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Understanding key provisions in the federal health care reform law

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The drive to pass comprehensive health care reform legislation is over. President Obama has signed into law the landmark legislation. The new law will result in as many as 32 million U.S. residents gaining coverage, chiefly through expanding Medicaid for the low-income uninsured and extending federally subsidized health insurance premiums to uninsured individuals with incomes up to 400% of the federal poverty level. For the first time, employers will be subjected to taxes if they do not offer coverage to employees or if the coverage fails an affordability test. Already, employers are changing the design of their plans to comply with a wide range of new requirements, such as continuing coverage to employees' adult children.

Some benefit programs, such as flexible spending accounts, will have to be cut back; others, most notably prescription drug plans provided to Medicare-eligible retirees, will lose tax breaks.

Down the road, employers also could be affected by a new tax on costly health insurance plans if health care plan costs continue to rise. To help employers keep up with the latest developments, Business Insurance provides answers to frequently asked questions about the issues. (Updated Oct. 29, 2010)

Q: How will the new excise tax on health insurance premiums work?

Starting in 2018, a 40% excise tax will be imposed on health insurance premiums exceeding $10,200 for single coverage and $27,500 for family coverage. The cost thresholds triggering the tax will be slightly higher for plans covering retirees or employees in certain high-risk industries. In 2019, the thresholds will rise to match the increase in the Consumer Price Index, plus one percentage point. In 2020 and succeeding years, the thresholds will increase to match rises in the index.

The tax will be paid by insurers for fully insured plans and by plan administrators for self-funded plans. Insurers and plan administrators almost certainly will try to recover that cost from employers.

Q: Will the tax apply to all health care-related coverage?

No, dental and vision care premiums or costs will be excluded.

Q: What is the penalty on employers that do not offer health care coverage?

Starting in 2014, employers with at least 50 employees will be assessed an annual penalty of $2,000 for each employee they do not offer coverage. In calculating the amount of the tax, the first 30 employees will be excluded.

Q: Is there a penalty if an employer offers coverage, but coverage is not "affordable"?

Yes, a penalty of $3,000 per employee per year will apply starting in 2014. Two conditions will have to be met for the penalty to be triggered: The share of the premium paid by the employee would have to exceed 9.5% of household income and the employee will have to use federal insurance premium subsidies to purchase coverage through new state health insurance exchanges. While the tax is $3,000 for each employee for whom coverage is not affordable and who receives subsidies for buying coverage in the state exchanges, the total penalty can't exceed $2,000 per employee.

Q: Since 2004, employers offering retiree prescription drug coverage at least actuarially equal to Medicare Part D have been eligible for a tax break. Specifically, the government provides tax-free reimbursement of 28% of employers' drug costs to retirees within a certain corridor. Does the law take this tax break away?

The law curbs the tax break starting in 2013. Employers still will be eligible for the subsidy, which will continue to be tax free. But employers will not be able to take a tax deduction for retiree prescription drug expenses for amounts equal to the subsidy.

Q: What will happen to flexible spending accounts?

Starting in 2011, employees no longer will be able to be reimbursed from their FSAs for over-the-counter drug expenses unless they have a prescription for the OTC medication. Then, in 2013, a $2,500 cap on contributions to flexible spending accounts will go into effect. In succeeding years, the cap will be increased to match the rise in the Consumer Price Index. There is no annual limit under current law, though employers typically impose limits between $4,000 and $5,000 a year.

Q: What restrictions will be imposed on health savings accounts?

Beginning in 2011, the current 10% tax on health savings account withdrawals taken prior to age 65 that are not used for reimbursement of health care expenses will be raised to 20%.

Q: What changes affecting health care plan design will go into effect quickly?

On the first day of the plan year that begins after six months after the March 23 enactment of the legislation, group plans will have to extend coverage to employees' adult children up to age 26 if the adult child is not eligible to enroll in another employer plan. That will mean, for example, that employers with calendar year plans will have to extend the coverage by Jan. 1, 2011.

