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Likely Impacts of Healthcare Reform on Employers

by Laura Mueller, Attorney

On March 23, 2010, healthcare reform, through the Health Care and Education Affordability Reconciliation Act ("the Act"), became a reality in the United States. The purpose of this article is to highlight some of the impacts that the reform measures will have on employers as it is rolled out in stages over the next several years.

Importantly, the Act does not require employers to offer health care coverage or to make contributions toward coverage. Some of the important provisions of the law (which is over 2,000 pages in length) as pertaining to employers are as follows.

Small Business Tax Credit

Effective now, tax credits are available to qualifying small businesses that offer employee health insurance. A business will qualify for the credit if it covers at least 50% of the cost of health care coverage, pays average annual wages below $50,000, and has less than the equivalent of 25 full-time workers. The purpose of the credit is to make premiums more affordable. In Iowa it is estimated that 48,600 small businesses could qualify for the small business tax credit.

The credit is worth up to 35% of the premiums a business pays to cover its workers, or 25% for nonprofit firms. The size of the credit will depend on average wages and the employee head count – the full credit is available to companies with average wages below $25,000 and less than 10 full-time equivalent workers and other credits phase out gradually for firms with average wages between $25,000 to $50,000 and head counts between 10 to 25 employees. In 2014, the value of the credit will increase to 50% (35% for nonprofits).

This credit will impact both small businesses who already offer insurance and those who begin offering coverage.

• Note that employees of small businesses that don’t offer coverage will be able to obtain tax credits to purchase individual coverage.

Insurance Exchange Pools

Starting by 2014, the Act requires creation of state-based health insurance exchanges that allow small businesses to pool together ("small business" here means companies with 100 or fewer employees). The purpose of the exchanges is to spark competition and consequently make premiums more affordable to ensure that small businesses can experience the purchasing power that big businesses have always enjoyed. The small businesses will also then share administrative costs.

Children of Employees

Six months after the Act was adopted (beginning September 23, 2010), insurers will be required to permit children to stay on family policies (through both new and existing health plans) until age 26 (even if married) unless the adult child has an offer of coverage through his or her employer. The requirement will take effect the next time the plan comes up for renewal. Adult children who are on their parents' plan now but who lose that coverage when they graduate from college will be able to rejoin the policy in the new plan year beginning six months from the date of enactment of the law.

Pre-existing Conditions, Lifetime Maximums, and Rate Hikes

Under the reforms, six months after the Act was adopted, children previously denied coverage due to pre-existing conditions will be able to access healthcare. As of 2014, this protection will cover adults as well. Lifetime maximums will be prohibited and insurance companies will not be allowed to drop insureds if they become ill. Nor will they any longer be permitted to base the cost of coverage on health status (in other words, employers will be protected from sudden and arbitrary rate hikes on account of a worker’s sickness). Additionally, starting six months from enactment, the Act will tightly restrict the use of annual limits so as to ensure access to care. Beginning in 2014, the use of any annual limits will be prohibited.

Preventive Services

Beginning six months after the Act was adopted, insurers will be required to provide coverage for preventive services. No deductibles or copayments will be allowed to cover prevention and vaccination services.

Employer Penalties

In 2014, an IRS monetary penalty will kick in and impact some employers that either choose not to purchase health insurance or employ individuals who qualify for tax credits under the Act (employers may decide that the penalty is more economical than actually providing insurance, which is within their rights under the Act). Large businesses (more than 50 full-time equivalent employees) with at least one employee who receives taxpayer-funded health assistance (due to low income) will pay an assessment to offset the cost of the subsidies to taxpayers. The penalty will be $2,000 per full-time worker, which is less than the annual cost of providing health insurance. The first 30 workers will be subtracted from the total when calculating the assessment.

Health Care Reimbursement Accounts

Effective January 1, 2011, over-the-counter drugs will no longer be permitted to be reimbursed from a health care flexible spending account unless prescribed by a physician. Additionally, effective in 2013, health care reimbursement account contributions will be limited to $2,500 per year.

Miscellaneous

• Beginning on January 1, 2011, insurance companies will be required to spend most of the premium dollars on care (80 percent in the group market and 75 percent in the individual market), not on profits or overhead, and any excess must be rebated to enrollees.
• Plans must have a straightforward and independent appeals process.
• The Act creates a temporary re-insurance program (until the above-referenced exchanges are available), to help offset costs of expensive premiums for employers and retirees for health benefits for retirees age 55 through 64.
• The Act prohibits new group health plans from establishing any eligibility rules for health care coverage that have the effect of discriminating in favor of higher earning employees.
• Employers cannot require waiting periods beyond 90 days without being assessed a penalty.
• Employers will be required to report the value of health benefits on W-2 forms effective for the first taxable year after December 31, 2010.
• Starting in 2014, employers with more than 200 employees will be required to automatically enroll employees into their lowest cost plan (employees can opt out, but employers will then have to pay a fee).
• Employers of 50 or more employees must provide reasonable unpaid breaks to nursing mothers to express milk and are required to provide a private location, other than a bathroom, for these purposes during the first year following the birth of the child. Employers of fewer than 50 employees are exempt if the requirement would impose an undue hardship by causing the employer significant difficulty or expense.

Laura Mueller is available to answer your questions regarding the impact of healthcare reform legislation on employers. She can be reached at (319) 861-8721.