Health Care Reform: Where Do Things Stand for Employers?

January 14, 2010

While there has been significant press coverage of the health care reform bills being considered by Congress, there has not been as much attention given to the impact that this legislation could have on employers. As widely publicized, both the House and Senate passed their own versions of a health care reform bill. The House passed the Affordable Health Care for America Act (H.R. 3962) on November 7, and the Senate passed the Patient Protection and Affordable Care Act (H.R. 3590) on December 24. Both houses promise to act quickly to reconcile these two bills, with the goal of presenting President Obama with a bill for signing early in the year.

The bills differ in many ways, and it is too early to predict which provisions of the bills will survive the conference process, but at this stage, there are a few core concepts employers should understand:
 

Employer Mandate: Commonly referred to as “pay or play,” both bills contain provisions designed to force employers to offer health care coverage to employees. In the House bill, any employer that fails to offer an acceptable health plan must pay a tax of 8% of payroll. (The tax is phased out for smaller employers.) Under the Senate bill, employers are not technically required to provide coverage, but a “free rider penalty” penalizes employers with over 50 employees in certain circumstances. Generally, if an employer does not provide coverage or offers a plan that is considered “unaffordable,” and at least one employee enrolls in an exchange plan instead (explained below) and receives a government subsidy, the employer would pay a penalty of as much as $750 per year for every full-time employee it employs (not just the number of employees who purchase coverage through an exchange and receive a subsidy.)

Individual Mandate: Subject to certain exceptions, individuals will be required to obtain health insurance coverage through their employer or on their own through an exchange, or pay a penalty. Certain low income individuals would receive subsidies to help pay for the costs of premiums and cost-sharing. The amount of the penalty differs between the two bills, with the House bill imposing a potentially larger penalty.

New Rules for Insurance Policies: Both bills specify categories of benefits that must be covered under “qualified” health plans, and impose specific cost-sharing limits, out-of-pocket spending limits, and rules regarding annual and lifetime limits. The House bill would subject all plans, including all employer-sponsored plans, to these requirements, although plans currently offered by employers would be grandfathered for five years. Under the Senate bill, only plans offered through the exchange (explained below) or in the individual or small group market would be subject to most of these requirements. Since the exchange would be open only to individuals and small businesses, plans offered by larger employers would be exempt from most of these rules.

Small Business Tax Credits: Both bills provide tax credits to small businesses that offer health insurance. Businesses with 10 or fewer employees and average taxable wages of $20,000 or less would be eligible for the credits. The credits would be phased out as average compensation increases to $40,000 (House bill) or $50,000 (Senate bill) and the number of employees increases to 25. The amount of the credit differs between the bills.

Health Insurance Exchange: Both bills set up health insurance exchanges to facilitate the purchase of insurance by individuals and small businesses. The exchange would not be an insurer, but would provide access to insurers’ plans. Exchange plans would be required to contain specified features and cover specified benefits. Individuals eligible for employer plans would not be allowed to apply their employer’s contribution toward an exchange plan (i.e., the employee would be responsible for the entire exchange premium), thus deterring individuals from dropping employer coverage for an exchange plan (although the Senate bill would require employers who provide coverage to offer “free choice vouchers” to a small segment of low-income employees to purchase insurance through the exchange.) Certain small businesses would be “exchange-eligible,” meaning the employer could make exchange plans available to employees.

Excise Tax on Certain Employer-Sponsored Plans: This controversial tax on so-called “Cadillac plans” is included only in the Senate bill and would place a 40% tax on employer-provided health insurance plans with an aggregate value of more than $8,500 for individuals and $23,000 for families (with some exceptions), and would be adjusted for inflation. Note that these amounts apply to the full value of the plan, not just the premium. This includes not only the premium of the health plan, but also any dental, vision or supplemental plan, as well as employer contributions to HSA or FSA accounts. Only the value of the plan in excess of the limit would be taxed. The tax would be imposed on the insurer, which in the case of some self-insured plans would be the employer. Opponents of this provision see it as an unfair tax on the middle-class that would drive employers to reduce coverage for their employees. Supporters see it as a tool to reduce the use of excessive health insurance plans that do not improve heath outcomes, but encourage unnecessary health care spending.

Flexible Savings Accounts: Under both bills, FSA contributions would be capped at $2,500 per year. Currently, employers have the discretion to set FSA contribution limits. In addition, employees would no longer be able to use tax-free FSA or HSA funds for non-prescription drugs and medical supplies.

These are just a few highlights of two lengthy, complex bills. All of these provisions are subject to change in the conference process.