How Health Insurance Reform Affects Employers and Employees

On Monday, we posted an article discussing how health reform affects insurance agents and their clients. Last night, the House and Senate both passed the final version of the bill. Some changes will go into effect this year, but many of the major provisions (including the individual and employer penalties) will not take effect until 2014 and beyond.  Before the major provisions are put in place, additional new state and federal laws and regulations will need to be created. 

Until specific regulations are issued, we won't know exactly how this legislation will affect anyone's specific health plan. 

However, this does means we can now give a more definitive answer to the question: "How does Health Care Reform affect U.S. Employers and their Employees?"

This post breaks the changes into three groups:

(1) Changes Affecting all Employers and their Employees(2) Changes Affecting only Employers with Less than 26 Full-time Employees(3) Changes Affecting only Employers with More than 50 Full-time Employees

(1) Changes Affecting all Employers and their Employees

New Temporary High-Risk Pool - In 90 days, a temporary national high-risk pool will be established to provide health coverage to individuals with pre-existing medical conditions. Employees who have a pre-existing medical condition and who have been uninsured for at least six months will be eligible to enroll in the high-risk pool and receive subsidized premiums. 

No Lifetime Maximums Allowed - In 6 months, insurance companies will be prohibited from placing lifetime limits on health plans. This applies to both individual health plans purchased by an employee and group health plans purchased by employers.

Increased Dependent Coverage - In 6 months, insurance companies must provide dependent coverage for children up to age 26 for individual and group health plans.

No Exclusions for Dependent Coverage Allowed - In 6 months, insurance companies will be prohibited from placing pre-existing condition exclusions on a policy-holder's children.

Over the Counter Drugs Excluded from HRA/HSA/FSA - Beginning in 2011, the costs for over-the-counter drugs not prescribed by a doctor will no longer be eligible for tax-free reimbursement through an HRA, FSA or HSA.

Health FSA Contribution Limit - Beginning in 2013, the amount of contributions to health FSAs is limited to $2,500 per year.

Health Insurance Exchanges - By 2014, each state must create an American Health Benefit Exchange and a Small Business Health Options Program Exchange, administered by a governmental agency or non-profit organization. The exchanges must provide a place where individuals and small businesses with up to 100 employees can purchase coverage that meets certain requirements.

Insurance Carrier Rating Rules - Beginning in 2014, medical underwriting and pre-existing condition exclusions for individual and small group health insurance plans will be prohibited in all states. Insurers will be prohibited from denying coverage or setting rates based on gender, health status, medical condition, claims experience or other health-related factors. Premiums will vary by age (limited to a 3:1 ratio), family structure, geography, actuarial value, tobacco use (limited to a 1.5 to 1 ratio) and participation in a health promotion program.

Employee Subsidies - Beginning in 2014, the federal government will give tax credits (called "premium credits") to individuals with incomes between 100 and 400% of the federal poverty line (FPL) that cap an individual's health insurance cost on a sliding scale from 2% to 9.5% of income respectively. Employees who are offered coverage by their company will not be eligible for premium credits unless the company's plan does not meet "minimum coverage requirement" or if the employee share of the premium exceeds 9.5% of income.

Employee Free Choice Voucher - Beginning in 2014, employers that offer coverage to their employees will be required to provide a "free choice voucher" to employees with incomes less than 400% FPL whose share of the premium exceeds 8% but is less than 9.8% of their income if they choose to enroll in a plan in the Exchange. The voucher amount must be equal to what the employer would have paid to provide coverage to the employee under the employer’s plan.

Employee Requirement to Purchase Insurance - Phasing in from 2014-2016, individuals will have to purchase coverage or pay a penalty of the greater of $650 per year up to a maximum of three times that amount per family or 2.5% of household income. Beginning in 2017, the penalty will be increased annually by the cost-of-living adjustment. Exceptions will be made for religious objectors, those who cannot afford coverage and individuals who meet other special criteria.

(2) Changes Affecting Employers with Less than 26 Full-time Employees

Employer Subsidies - Provide small employers with no more than 25 employees and average annual wages of less than $50,000 that purchase health insurance for employees with a tax credit. 

Phase I: Beginning in the 2010 tax year and ending in 2013, Phase 1 of this subsidy will provide a tax credit of up to 35% of the employer’s contribution toward the employee’s health insurance premium if the employer contributes 50% or more of the total premium cost (or 50% of a to-be-established benchmark premium). The full credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000, but the credit will decline as the company size and average wage rates rise. Tax-exempt companies are eligible for tax credits of up to 25% of the employer’s contribution toward the employee’s health insurance premium. Phase II: Beginning in 2014 and available for 2 years, small companies that purchase coverage through the state exchanges will be eligible for a tax credit of up to 50% of the company's contribution toward an employee’s health insurance premium if the company contributes at least 50% of the total premium cost. In Phase 2, the full credit will only be available to companies with 10 or fewer employees and average annual wages of less than $25,000. Similar to Phase 1, the size of the credit will decrease as company size and average wage increases. Tax-exempt businesses are eligible for tax credits of up to 35% of the company's contribution toward the employee’s health insurance premium.

(3) Changes Affecting Employers with More than 50 Full-time Employees

Employer Penalties for Not Offering Any Coverage - Beginning in 2014, a company with more than 50 full-time employees that does not offer coverage and has at least one full-time employee receiving an individual tax credit must pay an annual penalty of $2,000 per full-time employee, excluding 30 employees from the assessment.  For example, an employer with 51 full-time employees that does not offer health coverage will pay an annual penalty of $42,000 ($2,000 per employee for 21 employees). 

Employer Penalties for Offering "Unaffordable" or "Unqualified" Coverage - Beginning in 2014, a company with more than 50 employees that offers coverage that is "unaffordable" or does not meet the "minimum coverage requirement" (i.e. the coverage is "unqualified") and has at least one full-time employee receiving an individual tax credit, will pay the lesser of $3,000 per year for each employee receiving a credit or $2,000 per year for each full-time employee, excluding 30 employees from the assessment.  The definition of "unaffordable" will be different for each employee as it will depend on the employee's income and whether or not they fall in that 100%-400% of the FPL bracket. The "minimum coverage requirement" requires a qualified plan cover 60% of the benefit costs of the plan, with an out-of-pocket limit equal to the Health Savings Account (HSA) current law limit ($5,950 for individuals and $11,900 for families in 2010).

Note: This should not be taken as legal or tax advice.