prohibited.
- Preventive Care services provided with no cost-sharing
- Insurance companies barred from denying coverage to children with pre-existing illness.
- Rescission of coverage not allowed, except for fraud, failure to pay or intentional misrepresentation
- Essential Health Benefits determined and made mandatory without annual dollar limits or lifetime maximums
- Coverage of emergency services
- Access to OB/GYN care
- Rate Hike Review is implemented whereby insurers must justify rate hikes over 10% to the state.
- 80/20 rule is implemented. Insurers must spend at least 80% of money on health care or give customers a rebate for the difference starting in 2012.
- Over-the-counter drugs are no longer eligible for reimbursement under FSA
- Very large employers (250 or more workers) must begin reporting the value of health care benefits on employees' W-2 statements.
- Summary of benefits and coverage required
- Plans must cover women’s preventive healthcare services with no cost sharing.
- A new 0.9 percent surtax is tacked onto the 1.45% Medicare payroll taxes paid by individuals earning more than $200,000 per year or joint filers earning more than $250,000 per year. An additional 3.8% Medicare tax on investment income from capital gains, interest, dividends, annuities, royalties and rent is imposed on these same individuals/couples. Neither tax is indexed to inflation so the number people exposed to the tax will increase each year.
- The threshold for claiming medical expense deductions rises from 7.5% of adjusted gross income to 10%. (The threshold will remain at 7.5% for individuals 65 or older until 2016).
- Contributions to health care flexible spending accounts (FSA) are limited to $2,500. The cap will be indexed to inflation beginning in 2014.
- A new 2.3% tax is imposed on medical device manufacturers.
- SHOP exchanges for small businesses take effect (if not sooner). Subsidies available to participating small companies based on wages and number of employees. Congress must also shop via the exchanges.
- Large companies (50 or more full time and full time equivalent employees) must offer affordable coverage or risk a fine of $2,000 per employee, excluding the first 30 employees.
- Three-year fee starts to be imposed on employers for each person insured under a plan to finance a $25 billion fund to help insurance companies cover the costs of the newly insured with pre-existing conditions. Fee starts at $63 at the end of 2014 but decreases to about $40 in 2015 and $28 in 2016.
- All individuals must now have minimum insurance or pay a penalty (as outlined above).
- Medicaid expands coverage to 17 million low-income individuals (subject to state approval).
- Health plans are prohibited from imposing annual limits on the amount of coverage an individual may receive.
- Benefits must begin by the 91st day
- Cannot deny coverage based on pre-existing condition regardless of age
- Penalty for individuals that don’t have minimum insurance rises to $325, capped at greater of $975/family or 2% of family income.
- Doctor’s income is to be based on quality of care not the quantity of care provided.
- Penalty for individuals that don’t have minimum insurance rises to $695, capped at the greater of $2,085/family or 2.5% of family income, and is thereafter tied to inflation.
- Businesses with more than 100 workers may buy coverage through the SHOP exchange, if state permits.
- States have the authority to implement their own plans (ex: a single-payer plan where state residents are taxed and have coverage, replacing private insurance).
- A 40% excise tax on high-cost health insurance plans takes effect. Paid by insurers, the tax is on the amount in excess of $10,200 for individuals and $27,500 for families.
- Medicare Gap now fully eliminated (instead of just offering rebates to seniors).