A Checklist for Understanding the Key Elements of the 2014 Patient Protection and Affordable Care Act

By Posted March 19th, 2013

In 2014, Americans will see the greatest impact yet from the Patient Protection and Affordable Care Act (also sometimes called “Obamacare” or “the Affordable Care Act”) as many key provisions of this landmark legislation take effect. Since this is the first time any of these processes and regulations have been attempted – by employers and government divisions as well – we can expect some turmoil until we all learn how to adjust and things begin to settle in.

Since you (like all of us at SpinifexIT North America) are beginning to plan for the changes that will occur in just 10 months, I wanted to share a planning checklist that our friends at J. Smith Lanier & Co. put together (all credit for the following content goes to them). While this blog post is considerably longer and a bit heavier than what I normally share, I found this to be very helpful and a great conversation starter for the efforts that we will all go through once these regulations take effect.

“Guaranteed Issue” Health Insurance

No individual can be refused health insurance or charged additional premiums based on one’s health history, gender, and/or pre-existing conditions; nor can an insurance company exclude or waiver pre-existing conditions from coverage. Pricing can be adjusted for age but within limited confines. Insurers will be allowed to surcharge tobacco use, but beyond this, pricing must be uniform. Insurers are forbidden to separate insureds into risk pools based on claims experience and charge more for those in higher risk pools. In other words, pricing will be a level playing field.

The Individual Mandate

All individuals must carry health insurance beginning January of 2014. If not, penalties are assessed as the greater of (i) a dollar amount or (ii) a percent of household income. IRS enforcement will be conducted by deducting accrued penalties from income tax refunds.

Year Penalty Per Adult Penalty Per Child Maximum Household Penalty Percentage of Income Penalty
2014 $95.00 $47.50 $285.00 1%
2015 $325.00 $162.50 $975.00 2%
2016 $695.00 $347.50 $2,085.00 2.5%
2017+ 2016 indexed for inflation

Buying Exchanges Established

An exchange will be an online venue whereby individuals and small employers can shop for health insurance coverage. Each state is permitted to operate its own exchange or defer to the Dept. of HHS’s federal exchange. Four levels of policies (premium structures and out-of-pockets) called the “metal levels” will be offered…

Bronze….60% actuarial value
Silver….70% actuarial value
Gold……80% actuarial value
Platinum..90% actuarial value

“Actuarial value” means that across the board in that plan, on the average the stated percentage of total medical expenses incurred by plan members is reimbursed.

Premium Assistance Available From Exchanges

If the person’s or household’s income is below 400% of the federal poverty level, premiums will be reduced on a sliding scale via use of an advanced premium tax credit. For 2013, 400% of the federal poverty level for an individual is $45,960; 400% of the federal poverty level for a family of four is $94,200. Premium assistance is only available for the second lowest-priced silver plan sold in the exchange; and only available if the person is not eligible to enroll in an affordable employer-sponsored plan, Medicare, Medicaid, or other government plan. Out-of-pockets are also reduced at certain income thresholds.

Employer Exchange Notices

This was scheduled to begin in 2013 but has been delayed until further notification. On an enrollment event, the employer will provide a notice about the exchange (standard verbiage scripted by Dept. of HHS) which will advise employees on the operation of the exchange and contact information; and inform the employee if the plan is “unaffordable”, as discussed below.

The Employer “Shared Responsibility” Mandates

Applicable to employers that average 50 or more full-time employees and full-time equivalents over a calendar year, the intent of this section is to require employers who either do not offer coverage to substantially all of its employees, or offer coverage but such is below minimum standards — to pay into the exchange system to help fund the cost of their employees who qualify for premium assistance; thus the “shared responsibility” moniker. These penalties are excise taxes and accrue monthly beginning January 1, 2014. For purposes of calculating shared responsibility penalties, part-time employees (less than 30 hours a week) can be disregarded; as well as seasonal employees, leased employees, and temps.

There are two shared responsibility mandates….

#1 – The “Play or Pay” Mandate
This penalty applies if an “applicable large employer” (50 full-timers and equivalents) fails to offer enrollment to 95% of its full-time employees and their children. Said penalty is $2,000 annually ($166.66 per month) for all full-time employees in excess of 30 (i.e., the first 30 you get free)…provided just one of them purchases coverage in the exchange and qualifies for premium assistance. Example: If an employer with a 200-count group misses the 95% mark, the penalty for one year is $340,000 (200 – 30 X $2,000). The operative word here is “offer”. Coverage does not have to be accepted by 95%, just offered.

#2 – The Unaffordable Plan Penalty
An employer plan is deemed “unaffordable” if either (i) its actuarial value is below 60% or (ii) the employee premium share for employee-only coverage exceeds 9½% of that employee’s income. If this scenario is present, the employer will pay a $3,000 excise tax ($250/month) for each employee who declines enrollment in the employer plan and buys insurance from the exchange and qualifies for premium assistance.

