Health Care Reform

In March 2010, President Obama signed two major health care bills into law, despite ongoing controversy among state leaders and lack of public support. Churches have been left to wonder what impact this new legislation will have on them and their staffs. After wading through more than 2,500 pages of provisions, I have compiled the most relevant information regarding the bills’ effect on churches. Let me start by providing some context for how these new health care laws came to pass.

On May 3, 1854, President Franklin Pierce vetoed the Land-Grant Bill for Indigent Insane Persons. The bill would have established institutions for mentally disabled poor persons throughout the United States, funded by the sale of federal lands. Pierce wrote a letter to Congress, in which he explained the reasons for his veto. His letter reads, in part:

The recently enacted health care legislation has three principal objectives:

Pierce’s veto established the principle of non-involvement by the federal government in social welfare legislation. While this principle eroded significantly during the Great Depression, it continues to resonate to this day with many Americans. It led to the defeat of Hillary Clinton’s nationalized health care proposal in the 1990s, and invigorated opposition to President Obama’s comprehensive health care legislation. But the President’s vision prevailed. On March 23, 2010, he signed into law the “Patient Protection and Affordable Care Act.” And, on March 30, 2010 he signed the “Health Care and Education Reconciliation Act of 2010,” which makes a number of changes to the Patient Protection and Affordable Care Act. These two laws are referred to as the “health care legislation” in this article. Together, they fundamentally change the way health care is provided. Opposition to the legislation continues. Many, like Franklin Pierce, question the constitutionality of several of the new law’s provisions, including the requirement that every citizen purchase health insurance. Surveys of public opinion in the days leading up to, and following, enactment of the legislation consistently revealed that a majority of Americans opposed it. Less than an hour after the Patient Protection and Affordable Care Act was signed into law by the President, 13 state attorneys general filed a lawsuit in a Florida federal court challenging its constitutionality. Other states likely will join in this lawsuit. Meanwhile, 29 state legislatures have introduced state constitutional amendments that would have the effect of blocking some of the new law’s provisions.

Many are deeply concerned about what they believe will be an unprecedented level of debt that will be placed, unfairly, on the shoulders of our descendants. Others object to one-sixth of the nation’s economy (the health care system) being turned over to the federal government; to the half a trillion dollars in cuts to the Medicare system that were necessary to finance the new law; to the new taxes; or to the rationing of health care that many believe will be an inevitable result of the coverage of tens of millions of additional Americans on an already overburdened health care system. The intensity and breadth of the opposition raise legitimate questions about the long-term viability of this legislation. We will be monitoring any developments.

Regardless of the lingering uncertainty as to the long-term viability of this historic legislation, it is important for church leaders to become familiar with the main provisions in order to be prepared in the event that it withstands its many challenges. Those provisions of most relevance to churches and church staff are summarized in this article.

The health insurance mandate

One of the most important and divisive provisions in the recently-enacted health care legislation is a requirement that, beginning in 2014, “applicable individuals” are required to maintain “minimum essential” health care coverage or pay a penalty. A requirement that persons failing to provide such coverage would be subject to imprisonment was dropped during final consideration.

Why mandate health insurance for most Americans? To achieve two of the fundamental objectives of the legislation— universal coverage and affordable insurance. The idea is that requiring younger, healthier persons to obtain insurance will provide the necessary funding for the tens of millions of Americans who will be added to the health care system under the new law.

The health care legislation contains a few exemptions from the definition of an “applicable individual” including those who qualify for a “religious conscience exemption.” There is much confusion over this exception, due in part to the fact that many explanations of the health care legislation use ambiguous terminology such as the “religious objection” or “religious objectors” in referring to this exemption. In fact, the exemption applies to only two groups of individuals:

(1) Members of certain sects

Individuals who are members or adherents of a recognized religious sect described in section 1402(g)(1) of the tax code. This section permits members (whether ministers or laypersons) of certain religious faiths to exempt themselves from Social Security coverage if the following conditions are satisfied:

Religious sects benefiting from this exemption include, but are not limited to, the Amish and Old Order Mennonites.

