The U.S. Supreme Court’s Health Care Reform Ruling: Impact on Employer Plans

Posted on June 28, 2012


The Patient Protection and Affordable Care Act (PPACA) was signed into law March 23, 2010 and the related Health Care and Education Reconciliation Act of 2010 (HCERA), which modified certain provisions of the PPACA was signed into law March 30, 2010 (together known as the “Affordable Care Act” (ACA)). Multiple constitutional challenges were raised and on June 28, 2012 the United States Supreme Court ruled on those challenges to the ACA. Following is a summary of the Supreme Court ruling and its impact on employer sponsored health plans.

1. The ACA Decision: Key Issues.

(a) Individual Mandate. The “shared responsibility payment” is upheld as being within the Congressional power to levy and collect taxes; not as a Congressional power to regulate commerce. Despite the “shared responsibility payment” being labeled a “penalty” in the ACA, this label is not fatal to its being considered a tax because: it is not so high as to remove the choice about buying health insurance; the payment is not limited to a willful violation as payments for an unlawful act; and the payment is collected by the IRS and is to be assessed and collected in the same manner as an individual’s taxes.

(b) Medicaid Expansion. The provision that States would lose existing Medicare funding unless they comply with the expansion provisions of the ACA violates the Constitution as beyond the scope of Congressional power to pay debts and provide for the general welfare of the United States. However, the violation is remedied by precluding the Secretary of Health and Human Services from taking away existing Medicaid funds from States that fail to comply with the ACA’s Medicaid expansion.

(c ) Severability. The ACA does not have a provision that if certain sections of the statute are declared invalid the remainder of the act will survive. Notwithstanding the absence of a severability clause and the invalidity of certain Medicare provisions, the remainder of the ACA is upheld.  2.Impact on Employer Sponsored Plans.

(a) Health Care Provisions That Are Already Effective and Will Remain Effective.

(i) Adult children. Coverage has been extended for adult children to age 26;

(ii) No pre-existing condition limitation for participants under age 19;

(iii) FSA reimbursement restrictions. Flexible spending accounts, health care savings accounts and health reimbursement accounts may not reimburse for over-the-counter drugs, except insulin, without a doctor’s prescription;

(iv) Small business health care tax credit. Employers who pay one half of the insurance premium for their employees and have fewer than twenty-five (25) full time employees whose average wages are less than $50,000 may be eligible for a tax credit up to 35% of the workers’ premium. The credit rate increases to 50% in 2014.

(v) Nondiscrimination. Insured group health plans that are not “grandfathered” may not discriminate in favor of highly compensated individuals. In Notice 2011 - 1 the IRS announced that compliance with the rule prohibiting insured group health plans from discriminating in favor of highly compensated employees would not be required until after regulations or other administrative guidance have been issued. Expect that the IRS will act on this promptly and the rule will apply in 2013. This will prevent plans from offering different benefits or subsidizing premium contributions in a manner that discriminates in favor of highly compensated employees. This will require attention as soon as the IRS modifies Notice 2011-1.

(vi) Simple Cafeteria Plans. Internal Revenue Code Section 125(j) establishes a safe harbor from the nondiscrimination requirements for certain cafeteria plan benefits. The benefits included within the safe harbor umbrella are: group term life insurance, self-insured medical expense reimbursement, and dependent care assistance. Generally, an employer with one hundred (100) or fewer employees that makes a contribution to the cafeteria plan on behalf of each employee who worked at least 1,000 hours during the preceding year may avail itself of the Simple Cafeteria Plan rules and avoid nondiscrimination testing.

(b) Health Care Provisions That Will Become Effective.

(i) Pay or Play. Prior to the ACA there was no federal requirement that employers offer health insurance coverage. Beginning in 2014 the ACA will impose penalties on employers with 50 or more employees for any month in which employees (over a 30-employee threshold) are either not provided employer sponsored coverage or the available coverage is deemed inadequate or unaffordable by the employees. The excise tax is $2000/year per employee assessed on each month for which there is a coverage failure. The $2000 is the initial surtax and will change over time.

(ii) Choice Vouchers. Beginning in 2014 the ACA will require employers to provide certain employees with a voucher, the value of which would be equal to the employer’s contribution to the employer’s health plan and the employee could use the voucher to purchase insurance through an exchange. To be eligible for a voucher the employee’s contribution to the cost of “essential coverage” under the employer’s plan must be more than 8% but less than 9.5% of household income, which may not exceed 4X the poverty level for the family.

(iii) Health Insurance Exchanges. Beginning in 2014 the ACA requires state-based health insurance exchanges. Pennsylvania is in the process of developing its exchange.

(iv) Unearned Income Tax Surtax. Beginning in 2013, a 3.8% surtax will apply on investment income (interest, dividends, royalties, rents, gross income from passive investments, and net gain from sale of property other than property held in a trade or business) in excess of $200,000 of income ($250,000, joint return).

(v) Flexible Spending Limitation. The ACA $2500 annual cap on health care flexible spending account contributions is effective for flexible spending plan years beginning in 2013.

(vi) Nondiscrimination. Beginning in 2014, all group health plans, insured and self-insured, grandfathered and not-grandfathered may not discriminate in favor of highly compensated employees. See 2(b)(v) above.

(vii) Reporting. Small employers (those with less than 250 employees) must report the cost of health coverage on Forms W-2 for the 2013 tax year on the W-2’s issued in January 2014.

3. What Should Employers Do Now?

(a) Let The Dust Settle. Just as the ACA created broad uncertainty in the marketplace with its volume and scope, and just as the pro and con arguments leading up to the Supreme Court’s ruling fueled the uncertainty fire, now there will be debates and uncertainty as to whether the 2012 elections will impact the ACA. Before the decisions several provisions, e.g. the extension of coverage for adult children until age 26, became operative. So, for the remainder of the current plan year, consider leaving the existing plan terms and benefits in place. This will minimize employer, employee and participant disruption. It will give you time to watch the political juggling that will take place under the Washington, D.C. big tent.

(b) Review Your Plan Documents. If your plan provides different benefits or different premium subsidies that discriminate in favor of highly compensated employees, those discriminatory features will have to be eliminated. If your plan has been changed so as not be grandfathered, watch for the IRS to update Notice 2011-1 and likely the nondiscrimination rules will apply in 2013. All plans will have to comply with the nondiscrimination requirements beginning in 2014, so start planning for this.

(c ) Size Counts. The pay or play rules apply to employers with fifty (50) or more employees. Be sure to include this factor into your business development expansion, budgetary and other planning.

(d) Watch Out For 2014. Most of the “big” ACA requirements: pay or play, vouchers and exchanges, are to be effective in 2014. This should allow time to compare the current level of your plan benefits and costs against the corresponding benefits offered through an available exchange and any applicable excise tax. For more information about this or other employee benefits topics please contact David M. Mosier (dmosier@kmgslaw.com) or reach any of the Knox Firm attorneys at 120 West Tenth Street, Erie, PA 16501 and by phone at 814-459-2800.

David M. Mosier is an Shareholder at Knox McLaughlin Gornall & Sennett, P.C.’s Erie office.

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