House Health Reform Bill’s Impact on Employers

Update Dec. 16: COBRA Subsidy Extension Provisions Likely to Be Enacted As Part of DOD Appropriations Act

By Ashley Gillihan and John Hickman

Last week Nancy Pelosi (D-California), the Speaker of the U.S. House of Representatives, released a 1,990-page health care reform bill called the Affordable Health Care for America Act. The bill is a combination of the three different health care reform bills approved by House committees this summer. The information below also includes the provisions in the manager’s amendment released by Speaker Pelosi on Tuesday, Nov. 3.

The bill would create an insurance exchange that offers insurance through private companies as well as through a government-run public option. The legislation would expand Medicaid, offer subsidies to lower-income individuals, and prohibit insurance companies from denying coverage to individuals based on their preexisting conditions. The bill also contains an individual mandate that would require most individuals to obtain insurance or pay a fine.

Audio Conference: Health Care Reform Is Here: Impact and Answers for Employers offered April 22, May 6 and May 20

House health reform bill’s impact on employers
The legislation would establish several immediate reforms — most are effective for plan years beginning January 1, 2010 — that would affect employers by:

• Requiring certain group health plans to offer covered employees the option to extend coverage for dependents through age 26 who are not otherwise covered under any group health plan;
• Limiting preexisting condition exclusions in group health plans until the prohibition on preexisting condition exclusions became effective in 2013 (for example, the bill would shorten the “look back period” from six months to 30 days and shorten the preexisting condition exclusion/limitation period from 12 months to three months);
• Eliminating lifetime limits on benefits payable under group health plans or coverage;
• Prohibiting group health plans from reducing a retiree’s health benefits postretirement (effective as of the date of enactment). Under the bill, the retiree’s portion of the premium may not increase or the value of the coverage may not decrease more than five percent unless the same changes are made to active employees. [NOTE: Employers would not be prohibited under the bill from terminating retiree coverage for future retirees.];
• Establishing a reinsurance program for certain retirees. All reinsurance amounts must be used to reduce the costs borne by participants and dependents;
• Providing wellness program grants to certain small employers (effective July 1, 2010); and
• Extending COBRA continuation coverage for certain COBRA participants until they become eligible for acceptable coverage or coverage through the new insurance exchange in 2013 (this provision would generally be effective on the date of enactment of the legislation).

Update: Read more about the COBRA subsidy and a possible extension to the program

The bill also contains what House Minority Leader John A. Boehner (R-Ohio) calls “job-killing employer mandates.” More specifically, the legislation would require employers to provide health plan coverage to their employees or pay an excise tax (generally, 8% of the average wages that the employer paid during the period of enrollment). There is, however, an exemption for small employers (those with payrolls of less than $500,000), and smaller employers with payrolls between $500,000 and $750,000 would pay a smaller percentage based on their annual payroll.

In addition, the House bill contains provisions that would affect employers and generally become effective in 2013. Specifically, the legislation would:

• Establish rules allowing employers to participate in the exchange based on their size (e.g., in year one, only employers with 25 or fewer employees may participate in the exchange; in year two, employers with 50 and fewer may participate);
• Set minimum employer contributions for full-time and part-time employees;
• Require employers to automatically enroll applicable employees in employer-sponsored health benefits;
• Establish civil penalties for employers that offer nonqualifying health coverage;
• Provide tax credits to small businesses that offer employee health coverage;
• Limit distributions for qualified medicine under health savings accounts (HSAs), Archer medical savings accounts (MSAs), health flexible spending arrangements (FSAs), and health reimbursement accounts (HRAs) to prescription drugs and insulin (effective tax years beginning January 1, 2011);
• Limit employee salary reductions for purposes of coverage under health FSAs under cafeteria plans to $2,500 for a taxable year (indexed beginning 2014);
• Increase the penalty for nonqualified distributions from HSAs to 20 percent of the disbursed amount (effective tax years beginning January 1, 2011); and
• Deny deductions for retiree prescription drug subsidies that are not included in gross income (effective in 2013).

The legislation will go to the House floor for what is sure to be a lively debate as early as this week. The legislation needs 218 votes to pass in the House.

Keep up with the latest legal changes affecting employer benefits and trends in employee benefits with the Benefits Complete Compliance

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Ashley Gillihan is counsel in the Atlanta office of law firm Alston + Bird and is a member of the firm’s Employee Benefits & Executive Compensation and ERISA Litigation Groups. He focuses his practice exclusively on health and welfare employee benefit compliance and litigation issues for employers, health plan administrators, and other health and welfare benefit plan service providers. He also has extensive experience assisting financial institutions and insurance companies that serve as HSA trustees or custodians.

John Hickman is head of Alston + Bird’s Health Benefits Practice, where he leads five attorneys devoted exclusively to HIPAA privacy, flexible benefits, and other health and welfare benefit issues. He has been a pioneer in the consumer-directed health care arena and has worked closely with health plans, financial institutions, and employers as well as the IRS, Treasury, and DOL in developing guidance for tax-favored HRAs and HSAs.