HEALTH CARE REFORM: What it Means for Employers

1. HEALTH CARE REFORM:What it Means for Employers April 2010 April 2010 Tye Andersen Jackson Walker L.L.P. 100 Congress Avenue, Suite 1100 Austin, Texas 78701 512-236-2007 tandersen@jw.com

2. The Bills Patient Protection andAffordable Care Act (PPACA) Passed March 23, 2010 Health Care and Education Reconciliation Act of 2010 Passed one week later

3. Grandfathered Plans • What is it? • Adding new employees ordependents is okay • Can we modify it some? Probably

4. Grandfathered Plans, cont. • Grandfathered Plans are exempt from the following requirements: • Coverage of preventative cost • Non-discrimination rules for fully-insured plans • Claims procedures • High risk pools • Electronic transaction standards • Cover certain clinical trial treatment • Transparency requirements

5. Grandfathered Plans, cont. • Grandfathered Plans are exempt from the following requirements (cont.) • Require plans to implement various activities such as case management, reduction in hospital readmission and wellness programs and report the status report to Secretary of HHS and participants • Require certain choice of providers for pediatric and ob/gyn care and require in-network coverage for emergency room visits to non-network providers Allow for HHS to annually review premium increases • Restrictions on premium rate differentials by age, geography and tobacco use (insurers only) • Guaranteed issue and renewability (insurers only) • Prohibit discrimination based on health status, including increase in premium reduction for wellness programs (insurers only) • Limit cost sharing

6. Grandfathered Plans, cont. • Grandfathered Plans (pre-March 23, 2010) arerequired to: • Not have lifetime limits • Not have pre-existing conditions exclusions for dependents under age 19 • No pre-existing conditions exclusions for anyone (Jan. 1, 2014) • Restricted annual limits from 2011-2013 and eliminate annual limits in 2014 • Prohibition on rescission • Extend coverage to unmarried or married, adult children to age 26 • Use the standard uniform explanation of coverage (once developed) • Give rebates if MLRs do not meet the applicable standards (only for insurers, not self-funded plans) • Not have waiting periods greater than 90 days (Jan. 1, 2014)

7. Annual and Lifetime Limits • No lifetime dollar limit on “essential benefits” • Restricted annual dollar limits on “essential benefits” • What does “restricted” mean for 2011-2013? It’s unclear • In 2014, no annual dollar limits at all Questions – • Is there a difference between in-network and out-of-network? Probably not • Retiree programs? Probably not allowed • Are non-dollar limits okay? Maybe

8. Essential Benefits • Secretary of HHS will issue regulations defining essential benefits • However, these general categories are “essential”: • Ambulatory patient services • Emergency services • Hospitalization • Maternity and newborn care • Mental health and substance use disorder services • Prescription drugs • Rehabilitative services and devices • Prevention and wellness services and chronic disease management, and • Pediatric services, including oral and vision care

9. Dependent Coverage Until Age 26 • Meaning of age 26 • Definition of dependent • Married or unmarried • Plan only has to cover the adult child, not spouse or dependents • Coverage is not included in income for employee or for adult child • “Full time student status” cannot be a requirement • COBRA qualifying event and 125 plan event

10. Over the CounterDrug Prohibition • Effective January 1, 2011 • End of tax-advantaged treatment of OTC drugs • Prohibits reimbursement of OTC drugs from: • FSAs • HRAs • HSAs • Prescription drugs and insulin can still be reimbursed

11. Individual Mandate In 2014, all individuals must obtain health insurance or pay a penalty, which would be the greater of: • 2014: 1.0% of AGI or $95/person • 2015: 2.0% of AGI or $325/person • 2016: 2.5% of AGI or $695/person • Indexed after 2016 • Family flat dollar amount capped at 300% of individual penalty Hardship Exemption: Individuals below tax filing threshold

12. The Exchanges • Beginning in 2014, states are required to create Health Insurance Exchanges where individuals and employers can purchase health insurance, either through private insurers or a co-op • Actuarial value: Bronze (60%), Silver (70%), Gold (80%), Platinum (90%) • Exchange open to employers with less than 100 employees • States can tinker with this limit or open exchanges to large employers after 2016 • Premium subsidiaries and cost-sharing subsidies available for individuals who are below 400 % of the federal poverty level ($43,000 for individual, $88,000 for family of four) • Employees, whose employer does not offer coverage, are eligible to obtain coverage from the Exchange • Employees, whose employer does offer coverage, are eligible to join an Exchange if their employer coverage is unaffordable (9.5% of AGI) or the employer plan does not have at least a 60% actuarial value (bronze level) • Overall, increased administrative burden for employers

13. Employer Mandate • Starting in 2014 • If employer does not provide coverage and at least one employee obtains low-income premium subsidy in an Exchange, there is a penalty of $2,000/year x number of full-time employees (30 hours/week) • Not deductible by employer • Employer does provide coverage but • Employer plan fails: • 60% bronze level test, or • 9.5% AGI affordability test; and • Employee enrolls in Exchange and receives low-income subsidy • Employer does not have to calculate affordability test, employee discovers eligibility after going to the Exchange • Penalty of $3,000 per employee with subsidy • Maximum of $2,000 times number of full-time employees

