Flex-Plan Services, Inc. Coffee Talk IRS Notice 2010-38 and Health Care Reform Thursday May 6, 2010 Tina Shozen In-House Counsel & Compliance Officer Hilarie Aitken www.flex-plan.com © 2010 Flex-Plan Services, Inc. 1 Agenda • • Housekeeping What we’re going to cover: – – – – – – – • IRS Notice 2010-38 Patient Protection and Affordable Care Act (PPACA): The path to health care reform Insurance and Benefit Plan Reforms Insurance Exchange Employer “Pay or Play” Mandate Individual Mandate Financing Reform & Tax Provisions What we’re not going to cover: – Medicare provisions – Claims requirements, electronic data and transactions standards and high risk pools. – Stuff we don’t know anything about 2 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Pre-Tax Benefits for Adult Children • PPACA amended 105(b) of the code extending pre-tax benefits to Adult Children (AC) up to the age of 27. – Effective now – Accident and Health Care premiums – FSA and HRA reimbursements • IRS Notice 2010-38 released on April 27, 2010, provides more guidance how this will function. • This provision is different from the requirement to continue coverage for adult children until they reach age 26 (that provision is effective for plan years beginning on or after September 23, 2010). 3 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Pre-Tax Benefits for Adult Children continued… • To receive medical care on a tax free basis the adult child cannot turn 27 at any time during the taxable – Example: AC turns 27 on January 8, 2010, none of their premiums are pretax. – AC turns 27 on December 31, 2010, then none of their premiums could be deducted pre-tax during the 2010 taxable year. • The must be a son, daughter, stepson, stepdaughter, a legally adopted child or eligible foster child of the employee. • This is important—the other sections of 152(c) do not apply (e.g. residency, support, not filed a joint tax return with a spouse, etc.). The AC only needs to be one of the individuals name above and not reach age 27 within the taxable year. 4 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Pre-Tax Benefits for Adult Children continued… • Notice amends the regulations retroactively March 30, 2010 – • Election changes are permitted but only if the AC did not qualify as a dependent previously – – • Plan amendments? Not if Flex-Plan wrote your plan references 105(b) in the PD/SPD EX: Your child, not living with you, age 23, makes a $100,000,000.00 a year, and married = Not eligible for pre-tax benefits under prior rules. Now under new law, same child eligible. Employees can immediately start deducting premium pretax – Premiums deducted prior to March 30, 2010 remain post-tax – Should employers correct prior deductions? • • • Administrative burden Does child turn 27 in 2010? FSA and HRA Implications – – – – – Election changes permitted? Only if they were previously ineligible Expenses incurred before March 30, 2010 not eligible Employer Responsibilities--May want to provide notice to permit changes provide deadline to make changes We will provide access to a sample notice 5 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Switching Gears Year In Review – Flex-Plan has been active in Washington DC and working within the industry to advocate for pre-tax benefits. – Protect FSAs, HRAs, HSAs, and pre-tax premiums – Started with complete elimination of pre-tax premiums and FSAs: • • • Increased FSA to $2500 Indexed for Inflation Working to remove from Cadillac Tax • Patient Protection and Affordable Care Act passed 3/23/2010, amended by Reconciliation bill and signed into law 3/30/2010. • Many types of reforms: insurance industry, medical industry, benefit plan design, and tax reforms. 6 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Insurance & Benefit Plan Reforms • PPACA has a number of reforms that will affect the level of benefits offered on both fully and self-insured health plans & plans offered on the Exchange. – Currently the insurers or employer plan sponsors decide benefits and levels of coverage – PPACA reforms are meant to provide essential and affordable health plan coverage • Reforms will take effect in phases beginning 2010 through 2014 • Definitions, clarification and further regulations NEEDED!! The bill relies on terms for which definitions have yet to be provided. – – – – – Minimal Essential Coverage Affordability Essential Health Benefits The “Secretary will…establish, develop, promulgate, identify, determine” etc. Likely have first set of regs by June for reforms that take effect in 2010, and at least some clarifications or definitions provided. 7 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Which Plans are Subject to Reforms? • Reforms will apply to all health plans—fully insured, selfinsured and plans offered on the Exchange. • Dental and Vision are not considered a group health plan for purposes of reform. • Health FSAs have their own reforms, but will not be subject to the general plan design requirements. • Grandfathered Plans are exempt from many, but not all of the reforms. 