The term “minimum essential health benefits” is an important one under the health care reform legislation because it defines the benefits that individuals will be required to provide beginning in 2014. It also defines the benefits that “large” employers (i.e., those with 50 or more full-time employees) must provide in order to avoid a penalty. The new law does not define “minimum essential health benefits.” Instead, it instructs the Secretary of Health and Human Services (HHS) to define the term, with the following benefits being included, at a minimum:

The courts have strictly enforced the requirement that the member belong to a religious sect having established tenets or teachings in opposition to Social Security coverage and that provides for its dependent members. To illustrate, a Seventh-Day Adventist was denied an exemption despite his claim that he was personally opposed to Social Security coverage on the basis of religious beliefs, since the Seventh-Day Adventist Church has no established tenets or teachings against Social Security coverage and does not make provision for the support of its dependent members. Varga v. United States, 467 F. Supp. 1113 (D. Md. 1979).

(2) Members of a health care sharing ministry

Individuals who are members of a health care sharing ministry are exempted from the definition of “applicable individual” and therefore are not legally required to obtain “minimum essential coverage.” The law defines a health care sharing ministry as an organization that:

The leading health care sharing ministries in the United States are Samaritan Ministries International, Medi-Share, and Christian Health care Ministries. These ministries have a combined membership of up to 100,000 persons. While still largely unknown to the general public, the visibility and ranks of these ministries doubtless will increase due to the special exemption provided to them by the recent health care legislation. They constitute one of the few places of refuge for persons who are opposed to that legislation.

The Alliance of Health Care Sharing Ministries provides helpful information about these ministries. It explains how they work as follows:

There are no religious exemptions other than the two summarized above.

Ministers who have opted out of Social Security

For many years the tax code has provided ministers with a limited opportunity to exempt themselves from paying self employment (Social Security) taxes on their ministerial income by filing a timely exemption application (Form 4361) with the IRS. A minister certifies on Form 4361 that “I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I performed as a minister …) of any public insurance that makes payments in the event of death, disability, old age, or retirement, or that makes payments toward the cost of, or provides services for, medical care.”

Many ministers have opted out of paying self-employment taxes by submitting a timely Form 4361 with the IRS. Does this exemption apply to the recently-enacted health care legislation? Are these ministers exempt from the mandate to have health insurance?

Unlike the related exemption of members of certain religious faiths from the payment of Social Security taxes based on section 1402(g) of the tax code, the health care legislation contains no “religious conscience” exemption for such ministers. As a result, ministers who have opted out of Social Security by filing Form 4361 with the IRS are not exempt from the provisions of the health care legislation, including the insurance mandate.

Some ministers who have opted out of Social Security undoubtedly will claim that the new law’s failure to exempt them from its provisions violates the First Amendment guaranty of religious freedom. It is highly unlikely that such a claim will be successful. To illustrate, a number of ministers who failed to file a timely exemption application (Form 4361) from Social Security coverage have argued that their constitutional right to freely exercise their religion is violated if they are forced to pay Social Security taxes against their will. This contention has been consistently rejected by the courts. The United States Supreme Court has observed that “if we hold that ministers have a constitutional right to opt out of the Social Security system when participation conflicts with their religious beliefs, that same right should extend as well to persons with secular employment and to other taxes, since their right to freely exercise their religion is no less than that of ministers.” United States v. Lee, 455 U.S. 252 (1982).

Here is a summary of the main provisions in the new health care legislation:

Beginning in 2014, failure to maintain minimum essential health care coverage will result in a penalty of the greater of $95 or one percent of income in 2014, $325 or two percent of income in 2015 and $695 or 2.5 percent of income in 2016, up to a cap of the national average bronze plan premium. Families will pay half the amount for children up to a cap of $2,250 for the entire family. After 2016, dollar amounts will increase by the annual cost of living adjustment.

The penalty applies to any period in which an individual does not maintain minimum essential coverage and is determined monthly.

Exceptions to the individual responsibility requirement to maintain minimum essential coverage are made for religious objectors (see above), individuals not lawfully present in the United States, and incarcerated individuals.

