As of January 1, 2014, several significant provisions in the Health Care Reform law (formally known as the Patient Protection and Affordable Care Act, or PPACA) become effective:
1- Employer Shared Responsibility (aka the Employer Mandate or “Pay-or-Play”)
2- The Individual Mandate
3- Health Insurance Marketplaces (originally called “Exchanges”)
4- Federal subsidies to help qualified individuals buy insurance in a Marketplace/Exchange
5- Medicaid expansion
Following is a brief explanation of each of these provisions and how they interact.
EMPLOYER SHARED RESPONSIBILITY requires “large” employers (those who employed on average at least 50 full-time employees and “full-time equivalents” in the prior year) to offer health coverage to at least 95% of “full-time” employees (and their dependents), or face potential penalties. “Full-time” is defined as working on average at least 30 hours per week (or 130 hours per month). Small employers are not subject to the Employer Mandate, so they are not subject to potential to penalties if they do not comply with it. Many small employers choose to offer coverage to some or all employees.
The coverage the employer offers is defined under the law as “minimum essential coverage” (MEC), but the law does not specify what benefits or levels of coverage must be provided by MEC. If a large employer wants to ensure it will not be subject to any potential penalties under PPACA, it must offer MEC that meets “Affordability” and “Minimum Value” (MV) requirements.
- The Affordability test is met if the employee cost for self-only coverage is not more than 9.5% of the employee’s “household income.” Since employers generally will not know their employees’ household incomes, the government will allow employers to use the following three “safe harbor” methods instead of household income:
- W-2 method: The employee’s W-2 (Box 1) income from the employer for the current year.
- Rate of pay method: 130 x the employee’s hourly rate of pay as of the first day of the plan year, or monthly pay for salaried employees (not multiplied by 130).
- Federal poverty line: 100% of Federal Poverty Line for an individual. For 2013, this is $11,490.
- The Minimum Value (MV) requirement is met if the plan pays on average at least 60% of the total actuarial value of benefits covered under the plan. (This means that employee cost-sharing – deductibles, coinsurance, co-payments and out-of-pocket maximums – cannot exceed 40% of the average cost of benefits under the plan.)
There are two different penalties for which an employer might be liable. No penalty applies unless at least one full-time employee purchases coverage in a Marketplace/ Exchange and receives a premium tax credit. (See below regarding eligibility for premium tax credits in a Marketplace.) An employer could not be liable for both penalties, but only for one or the other (or for no penalty). The two potential penalties and their amounts are:
|“Non-offering Employer” Penalty|
IRC section 4980H(a)
|Applies if the employer does not offer “minimum essential coverage” to at least 95% of employees who work on average at least 30 hours per week (or 130 hours per month)||Monthly penalty amount = $167 x the total number of eligible full-time employees (minus the first 30) ($167/month = $2,000/year)|
“Minimum Value” penalty
IRC section 4980H(b)
|Applies if the employer does offer coverage to at least 95% of full-time employees, but the coverage either does not meet the Affordability test or does not provide Minimum Value||Monthly penalty amount = $250 for each employee for whom coverage does not meet Affordability or Minimum Value requirements, BUT this penalty is capped at the amount of the above penalty. ($250/month = $3,000/year)|
THE INDIVIDUAL MANDATE requires almost all legal residents in the United States to have
“minimum essential coverage” for themselves and their dependents, or pay a tax. The minimum essential coverage could be either an employer group health plan, a governmental program (such as Medicare or Medicaid), or individual health insurance. The following categories of individuals will be exempt from the individual mandate:
- individuals who are incarcerated
- individuals who have a “religious conscience objection”
- individuals who are not lawfully present in the U.S. (undocumented)
Additionally, the tax will not be imposed on the following individuals even though they would otherwise be subject to the mandate:
- individuals who have a gap in coverage of less than three months
- individuals with household incomes below the federal income tax filing threshold
- individuals for whom the premium for the lowest cost bronze policy is more than 8% of household income
- members of Native American tribes
- individuals who receive a “hardship” waiver from the government
For all others, the tax will be phased in beginning in 2014. It is calculated monthly but paid annually after the end of the year, with the individual’s federal tax return. The amount listed below is the annual amount for each year. The tax amount due will be the greater of the following dollar amount or the percentage of income:
2014 $ 95 per person or 1% of modified adjusted gross income (MAGI)
2015 $325 per person or 2% of modified adjusted gross income (MAGI)
2016 $695 per person or 2.5% of modified adjusted gross income (MAGI)
The maximum annual fixed-dollar tax per family is three times the individual tax (3 x $695 = $2085 in 2016), and the maximum annual tax per child under age 18 is 50% of the individual tax. The “percentage of income” tax cannot exceed the national average premium cost for bronze level coverage. After 2016, the tax amounts will be increased by a specified cost-of-living adjustment.
