The Health Care Reform Act

1. The Health Care Reform Act

2. Presenters • Kim Houlton, SPHR, Director of Human Resources • Terri Lillesand, CPA , Tax Shareholder

3. Presenters • Kim Houlton, SPHR, Director of Human Resources • Terri Lillesand, CPA , Tax Shareholder

4. Overview • Health Care Reform • Impact on Health Care Plans • Health Care Reform • Tax Ramifications • HIRE Act • Expiring Tax Provisions • Questions & Answers

5. Health Care Reform Overview • Two laws: Patient Protection and Affordable Care Act (Enacted 3/23/10) and Health Care and Education Reconciliation Act of 2010 (Enacted 3/30/10) • Various effective dates • Information is coming out daily. The information discussed and in the materials is current through today.

6. Impacts on Employer Benefits & Insurance Plans

7. Mandated Benefits and Plan Design Changes for All Plans • Lifetime limits for benefits removed • For plans beginning after Sept. 23, 2010 • Annual limits on essential benefits removed • For plans beginning after Sept. 23, 2010 • Certain reasonable limits, to be defined by the Department of HHS will be allowed until 2014 • Rescissions for fraud only • For plans beginning after Sept. 23, 2010 • Waiting periods no greater than 90 days • For plans beginning in 2014

8. Mandated Benefits and Plan Design Changes for All Plans • Coverage for adult children to age 26 • For all plans providing dependent benefits, coverage must be extended to children of plan participants up to the age of 26 regardless of student status, marital status or tax dependency • Applies to plan years beginning after Sept. 23, 2010 • Prior to 2014, this requirement is limited to those adult children who are not eligible for their own employer sponsored plan

9. Mandated Benefits and Plan Design Changes for All Plans • Pre-existing Conditions • National high risk pools to be available by June 21, 2010 for individuals who cannot get coverage due to pre-existing conditions • Only available until 2014 • Federal program funded with $5 billion • Available to those who have been uninsured for at least six months • Under 19 years of age • No pre-existing condition limits may be applied for plans beginning after September 23, 2010 • Age 19 and over • No pre-existing condition limits may be applied beginning in 2014

10. Mandated Benefits and Plan Design Changes for All Plans • FSAs - Health Flexible Savings Accounts • HRAs - Health Reimbursement Arrangements • HSAs - Health Savings Accounts • OTC – Over-the-Counter medications or supplies no longer allowable without prescriptions (insulin still OK) after 2010 • $2,500 annual cap on expenses covered under health FSAs, starting in 2013

11. Mandated Benefits and Plan Design Changes • Automatic enrollment for large groups (>200 employees) • Employees must be automatically enrolled in employer health plan • An opt-out provision is required • Date not defined but could begin 2013 (HHS may accelerate)

12. Mandated Benefit for All Employers • Lactation Breaks • Fair Labor Standards Act amended to require reasonable unpaid breaks to nursing mothers (unless State requires compensation) • Private space (not restroom) required • Employers with < 50 employees not mandated if undue hardship would result • Immediate implementation (March 23, 2010)

13. Grandfathered Status • Plans in place on March 23, 2010 are Grandfathered • Grandfathered Plans are exempt from many of the new mandates • Maintain Grandfathered Status by • No reduction in or elimination of any benefit • No increase in percentage of co-insurance • No increase in deductibles or out-of-pocket limits >15% above medical inflation • No increase in co-pays >15% of medical inflation plus $5.00 • No decrease in percentage of employer premium contributions by more than 5% • No new insurance plan, contract or carrier

14. Mandated Benefits and Plan Design Changes for Non-grandfathered Plans • Preventive Care • Considered essential coverage for plan years as of Sept. 23, 2010 • The Department of Health and Human Services issued interim final regulations in July • 100% coverage required under HDHPs • Coverage for Clinical Trials • Requires coverage of routine patient costs associated with participation in clinical trials to be effective in 2014

