On March 21, 2010 the U.S. House of Representatives passed the "Patient Protection and Affordable Care Act" (H.R. 3590) and President Obama subsequently signed it into law. Currently, a reconciliation bill has now been passed making a variety of adjustments to the law, which has also been signed into law. Even though we now officially have “healthcare reform” it is still far too early to tell exactly what the final requirements are that businesses of various sizes will have to address in the coming years. The bill was partisan and more unpopular than not, according to most polling, and as law that has not substantially changed. There will be aggressive efforts to reform if not repeal it by 2014 when most of the benefit portion is slated to take effect. This article takes a look at where the law stands today and some of the main provisions that will impact industry business owners. NOTE: THIS, AND VIRTUALLY ALL SIMILAR MEDIA COVERAGE OR SUMMARIES OF THE LAW ARE FAR FROM DETAILED AND YOU SHOULD CONSULT AN HR PROFESSIONAL VERSED IN THE LAW TO SEE HOW IT SPECIFICALLY IMPACTS YOUR BUSINESS.
There are numerous provisions to the bill which take effect at various deadlines between now and 2018. Offered below are some of the key direct provisions of interest to employers, based on a composite of background materials provided by the HR consulting firm Hewitt Associates and the National Federation of Independent Business.
- Effective 2010, there is a small business health tax credit. The full credit, 35 percent, is available to businesses with 10 employees or less. For those with 11-25 employees, the credit is reduced and businesses with more than 25 employees receive no credit. Only firms that pay their workers an average of $25,000 or less are eligible for the full credit. The credit is reduced as the average wage goes up, stopping at $50,000. The credit is only available for a maximum of five years.
- Effective 2011, an annual fee on health insurance providers will be passed on to consumers. This tax will fall on the vast majority of plans that small businesses purchase, but not on self-insured plans (such as most big business and labor union policies). The amounts are $2 billion for 2011, $4 billion for 2012, $7 billion for 2013, and $9 billion per year for 2014 through 2016, $10 billion thereafter, with certain exceptions.
- Effective 2013, annual contributions to employer-provided health care flexible spending accounts (FSAs) would be capped at $2,500 (indexed thereafter to general inflation) and reimbursement of over-the-counter medicines would be limited to those that have a prescription.
- Effective in 2013, for single taxpayers with adjusted gross income of $200,000 or more and joint filers with AGI of $250,000 or more, the reconciliation bill would add a 3.8 percent tax on unearned income from interest, dividends, annuities, royalties, rents and capital gains ("net gain from disposition of property"). The tax would not include income that is derived in the ordinary course of a trade or business that is not a passive activity. This 3 is in addition to the 0.9 percentage point increase in the Medicare payroll tax for Hospital Insurance. This additional tax would not apply to qualified plan distributions under code sections 401 (a), 403(a), 403(b), 408, 408A, or 457(b).
- Effective 2013, the Medicare payroll tax on wages and self-employment income in excess of $200,000 ($250,000 joint) will increase to 2.35 percent and is not indexed to inflation. This tax marks the first time that funds designated for Medicare will be diverted elsewhere – specifically to pay for the insurance policies of people under the Medicare age.
- By 2014 each state will have to establish Small Business Health Options Programs or "SHOP Exchanges." The goal is to allow small business to pool together and buy insurance. A small business would typically be defined as having 100 employees, though states have the option of limiting pools to companies with 50 or fewer employees through 2016. Large employers can start joining the exchanges after 2017.
- There is a penalty on individuals who do not maintain insurance coverage that is the higher of either a flat dollar amount or a percentage of income. The flat dollar amount is $95 in 2014, $325 in 2015 and $695 in 2016. The percentage of income assessment is 1 percent in 2014; 2 percent in 2015, and 2.5 percent in 2016 and subsequent years. A hardship exemption would be available for individuals with income below the tax filing threshold ($18,700).
- Effective 2014, the federal government begins subsidizing individuals up to 400 percent of the federal poverty line – around $88,000 today. These credits will subsidize individuals purchasing insurance in exchanges, but not those with traditional employer-sponsored plans.
- Effective 2014, employers would be subject to a "free rider" penalty to require companies not offering coverage to pay $2,000 per full-time employee for all full-time employees even if one employee enrolls in a health plan through the Health Insurance Exchange and receives a federal subsidy. The assessment would exclude the first 30 workers from the payment calculation. Employers offering “unaffordable" coverage would be assessed $3,000 for each full-time employee who enrolls in the Exchange and receives a subsidy. Coverage would be considered "unaffordable" if the premiums for the class of coverage selected by the employee exceed 9.5 percent of family income. Note that the Congressional Budget Office (CBO) estimates that the average Health Insurance Exchange subsidy per subsidized enrollee would be $5,200 in 2015, rising to $6,000 per subsidized enrollee in 2019.
- Effective 2018, a 40 percent excise tax would be imposed on the aggregate value of health coverage offered by employers if that value exceeds a certain threshold (Cadillac Plans). The threshold is $10,200 for singles and $27,500 for families and be indexed to the rate of general inflation plus one percentage point beginning in 2019. In 2020 and beyond, the threshold would be indexed to general inflation only. If, by 2018, health care costs increase more than expected, the initial threshold would be automatically adjusted upwards. This would occur if the cost of coverage for the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Program increases more than 55 percent between 2010 and 2018. There is a permanent adjustment in the threshold for retirees age 55-64 and for employees in high-risk jobs, raising it to $11,850 for singles/$30,950 for families in 2018. Alternatively, there would be an adjustment available for companies whose health care costs are higher because of the age or lender of their workers, relative to a national pool.
