Health Care Reform Update May 2011

To align the federal tax code with the health care reform law, the IRS issued a notice in March 2010 that allows employees to exclude from their gross income any employer-sponsored accident or health insurance benefits for children younger than 27. However, some states – including California – did not make similar changes to state tax code in 2010.  

On April 7, 2011, Gov. Jerry Brown signed a bill that makes health care benefits for children under age 27 exempt from taxable income in California. The law took effect immediately, and it applies to tax returns for 2010 and future years. For more information, go to http://www.ftb.ca.gov/professionals/taxnews/Patient_Protection_and_Affordable_Care_Act.shtml

Broker Compensation | Medical Loss Ratio

As part of health care reform, insurance carriers as of January 1, 2011, must spend 80% – 85% of premium dollars on “patient care.”  So their “loss ratio” cannot exceed 80% in small group, and 85% in large group.  The lion’s share of premiums must be used to pay doctors, hospitals, pharmacies and the like.  That leaves no more than 15% – 20% to provide ID cards, customer service staff, and overhead costs.

Most health insurance carriers in California already meet the 85% loss ratio. Insurance carrier profit margins average 3% per year.  So, the huge insurance premiums we pay now are due more to the higher cost of providing care than inflated insurance company profits.

There is legislation pending in Congress now to allow brokers to be paid as a “pass through” cost, similar to the way insurance carriers pay their taxes.  This way, the broker who is the insured’s advocate, shopper and educator, can be included (or not) as an add-on cost.  Otherwise, insurance carriers will be forced to cut broker commissions or perhaps eliminate the brokerage system altogether. 

Repealed | 1099 Expanded Provisions

Part of the PPACA health care reform included a new and expanded 1099 reporting rule, which required business owners to report payments for any purchase of “property” totaling $600 or more to a single payee.  This would have applied to various goods, computer and office equipment, tools, fixtures, and so on. 

Another little known new rule was a requirement for private individuals to complete a 1099 for receipt of rental income for $600 or more. These two new requirements would have created a crushing burden of paperwork for taxpayers and the IRS, alike.

Last week, President Obama signed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.  This new law repeals both of the expanded 1099 reporting requirements mentioned above and allows the 1099 rules previously on the books to remain unchanged.

Repeal of Expanded Information Reporting Requirements

http://www.irs.gov/govt/fslg/article/0,,id=238635,00.html

New Guidance | W-2 Reporting of Health Care Costs

PPACA requires employers to report the cost of employer-provided health coverage to employees on annual W-2 forms.  Though the amounts are not taxable, they will be used to provide information about the cost of health care.

On March 29, 2011, the IRS provided guidance in Notice 2011-28.  Here are the highlights:

• Will not be mandatory for 2011 Forms W-2
• Becomes mandatory with 2012 Forms W-2 for most employers
• Smaller employers have until the the 2013 Forms W-2 (“smaller” defined as employers who file fewer than 250 Forms W-2 for 2011)

Health care costs to be reported include the aggregate cost of employer-sponsored group health coverage.  For self-insured plans, that would be the “applicable premium” for purposes of COBRA continuation coverage.  This does not apply to contributions to Health Savings Accounts, Medical Savings Accounts or Flexible Spending Arrangements.  It also does not apply to long term care insurance or for a separate policy for dental or vision coverage.  If the dental and vision are “bundled” into the same policy, then it would be includable.

IRS New Release Notice 2011-31 (3/29/2011)
 IRS Issues Interim Guidance on Information Reporting of Employer-Sponsored Health Coverage
 http://www.irs.gov/newsroom/article/0,,id=237870,00.html

Reminder – Things you need to know now for health care reform

While not all inclusive, these highlights will help you to be better informed of the key areas that impact your employee benefits program.  For all practical purposes, these changes are effective for plan years on or after October 1, 2010.  Please call or email if you need assistance or have questions.   