Also by Jan. 1, 2011, group plans no longer can have lifetime dollar limits and no restrictive annual limits, as defined by regulations. In 2014, waiting periods exceeding 90 days will be banned as will annual dollar limits on benefits.

Q: The law requires employers to extend coverage to employees' adult children up to age 26. Can employers extend coverage beyond age 26?

The Internal Revenue Service in Notice 2010-38 made clear that coverage can be extended on a tax-favored basis through the end of the calendar year in which the child turned 26.

Q: Can employers condition coverage to employees' adult children on such factors as parental support?

Guidance issued in May by the Departments of Labor, Health and Human Services and Internal Revenue Service says conditioning health coverage to parental financial support, student status, residency or marital status is not permitted under the new law.

Q: Can employers impose surcharges for the extension of coverage to employees' adult children?

No. The regulatory guidance makes clear that the terms of coverage cannot be based on age.

Q: What happens when adult children turn 26 and lose coverage?

When children age out of a plan, the employer has to extend COBRA continuation coverage for up to three years to the adult child.

Q: Will group health care plans be exempt from certain health care reform requirements?

Yes, so-called grandfathered plans will be exempt from several mandates, including one that requires full coverage of preventive services.

To qualify for grandfather status, a health care plan can't, among other things, ever increase a coinsurance requirement, raise by more than five percentage points the share of plan premiums paid by employees, boost copayments by more than $5, or a percentage equal to medical inflation, plus 15 percentage points, whichever is greater, or eliminate coverage for a specific condition.

Q: The health care reform law creates a $5 billion program to reimburse employers for claims incurred by enrollees in early retiree health care plans. How will that program work?

The reimbursement is available for claims incurred by retirees who are at least 55 years old, but not eligible for Medicare, as well as retirees' covered dependents, regardless of age.

The reimbursement begins after a participant incurs $15,000 in claims. After that, the government will reimburse plan sponsors for 80% of a participant's claims, up to $90,000 during a plan year. The reimbursement applies to claims incurred since June 1.

Q: What conditions does an employer have to meet to receive the reimbursement?

The program requires employers to use the reimbursement to offset future plan cost increases, plan enrollees' costs or a combination of the two.

Employers that use the reimbursement exclusively to offset their premium or health benefits costs must abide by a maintenance of effort requirement in which they must spend no less than the same amount of money on their early retiree health care plans as they did in the prior year.

Q: Must employers immediately file an application to have any chance of receiving reimbursement?

While regulators at the Department of Health and Human Services will process applications in the order in which they are received, the key determinant for reimbursement will be on when employers file claims.

Q: How long will the $5 billion fund last?

Researchers at the Employee Benefit Research Institute in Washington project that the fund will be exhausted sometime in 2011.

Q: The law, requires, that full coverage be provided, starting Jan. 1, 2011, for calendar-year plans, for preventive services. What are examples of preventive services?

Among other things, no employee cost-sharing would be allowed for blood pressure, diabetes and cholesterol tests, annual physicals, age-appropriate colonoscopies, as well as obesity and smoking cessation counseling.

While 100% coverage will have to be provided for preventive services, HHS regulations issued in July make clear that comparable coverage does not have to be provided for preventive services delivered by out-of-network providers.

Q: The law bars, starting in 2014 annual dollar limits on essential benefits. What are the dollar limits that can be imposed prior to then?

HHS regulations set a minimum annual limit of $750,000 in 2011, $1.25 million in 2012 and $2 million in 2013.

Q: Can so called mini-med plans receive an exemption from the annual limit requirements?

HHS in September issued a bulletin that said mini-med plan sponsors can seek a waiver from the limits for 2011 through 2013.

To receive a waiver, the plan administrator or CEO of the issuer of the coverage, must provide a statement that says the plan existed prior to Sept. 23, 2010, and that meeting the minimum annual limits would result in a significant decrease in access or a significant increase in premiums for the plan.

HHS says it will act on waiver requests within 30 days of receipt.