Exemptions from the penalty will be made for those who cannot afford coverage, taxpayers with income below the filing threshold, those who have received a hardship waiver and those who were not covered for a period of less than three months during the year.

Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost bronze plan (defined below) in the local Exchange exceeds eight percent of household income for the year are exempt from the penalty. In years after 2014, the eight percent exemption is increased by the amount by which premium growth exceeds income growth. If self-only coverage is affordable to an employee, but family coverage is unaffordable, the employee is subject to the mandate penalty if the employee does not maintain minimum essential coverage. However, any individual eligible for employer coverage due to a relationship with an employee (e.g. spouse or child of employee) is exempt from the penalty if that individual does not maintain minimum essential coverage because family coverage is not affordable (i.e., exceeds eight percent of household income).

No penalty is assessed for individuals who do not maintain health insurance for a period of three months or less during the taxable year. If an individual exceeds the three month maximum during the taxable year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage.

How do individuals comply with the law’s requirement that they maintain “minimum essential” health care coverage? That depends on the circumstances. Consider the following three scenarios.

(1) You do not have health insurance

According to data compiled by the Employee Benefit Research Institute, 17 percent of Americans have no medical insurance. The recent health care legislation addresses these persons in the following ways:

(1) Most persons are required to have health insurance, and are subject to a penalty (explained above) for not having it.

(2) No group health plan or insurer offering group or individual coverage may impose any pre-existing condition exclusion or discriminate against those who have been sick in the past.

(3) An individual policy can be purchased through an American Health Benefit Exchange that each state is required to implement by 2014. For the individual and small group markets, the Secretary of Health and Human Services (HHS) is required to define essential health benefits (addressed above) which must be equal in scope to the benefits of a typical employer plan.

For all plans in all markets, prohibits out-of- pocket limits that are greater than the limits for Health Savings Accounts (HSA).

For the small group market, prohibits deductibles that are greater than $2,000 for individuals and $4,000 for families. Indexes the limits and deductible amounts by the percentage increase in average per capita premiums.

For the individual and small group markets, requires one of the following levels of coverage, under which the plan pays for the specified percentage of costs:

Bronze: 60 percent
Silver: 70 percent
Gold: 80 percent
Platinum: 90 percent.

(4) The Internal Revenue Code is amended to provide tax credits to assist with the cost of health insurance premiums. The premium assistance credit amount is calculated on sliding scale starting at two percent of income for those at or above 100 percent of poverty and phasing out to 9.5 percent of income for those at 300 to 400 percent of poverty.

(5) In the individual market, a catastrophic- only plan may be offered to individuals who are under the age of 30 or who are exempt from the individual responsibility requirement because coverage is unaffordable to them or because of a hardship. A catastrophic plan must cover essential health benefits and at least three primary care visits, but must require cost-sharing up to the HSA out-of-pocket limits.

(6) The health care legislation creates a new state option to provide Medicaid coverage through a state plan amendment beginning on April 1, 2010. Eligible individuals include: all non-elderly, non-pregnant individuals who are not entitled to Medicare (e.g., childless adults and certain parents). It creates a new mandatory Medicaid eligibility category for all such “newly-eligible” individuals with income at or below 133 percent of the Federal Poverty Level (FPL) beginning January 1, 2014. Also, as of January 1, 2014, the mandatory Medicaid income eligibility level for children ages 6 to 19 changes from 100 percent FPL to 133 percent FPL. Effective April 1, 2010, states have the option to provide Medicaid coverage to all non-elderly individuals above 133 percent of FPL through a state plan amendment.

(2) You purchase your own health insurance

According to data compiled by the Employee Benefit Research Institute, seven percent of Americans purchase their own health insurance. Any individual or family who currently has coverage and would like to retain that coverage can do so under a “grandfather” provision. This coverage is deemed to meet the individual responsibility to have health coverage. Similarly, employers that currently offer coverage are permitted to continue offering such coverage under the “grandfather” policy.

Some of the provisions in the health care legislation will apply to grandfathered plans, including (1) the ban on lifetime benefit caps, (2) no cancellation of coverage due to sickness, and (3) coverage of dependents up to age 26.

