On March 30, 2010, President Barack Obama signed into law the Health Care and Education Reconciliation Act of 2010 (H.R. 4872), amending the comprehensive health care reform legislation enacted on March 23, 2010 (i.e., the Patient Protection and Affordable Care Act).  Many of the specifics associated with the new legislation remain unclear. Further guidance will become available as clarifying regulations are made to address how the law is to be implemented. Until then, the impact certain aspects of the Acts will have on benefits plans and financial statements will have to be estimated and monitored as guidance is provided. 

 

The Acts are far reaching and too voluminous to fully summarize here, however highlights of certain provisions of the Act include:

BUSINESS RELATED PROVISIONS

The Act does not require employers to provide health coverage to employees; but beginning in 2014, it penalizes them for failing to do so through penalties (administered by the IRS) that are imposed on certain employers with at least 50 full-time employees (those working 30 or more hours per week).

Small businesses and eligible tax-exempt employers who are required to make certain non-elective contributions toward the costs of employee health benefits will be eligible for a small business credit to offset the cost of employee health insurance.  When fully effective, the new credit will be up to 50 percent of the lesser of: (1) the employer’s aggregate contributions towards premiums paid to a qualified health plan offered by the employer through an exchange; or (2) the aggregate contributions an employer would have made if the employee had enrolled in a qualified health plan having a premium equal in value to the average premium for the small group market in which the employee enrolls. For years 2010 through 2013, the credit is 35 percent of the lesser of: (1) employer’s nonelective contributions for premiums paid for health insurance coverage; or (2) the average premium for the small group market in the employer state.

 

In order to qualify, the business must have no more than 25 full-time equivalent employees, pay average annual wages of less than $50,000, and provide qualifying coverage. The full amount of the credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000, and will phase out when those thresholds are exceeded. The average wage threshold for determining the phase-out of credits will be adjusted for inflation after 2013.

Small employers (generally those with 100 or fewer employees) will be allowed to adopt new “simple cafeteria plans,” which are conceptually similar to simple 401(k) plans and simple IRAs under current law. In exchange for satisfying minimum participation and contribution requirements, these plans will be treated as meeting the nondiscrimination requirements that would otherwise apply to the cafeteria plan. The provision is effective for taxable years beginning after December 31, 2010.

 

Two significant design changes to employers’ health flexible spending accounts also will be required for 2013. The first is a new $2,500 cap on the amount of salary reduction contributions employees can make to their FSAs each year. The second change is more subtle, but likely will affect a larger percentage of the employee population on a consistent basis. That is, health FSAs can no longer reimburse employees for the cost of over-the-counter medicines — a loss of flexibility that may make participants more vulnerable to the use-or-lose rule.

 Another provision of the Act that may force design changes to some employers’ group health plans is the 40 percent excise tax on high-cost plans. This excise tax, which will begin to apply in 2018, is based on the total cost of benefits provided under the plan regardless of how those costs are allocated among the employer and employee. So avoiding the excise tax will require plan design changes as opposed to just shifting some or all of the premium cost to employees.

Even though the Act will not become fully effective for a number of years, employer-sponsored group health plans will feel a much more immediate impact. In fact, a number of plan design changes will need to be implemented in time for the 2011 plan year. These include:

• Eliminating lifetime and annual limits on benefits;

• Providing first-dollar coverage for preventive care;

• Extending eligibility for dependent coverage (if offered) to employees’ unmarried children who are not yet 26 years old; and

• Establishing a new internal and external review procedure for claims determinations.

 

 

MISCELLANEOUS BUSINESS PROVISIONS

The Act significantly expands the current-law obligation of persons engaged in a trade or business to report on payments of other fixed and determinable income or compensation (1099 Reporting).   First, to the Act extends reporting to include payments made to corporations other than corporations exempt from income tax under section 501(a).   Second the Act expands the kinds of payments subject to reporting to include reporting of the amount of gross proceeds paid in consideration for property or services.  The new 1099 reporting is effective for payments made after December 31, 2011.

FUTURE CONSIDERATIONS

The Act and the Reconciliation Agreement will end the national health care reform debate. Many observers believe that this legislation does not address the lingering challenge posed by the expansion of health care costs as the retirement of the baby-boom generation shifts more and more of these costs onto Medicare. Future Congresses will return to health care reform to address the cost of medical care, the benefits provided under various federal health care programs, and the taxes needed to support those government commitments.

 

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