What Employers Need to Know About PPACA ("Obamacare")

Matthew Joseph Lapointe

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Introduction

On June 28, 2012, the US Supreme Court issued its highly anticipated ruling on the Patient Protection and Affordable Care Act (“PPACA"). Opponents of the law argued that Congress overstepped its authority by requiring individuals to buy health insurance or pay a fine (the so-called “individual mandate"). While acknowledging Congress’ authority to regulate interstate commerce, opponents of PPACA argued that requiring someone to buy insurance was not regulating commerce – it was creating commerce. In an opinion authored by Chief Justice John Roberts, the Supreme Court upheld the individual mandate, but not under Congress’ authority to regulate commerce. Instead, Justice Roberts held that Congress has the authority under its constitutional taxing power to impose a fine on those who do not buy health insurance. Thus, Congress cannot regulate the inactivity of not buying health insurance, but Congress may tax that inactivity.

Now that the Supreme Court has upheld the major elements of the law [1], the individual mandate will become effective in 2014, along with a number of other important provisions of PPACA. Business owners should have at least a basic understanding of the key provisions of the law, particularly those provisions that are already in effect and those that will go into effect in 2013 and 2014. Following is a summary of key provisions of PPACA that should be of interest to every business owner.

Health Insurance Exchanges

By January 1, 2014, PPACA requires each state to establish an American Health Benefit Exchange and Small Business Health Options Program Exchange (an “Exchange"), to be administered by a governmental agency or non-profit organization, through which individuals and small businesses with up to 100 employees can purchase qualified coverage. Four benefit categories are available through these Exchange plans – bronze, silver, gold and platinum – based on the actuarial value of the plans.

Federal funding for states to establish such Exchanges is available until January 1, 2015. PPACA requires Exchange plans to meet standardized affordability, essential benefit, and consumer protection requirements. Additionally, it requires Exchange plans to meet any additional state benefit requirements, but states must defray premium and cost-sharing costs related to additional benefits for subsidized individuals. PPACA offers individual subsidies for Exchange plans in the form of premium credits available to eligible individuals and families with incomes between 133% and 400% of the federal poverty level. The credit will be set on a sliding scale.

If a state does not establish its own Exchange [2], PPACA provides that an exchange for that state will be set up and operated by the federal government.

The Individual Mandate and the Employer Mandate

PPACA generally requires that as of January 1, 2014, all individuals must have health insurance or be subject to a penalty on their federal income tax return. The amount of the penalty increases gradually over three years, starting in 2014. In 2014 the penalty will be the greater of $95 or 1% of household income in excess of the tax filing threshold. By 2016, the penalty will be the greater of $695 or 2.5% of income in excess of the tax filing threshold. For example: assuming the tax filing threshold in 2014 is $10,000, if an individual has a household income of $50,000, the percentage penalty would be 1% of $40,000, which is $400. Because this percentage penalty is greater than the flat dollar penalty for 2014 (which is $95), he or she would pay the percentage penalty.

In addition to the individual mandate, as of January 1, 2014, PPACA requires employers with more than 50 full-time equivalent employees (“FTEs") to offer “qualified health insurance coverage" to their employees – this provision is known as the “employer mandate." “Qualified health insurance coverage" is that which provides the essential health benefits package prescribed by PPACA, limits annual cost-sharing to the high-deductible plan limit, limits the annual deductible for small group market plans to $2,000 for individuals and $4,000 for families, and does not require cost-sharing for preventive services or immunizations.

If a business has 50 or more FTEs and one or more of its employees receive a government subsidy to help purchase health insurance from a state Exchange, then the business will pay a penalty. An employee is eligible for a premium subsidy if he or she meets two conditions: (1) the employee’s household income must be less than 400% of the Federal Poverty Level (FPL) and (2) the employee’s portion of the insurance premium on the employer’s plan exceeds 9.5% of the employee’s household income.

