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:
I readily acknowledge the duty incumbent on us all as citizens, and as among the highest and holiest of our duties, to provide for those who, in the mysterious order of Providence, are subject to want and to disease of body or mind; but I can not find any authority in the Constitution for making the Federal Government the great almoner of public charity throughout the United States. To do so would, in my judgment, be contrary to the letter and spirit of the Constitution and subversive of the whole theory upon which the Union of these States is founded.
The recently enacted health care legislation has three principal objectives:
- To reform the health insurance market by eliminating discriminatory practices, such as the exclusion of pre-existing conditions.
- To provide universal coverage of all Americans.
- To make health insurance affordable for everyone.
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.
• Key point. Note that some of the most important provisions in the health care legislation do not take effect until 2014 or later. This was intentional to provide states and the federal government with adequate time to create the infrastructure required to implement the overhaul of the health care industry.
2. Impact on Individuals
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:
- The member belongs to a recognized religious sect;
- The sect is opposed to the acceptance of “the benefits of any private or public insurance which makes payments in the event of death, disability, old-age, or retirement, or makes payments toward the cost of, or provides services for, medical care (including the benefits of any insurance system established by the Social Security Act)” on the basis of its established tenets or teachings;
- The member adheres to the sect’s tenets or teachings relating to Social Security coverage;
- the member files an exemption application (Form 4029);
- The member’s exemption application is accompanied by evidence of his membership in and adherence to the tenets or teachings of the sect;
- The member waives his right to all Social Security benefits; and
- The Secretary of the Department of Health and Human Services finds that the sect (1) does, in fact, have established tenets or teachings in opposition to Social Security coverage; (2) makes provision for the financial support of its dependent members; and (3) has been in existence continually since December 31, 1950.
Religious sects benefiting from this exemption include, but are not limited to, the Amish and Old Order Mennonites.
Minimum Essential Benefits
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:
- Ambulatory patient services
- Emergency services
- Maternity and newborn care
- Mental health and substance use services, including behavioral health treatment
- Prescription drugs.
- Rehabilitative and habilitative services and devices
- Laboratory services
- Preventive and wellness services and chronic disease management
- Pediatric services, including oral and vision care
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:
- Is exempt from federal income taxation as an organization described in section 501(c)(3) of the tax code;
- Members of which share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs and without regard to the state in which a member resides or is employed;
- Members of which retain membership even after they develop a medical condition;
- Which (or a predecessor of which) has been in existence at all times since December 31, 1999, and medical expenses of its members have been shared continuously and without interruption since at least December 31, 1999; and
- Which conducts an annual audit which is performed by an independent certified public accounting firm in accordance with generally accepted accounting principles and which is made available to the public upon request.
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:
The member ministries of the Alliance publish and distribute a monthly publication to a group of committed Christian members who have offered to give a certain amount each month. This money is shared among the members to assist those with medical bills. The publication lists the current needs of its members and shows who the payment is to help that particular month. This brings Christians together to share medical bills with one another. The key is that medical needs are shared among members. The personal approach of need sharing ministries facilitates Christians to bear one another’s burdens in a very tangible way. Biblical principles are foundational to health care sharing ministries and the members treat each other with respect, prayer, and genuine care.
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).
• Example. Bob and his family are members of a health care sharing ministry in their state. They are exempt from the health care legislation’s mandate (which begins in 2014) that every citizen maintains “minimum essential health care coverage.” As a result, beginning in 2014 they can continue to provide for their health care needs through their health care sharing ministry.
• Example. A health care sharing ministry is organized in 2013 in order to respond to the likely growth in demand for such services by persons looking for a way to opt out of the requirements of the recently-enacted health care legislation. Persons who join this ministry are not exempt from the requirement that they maintain minimum essential health care coverage beginning in 2014. Members of health care sharing ministries are exempt only if the ministry has been in existence at all times since December 31, 1999, and medical expenses of members have been shared continuously and without interruption since at least December 31, 1999.
• Example. A married couple is opposed on the basis of their religious beliefs to many of the provisions in the recently-enacted health care legislation. They are not members of a religious sect described in section 1402(g)(1) of the tax code that is opposed on the basis of religious tenets to the acceptance of “the benefits of any private or public insurance which makes payments in the event of death, disability, old-age, or retirement or makes payments toward the cost of, or provides services for, medical care,” and they are not members of a qualifying health care sharing ministry. Their religious-based opposition is not sufficient to exempt them from the health care legislation’s mandates and requirements.