For the rules that apply beginning in 2014, see the analysis under “(1) you do not have health insurance,” above.

(3) You are insured through your employer

According to data compiled by the Employee Benefit Research Institute, 62 percent of Americans have employment based health insurance plans. Employers that maintained a health plan for their employees as of the date of enactment of the health care legislation are allowed to keep it under a “grandfather” provision. However, some of the provisions in the health care legislation will apply to grandfathered plans, including (1) the ban on lifetime benefit caps, (2) no cancellation of coverage due to sickness, and (3) coverage of dependents up to age 26 (unless coverage is available through their place of employment).

The health care legislation dropped the “public option” (government-provided coverage) in order to ensure passage. However, the legislation creates state insurance Exchanges where individuals can shop for coverage.

For the rules that apply beginning in 2014, see the analysis under “(1) you do not have health insurance,” above. In addition to those rules, note the following:

The Congressional Budget Office (CBO) has determined that the health care legislation is fully paid for, provides health insurance coverage for 94 percent of all Americans, and reduces the federal deficit by $143 billion over the next ten years, and even more in the following decade. Each of these conclusions is disputed by many conservatives.

The Congressional Budget Office and Congressional Joint Committee on Taxation estimate that by 2019 the combined effect of enacting the health care reform legislation will result in a reduction in the number of non-elderly people who are uninsured by about 32 million, leaving about 23 million non-elderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under the legislation, the share of legal non-elderly residents with insurance coverage would rise from about 83 percent currently to about 94 percent.

Approximately 24 million people would purchase their own coverage through the new insurance Exchanges, and there would be roughly 16 million more enrollees in Medicaid and the Children’s Health Insurance Program than the number projected under current law. Relative to currently projected levels, the number of people purchasing individual coverage outside the Exchanges would decline by about 5 million. Under the legislation, certain employers could allow all of their workers to choose among the plans available in the Exchanges, but those enrollees would not be eligible to receive subsidies via the Exchanges (and thus are shown in Table 4 as enrollees in employment-based coverage rather than as Exchange enrollees). Approximately 5 million people would obtain coverage in that way in 2019, bringing the total number of people enrolled in Exchange plans to about 29 million in that year.

How will the recent health care legislation affect employers? Here are the main provisions. They take effect in 2014 unless otherwise noted.

The health care reform legislation does not require employers to provide health insurance for their employees. Instead, the legislation places the responsibility to obtain coverage on individuals, subject to a penalty for noncompliance. However, an “applicable large employer” that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60 percent, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state Exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. An employer is an applicable large employer with respect to any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year. In counting the number of employees for purposes of determining whether an employer is an applicable large employer, a full-time employee (meaning, for any month, an employee working an average of at least 30 hours or more each week) is counted as one employee and all other employees are counted on a pro-rated basis in accordance with regulations prescribed by the Secretary of HHS.

An applicable large employer that offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan is subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a state Exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees.

The penalty is an excise tax that is imposed for each employee who receives a premium tax credit or cost-sharing reduction for health insurance purchased through a state Exchange. For each full-time employee receiving a premium tax credit or cost-sharing subsidy through a state Exchange for any month, the employer is required to pay an amount equal to one-twelfth of $3,000. The penalty for each employer for any month is capped at an amount equal to the number of full-time employees during the month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) in excess of 30, multiplied by one-twelfth of $2,000.

For calendar years after 2014, the $3,000 and $2,000 dollar amounts are increased by the percentage (if any) by which the average per capita premium for health insurance coverage in the United States for the preceding calendar year (as estimated by the Secretary of HHS no later than October 1 of the preceding calendar year) exceeds the average per capita premium for 2013 (as determined by the Secretary of HHS), rounded down to the nearest $10.

The Congressional Budget Office and Congressional Joint Committee on Taxation estimate that the number of people obtaining coverage through their employer would drop by about three million in 2019 under the health care reform legislation. The net change in employment-based coverage would be the result of the following:

Beginning in 2014 employers with more than 200 employees must automatically enroll new full-time employees in coverage (subject to any waiting period authorized by law) with adequate notice and the opportunity for an employee to opt out of any coverage the individual or employee was automatically enrolled in.

