Health-care reform: A few points to keep in mind
Health reform is now federal law. Businesses with fewer than 25 employees (excluding owners, certain family members, and seasonal employees) averaging less than $50,000 a year in compensation are eligible for a tax credit for health premiums (see Small Business Adviser). Companies with 49 full-time equivalents workers or less are less impacted by the new rules that go into effect in stages over the next eight years. Only businesses with 50 or more full-time equivalent employees must offer health insurance coverage or pay a sanction, beginning in 2014.
Small businesses that meet certain criteria eventually will be able to purchase health insurance through an “insurance exchange”—allowing them to choose among plans that should provide better coverage at lower costs than they could find in the current small-group market.
An exchange is supposed to make the purchase of health insurance sample, much like travel-related Web sites allow one to pick and choose among airlines and hotels. But those employers with 50–100 FTEs are too small to self-insure or have much bargaining clout, and depending on their state, they may not be eligible to use an exchange. Each state by 2014 must establish a health-insurance exchange for use by the uninsured and small employers with 100 or fewer employees (although states may set the cap at 50 employees). After 2017, states can elect to allow employers with more than 100 employees to purchase coverage through the state’s insurance exchange.
However, employers with under 50 employees will not necessarily be able to do what they want as they have in the past. There are new non-discrimination rules that go into effect for health insurance plan years beginning on or after Sept. 23, 2010. The rules are to be modeled on the non-discrimination rules that now only apply to self-funded plans. The rules prevent discrimination in favor of highly compensated employees. Employers that fail the new rules will be subject to an excise tax of $100 per day for each highly compensated employee receiving discriminatory health insurance benefits.
One big exception to the non-discrimination rules is for those employers with grandfathered plans. A grandfathered health-insurance plan is one in existence as of March 23, 2010. It can add new employees, spouses and dependents without losing grandfathered status. Most other changes will result in the loss of grandfather status. A change in carriers or an increase in insurance cost to employees of the rate of medical inflation plus 15 percent will casuse the loss of grandfater status.
A second exception is the new simple cafeteria plan, which exempts an employer from all non-discrimination rules for group term life insurance, flexible health-care spending accounts, and dependent care if it makes a contribution of 2 percent of pay or a designated matching contribution.
Unfortunately, the law does not specifically list the new tax code section 9815 preventing discrimination in favor of highly compensated employees for health insurance. However, it does list 105(h), on which 9815 is based. Again, we must wait for technical-corrections legislation or regulations to know for sure on this issue.
Discriminatory plans that reimburse only executives for physicals and other diagnostic tests can be continued, but these are available only in C corporations on a tax advantaged basis to owner-employees.
What does health reform mean for employers and employees in the next few years? Smaller employers with grandfathered plans providing greater benefits for key and owner-employees and keep them and continue to get the deductions as long as they remain grandfathered. However, beginning in 2014, any employer with 50 or more FTEs will pay a penalty for a discriminatory plan, so those employers will bring their insurance plans into compliance or discontinue insurance altogether.
Once the state exchanges are up and running in 2014, employees with family income below 400 percent of the poverty level will be subsidized in part by the federal government, and thus some employers, even those with 50 FTEs or more, will have an incentive to discontinue health insurance and let employees buy it on the exchange because the penalties for not providing coverage are much less than its cost.
But key employees would likely lose favorable tax treatment, as that would likely terminate grandfathered status. They too, then, would need to purchase insurance on an exchange.
Alson R. Martin is a lawyer specializing in health-care matters for Lathrop & Gage in Overland Park.
P | 913.451.5170
E | amartin@lathropgage.com
Return to Ingram's June 2010