- Employers that offer health care coverage and make a contribution toward the cost of the health care coverage would have to provide "free choice vouchers" to qualified employees for the purchase of qualified health plans through the exchanges.
For the plans themselves, the exchanges will offer four levels of coverage (Bronze, Silver, Gold and Platinum) with actuarial values between 60-90 percent. The plans will be generally in line with most employer-offered plans today, however they will likely exclude what could be considered basic “catastrophic” only plans. Non-exchange employer plans must be in line with those offered on the exchanges. Grandfathered plans have some leeway, though provisions such as covering children up until age 26 must be added. The laws structure will work to remove grandfathered plans over time.
Chamber of Commerce View
Although the Obama administration states this law will benefit small business, the U.S. Chamber of Commerce does not agree. It cites the following examples of requirements in the law that will negatively impact small business. Not included are some of the “big picture” issues with the law, such as dubious claims at deficit and health care cost reduction that stand to impact the country as a whole.
- The law creates a damaging new mandate on employers that would force them either to offer a government-mandated level of coverage or be liable for significant new taxes of $2,000 per employee, while further adding pro-rated penalties for part-time workers (two part time workers count as one full time worker). Worse, an employer who offers coverage could be fined just as much as one who offers no coverage. This mandate constitutes a massive incentive for small businesses not to grow or hire new workers, and many businesses will be hesitant to hire low-income, low-skill workers, who would be likely to trigger the new tax.
- The law imposes nearly $500 billion in new taxes, many of which would fall squarely on small businesses. Taxes on medical devices and prescriptions would be passed through to consumers. Taxes on insurance plans would be passed on directly to small businesses, as large self-insured employers are exempt. A new tax on “Cadillac” benefits will be harmful to small businesses that have more expensive, but not necessarily more comprehensive plans, while the new “corporate reporting” paperwork tax will exclusively hit small businesses. The Medicare surtax will tax small businesses that file as individuals. Worse, the surtax will hit investments and 401(k) plans. Neither the “Cadillac” tax nor the surtaxes are properly indexed, meaning they will both have an AMT-like effect of ballooning and eventually devastating the middle class. The bill also contains hidden taxes in the form of reduced payments to doctors and hospitals by the government, which will be cost-shifted to the private sector while government underpayments already account for 20-30 percent cost increases for individuals and businesses.
- Every health plan will be required to meet certain standards set by the federal government, except for “grandfathered plans,” which the law essentially eliminates. The end result of these new requirements, according to CBO, is that health insurance on the individual market will be 10-13 percent more expensive.
- Because of the extremely low wage restrictions for small businesses to be eligible for credits, hardly any small businesses would be eligible. Those businesses that are eligible would be required to offer highly comprehensive plans and pay the vast majority of the employees’ premiums – and after two or three years, the credit would vanish entirely, leading to an immediate spike in a small businesses’ cost. These factors make it highly unlikely that most small businesses would, or would be able to, take advantage of this credit.
One consideration for employers will be whether they continue to provide their own plans or settle to pay the free-rider fee. As J.D. Piro, principal and head of Hewitt Associates' Health Law Consulting practice, noted it will be up the individual company to not only run the numbers, but gauge the ancillary impact. Hewitt is a leading human resources consulting firm based in Lincolnshire, Ill. “Employers, regardless of scale, are going to have to assess what the financial impact of this is going to be,” he said. “Do they offer the coverage? If not how big are they? Do they get any exemptions from the penalty based upon how it's calculated? If they do offer coverage, is the coverage valuable enough to be able to satisfy the free-rider mandate? We think most employer plans will be able to satisfy that. Is it going to be affordable for the employees or will they have to turn it down and go get coverage from the exchange? And the employer would pay a penalty in that case.”
Although the numbers under the free-rider provision may be attractive today, there is no indication that will hold true in the years to come. As Piro noted, since 1985 there has been major pieces of health care legislation enacted every 18 months and there is no reason to think that this is going to be any different. “If you look at it only on a static basis – just what's outlined today and what's the cost if I stay in and what's the cost if I get out – every employer will likely run that calculation,” he said. “And based on the penalty some might say it's cheaper to get out. But, what employers have to look at is not just basing the decision on today, but over the longer term – three, four or five years from now. The penalties that are out there now for not offering coverage are a floor and not a ceiling.
“Over a period of time the government might decide that this penalty we have of $2,000 per employee is not enough and maybe we need a penalty of $4,000 or $6,000 or $8,000. And this will be based on, if the predictions work out, from a cost standpoint. And if that comes true, you now have a cost that you did not have before and it's a substantial increase. So now you have a large part of your budget attributable to your employees’ health that you gave over to the government. And if that penalty is suddenly greater than the cost of providing your own coverage it's not going to be that easy to get back into managing your own costs. You'll have sacrificed the administrative infrastructure, you'll have sacrificed the communications infrastructure, the compliance infrastructure, the HR knowledge aspect and it will be very difficult to ramp back up and get that into play.”