If a business owes an employer mandate penalty, the calculations are as follows: (1) if the business DOES NOT provide health insurance, its annual penalty equals [the total number of employees in the firm (subsidized and unsubsidized) minus 30] x $2,000; and (2) if the business DOES provide health insurance, its annual penalty equals THE LESSER OF [the number of subsidized employees] x $3,000 OR [the number of employees (subsidized and unsubsidized) minus 30] x $2,000.

Small Business Health Care Tax Credit

PPACA included a tax credit to assist small businesses that want to provide health insurance to their employees. The credit went into effect in 2010. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000. Employers with more FTEs or with higher average annual wages may still qualify for a smaller credit. In order to claim any amount of the credit, the business must have no more than 25 FTEs, and the employees must have annual full-time equivalent wages that average no more than $50,000.

W-2 Reporting for Large Employers

Beginning with the 2012 tax year, PPACA requires that employers that issue more than 250 W-2s report the cost of employer-provided coverage on W-2s issued in 2013. The entire cost of the benefits is to be included in the W-2 – both the employee portion and the employer portion. This amount will not include any salary reduction contributions made to flexible spending accounts, health savings accounts or Archer MSAs. This reporting is for informational purposes only; PPACA did not alter the tax-exempt nature of these benefits.

Health Insurance Reforms

Starting in2010, PPACA required that all insurers offering dependent coverage provide such for children through age 26 and not impose any pre-existing condition exclusions. This expanded dependent coverage will remain effective, thanks to the Supreme Court’s decision upholding the law. According to the National Center for Health Statistics, an additional 2.5 million young adults have enrolled in health insurance as a result of this provision.

Since June 2011, health insurance plans have been required to report the proportion of premium dollars spent on clinical services, quality, and administrative costs (the so-called “medical loss ratio" or “MLR"). Insurance companies in the individual and small group markets must spend at least 80 percent of the premium dollars they collect on medical care and quality improvement activities. Insurance companies in the large group market must spend at least 85 percent of premium dollars on medical care and quality improvement activities. Insurance companies that do not meet the 80% and 85% targets must issue rebates beginning in 2012. Most of these rebates will go to the employers who paid the premiums on their employees’ behalf. The employer must share the appropriate portion of the rebates with their employees. For example, if the employee pays 50% of the health insurance premium, then 50% of the rebate must be paid to the employee and 50% may be retained by the employer.

Effective January 1, 2014, insurance companies cannot deny coverage to anyone with pre-existing conditions. In addition, PPACA will prohibit insurance plans from establishing annual limits or lifetime limits and requires that they provide the prescribed essential health benefits package.

Conclusion

The U.S. Supreme Court has finally given health care providers and employers certainty as to the law of the land on healthcare reform. While the presumptive Republican presidential candidate, Mitt Romney, has vowed to repeal PPACA if he is elected in November, it is questionable whether there will be a sufficiently large Republican majority in the Senate to repeal the law entirely if Romney prevails. It would be prudent for business owners to learn more about the law as it stands and how its provisions will affect their businesses over the coming years. PPACA’s provisions are complex and business owners who are struggling to understand how its provisions apply to them are encouraged to consult with their business attorney, their accountant or their benefits advisors for guidance.

[1] The Supreme Court struck down one of PPACA’s provisions dealing with the expansion of the Medicaid program. PPACA offered federal funds to states to expand their Medicaid programs to enroll more poor people. Under PPACA, if a state declined to implement the expansion, the state would not only lose the promised additional funds, it would lose all federal funding of its Medicaid program. This “all or nothing" provision was struck down by the Supreme Court.

[2] Several states have refused to implement a state-operated Exchange, including Florida, New Hampshire, Georgia, Louisiana, Wisconsin and others. Other states have been working on establishing an Exchange for several years and should be prepared to "go live" on January 1, 2014.

Additional Resources

For an excellent book that describes the health care systems of other developed countries, see "The Healing of America," by T.R. Reid.

IRS Guidance: Small Business Health Care Tax Credit

IRS Guidance: W-2 Reporting of Employer-Sponsored Health Coverage

Congressional Research Service: Employer Mandate & Related Penalties

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