HEALTH INSURANCE MARKETPLACES (originally called EXCHANGES) will operate as virtual health insurance marketplaces, where “qualified individuals” and “small employers” can purchase health insurance in the form of various “qualified health plans” (QHPs) offered in the Marketplace/Exchange. “Qualified individuals” are those who do not have coverage available through an employer-sponsored health plan or through a government program. “Small employer” (in the Exchange) is defined as less than 100 employees, but States may opt through 2015 to define “small” employer as less than 50 employees (and most have). Starting in 2017 States may allow larger employers (100+ employees) to purchase health insurance through the Marketplaces/Exchanges.
By October 2013 each state is required to establish a State Exchange or a partnership Exchange with the federal government, or the federal government will operate a Federally Facilitated Exchange (FFE) in those states that have not. As of May 2013, 16 states and the District of Columbia have been approved by HHS (by the December 14, 2012 deadline) to run their own State Exchanges in 2014. Seven states will offer State-Federal Partnership Exchanges, and 27 states will default to the FFE.
Plans offered in the exchanges must be “qualified health plans” (QHPs) and must provide the “essential health benefits” package, which includes:
- covering the 10 categories of essential health benefits,
- complying with specified cost-sharing limitations – e.g., maximum out-of-pocket limited to that for HDHPs ($6,350 single coverage/$12,700 family in 2014), and for small group insured plans generally no deductible in excess of $2,000 for single coverage or $ 4,000 for family (but bronze plans can have higher deductible if necessary to meet 60% value level),
- providing coverage at one of four specified actuarial values (AVs) listed below — at a minimum, the plan must pay at least 60% of the total cost of benefits covered under the plan
Actuarial Value is a general indicator of a plan’s payment generosity and is intended to help consumers compare health insurance options. The AVs are expressed as “metal levels” that meet certain “minimum value” (MV) requirements. The percentage associated with the metal level indicates the amount the plan will pay toward the total cost of the plan.
- 60% for a bronze plan (participant pays 40% of the total cost of the plan)
- 70% for a silver plan (participant pays 30% of the total cost of the plan)
- 80% for a gold plan (participant pays 20% of the total cost of the plan)
- 90% for a platinum plan (participant pays 10% of the total cost of the plan)
Additionally, catastrophic coverage (dubbed “young invincibles” coverage) can be offered in the individual Marketplace/Exchange to individuals who are under age 30 at the beginning of the year.
FEDERAL SUBSIDIES. The two types of subsidies in the Marketplace/Exchange are cost-sharing reductions and premium tax credits. Cost-sharing reductions apply at the point of service and will result in reduced co-pays and coinsurance for individuals with household income up to 250% of the FPL. Premium tax credits will help individuals buy health insurance in the Marketplace if they have household incomes equal to 100%-400% of the Federal Poverty Limits (FPL) and they are not eligible for employer-provided health coverage or for government programs (such as Medicaid or Medicare). Individuals will not be eligible for this tax credit in the Marketplace if they are offered affordable employer-provided health coverage that meets minimum value. Additionally, in states that implement the PPACA Medicaid expansion, individuals with household incomes up to 133% of the FPL will be eligible for Medicaid, so only those with incomes between133%-400% of the FPL will be eligible for the tax credit.
The tax credits are both advanceable and refundable. If tax credits are paid in advance, the government will pay them each month directly to the insurance companies on behalf of the qualifying individuals who are enrolled, so individuals will not have to forgo insurance due to cash flow problems. When the tax credit is refundable, individuals can receive it as a refund on their federal taxes after year-end.
MEDICAID EXPANSION. Starting January 1, 2014, Health Care Reform offers states financial incentives to expand Medicaid eligibility to all state residents with household incomes up to 133% of the FPL. Currently Medicaid is only available to specified categories of poor individuals, such as the elderly, blind, disabled, and families with dependent children. Individuals who qualify for Medicaid will not be eligible for a premium tax credit (because they will not have to buy insurance in the Exchange). This affects employers because the “pay-or-play” penalty only applies if a full-time employee qualifies for a tax credit to purchase insurance in an Exchange. Thus, if an individual is covered under Medicaid the employer cannot incur a penalty.
States may opt out of the Medicaid expansion. If a state does not implement the Medicaid expansion it is more likely employers in that state will incur penalties, because individuals with household incomes of 100%-400% of the FPL might qualify to receive a premium tax credit. In states that do implement the Medicaid expansion, however, only individuals with household incomes of 133%-400% of the FPL can qualify for the tax credit. Some states have already declared they will not implement the Medicaid expansion because it would be too costly. It remains to be seen which states will implement the expansion in 2014.