8 www.flex-plan.com © 2010 Flex-Plan Services, Inc. The Grandfather Rule • The grandfathered plan rule allows Reform exemptions for health plans that were in place on March 23, 2010 – These plans are literally “grandfathered” in so don’t need to meet certain plan design reform requirements. • Grandfather Plan(GFPs): – Rule applies to the actual “plan” not the enrollee’s on the plan. – New employees (and their families) and family members of current enrollee’s may join the GFP. – GFPs are deemed to be “minimum essential coverage” for purposes of individual and employer pay or play mandates on coverage. • GFP status is ideal – What, if anything, could compromise GFP status? Need clarification. – Some think that having an ERISA plan (i.e. 501 health benefit plan) constitutes a GFP; so an employer could change insurance plans/carriers without sacrificing GFP status – Others think that the GFP is the actual “plan design”—so any alteration to that plan design could compromise GFP status. 9 www.flex-plan.com © 2010 Flex-Plan Services, Inc. The First Reforms • Small Employer Tax Credit – Employer must have less than 25 Full Time Equivalent (FTE) employees & average annual compensation of $50k or less. – Employer must provide at least 50% of premium cost for single coverage. – Credit is 35% of premiums paid (2010-2013) and increases to 50% of premiums paid in 2014 • • NOTE: different tax credit criteria for small tax-exempt employers. 85% Loss Ratio Requirement: Insurance carriers must provide a rebate to consumers (employer plan sponsor) if amount spent on clinical services and quality is less than 85% of premium cost. – Insurance company profitability could be affected – Broker commissions could see affects • Auto-enrollment on health plan for new employees – Only employers with more than 200 employees – No effective date noted in the bill—general rule is date of enactment. – No enforcement until regulations are issued. 10 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Insurance Reforms: Grandfathered Plans MUST Comply Effective First Plan Year 6 Months After Enactment (10/1/2010) • No lifetime limits and only “restricted annual limits” on value of essential benefits is allowed (limitations on non-essential benefits OK). – This could be problematic for HRAs since level is benefit is limited to amount of employer contribution—we’re seeking clarification and asking for exemption. • • • • • No pre-existing condition exclusions for children under 19. No rescission of coverage Dependent children eligible for health coverage up to age 26. Definition of dependent child changed to provide benefits through age 26. Distribute new Summary of Coverage to all enrollees – Must be provided in ADDITION to Summary Plan Description – Includes benefits, coverage levels, cost-sharing, whether or not the plan meets the “minimum essential coverage requirements”, contact information for employees to ask questions. – No longer than 4 pages and 12 point font. – Insurer responsibility for fully-insured plans; Employer responsibility for self-insured plans (including HRAs) – HHS to provide specific regs; will not be enforceable until regs released. 11 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Insurance Reforms: Grandfathered Plans Exempt Effective First Plan Year 6 Months After Enactment (10/1/2010) • No cost-sharing for certain evidence-based preventive care and immunizations – Includes well-child care – Secretary will provide guidance on “preventive” – No copays. Most plans currently have office visit copays applicable to preventive visits. • Fully insured plans will be required to satisfy discrimination requirements that apply to self-funded plans – Problematic for employers who offer Executive plans or provide for higher levels of coverage for management. • Appeals process changed: • Health Care Provider Changes: – Patients will receive coverage during the appeals process – Secretary of HHS or state law will provide for external claim review – Primary care providers selected by patient from any available participating provider – No pre-authorization or increased cost for emergency services – No authorization or referral needed for OBGYN care 12 www.flex-plan.com © 2010 Flex-Plan Services, Inc. W2 Reporting Effective 1/1/2011 • Employers will need to report “aggregate cost of employer sponsored coverage” – Currently done for Day Care benefits and contributions into an HSA • The new law references COBRA laws in determining the value to report • Law excludes “salary reduction contributions to a Flexible Spending Arrangement (FSA)” – Oversight? The intent of the reporting is calculate the excise tax in 2018, which includes FSAs – Questionable as to whether Dental and Vision included in the W-2 reporting (the Reconciliation Bill specifically excluded Dental and Vision plans from the excise tax) • More guidance needed 13 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Over-the-Counter Drug Restrictions Effective 1/1/2011 • As of 1/1/2011 Over-the-Counter (“OTC”) “Medicines and Drugs” will be ineligible for reimbursement – – UNLESS the participant has a “prescription” or the expense is for insulin This does not change what expenses are eligible—it simply adds another administrative step for participants. • This rule only applies to “medicines or drugs” it does not apply to band-aids, saline solution, wrist braces, reading glasses, etc. • There is no definition of “prescription” or guidance regarding duration of the prescription. • What is going on in the industry to prepare for this change – – – SIGIS the nonprofit organization that provides the list of eligible expenses to merchants (Target, Wal-Mart, etc.) is reviewing their list. By the deadline Benefit Debit cards should be programmed to only pay for those eligible items If you don’t provide a card, this may be a good time add, easier on participants to determine which expenses are covered and which are not. • Transition relief unlikely provision seen as a “pay for” for Health Care Reform • This really affects plans beginning 2/1/2010 since those individuals have made their elections. • We have provided a participant notice, plus information at renewal, plan amendments not necessary. 14 www.flex-plan.com © 2010 Flex-Plan Services, Inc. HSA Excise Tax & Simple Cafeteria Plan Rules Effective 1/1/2011 HSA Excise Tax • HSA Excise Tax on non-qualified distributions increased from 10% to 20% Simple Cafeteria Plan Rules • Free pass or “Safe Harbor” for many of the Nondiscrimination tests if certain requirements met, including Dependent Care Test! • Applies to small employers: – “Employers employing an average of 100 or fewer employees on business days during either of the 2 preceding years.” – Look to current year and what is reasonably expected if not in existence during prior year – Growing employer exception: if you employ an average of 200 or more during a year, not eligible during the subsequent year. 15 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Simple Cafeteria Plan Rules Cont… Effective 1/1/2011 • Employer must pass minimum “Contribution Requirements” and “Eligibility and “Participation Requirements “ – Employer must make contributions toward “qualified benefits” under the plan on behalf of each “qualified employee” in the amount of: – 2% of the employees compensation for the plan year ($60,000 = $1,200) – OR the lesser of 1) 6% of the employee compensation for the plan year; – OR 2) Two times the amount of salary reduction contributions for each qualified employee. • What is two times the amount of salary reduction contributions? It means that the employer cannot pay less than 2/3 of the cost of benefits. • Which employees need to receive 2/3 amount toward their benefit? – – – • Anyone “who had at least 1000 hours of service for the preceding plan year” Practical concern, 1000 hours is a 20/hr/week employee The penalties to offer coverage under the new rules apply to “Full-time” employees e.g. those working on average at least 30 hours/week. Flex-Plan will be advocating to correct this discrepancy (move the requirement to 30) 16 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Simple Cafeteria Plan Rules Cont… Effective 1/1/2011 • Highly Compensated and Key Employee Contribution Requirements – Employer will not meet the contribution requirements if the “rate of contributions” for Highly Compensated (HCE) or Key is greater than those who are not highly compensated. – What does that mean? Essentially employers will need to determine 2/3 of what their HCEs and Keys are receiving and match that amount for all other qualified employees. 17 www.flex-plan.com © 2010 Flex-Plan Services, Inc. $2,500 Cap on Flexible Spending Arrangements (FSA) Effective 1/1/2013 Background • Flex-Plan worked in Washington DC to save FSAs, increase the cap, get indexing. – We argued that capping this benefit meant that families and chronically ill would be paying more for health care since those individuals tend to elect higher amounts – Also argued that this is one of few benefits that makes individuals aware of health care costs and influences budgeting. FSA Reform Policy • PPACA caps FSAs at $2500 – – • Original effective date 12/31/2010 Reconciliation Bill pushes back the effective date to 12/31/2012 Taxable year versus plan year means that it can impact plans mid year – Actual Language: FSA will not be a “qualified benefit” under the plan “unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contribution in excess of $2,500 made to such arrangement.” • • • Not a qualified benefit, could blow up plan The cap is on “salary reduction contributions” not on employer seed or match Cap is per cafeteria plan per participant (participants can sign up for $2500 under each employer) 18 www.flex-plan.com © 2010 Flex-Plan Services, Inc. $2,500 FSA Cap Cont… Effective 1/1/2013 • First plans affected • What will employers want to know? – 2/1/ 2012 since their plan straddles the effective date. – Reduce maximums? Short plan year ending 12/31/2012? Accelerate contributions? Two buckets for ER & EE amounts? • • • • Cannot change participant elections Short plan years permitted only