14. Small Employer Tax Credit • Employers with less than 25 employees who do offer coverage • Employee average wages must be less than $50,000 • Eligible for federal tax credit up to 35% of their premiums • Effective immediately

15. Vouchers Starting in 2014, if employer offers health care insurance, then: • Employer must offer cash voucher to any employee whose premium is between 8% and 9.5% of the employee’s household income and whose income is below 400% of the FPL • Voucher is equal to the greatest employer contribution which employer would have made to its own plan(ex. HMO only, HMO-PPO) • Any excess amounts is given to the employees as wages • No employer penalty for employees who receive a voucher • Voucher amount is deductible by the employer • Vouchers are excluded from employee’s income • Administrative difficulties anticipated

16. New Employer Requirements • Starting in 2014 automatic enrollment mandatory for large employers with 200+ employees who offer coverage after two notices and opportunities to opt-out • Additional reporting and notice requirements • Explanation of Exchange (3/31/2013) • Reporting of insurance coverage to the IRS and the participant (2014) • W-2 reporting of the value of employer-provided group health coverage excludable from employee’s gross income • health, dental, vision, employer HSA contributions, and HRA contributions • Cadillac tax calculation and reporting in 2018 • Excludes dental and vision costs for calculation

17. Cadillac Tax • 40% tax on value above $11,850/$30,950 for retirees and high-risk industries • Indexed at CPI-U+1% for 2019, CPI-U only after 2019 • Higher indexing based on age and gender • Which benefits count? All medical benefits as well as account-based plans (HSAs, FSAs, HRAs) • Excludes dental and vision • Tax applies for non-profits, multi-employer and governmental plans • Double-dipping allowed • Begins in 2018 • 40% tax on value above $10,200 individual and $27,500 family

18. Tax Changes • Industry fees • Health Insurers ($60.1 billion over 10 years) • Law exempts some VEBAs • Pharmaceutical Industry ($27 billion over 10 years) • Medical devices (2.3% excise tax on 1st sale, $20 billion over 10 years) • Medicare Hospital Insurance (HI) Tax • Currently 1.45% • Increases tax rate from 1.45% to 2.35% starting in 2013 for high-income earners (income in excess of $250,000 for joint filers; $200,000 for single filers) • 3.8% tax on net investment income (income in excess of $250,000 for joint filers; $200,000 for others • Does not include distributions from qualified retirement plans • Itemized medical deduction threshold increased from 7.5% of AGI to 10% starting in 2013

19. Other Issues • Medicare Advantage plans • Not as advantageous to employers as in the past • CLASS Act • Increased HSA penalty for non-medical distributions (was 10%, now 20%) • FSA cap of $2,500 starting in 2013 • Small employer “Simple” Cafeteria Plans

20. Immediate Implications • Health insurance reforms. These apply to the first plan year beginning after September 23, 2010: • Extension of health plan coverage for adult dependent children up to age 26. • Eliminate pre-existing condition exclusions for children under age 19. • Eliminate lifetime limits and modify annual limits. • Changes to medical reimbursement, HSA and HRA plans starting in 2011 regarding OTC reimbursements. Starting in 2011: • These plans may no longer be used to reimburse for over the counter drugs, unless pursuant to a prescription from a doctor • This may impact "grace period" claims from January to March of 2011 on account of 2010 elections • In addition, the excise tax on amounts distributed for nonmedical expenses increases to 20% from 10% • Expanded W-2 Reporting. Starting for 2011 (due in January of 2012): • Employers must report the aggregate cost of employer sponsored health insurance coverage. • Tax credit for employers with 25 or fewer employees. Effective now • Employers are eligible for a credit based on the employers cost of health insurance • Average wages must be $50,000 or less • Credit is on a sliding scale up to 35% • Adoption of Temporary High Risk Pool • May replace the Texas high risk pool • Effective June 2010 • Applies to individuals who do not have insurance.

21. The Tan Tax • 10% tax on amounts paid for indoor tanning services • EffectiveJuly 1, 2010 Tax on tanning? That should bea deductable business expense!

22. Jan. 1, 2011 • Prohibition of lifetime dollar limits • Restriction on annual dollar limits • Pre-existing condition exclusions for • dependents under 19 years of age prohibited • Dependent child coverage expanded to age 26 • OTC drugs ineligible for FSA, HSA, HRA reimbursements • Uniform explanation of coverage (once promulgated) • Phase out of Part D “donut hole” begins • CLASS Act (long-term care program) • Medicare Advantage funding reduced • W-2 reporting for 2011 tax year Jan. 1, 2020 Part D “donut hole” filled Health Care Reform Timeline Summary of Selected Changes (as of March 30, 2010) * • Jan. 1, 2014 • Annual dollar limits prohibited • Free choice vouchers for exchange • Auto enrollment required for employerswith 200+ employees • Low income premium subsidy for the exchange • Individual & employer mandates effective • No waiting periods longer than 90 days • Health insurance exchanges established • Pre-existing condition exclusions • prohibited for everyone Jan. 1, 2012 Tax on comparative effectiveness research *Timeline indicates calendar year grandfathering plan 1st Qtr, 2010 RDS accountingchanges • Jan. 1, 2013 • Medicare (HI) tax • Health care FSA • contributions capped • at $2500 Jan. 1, 2018 Cadillac tax is established