• Example. A pastor filed a timely application for exemption from self-employment taxes (Form 4361) with the IRS several years ago, opting out of the requirement to pay self-employment (Social Security) taxes on ministerial income on the basis of his religious-based opposition 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.” This exemption applies only to the payment of self-employment taxes. It does not apply to the minister’s coverage under the health care legislation.
Health Care Legislation in a Nutshell
Here is a summary of the main provisions in the new health care legislation:
- Most Americans will be required to have health insurance that provides “minimum essential coverage” (as defined by the Secretary of Health and Human Services) by 2014 or face a monetary penalty. This provision is intended to bring actuarial integrity to a plan that aims to extend health care coverage to an additional 32 million Americans. There are limited exceptions for members of religious sects that are opposed on religious grounds to purchasing health insurance, and members of “health care sharing ministries.”
- Individuals are free to keep their existing insurance under a “grandfather” provision, subject to some conditions.
- Beginning in 2010, small employers (including nonprofits) are eligible for a refundable tax credit as inducement to obtain health insurance for their employees.
- Beginning in 2014, uninsured individuals can purchase insurance coverage through a state-operated “Exchange.” An Exchange must offer four levels of benefits. Low-income persons may qualify for a tax credit to assist in paying their premiums.
- Beginning in 2014, employer-provided plans in existence on the date the health care legislation was enacted can continue to operate under a “grandfather” provision.
- No employer is required to provide health insurance coverage for its employees. However, the health care legislation incorporates a “play or pay” rule beginning in 2014 that imposes penalties on large employers (50 or more full-time employees) that fail to provide such coverage if certain conditions are met.
- Prohibits health insurers from excluding coverage of pre-existing conditions for children.
- Provides $5 billion in immediate federal support for a new program to provide affordable coverage to uninsured Americans with pre-existing conditions until new Exchanges are operational in 2014.
- Prohibits insurers from imposing lifetime limits on benefits.
- Stops insurers from rescinding insurance when claims are filed, except in cases of fraud or intentional misrepresentation of material fact.
Penalty for noncompliance
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.
• Key point. The penalty is assessed through the tax code and accounted for as an additional amount of federal tax owed. However, the use by the IRS of liens and seizures of property otherwise authorized by the tax code for the collection of taxes do not apply to the collection of this penalty.
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.
• Key point. The health care reform legislation does not provide for health coverage for persons not legally present in the United States.
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:
Immediate coverage. Enacts a temporary insurance program with financial assistance for those who have been uninsured for several months and have a pre-existing medical condition. Insures 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 (see below). Also establishes a transition to the Exchanges for eligible individuals.
Beginning in 2014:
(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.
• Example. Emily is a church employee. The church does not provide health insurance coverage, and Emily has not purchased a private medical policy. The new health care legislation establishes a temporary insurance program with financial assistance for those who have been uninsured for several months and have a pre-existing medical condition. Beginning in 2014, most persons are required to have health insurance, and are subject to a penalty for not having it. Emily can purchase an individual policy through an American Health Benefit Exchange. If she needs assistance in doing so, and meets certain conditions, she may qualify for a new tax credit. The premium assistance credit is calculated on a 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. Also, note that Emily’s employing church can assist her in providing health coverage this year by establishing a flexible spending arrangement (FSA) or a health savings account (HSA). These options remain available under the new health care law, with the modifications summarized below.
(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.
• Key point. According to data compiled by the Employee Benefit Research Institute, seven percent of health insurance coverage was purchased by individuals in 2007. This compares to 62 percent with employment-based plans, 18 percent available through Medicaid or some other public program, and 17 percent of Americans who were uninsured.
(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:
- Free choice vouchers. The legislation requires employers that offer coverage and make a contribution to provide free choice vouchers to qualified employees for the purchase of qualified health plans through Exchanges. The free choice voucher must be equal to the contribution that the employer would have made to its own plan. Employees qualify if their required contribution under the employer’s plan would be between 8 and 9.8 percent of their income. Free choice vouchers are excluded from taxation. Voucher recipients are not eligible for tax credits.
- 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. A small employer is generally defined as one having fewer than 50 full-time employees (i.e., employees working 30 or more hours per week).
- Credit for employee health insurance expenses of small businesses. Amends the Internal Revenue Code to provide a sliding scale tax credit to small employers with fewer than 25 employees and average annual wages of less than $50,000 that purchase health insurance for their employees. This credit is explained below.
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.
Effects of the Legislation on Insurance Coverage
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.
3. Impact on employers
How will the recent health care legislation affect employers? Here are the main provisions. They take effect in 2014 unless otherwise noted.
• Key point. The health care reform law contains no special exemptions for churches. Churches are subject to the same requirements and penalties as a for-profit employer. However, note that employers with fewer than 50 employees are not subject to the shared responsibility provisions of the new law.