for legitimate business purposes. Accelerated contributions maybe possible such that they are paid in before 1/1/2013, uniform contributions schedule required Two buckets are theoretically possible but administratively difficult. – Easy fix – limit maximum to $2500 • Interesting Facts: – When an individual exceeds the day care max the overage is taxable – Language in the indicates that the plan may “blow up” in the event participants contribute >$2500 – The IRS knows that the day care maximum has been exceeded because its reported in box 10 of the W-2. Flexible Spending contributions appear to be excluded from the new W-2 reporting 19 www.flex-plan.com © 2010 Flex-Plan Services, Inc. The Insurance Exchange Effective 1/1/2014 • Each state must establish an American Health Benefit Exchange • Individuals may purchase coverage • Employers with fewer than 100 employees in the previous calendar year may purchase from the Exchange – Employers who offer coverage through the Exchange may permit employees to pay for coverage with pre-tax dollars through the employer’s Sec 125 plan. • 2017 states can allow for employers of all sizes to purchase coverage through the Exchange. • What will the Exchange look like??? Current players in the industry likely to provide claims service to state Exchanges. 20 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Insurance Exchange Plans Effective 1/1/2014 • Five tiers of coverage are offered through the Exchange – Bronze: provides “minimum essential benefits”, covers at least 60% of actuarial value of covered benefits, OOP same as HSA limits • Bronze Level is used as the threshold for determining if Employers will meet the contribution requirements under Pay or Play provisions. – Silver: provides minimum essential benefits, covers at least 70% of actuarial value of covered benefits, OOP same as HSA limits – Gold: provides minimum essential benefits, covers at least 80% of actuarial value of covered benefits, OOP same as HSA limits – Platinum: provides minimum essential benefits, covers at least 90% of actuarial value of covered benefits, OOP same as HSA limits – Catastrophic: similar to high deductible health plan, except available ONLY to individuals up to age 30 in the individual market 21 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Insurance Reforms Effective 1/1/2014 Reforms apply to fully and self-insured plans, and Exchange plans. • No Pre-existing conditions or exclusions • No discrimination on health status (essentially same as current rule under HIPAA) • Cost Limitations – Out-of-pocket not to exceed HSA qualified plan limits – Deductibles not to exceed $2,000 EO or $4,000 E+F (indexed) • This may only apply to fully-insured and small group market—not sure. • No waiting periods in excess of 90 days – Recommend 60 days with Effective Date first of the month following – Applies to any “minimum essential coverage” under an employersponsored plan” – Does not appear to include dental, vision, FSA etc., however “minimum essential coverage” not yet defined. 22 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Employer Pay or Play Effective 1/1/2014 • “Applicable” large employers are subject to Pay or Play provisions – Who’s “Applicable”? Employers with 50 or more full-time equivalent employees during 121 days or more in the preceding calendar year • Part-time employees must be considered when determining if the Employer is “Applicable” • Seasonal employees excluded solely for purposes of determining whether employer is subject to Pay or Play • Determining if Employer is “Applicable” – Employer Widgets, Inc. has 35 EEs who work 30+ hr/wk & 100 EEs who work 20 hr/wk – Determine FTE: 100 EEs x 20 hr/wk x 4 (weeks in a month) divided by 120 = 66.67 full-time equivalent employees – Add 67 FTE to the 35 “full-time EEs” = 101.67 EEs – 101 Full Time Equivalent Employees is greater than 50; so the Employer is “Applicable” 23 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Employer Pay or Play Effective 1/1/2014 Two different Pay or Play provisions in the Bill: 1. Penalty for not offering coverage 2. Penalty for providing “unaffordable” coverage 24 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Employer Pay or Play Effective 1/1/2014 • Penalty for not offering coverage: – Applicable Employers who do not offer health coverage to their full-time employees (30 hr/wk) are subject to a monthly penalty • IF any full-time employee enrolls in the Exchange • AND qualifies for taxpayers subsidized coverage. – Monthly Penalty: $2,000 divided by 12 ($166.67), multiplied by the number of full-time employees employed during that month, not including the first 30 full-time employees • Example: Widgets, Inc. (employer used in previous example) – 35 full-time employees less the first 30 = 5 full-time employees. – 5 full-time employees times $166.67 ($2000 divided by 12 months) = $833.35 penalty for that month 25 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Employer Pay or Play Effective 1/1/2014 • Penalty for providing “unaffordable” coverage – Penalty assessed