Employers are required to provide notice to their employees informing them of the existence of an Exchange. Also, if the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, then the employee may be eligible for a premium assistance tax credit and cost sharing reduction. Finally, if the employee purchases a qualified health plan through the Exchange, the employee will lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.

Requires large employers to report to the Secretary of HHS whether they offer to their full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, the length of any applicable waiting period, the lowest cost option in each of the enrollment categories under the plan, and the employer’s share of the total allowed costs of benefits provided under the plan. The employer must also report the number and names of full-time employees receiving coverage.

Amends the tax code to clarify that plans provided through an Exchange will not be an eligible benefit under an employer-sponsored cafeteria plan, except in the case of qualified employers (i.e., small employers, and, after 2017, large employers in electing states) offering a choice of plans to their employees through the Exchange.

Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees now qualify for a special tax credit authorized by the recent health care legislation. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

According to the U.S. Department of Health and Human Services, the following provisions in the recent health care legislation take effect immediately:

“This credit provides a real boost to eligible small businesses by helping them afford health coverage for their employees,” said IRS Commissioner Doug Shulman. “We urge small businesses and tax-exempt employers to look closely at this important tax break—which is already effective—to see if they qualify.”

The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.

The maximum credit goes to smaller employers (those with 10 or fewer FTEs) paying annual average wages of $25,000 or less.

The recent health care legislation will impose massive new costs upon the federal government. Those costs will be offset, in part, through the following revenue provisions:

Young adults have the highest rate of uninsured of any age group. About 30 percent of young adults are uninsured, representing more than one in five of the uninsured. This rate is higher than any other age group, and is three times higher than the uninsured rate among children.

In addition, young adults have the lowest rate of access to employer-based insurance. As young adults transition into the job market, they often have entry-level jobs, part-time jobs, or jobs in small businesses, and other employment that typically comes without employer-sponsored health insurance. The uninsured rate among employed young adults is one-third higher than older employed adults.

The employee is also liable for this additional 0.9-percent HI tax to the extent the tax is not withheld by the employer. The amount of this tax not withheld by an employer must also be taken into account in determining a taxpayer’s liability for estimated tax. This same additional HI tax (0.9 percent) applies to the HI portion of SECA tax on self-employment income in excess of the threshold amount. As in the case of the additional HI tax on employee wages, the threshold amount for the additional SECA HI tax is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. The threshold amount is reduced (but not below zero) by the amount of wages taken into account in determining the FICA tax with respect to the taxpayer. No deduction is allowed for the additional SECA tax, and the deduction under 1402(a)(12) is determined without regard to the additional SECA tax rate.

This new tax applies to compensation received and taxable years beginning after December 31, 2012.

This section summarizes several additional provisions in the health care reform legislation that will be of interest to church leaders. Topics will be presented according to the title under which they appear in the legislation.

Title I of the health care legislation contains several provisions addressing immediate improvements in health care coverage for all Americans, including the following:

Churches that have adopted a cafeteria plan (including a health FSA) may need to amend their plan to include employees’ children who have not attained age 27 as of the end of the year. Notwithstanding the general rule that cafeteria plans may only be amended prospectively, the IRS has announced that “as of March 30, 2010, employers may permit employees to immediately make pre-tax salary reduction contributions for accident or health benefits under a cafeteria plan (including a health FSA) for children under 27, even if the cafeteria plan has not yet been amended to cover these individuals. However, a retroactive amendment to a cafeteria plan to cover children under age 27 must be made no later than December 31, 2010, and must be effective retroactively to the first date in 2010 when employees are permitted to make pretax salary reduction contributions to cover children under age 27 (but in no event before March 30, 2010).”

(2) Tax-free benefits for dependent children

Section 105(b) of the tax code excludes from an employee’s taxable income any employer-provided reimbursements made directly or indirectly to the employee for the medical care of the employee, or the employee’s spouse or dependents. The health care reform legislation amends section 105(b) to extend this exclusion to cover employer-provided reimbursements for expenses incurred by an employee for the medical care of the employee’s child who has not attained age 27 as of the end of the taxable year, including a child who is not an employee’s dependent. As a result, the age, support, and other tests that ordinarily apply to dependents do not apply for purposes of section 105(b).