For purposes of meeting the 9½% test, the employer can use (i) box 1 of the W-2; (ii) the federal poverty level for individuals; or (iii) monthly pay rate. To determine the monthly pay rate for hourly-paid employees, multiple the hourly rate times 130. The employer may vary the method by classification of employee within limits.

The penalties are calendar year based so there is a 2014 transitional rule for off-calendar (“fiscal”) plan years. If on January 1st of 2014 25% of the employees are covered or 33% were offered coverage at the last open enrollment, no penalties will be charged for the months from 01/01/14 to the first day of the plan year. There also is a safe harbor for employers with variable hour employees – those for whom the employer genuinely has no idea whether or not they will average 30 hours/week – there is a relief provision that permits the employer to use a look-back period as long as 12 months to determine if a person will average 30 hours and thus be deemed full-time. This relief applies to new hires and on-going variable hour employees as well. Once on the plan, the employee must remain on the plan for the same time period as the look-back – and at least six months – regardless of hours worked during that time.

Annual Benefit Limits Barred

Starting with 2014 plan years, no plan, including grandfathered plans, can impose annual benefit limits.

Information Reporting

Non-grandfathered plans will begin annual reporting to IRS. No details have been released but we would expect considerable detail regarding eligibility and coverage will be needed by IRS related to the shared responsibility mandates.

Maximum Waiting Periods

Effective for 2014 plan years, employees must be enrolled within 90 days of hire. Unless further guidance is issued, the way the initial guidance is written, 90 days is the drop-dead date. Thus, if you normally enroll on the first day of each month, you’ll need to cover some people earlier than 90 days, because they must be on board at the end of this 90-day period. The only exception is if the employee takes more time to process paperwork and such.

Specific Small Group Issues

What is a “small” group? The Affordable Care Act says less than 100 employees, but the states are given the option to use under 50 until 2016 plan years. There are several issues affecting these small group plans in 2014…

1.  Non-grandfathered small groups (and individual policies by the way) must offer this “minimum essential benefits” package….

  • Ambulatory services
  • Emergency services
  • Hospitalization
  • Maternity and newborn
  • Prescription drugs
  • Pediatric vision & dental
  • Mental health & Substance Abuse
  • Preventive & wellness
  • Laboratory services
  • Rehabilitative services

2.  Similar to the guaranteed issue mandate for individual policies, small groups must be “community rated”; meaning every similarly situated group is charged the same price. No longer will groups be experience rated; no longer will there be employee health questionnaires. Expected result? Prices will increase.
3.  Small group deductibles cannot exceed $2,000 single; $4,000 family beginning with 2014 plan years.
4.  Small group out-of-pocket costs cannot exceed the limits imposed on high-deductible health plans, which for 2013 are $6,250 single; $12,500 family.

Will We See the Non-Discrimination Rules for Insured Plans?

Prior to the Affordable Care Act, there were no anti-discrimination rules for insured group plans as there were for self-funded plans. PPACA changes that. In general, a group health plan may not provide benefits to highly-compensated employees not offered to rank-and-file; by plan design or in operation – same policy as with 401(k) plans. IRS has delayed enforcement until they write new interpretive regulations but know that the penalties are draconian. You will not want to be out of compliance. IRS historically has not enforced non-discrimination rules for self-insured plans, but all that is about to change.

The existing regulations for self-funded plans were installed some 30 years ago and are woefully out of date with PPACA and modern plan design. Therefore, pending regulations may end up applying to insured and self-insured plans as well. It is far more complex than this, but the old regs for self-funded plans say that a plan must pass an eligibility test or a classification test. The eligibility test says a plan must (a) benefit 70% of all employees…or (b) 70% must be eligible and 80% of those enrolled. Alternatively under the classification test, the employer can show based on facts and circumstances that the plan was not designed or does not operate to the benefit of key employees over rank-and-file; and a safe harbor quantitative classification test is available: The coverage ratio for the non-highly paid populace (lower 75% in pay) must be at least 85% of the participation rate of the top 25% paid). For example, if 90% of the highest-paid 25% participate, then 76.5% of the remaining 75% must participate.

Automatic Enrollment??

Groups of 200 were to conduct automatic enrollment beginning in 2010, but this mandate has been postponed pending issuance of the rules for opting out. It may come into play in 2014 but does not appear a high priority item at IRS at the present.

Wellness Rewards

The existing HIPPA wellness rewards (discounts off employee contribution amounts) for outcome-based wellness programs are increased in 2014 from 20% to 30%; 50% for programs designed to eliminate or reduce tobacco usage.