if any full-time employee enrolls in the Exchange and qualifies for taxpayer-subsidized coverage. Individuals may qualify for subsidy if: • Employee’s share of premium exceeds 9.5% of their household income OR; • Cost of employee share of premium exceeds 60% of the Bronze plan on the Exchange – Monthly penalty of $3,000 divided by 12, multiplied by the number of full-time employees who received the subsidy (excluding EEs who received Vouchers) • Penalty capped at 1/12 of $2000 x total number of full-time employees during such month • Example: – – – – – Employer Widgets, Inc. has 35 full-time employees for purposes of assessing penalty 7 employees are deemed eligible for taxpayer subsidy on Exchange and Enroll. $3000 divided by 12 = $250 x 7 employees = $1,750 Cap amount would be $2,000 divided by 12 = $166.67 x 35 FTE = $5,833.45 $1,750 is less than the cap amount; Employer pays $1,750 for that month 26 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Free Choice Vouchers Effective 1/1/2014 • • • Employers with more than 50 full-time employees who offer health coverage, must also offer Free Choice Vouchers to eligible employees in case they prefer to purchase insurance on the Exchange Eligible Employees: – Employees with household income less than 400% of the federal poverty level AND; – Who’s required contribution under the employer’s plan would be between 8-9.5% of their income. Vouchers will be equal to the amount the employer would’ve contributed to the employer sponsored plan – Excludable from employee’s income and deductible by the employer. – Excess employer contribution must be paid to the employee as taxable compensation • If Employee uses voucher to purchase coverage on the Exchange: – Employee is not eligible for tax credits through the Exchange – Employer will not be subject to Pay or Play provisions 27 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Individual Mandate Effective 1/1/2014 • • Individuals must enroll in qualifying coverage or pay an excise tax Excise tax is the greater of – A flat dollar amount • • 2014- $95 (only individuals who make less than $9,500 per year will pay this amount, everyone else will pay percentage of income). 2015- $325 2016 and all years after- $695 • • • 2014- 1% of income 2015 2% of income 2016 and all years after- 2.5% of income • – • • • • Percentage of income If the individual is a dependent of another taxpayer, the taxpayer will be assessed the excise tax (dependent defined by code section 152) – – Special rule for those under 18 (1/2 of the tax) Spouses who file jointly will be both be liable – Example: $695 divided by 12 months = $57.92 x 8 months with no coverage = $463.36 tax Excise tax to be assessed in the tax return Excise tax determined by dividing the percentage or flat amount by 12 months and multiplying by the number of months the individual had no coverage Exceptions provided for financial hardships, religious objections etc. 28 www.flex-plan.com © 2010 Flex-Plan Services, Inc. President Obama Tax-O-Rama • 2013 threshold for tax deduction on personal income tax returns goes from 7.5% to 10% of individual’s gross income • Tax on insured and self-insured health plans – 2013 tax is $1 times the average number of covered lives – 2014 tax increases to $2 – Tax does not apply to FSAs, Dental or Vision plans (tax does apply to HRAs) • Excise Taxes – Indoor tanning services subject to 10% excise tax (effective 7/1/2010) – Pharmaceutical and medical device excise taxes – Increase taxes on individuals earning more than $200,000 single/$250,000 joint filing. (effective 2013) • 0.9% increase to Medicare tax • 3.8% tax on net investment income (to the extent that total income exceeds the thresholds) 29 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Tax-O-Rama Cont… Cadillac Tax (effective 2018) • 40% excise tax on the value of coverage exceeding the caps of $10,200 for individuals and $27,500 for families – • Benefits Included in the Cap – – – – • Health Insurance Premiums Contributions to an FSA or HRA Employer contributions to an HSA (possibly Employee contributions too—pending guidance. All of these benefits will be reported on the W-2 as of next year (although FSAs currently excluded) Benefits Excluded from the Cap – – – • Caps increased for those in high risk professions (law enforcement, firemen, miners etc.) Accident and Disability Insurance Long-Term Care Policies Hospital or Disease Indemnity Policies (paid with after-tax dollars) Tax Assessed Against “coverage providers” – – Fully-insured plans: the insurance carrier Self-insured plans: the administrator, the person who administers the plan, “The term ‘person that administers the plan benefits’ shall include the plan sponsor if the plan sponsor administers benefits under the plan” • – Could be the Employer or the TPA (claims administrator) HSA or MSA: the employer making the contributions 30 www.flex-plan.com © 2010 Flex-Plan Services, Inc. Questions??? • Tina Shozen: [email protected] • Hilarie Aitken: [email protected] 31 www.flex-plan.com © 2010 Flex-Plan Services, Inc.