Section 106 of the tax code excludes from an employee’s taxable income any amounts paid by an employer (through insurance or otherwise) to cover medical expenses incurred by the employee or a spouse or dependent. The IRS has stated that “there is no indication that Congress intended to provide a broader exclusion in section 105(b) than in section 106. Accordingly, IRS and Treasury intend to amend the regulations under section 106, retroactively to March 30, 2010, to provide that coverage for an employees’ child under age 27 is excluded from gross income.”

Both of these changes (to section 105(b) and 106) took effect on March 30, 2010.

Section 125 of the tax code allows employers to establish cafeteria plans that allow employees to elect between receiving cash or certain “qualified benefits” including benefits provided under both section 105(b) (including health flexible spending arrangements or “health FSAs”) and section 106 as summarized above). As a result, the exclusions from taxable income under sections 105(b) and 106 for an employee’s child who has not attained age 27 as of the end of the employee’s taxable year carried forward automatically to the definition of qualified benefits under cafeteria plans, including health FSAs.

These same rules apply to health reimbursement arrangements (HRAs).

The IRS has explained these changes as follows:

5. Development and utilization of uniform explanation of coverage documents and standardized definitions. Requires the Secretary of HHS to develop standards for use by health insurers in compiling and providing an accurate summary of benefits and explanation of coverage for applicants, policyholders or certificate holders, and enrollees. The standards must be in a uniform format, using language that is easily understood by the average enrollee, and must include uniform definitions of standard insurance and medical terms. The explanation must also describe any cost-sharing, exceptions, reductions, and limitations on coverage, and examples to illustrate common benefits scenarios.

6. Prohibition of discrimination in favor of highly compensated individuals. Employers that provide health coverage will be prohibited from limiting eligibility for coverage to highly compensated individuals.

7. Patient protections. Requires that plan enrollees be allowed to select their primary care provider, or pediatrician in the case of a child, from any available participating primary care provider. Precludes the need for prior authorization or increased cost-sharing for emergency services, whether provided by in-network or out-of-network providers. Plans are precluded from requiring authorization or referral by the plan for a patient who seeks coverage for obstetrical or gynecological care by a specialist in these areas.

8. Ensuring that consumers get value for their dollars. For plan years beginning in 2010, the Secretary of HHS, and states, will establish a process for the annual review of increases in premiums for health insurance coverage. Requires states to make recommendations to their Exchanges about whether health insurance issuers should be excluded from participation in the Exchanges based on unjustified premium increases.

9. Nondiscrimination rules eased for “simple” cafeteria plans. A cafeteria plan is a separate written plan under which employees are permitted to choose among at least one permitted taxable benefit (for example, cash compensation) and at least one “qualified benefit” including employer-provided health insurance coverage, group term life insurance coverage not in excess of $50,000, and benefits under a dependent care assistance program.

Cafeteria plans and certain qualified benefits (including group term life insurance, self-insured medical reimbursement plans, and dependent care assistance programs) are subject to nondiscrimination requirements to prevent discrimination in favor of highly compensated individuals as to eligibility for benefits and as to actual contributions and benefits provided. There are also rules to prevent the provision of disproportionate benefits to key employees through a cafeteria plan.

Although the basic purpose of each of the nondiscrimination rules is the same, the specific rules for satisfying the relevant nondiscrimination requirements, including the definition of highly compensated individual, vary for cafeteria plans generally and for each qualified benefit. An employer maintaining a cafeteria plan in which any highly compensated individual participates must make sure that both the cafeteria plan and each qualified benefit satisfies the relevant nondiscrimination requirements, as a failure to satisfy the nondiscrimination rules generally results in a loss of the tax exclusion by the highly compensated individuals.

The recent health care reform legislation provides eligible small employers with a safe harbor from the nondiscrimination requirements for “simple” cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self insured medical expense reimbursement plan under section 105(h) of the tax code, and benefits under a dependent care assistance program. Under the safe harbor, a simple cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.

