By Kelly S. Kuglitsch
The U.S. Supreme Court issued an opinion yesterday upholding the constitutionality of both the so-called individual mandate and the expansion of Medicaid under the Patient Protection and Affordable Care Act of 2010 (the “Act”).
Couched within references to the structure of federalism and the history of the Supreme Court’s “limited role” within it, a 5-4 majority opinion authored by Chief Justice Roberts held that the individual mandate is a constitutional exercise of Congress’s power to tax. The mandate requires an individual to pay a “shared responsibility payment” if he or she fails to purchase basic health insurance. Under a more divided portion of the ruling, the Court also affirmed the constitutionality of the Medicaid expansion portion of the Act under Congress’s spending power, while limiting the federal power to eliminate Medicaid funding for a state that refuses to expand the program.
What does the ruling mean for employers?
Continue Implementation Efforts
Notwithstanding various legal challenges to the Act, the majority of employers have steadfastly worked toward meeting their obligations under the law. Now that the constitutionality of the individual mandate has been affirmed, employers should focus on implementing the remaining changes required by the Act, such as revising employee communications, amending plan documents, and preparing for federal data reporting. Those portions of implementation and planning that may have been put on hold must now be revisited in preparation for compliance under the existing timeline of effective dates over the next 18 months. Federal agencies tasked with issuing regulations, such as the Internal Revenue Service and Departments of Labor, and Health and Human Services, will also be busy issuing guidance for rules with upcoming effective dates and clarifying some requirements already in effect.
Uncertainty Continues But at Least Some Reforms are Here to Stay
With the 2012 Presidential election looming, employers face uncertainty as to the ultimate fate of the Act. Even in the event that a future Congress would repeal some or all of the reforms, certain popular components of the Act will likely remain a part of the health insurance landscape for the foreseeable future. Furthermore, many stakeholders have independently expressed a desire to improve and refine the current healthcare delivery system.
On June 11, for example, UnitedHealth Group Inc., Humana, and Aetna separately announced that their company’s policies would continue to provide health care insurance coverage for insured participants’ children up to age 26, regardless of the outcome of the High Court’s ruling.
The best practice, therefore, is to continue to work toward compliance with the Act as enacted, and to stay alert to subsequent refinements and developments.
Conduct “Pay or Play” and Strategic Analyses
Employees with fewer than 50 total full-time (and aggregate full-time equivalent) employees are exempt from the so-called “pay or play” penalties. For employers with 50 or more employees, an important part of moving forward will be to finalize a compliance strategy, perhaps by undertaking a “pay or play” cost-benefit analysis to decide whether the company should continue to sponsor a group health plan as of January 1, 2014.
Beginning in 2014, employers with 50 or more employees may be subject to a maximum annual penalty of up to $2,000 or $3,000, respectively, if the employer either (1) offers no coverage; or (2) offers coverage, but such coverage is not “affordable” to one or more of the employees respectively. For this purpose, coverage is unaffordable if the employee’s annual portion of the premium exceeds 9.5% of the employee’s annual W-2 wages.
Although the “pay or play” penalties are not tax deductible, the costs of maintaining an employer-sponsored health plan will continue to be tax deductible. Employers still deciding whether to continue to provide group health coverage as of January 1, 2014 must weigh many factors including: workforce demographics, the likely ability of employees to afford the offered coverage, the type of benefits currently offered, recognition of the fact that dropping coverage eliminates employees’ ability to pay for premiums on a pre-tax basis (i.e. through a cafeteria plan), and the role of offering a health plan as part of employee retention objectives.
Specific Items
For those employers committed to continued sponsorship of group health plan coverage, items to address in the near term include:
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Providing plan participants with a Summary of Benefits Coverage (SBC) for the first open enrollment period following September 23, 2012;
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Communicating with employees about, and implementing, the Health FSA salary reduction limit of $2,500, which takes effect January 1, 2013;
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Reporting the cost of 2012 employer-sponsored health care coverage on 2012 W-2s;
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Understanding preventative care requirements for women under non-grandfathered health plans;
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Managing various federal reporting requirements under the Act.
The coming months will undoubtedly bring new health care reform regulations, refinements, and legislative developments. In the meantime, plan sponsors, insurers, and health care providers should finalize a compliance strategy and continue to implement compliant practices.
To further discuss health care reform legislation or the impact of specific aspects of the rules on employers and employer-provided benefit plans, contact Kelly Kuglitsch at kkuglitsch@dkattorneys.com, (414) 225-1417, or your Davis & Kuelthau attorney.