In March 2010, President Obama signed legislation into law which mandates health care coverage for most Americans. The new law impacts virtually everyone. It contains provisions that will benefit many SEMA members, such as exchanges which will offer small businesses access to a variety of competitively priced plans. For other members, it may have a profound negative impact (e.g. mandates on larger companies and not enough cost controls).
Some parts of the law have already taken effect but most of it will be phased-in over the next few years. The following are highlights of provisions that directly impact companies, workers and individuals, along with a timeline for implementation:
For the first time in American history, individuals will be required to obtain “essential minimum coverage” for themselves and their dependents, beginning in 2014. The rationale for the individual mandate is to ensure that everyone participates in the system, thereby increasing the risk pool and potentially reducing overall costs. If individuals do not obtain coverage, a $95 penalty will be assessed in 2014, increasing to $325 in 2015, and $695 in 2016.
After 2016, the penalties increase by the cost-of-living adjustment. The government will provide subsidies for lower-income and unemployed individuals. The Internal Revenue Service (IRS) will be responsible for the verification and enforcement of this requirement. Whether the federal government has the authority to impose the mandate is subject to court challenge.
The law imposes significant requirements on mid- and large-size companies, but is friendly to “small” businesses. Employers with 50 or fewer employees are not required to provide health insurance. However, they are provided tax credits as a mechanism to voluntarily offer coverage. The law allows employers to go over the 50-employee limit for 120 days when using seasonal employees.
While there is no direct mandate, companies with 50 or more employees must effectively offer qualified coverage by 2014 since they will be penalized as soon as any full-time employee receives a government subsidy under the individual mandate. If the penalty is triggered, the government will impose a fee of $2,000 for every full-time employee (30 hours or more per week), minus the first 30 employees. A company with 51 employees, for example, would be assessed a fine of $42,000 annually.
For years, SEMA has lobbied in favor of legislation that would allow small companies to purchase nationwide insurance or bargain collectively within state lines, thereby infusing competition into the marketplace. The law establishes a mechanism for achieving this result through “exchanges.”
Every state is required to establish a health insurance exchange by 2014, if not sooner. Under the exchange, small businesses and individuals will be offered a menu of private-sector health plans which have been established under common rules regarding the offering and pricing of insurance. The exchange has the ability to pool a large number of potential consumers and thereby help organize a more competitive marketplace, especially if cost is a primary issue. Consumers will be provided with transparent information to help understand the options and differences between the plans (covered benefits, deductibles, premium costs, etc.).
The exchanges will be called the Small Business Health Options Program (SHOP), for companies, and the American Health Benefit Exchange for individuals. The exchanges may also be combined. They will be administered by a government agency or a non-profit organization. The SHOP exchange will be open to all companies with up to 100 employees. Beginning in 2017, states will have the option of allowing companies with more than 100 workers to participate as well.
States may also form regional exchanges or allow more than one exchange to operate in a state as long as each exchange serves a distinct geographic area. The federal government will contract with private insurers to offer at least two national or multi-state plans in each exchange. The federal government will also seek to foster the creation of non-profit health insurance companies to help spur competition.
There will be four benefit categories of exchange plans, plus a separate catastrophic plan. All of the plans will provide essential health benefits with an out-of-pocket limit equal to the Health Savings Account (HSA) current law limit ($5,950 for individuals and $11,900 for families in 2010). The plans will differ in the amount of covered costs: 60% (bronze), 70% (silver), 80% (gold) and 90% (platinum).
Small-Business Tax Credits
The law provides an immediate tax credit to small employers that purchase insurance if they have no more than 25 employees and average annual wages of less than $50,000. The credit varies according to size, wages and the amount of employer contribution for the premium. Beginning in 2014, small businesses that purchase through a SHOP exchange will be eligible for a two-year tax credit, based on firm size and average annual wages.
The law will cost an estimated $940 billion over 10 years and provide coverage for 32 million Americans, according to the Congressional Budget Office. The revenues will be collected through a variety of resources. Medicare taxes on individuals earning more than $200,000 a year ($250,000 for couples), for example, will jump from 1.45% to 2.35%. There will also be a new 3.8% tax on unearned income, such as dividends and interest. A 40% excise tax will be imposed on insurers of employee-sponsored health plans with values that exceed $10,200 for individuals and $27,500 for families. There will even be a 10% tax for indoor tanning services.
The law imposes a variety of restrictions on the insurance industry. It prohibits individual and group health plans from placing lifetime limits on the dollar value of coverage, or annual limits on the dollar value of coverage. It provides dependent coverage for children up to age 26 for all individual and group policies, and prohibits pre-existing condition exclusions for children. The law establishes a national high-risk pool to provide health coverage to other individuals with pre-existing conditions.
The law limits deductibles for health plans in the small group market to $2,000 for individuals and $4,000 for families unless contributions are offered to offset deductibles above these limits. It also provides grants for up to five years to small employers that establish wellness programs and allows companies to offer employee rewards to participate (premium discounts, waivers of cost-sharing requirements, etc.).
Timeline for Major Provisions
- Tax subsidies for very small businesses that provide coverage.
- Children permitted to stay on parents’ policies until 26th birthday.
- Insurance companies barred from denying coverage to children with pre-existing illness.
- Businesses must begin reporting the value of health care benefits on employees' W-2 statements.
- New information reporting is required for businesses making payments in excess of $600 over the course of a calendar year to corporations.
- A new 0.9% surtax will be tacked onto the 1.45% Medicare payroll taxes paid by individuals earning more than $200,000 per year or joint filers earning more than $250,000 per year. A new 3.8% Medicare surtax will also be imposed on these same individuals/couples. It will be the lesser of: (1) net investment income; or (2) any modified adjusted gross income over the threshold amount.
- The threshold for claiming medical expense deductions rises from 7.5% of adjusted gross income to 10% (the threshold will remain at 7.5% for individuals 65 or older until 2016).
- Contributions to health care flexible spending arrangement will be limited to $2,500. The cap will be indexed to inflation beginning in 2014.
- SHOP exchanges for small businesses take effect (if not sooner). Subsidies available to participating small companies based on wages and number of employees.
- Large companies (more than 50 employees) must provide affordable coverage or risk a fine of $2,000 per employee, excluding the first 30 employees.
- All individuals must now have minimum insurance or pay a $95 penalty.
- Penalty for individuals that don’t have minimum insurance rises to $325.
- Penalty for individuals that don’t have minimum insurance rises to $695, and is thereafter tied to inflation.
- Businesses with more than 100 workers may buy coverage through the SHOP exchange, if state permits.
- A 40% excise tax on high-cost health insurance plans takes effect. Paid by insurers, the tax is on the amount in excess of $10,200 for individuals and $27,500 for families.