The eligibility requirement is met only if all employees (other than excludable employees) are eligible to participate, and each employee eligible to participate is able to elect any benefit available under the plan. However, a cafeteria plan will not fail to satisfy this eligibility requirement merely because the plan excludes employees who (1) have not attained the age of 21 (or a younger age provided in the plan) before the close of a plan year, (2) have fewer than 1,000 hours of service for the preceding plan year, or (3) have not completed one year of service with the employer as of any day during the plan year. An employer may have a shorter age and service requirement but only if such shorter service or younger age applies to all employees.

The minimum contribution requirement is met if the employer provides a minimum contribution for each non-highly compensated employee (i.e., an employee who is not a highly compensated employee or a key employee). The minimum contribution is permitted to be calculated under either the non-elective contribution method or the matching contribution method, but the same method must be used for calculating the minimum contribution for all non-highly compensated employees. The minimum contribution under the non-elective contribution method is an amount equal to a uniform percentage (not less than two percent) of each eligible employee’s compensation for the plan year, determined without regard to whether the employees makes any salary reduction contribution under the cafeteria plan. The minimum matching contribution is the lesser of 100 percent of the amount of the salary reduction contribution elected to be made by the employee for the plan year or (2) six percent of the employee’s compensation for the plan year.

Simple cafeteria plans may only be established by “eligible small employers.” An eligible small employer is an employer that employed an average of 100 or fewer employees on business days during either of the two preceding years. If an employer was an eligible employer for any year and maintained a simple cafeteria plan for its employees for such year, then, for each subsequent year during which the employer continues, without interruption, to maintain the cafeteria plan, the employer is deemed to be an eligible small employer until the employer employs an average of 200 or more employees on business days during any year preceding any such subsequent year.

This provision is effective for taxable years beginning after December 31, 2010.

10. Effective dates. These provisions take effect for plan years beginning on or after the date that is 6 months after the date of enactment of the health care legislation (i.e., September 2010). For employers operating on a calendar year basis, these provisions take effect on January 1, 2011).

11. Immediate access to insurance for people with a preexisting condition. Enacts a temporary insurance program with financial assistance for those who have been uninsured for several months and have a pre-existing condition. Ensures premium rate limits for the newly insured population. Provides up to $5 billion for this program, which terminates when the American Health Benefit Exchanges are operational in 2014. Also establishes a transition to the Exchanges for eligible individuals.

12. Reinsurance for early retirees. Establishes a temporary reinsurance program to provide reimbursement to participating employment-based plans for part of the cost of providing health benefits to retirees (age 55-64) and their families. The program reimburses participating employment-based plans for 80 percent of the cost of benefits provided per enrollee in excess of $15,000 and below $90,000. The plans are required to use the funds to lower costs borne directly by participants and beneficiaries, and the program incentivizes plans to implement programs and procedures to better manage chronic conditions. The Act appropriates $5 billion for this fund and funds are available until expended.

13. Immediate information that allows consumers to identify affordable coverage options. Establishes an Internet portal for beneficiaries to easily access affordable and comprehensive coverage options. This information will include eligibility, availability, premium rates, cost sharing, and the percentage of total premium revenues spent on health care, rather than administrative expenses, by the issuer. The Internet portal will be available to small businesses and will contain information on coverage options available to small businesses.

14. Effective dates. These provisions took effect immediately upon the enactment of the legislation.

15. Fair health insurance premiums. Establishes that premiums in the individual and small group markets may vary only by family structure, geography, the actuarial value of the benefit, age (limited to a ratio of 3 to 1), and tobacco use (limited to a ratio of 1.5 to 1). This provision applies to insured plans in the large group market, not self-insured plans.

16. Guaranteed availability of coverage. Each health insurance issuer must accept every employer and individual in the state that applies for coverage, permitting annual and special open enrollment periods for those with qualifying lifetime events.

17. Guaranteed renew ability of coverage. Requires guaranteed renewability of coverage regardless of health status, utilization of health services or any other related factor.

