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WASHINGTON—Should the U.S. Supreme Court strike down the entire health care reform law, experts say that would result in mass confusion for employers involving key benefit and tax issues.
The high court is considering challenges to the Patient Protection and Affordable Care Act brought by 26 Republican attorneys general. As employers await the court's decision, which is expected by the end of June, experts cite several areas of concern should the high court overturn the law entirely.
The biggest sources of confusion for employers from such a ruling include provisions in the federal law that:
• Created a $5 billion program to partially reimburse employers and other early retiree health care plan sponsors for part of claims incurred by pre-Medicare eligible retirees.
That money has already been distributed to plan sponsors. It isn't clear whether the money would have to be returned if the law were struck down.
“There is a real issue here on what to do with the money,” said J.D. Piro, a senior vp with Aon Hewitt, a unit of Aon P.L.C., in Norwalk, Conn. “Where in the law does it say what you have to do? Employers will need guidance on that.”
• Mandated that employers extend health coverage to employees' adult children up to age 26, generally effective on Jan. 1, 2011. Under prior federal law, there was no mandate to extend coverage, but employers that did so could extend the coverage tax-free for employees' adult children until age 19, or age 24 for full-time students.
Overturning that expanded adult-child coverage likely would result in the amount spent being considered as taxable income for employees.
Potentially, that could mean employers would have to send revised W-2 wage and income statements for 2011 to affected employees—a major and potentially difficult undertaking as some employees may have since left the company without providing a forwarding address.
Without regulatory or legislative relief, “That could be a real horror show,” said Helen Darling, president of the National Business Group on Health in Washington.
• Limit to $2,500 the maximum annual contribution employees can make to their health care flexible spending accounts. Currently, there is no limit, though employers typically impose a contribution cap of $4,000 to $5,000.
While the cap does not go into effect until Jan. 1, 2013, some employers with fiscal-year plans beginning July 1 already have instituted the lower cap to prevent employees from breaching the $2,500 limit in 2013.
A Supreme Court ruling overturning PPACA could create an issue for employees who opted during their employers' open enrollment period to contribute $2,500 to their FSAs, but who would have contributed more were it not for the health care reform law limit.
While Internal Revenue Service rules allow employees to alter contribution elections after open enrollment has closed, such changes are allowed only if the employee's status changes, such as marriage.
But the rules do not specifically address whether a Supreme Court decision is a bona fide change in status that would allow employees to amend their FSA contribution, said Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.
These and other potential benefit and tax issues are being discussed with growing urgency by employers as a high court decision draws closer. “These are front-and-center issues for employers. There are ascending series of questions that are very difficult to address,” said Andy Anderson, a partner with Morgan, Lewis & Bockius L.L.P. in Chicago.
“It's a real hornets' nest. Employers would need immediate guidance,” said Gretchen Young, senior vp-health policy with the ERISA Industry Committee in Washington.
What experts say is frustrating is there are no certain answers.
“We are really dealing in unchartered waters,” Ms. Sheaks said. While the Supreme Court has struck down laws before, none had been implemented to the extent that the health care reform law has, she said.
If the Supreme Court were to strike down the law, regulators potentially could address retroactivity-related issues through rules and guidance.
But some experts question if regulators would have the legal right to resolve questions, such as whether early retiree reimbursements would have to be returned.
“Would agencies even have authority to issue guidance for a law that was struck down?” Ms. Sheaks asked.
Even if they did, “it could be months before regulators addressed the issues” and employers would need immediate guidance, Ms. Darling said.
Congress also could pass legislation, which some experts say is likely, to address technical, regulatory and tax issues.
As far as the taxation issue for employees whose adult children have had health coverage, “I can't believe that is something Congress would not fix,” Ms. Darling said.
Others, though, were less optimistic about quick action.
“If anything were to get done, it might be after the November elections,” Aon Hewitt's Mr. Piro said.
“A lame-duck session might be the first realistic chance” of Congress taking any action on corrective legislation, Mr. Anderson said.
“Tax reform is very likely to be a front-burner issue for 2013 and if Congress finds that they have to deal with any fallout from the court's decision, such as employees being subject to tax on coverage provided to adult children, they will have an ideal vehicle to make any corrections,” said Paul Dennett, senior vp-health care reform with the American Benefits Council in Washington.
Even if Congress is slow to move, “Employers will not want to react too quickly, since some of these issues could ultimately get resolved in subsequent legislation,” said Michael Thompson, a principal with Pricewaterhouse-Coopers L.L.P. in New York.
PLUS: Read Business Insurance's complete coverage of the Supreme Court health care decision.