Health Benefit Renewals: Consider Health Care Reform Rules When Renewing Coverage
November 5, 2010
Christina Bell, Senior Manager — Accounting and CFO Advisory Services
It's the time of year when we start thinking about health benefit renewals. This year, the decision is complicated by the recently enacted health care reform. Some of the new reform rules went into effect as early as September 23, 2010.
Health Care Plans that were in effect prior to the act being signed into law on March 23, 2010 are grandfathered in. Grandfathering exempts those plans from certain requirements in the near future, giving companies additional time to prepare for eventual requirements. Most plans are negotiated prior to an effective date, often beginning January 1 and lasting for twelve months. If your plan was already in effect on March 23, 2010, it is eligible to be grandfathered. Plans that are renewed later may still qualify to be grandfathered, provided that the plans are renewed without changes.
What constitutes "changes?" Suppose your company has the Blue Cross Premier PPO $20 plan and you elect to renew the plan. There are no changes, right? Maybe. But if you change the employee paid premium or restructure the cost to employees for dependent care or omit previously offered elective chiropractic coverage, the plan has changed. Note that other changes—such as an increase in deductibles or out of pocket limits or adding or reducing annual limits—could also constitute a change and invalidate the grandfather status of the plan. For more information, see: HealthReform.gov
Summary of Grandfathered Plan Rules
The new full time employee. The Act requires coverage of full time employees beginning in 2014 and imposes maximum waiting periods. The Act defines a full time employee as an employee who works 30 or more hours per week. With respect to seasonal workers, an employee is anyone who works 120 days or more per calendar year. So if you run a seasonal Halloween store, for instance, with 51 employees working 30 hours per week but only for the four months leading up to Halloween, you may qualify as an employer with over 50 employees! If your company employs part time or seasonal workers, you may be surprised to learn that some or all of your employees may be considered full time. You should therefore carefully consider how you structure your workforce.
What are the consequences of not offering coverage?
- Employers with more than 50 employees who don't offer coverage to full time employees could be required to pay $2,000 per full time employee per year. This assessment would not be tax deductible. Yes, we know that it's less than you'd likely pay if you offered coverage.
- If coverage is offered but it is not sufficient or is too costly to employees, other penalties will apply. The penalty will depend on the situation.
- If coverage is offered, but at least one employee declines coverage in favor of using government credit to purchase insurance through an exchange, the employer must pay the lesser of $3,000 per employee choosing an exchange over employer offered benefits or $2,000 for each full time person employed. For the purpose of calculating penalties, the first 30 employees are ignored.
My company employs less than 50 persons. Does any of this apply? Some. If the company chooses to offer coverage, it may be eligible for a tax credit. There are currently no penalties for not offering coverage, except the existing penalty in San Francisco.
What's all this about Exchanges? By 2014, states are required to set up Exchanges (a marketplace) to facilitate health insurance coverage for uninsured persons. People who are not working (because, for example, they are too young, retired, unemployed, or disabled) will purchase coverage directly or with government assistance. People who are working may be eligible to purchase insurance on the Exchange if, for example, they work for a company that doesn't offer health insurance or their individual employee premiums are more than a certain household income threshold. If the employee's income is less than four times the federal poverty level, the employer may be required to issue a voucher to the Exchange for the amount the company would have paid to insure the employee.
Can I get a small business tax credit? The tax credit for small businesses applies only to those companies with 25 full time employees (or fewer) with average annual wages less than $50,000 where the employer pays at least 50% of the health benefits. Sorry, Silicon Valley start ups; this mainly passed us by. The tax credit is for 25% to 50% of health benefits paid by the company.
My company offers only the very best health insurance. As part of a coordinated effort to attract top talent, we offer premium insurance. I don't need to be concerned with this, right? "Cadillac Plans," as these are called, result in a 40% excise tax imposed on carriers or plan administrators effective 2018. Any plan with a value to the employee of $10,200 or more (in 2018) will be considered a Cadillac Plan.
Other changes include:
Flexible Spending plans will have an annual limit of $2,500 (beginning 2013). Beginning 2011, over the counter medication is not reimbursable. It will be important to alert employees to this change when they are determining deferral amounts. If the company plan year expires prior to 12/31/2010 "older children" up to age 26 may be covered under the new plan. Employers wishing to allow participants to increase flex deferrals must amend Flex Plans by 12/31/10 in order to accommodate the "Change in Status."
Health Savings Account distributions (non-health related) will be taxed at the increased rate of 20%.
Dental and Vision plans are exempt from some of these requirements if they are sold separately. Annual limits are fairly standard with both types of insurance so it is advisable to talk with your broker.
Reporting requirements have changed
- Effective 2011, the value of health benefits was to be disclosed on W2's (memo only; non-taxable); however, as of October 12, the requirement was extended to 2012 in order to give employers the time they need to make the change. Reporting is optional for 2011.
- Effective 2012, 1099 reporting will be expanded to include payments to corporations and payments for the purchase of goods.
Some of the provisions of the Act have been challenged and many believe that some provisions will be rescinded, but for the upcoming insurance renewal decision these are the rules we are working with.
For more information on how these rules will affect your company, contact your insurance broker or Christina Bell at Frank, Rimerman + Co. LLP.
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