18. Prohibition of preexisting condition exclusions or other discrimination based on health status. No group health plan or insurer offering group or individual coverage may impose any preexisting condition exclusion or discriminate against those who have been sick in the past.

19. Prohibiting discrimination against individual participants and beneficiaries based on health status. No group health plan or insurer offering group or individual coverage may set eligibility rules based on health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability-including acts of domestic violence or disability. Permits employers to vary insurance premiums by as much as 30 percent for employee participation in certain health promotion and disease prevention programs.

20. Non-discrimination in health care. Prohibits discrimination against health care providers acting within the scope of their professional license and applicable State laws.

21. Comprehensive health insurance coverage. Requires health insurance issuers in the small group and individual markets to include coverage which incorporates defined essential benefits, provides a specified actuarial value, and requires all health plans to comply with limitations on allowable cost-sharing.

22. Prohibition on excessive waiting periods. Prohibits any waiting periods for group coverage that exceeds 90 days. Clarifies that waiting periods do not apply to the individual market.

23. Coverage for individuals participating in approved clinical trials. Prohibits insurers from dropping coverage because an individual chooses to participate in a clinical trial and from denying coverage for routine care that they would otherwise provide just because an individual is enrolled in a clinical trial. Applies to all clinical trials that treat cancer or other life-threatening diseases.

24. Preservation of right to maintain existing coverage. Allows any individual enrolled in any form of health insurance to maintain their coverage as it existed on the date of enactment of the legislation.

25. Effective dates. All provisions in this subtitle take effect on January 1, 2014.

26. Qualified health plan defined. Requires qualified health plans to be certified by Exchanges, provide the essential health benefits package, and be offered by licensed insurers that offer at least one qualified health plan at the silver and gold levels.

27. Essential health benefits requirements. Defines an essential health benefits package as one that covers essential health benefits, limits cost-sharing, and has a specified actuarial value (pays for a specified percentage of costs), as follows:

28. Abortion. The health care reform legislation:

29. Definitions. Defines the small group market as the market in which a plan is offered by a small employer that employs 1-100 employees. Defines the large group market as the market in which a plan is offered by a large employer that employs more than 100 employees. Before 2016, a state may limit the small group market to 50 employees.

The legislation defines an “educated health care consumer,” and requires Exchanges to consult with enrollees who are educated health care consumers.

30. Affordable choices of health benefit plans. Requires the Secretary of HHS to award grants, available until 2015, to states for planning and establishment of American Health Benefit Exchanges. By 2014, requires states to establish an American Health Benefit Exchange that facilitates the purchase of qualified health plans and includes a SHOP Exchange for small businesses. Requires the Secretary HHS to:

31. Consumer choice. Allows qualified individuals, defined as individuals who are not incarcerated and who are lawfully residing in a state, to enroll in qualified health plans through that state’s Exchange. Allows qualified employers to offer a choice of qualified health plans at one level of coverage; small employers qualify to do so, and states may allow large employers to qualify beginning in 2017. Requires insurers to pool the risk of all enrollees in all plans (except grandfathered plans) in each market, regardless of whether plans are offered through Exchanges. Requires the Secretary of HHS to establish procedures to allow agents or brokers to enroll individuals and employers in qualified health plans and assist them in applying for tax credits and cost-sharing reductions.

32. State flexibility to establish basic health programs for low-income individuals not eligible for Medicaid. Allows states to contract, through a competitive process that includes negotiation of premiums, cost-sharing, and benefits, with standard health plans for individuals who are not eligible for Medicaid or other affordable coverage and have income below 200 percent of the Federal Poverty Level (FPL).

33. Waiver for state innovation. Beginning in 2017, allows states to apply for a waiver for up to 5 years of requirements relating to qualified health plans, Exchanges, cost-sharing reductions, tax credits, the individual responsibility requirement, and shared responsibility for employers. Requires the Secretary of HHS to determine that the state plan for a waiver will provide coverage that is at least as comprehensive and affordable, to at least a comparable number of residents, as would be available under the health care reform legislation, and that it will not increase the federal deficit.

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