15. Mandated Benefits and Plan Design Changes for Non-grandfathered Plans • Minimum Essential Coverage by 2014 • Inpatient and outpatient hospital services • Physician and other health professional services • Prescription drugs • Preventive care for adults and children • Maternity and newborn care • Pediatric dental, vision and hearing services • Clinic and lab services • Emergency room services • Rehabilitation services • Mental health and substance abuse services

16. Mandated Benefits and Plan Design Changes for Non-grandfathered Plans • Emergency Services • Any plan covering emergency services must do so without requiring pre-authorization or imposing out-of-network charges • Plan years beginning Sept. 23, 2010 for non-grandfathered plans • OB/GYNs and Pediatricians designated as Primary Care Providers • Plan members must have a choice of primary care providers (PCPs) to include OB/GYN and Pediatricians • Plan years beginning Sept. 23, 2010 for non-grandfathered plans

17. Mandated Benefits and Plan Design Changes for Non-grandfathered Plans • Impacts to high deductible health plans • No lifetime or annual benefit limits • 100% paid preventive care (as defined by HHS) • Small employer maximum deductibles of $2,000 single, $4,000 family may limit participation in HSAs for these groups • Minimum actuarial value of 65% of essential coverages to be required in all types of insurance plans • If employer contributions to HSAs are not allowed in the actuarial calculations, many HSA plans may not meet 65% and will no longer be allowed

18. Mandated Benefits and Plan Design Changes for Non-grandfathered Plans • Internal and External Appeals Processes • Plans must establish HHS-approved external appeal processes • Plans must implement written procedures for internal appeals of coverage determinations and claims (and incorporate current ERISA rules) • For plan years beginning after Sept. 23, 2010 for non-grandfathered plans • States must provide processes to ensure independent review of State plans

19. American Health Benefit and SHOP Exchanges • Each state must establish an insurance exchange to help individuals and qualified small employers obtain coverage • Coverage offered with 4-5 standard benefit tiers Bronze, Silver, Gold, Platinum and Catastrophic • Qualified individuals, based upon income, may be eligible for premium assistance, cost-sharing or free-choice vouchers • Individuals and small groups by January 1, 2014 • Expands to large groups in 2017.

20. Medicare Coverage Changes • Medicare Part D (prescription coverage) • In 2010, Medicare Part D “donut hole” will be offset by $250 rebate check to beneficiaries • In 2011, Medicare Part D will give 50% discount for brand name drugs purchased within “donut hole” • By 2020, “donut hole” eliminated • In 2011, Medicare will provide essential preventive care services at no cost to participant

21. Early Retiree Reinsurance Program • Temporary reinsurance provides reimbursement to employer sponsored plans covering retirees ages 55 through 64, plus their dependents or surviving spouses. • Up to 80% of claims between $15,000-$90,000 per individual may be reimbursed to the plan • Reimbursements are to reduce premium costs, or to reduce contributions, co-pays, deductibles, co-insurance or other out-of-pocket costs for plan participants (limited other uses for employers)

22. Early Retiree Reinsurance Program • Program to run from June 21, 2010 to Jan.1, 2014 or until $5 billion fund is exhausted • Employers must apply for reimbursements • Applications and information found at: Official ERRP Program Application http://www.hhs.gov/ociio/Documents/official-errp-program-application_.pdf Official ERRP Application Instructions http://www.hhs.gov/ociio/Documents/application_instructions.pdf Frequently Asked Questions http://www.hhs.gov/ociio/Documents/application_faq.html Application Submission Dos and Don’ts http://www.hhs.gov/ociio/Documents/errp_dos_donts.pdf

23. New Communication and Reporting Requirements • Uniform Summary of Benefits • Plans must provide summaries of coverage • to enrollees prior to enrollment or re-enrollment • summaries must satisfy the requirements of regulations that will be issued by March 23, 2011 • Material Modifications • If a plan is modified • provide a notice of modification no later than 60 days prior to the date the modification will become effective • failure to comply may result in penalties up to $1,000/day, per failure • Effective by March 23, 2012