Your responsibilities include:

1.  W2 reporting of employer contributions for health care coverage, excluding HSA and FSA contributions.  This will be on the W2 for the 2011 plan year…it is not taxable, just reportable.  Get ready to start tracking this beginning in January.
2. Allow dependent children to remain covered on the plan until age 26, even if they are married, and not dependent upon the employee for financial support.
3. Changes to Flexible Spending Accounts – Over the Counter drugs may no longer be reimbursable, unless prescribed by a physician.  The maximum annual deferral will be reduced to $2,500.
4. Determine if your health plan discriminates in favor of highly compensated individuals, and if so, read the next section.

Important things to remember about “grandfathered plans”:

1. Plans in place on or before March 23, 2010, are considered to be “grandfathered”, and not subject to certain reform provisions, such as the inability to discriminate in favor of highly compensated individuals.  This is significant if your company offers an executive medical reimbursement plan, such as Exec-U-Care™. 
2. New health plans going forward cannot discriminate in favor of highly compensated individuals.  Companies may continue to offer executive plans other than health, such as life insurance, disability coverage, long term care insurance and non-qualified retirement plans for executives. 
3. If you want to keep your grandfathered plan the way it is, make no changes other than adding or deleting new employees who are in the same class or category as before.
4. Some of the new provisions still apply to grandfathered plans, including the requirement to cover dependents to age 26, unless they have other group coverage available.

Small Business Tax credits and grants

1. Tax credit are available retroactive for premiums paid beginning in 2010 for companies who pay at least half of employee health care premiums. 
2. These are for companies with fewer than 25 employees earning average annual wages of less than $50,000, and for companies with 10 or few employees earning $25,000 or less on average. 
3. Kaiser and NFIB have both posted calculators to estimate annual credits.  Here is a link to a Kaiser Excel spreadsheet for the calculation:  https://secure.logmein.com/f?aFNjy5-iziOysR3osHlk6MVIbaofwyQPytvs5s3w.Dw
4. Small group employer-based wellness program grants will be available beginning in 2011.
5. Unrelated to healthcare reform, there are also hiring tax credits.  New employees must have been unemployed for the past 60 days to qualify for either the Social Security exemption or the $1,000 Federal Tax credit.  Here is a link to the guide:  http://www.qqestpayroll.com/documents/pdf/hire_act_guide.pdf

Insurance changes for plans that renew on or after October 1, 2010:

1. No lifetime benefit limits based on dollar amounts – allowed restricted yearly limits on the dollar value of certain benefits.
2. No cost-sharing obligations for certain preventive services. 
3. No pre-existing condition exclusions for dependent children under 19 years of age.
4. No coverage rescissions/cancellations, except for fraud or intentional misrepresentation.
5. Must have dependent coverage up to age 26.
6. New health plan disclosure and transparency requirements.
7. New internal and external appeal processes.

Pre-existing condition coverage for individual market consumers:

1. Check out the website www.healthcare.gov for information about a high-risk pool for people who have been uninsured for at least six months, and cannot obtain current individual coverage. 
2. There is another website that has been around a long time which helps people who are uninsured by showing them all of their options, both public and private.  There is an online questionnaire and brochures for free downloads at www.coverageforall.org.

 For a more detailed timeline prepared by the national Association of Health Underwriters, click here:  http://www.nahu.org/legislative/resources/Reform%20Timeline%20revised%20july%20_2_.pdf?ibcToken=319abcd0-9e34-4cbe-8429-3dcff02e20b5

IRS Guidance on Health Savings Accounts

For all the companies out there trying to determine the exact rules of how much an employer may contribute toward Health Savings Accounts, and how to avoid violating non-discrimination rules, the IRS released this advice today:

http://www.treas.gov/press/releases/hp1056.htm

Employer matching contributions to the HSA through a cafeteria plan are not subject to the comparability rules, but cafeteria plan nondiscrimination rules apply. Contributions cannot be greater for higher paid employees than they are for lower paid employees, but contributions that favor lower paid employees are OK.