24. New Communication and Reporting Requirements • Quality of Care Reports • Group plans to provide annual reports to HHS regarding benefits that improve health outcomes • Wellness benefits, case management, disease management, care coordination, patient safety, hospital discharge programs to prevent readmission • First reports due March 23, 2012 or upon guidance from HHS • Coverage Reports • Employer plans are to submit to the IRS and to employees reports including identity of insured(s), dates of coverage, types of plans and costs • Beginning with tax year 2014

25. CLASS ACT • National voluntary program for individuals to purchase Community Living Assistance Services and Support (long-term care) • All working adults automatically enrolled with payroll deductions unless they (or their employers) opt out • After five years of payroll deductions, the plan provides monthly payments for services to help disabled persons stay in their homes HHS not yet ready to implement, perhaps in 2012

26. Opportunities for Cost Savings • Wellness Grants • Employers with fewer than 100 employees who work 25 hours or more per week may receive grants for up to five years to begin eligible wellness programs • Must not have had a wellness program in place prior to March 23, 2010 • Effective 2011-2015 or until $200 million funding exhausted • Employers may offer incentives of 30%-50% premium discounts to those participating in wellness programs • Beginning in 2014

27. Rapidly Changing Guidelines and Responsible Agencies Interim rules and final regulations will be released over time. The following agencies provide guidance as determinations are made: HHS Department of Health & Human Services (http://www.healthcare.gov/) IRS Internal Revenue Service (www.irs.gov)

28. 2010 Provisions

29. Taxation of Expanded Coverage of Adult Children in Employer Health Plans • Before HCR- health care coverage/benefits not taxable for employee, spouse and dependents . • Effective on March 30, 2010, no taxable income for employer provided health care coverage for children who are under age 27 at the end of the employee’s tax year regardless of if they are a dependent • As a direct result of the mandated increased coverage for adult children who have not obtained age 26. * Please see Pages 70-72 in the back of your booklet for additional information.

30. Taxation of Expanded Coverage of Adult Children in Employer Health Plans (cont.) • Child: son, daughter and includes step, adopted or foster children • Cafeteria plans will have to be amended by December 31, 2010 if they include adult children and can be effective retroactive to March 30, 2010 • If coverage is income taxable to the parent, it is not FICA taxable.

31. Taxation of Expanded Coverage of Adult Children in Employer Health Plans (cont.) • Wisconsin had adopted the coverage of adult children under age 27 as of January 1, 2010 for certain employers. Coverage through March 30, 2010 will be income taxable for both federal and Wisconsin purposes unless the adult child is a dependent for health care purposes. • Wisconsin has not adopted the federal provision exempting children under age 27 so there could be taxable income for all of 2010 for Wisconsin purposes only. Not taxable if a dependent for health care purposes.

32. Taxation of Expanded Coverage of Adult Children in Employer Health Plans (cont.) • Payroll issue: need to know if the child will be a dependent or not. May not be able to make that decision until the end of the year. So imputing income now may not be wise. • Taxable income amount is based on the “fair market value” of the coverage and is determined by the employer and insurance provider. • New law applies for both employees and self employed individuals

33. 2011

34. Miscellaneous Provisions • W-2 must include value of employer-provided health insurance • For tax years beginning after 12/31/2010 • Value does not include flexible spending accounts, Medical Savings Accounts (MSA) or Health Savings Accounts (HSA) • To determine the value of employer-sponsored health insurance coverage, the employer will have to calculate the applicable premiums for the tax year for the employee under the rules for COBRA continuation coverage

35. Miscellaneous Provisions (cont.) • Increase in Penalty for nonqualifying HSA or MSA distributions • From 10% to 20% for HSAs • From 15% to 20% for MSAs

36. Small Employers May Establish “Simple Cafeteria Plans” • All nondiscrimination requirements for cafe plans can be ignored if employer meets 3 tests: • is an “eligible employer” • Employer makes a required contribution to qualified employees • Plan passes eligibility and participation requirement

37. Small Employers May Establish “Simple Cafeteria Plans” (cont.) • Eligible employer: • Employed 100 or less employees on business days during either of the two preceding years. • If not in existence for two years can be based on estimate of number of employees in the current year • Even if employer grows beyond 100+ employees they retain their eligibility to maintain a simple cafeteria plan until they employ an average of 200+ employees on any business day. Eligibility lost for the following plan year.

38. Small Employers May Establish “Simple Cafeteria Plans” (cont.) • Employer contribution requirement to qualified employees: • Qualified employees are all those eligible to participate, NOT just those that are participating • Amount of contribution : • a uniform percentage (not less than 2%) of the employee’s compensation OR • At least the lesser of 6% of the employee’s compensation for the plan year or twice the amount of employee salary reduction.

39. Small Employers May Establish “Simple Cafeteria Plans” (cont.) • The amount received by the highly compensated can not be greater than the amount received by the non-highly compensated or the plan will be disqualified • Minimum eligibility and participation requirements • If 1000 hours of service in prior plan year, must be eligible to participate. • Each employee has a right to elect any benefit under the plan

40. Small Employers May Establish “Simple Cafeteria Plans” (cont.) • May exclude: • those who have not attained age 21 before the close of the plan year • Those who have less than one year of service as of any day during the plan year • Those covered by collective bargaining agreement

41. 2012

42. Changes to Information Reporting • Information reporting for payments to corporations and for goods (Form 1099) • For payments made after December 31, 2011 • Now includes payments greater than $600 to corporate providers • Now includes payments for property, not just services • How many more millions of 1099s will have to be issued? • What is the cost of issuing these additional 1099s? • Lots of unanswered questions: • What about fiscal year recipients? • W-9 used or some other form? • What about items purchased with credit cards?

43. 2013

44. Increased Medicare Taxes on Wages and Self-employment Income • An additional .9% hospital insurance (HI) tax applies to wages and self employment income IN EXCESS of $250,000 MFJ, $125,00 MFS, and $200,000 all other taxpayers • These amounts are NOT indexed for inflation • Only for the employee, not employer • Employer is required to withhold the additional .9% on wages in excess of $200,000

45. Increased Medicare Taxes on Wages and Self-Employment Income (cont.) • Example: • H has wages of $100,000 and W has wage of $250,000 • H’s employer does not have to withhold as his wage does not exceed $200,000. • W’s employer has to withhold the extra .9% on $50,000 (the amount exceeding $200,000). • They will owe the additional .9% on $50,000 of the H’s wages when they file their personal income tax return.

46. New 3.8% Medicare Tax on Net Investment Income • For individuals, estates and trusts • The amount subject to the new tax is the lesser of the net investment income or the excess of AGI over the threshold amount: • Investment income: interest, dividends, annuities, royalties and rents (unless those items are derived in the ordinary course of a trade or business), passive activities. • Subtract allowable deductions allocated to the investment income

47. New 3.8% Medicare Tax on Net Investment Income (cont.) • Does not include income not taxed (like muni income) or retirement plan distributions • Threshold amount (not indexed for inflation) • MFJ: $250,000 • MFS: $125,000 • All others: $200,000 • Effective 2013 tax rates (based on current law): • Ordinary unearned income & qualifying dividends: 39.6% + 3.8% = 43.4%. • LT capital gains: 20% + 3.8% = 23.8%.

48. New 3.8% Medicare Tax on Net Investment Income (cont.) • Example: Single taxpayer. Threshold amount is $200,000 for a single taxpayer. • 1: AGI of $180,000 and net investment income of $50,000. Since AGI not over threshold, no investment income taxed at 3.8%. • 2: AGI of $220,000 and net investment income of $100,000. Only $20,000 is subject to the 3.8% tax (the amount of AGI that exceeds the threshold). • 3: AGI of $350,000 and net investment income of $100,000. The full $100,000 is subject to the 3.8% tax.

49. Miscellaneous Provisions • Higher threshold for deducting medical expenses: currently medical expenses must exceed 7.5% of AGI. In 2013, the threshold will be 10% for those under age 65.

50. 2014