Shared responsibility for employers (the “play or pay” principle)
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.
Penalty for employees receiving premium credits
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.
• Key point. The new law does not exempt churches and other religious organization with 50 or more full-time employees from this requirement.
• Example. A church has 12 employees. It is not subject to the employer shared responsibility provisions in the health care reform legislation that take effect in 2014, meaning that it will not be penalized for failing to provide minimum essential health coverage for its staff. Beginning in 2014, each employee is required to have minimum essential health coverage through an individual health insurance policy, an employer plan, or a church plan. Failure to obtain such coverage will expose the church’s employees to a penalty. The church is not required to provide health insurance coverage for its employees beginning in 2014, but if it chooses not to do so, its employees will be required to provide for their own coverage through an individual insurance policy or an Exchange.
• Example. A church has 10 employees. It would like to provide insurance for its employees but is concerned about the cost. Since the church is a “small employer” (i.e., fewer than 50 employees) it may qualify for a special tax credit if it provides health coverage for its employees. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. The maximum credit is 25 percent of premiums paid in 2010 by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 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.
• Example. In 2014, a church offers health coverage and has 100 full-time employees, 20 of whom receive a tax credit for the year for enrolling in a state Exchange offered plan. For each employee receiving a tax credit, the employer owes $3,000, for a total penalty of $60,000. The maximum penalty for this employer is capped at the amount of the penalty that it would have been assessed for a failure to provide coverage, or $140,000 ($2,000 multiplied by 70 ((100-30)). Since the calculated penalty of $60,000 is less than the maximum amount, the church pays the $60,000 calculated penalty. This penalty is assessed on a monthly basis.
• Example. A church has 70 employees. Beginning in 2014 if the church does not provide minimum essential health care coverage and has at least one full-time employee receiving a premium assistance tax credit (explained above) it is required to make a payment of $2,000 per full-time employee. The new law includes the number of full-time equivalent employees for purposes of determining whether an employer has at least 50 employees. But, it exempts the first 30 full-time employees for the purposes of calculating the amount of the payment.
• Example. In 2014, a church fails to offer minimum essential coverage and has 100 full-time employees, 10 of whom receive a tax credit for the year for enrolling in a state Exchange-offered plan. For each employee over the 30-employee threshold, the church owes $2,000, for a total penalty of $140,000 ($2,000 multiplied by 70 ((100-30)). This penalty is assessed on a monthly basis.
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:
- Between six million and seven million people would be covered by an employment- based plan under the new law who would not be covered under prior law (largely because the mandate for individuals to be insured would increase workers’ demand for coverage through their employers).
- Between eight million and nine million other people who would be covered by an employment-based plan under prior law would not have an offer of such coverage under the new legislation. Employers that would choose not to offer coverage as a result of the new law would tend to be smaller employers and employers that predominantly employ lower-wage workers—people who would be eligible for subsidies through the Exchanges—although some workers who would not have employment-based coverage because of the new law would not be eligible for such subsidies. Whether those changes in coverage would represent the dropping of existing coverage or a lack of new offers of coverage is difficult to determine.
- Between one million and two million people who would be covered by their employer’s plan (or a plan offered to a family member) under prior law would instead obtain coverage in the Exchanges. Under the new law workers with an offer of employment-based coverage would generally be ineligible for Exchange subsidies, but that “firewall” would be enforced imperfectly and an explicit exception to it would be made for workers whose offer was deemed unaffordable.
Automatic enrollment for employees of large employers
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.
Employer requirement to inform employees of coverage options
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.
Reporting of employer health insurance coverage
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.
Offering of Exchange-participating qualified health plans through cafeteria plans
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.
Credit for employee health insurance expenses of small businesses
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.
Key Provisions that Take Effect Immediately
According to the U.S. Department of Health and Human Services, the following provisions in the recent health care legislation take effect immediately:
- Tax credits to small businesses to make employee coverage more affordable. Tax credits of up to 35 percent of premiums will be available to firms that choose to offer coverage. Beginning in 2014, the small business tax credits will cover 50 percent of premiums.
- Prohibits new health plans in all markets plus grandfathered group health plans from denying coverage to children with pre-existing conditions. Effective six months after enactment. Beginning in 2014, this prohibition would apply to all persons.
- Provides access to affordable insurance for Americans who are uninsured because of a pre-existing condition through a temporary subsidized high-risk pool.
- Bans insurance companies from dropping people from coverage when they get sick. Effective six months after enactment.
- Provides a $250 rebate to Medicare beneficiaries who hit the “donut hole” in 2010. Effective for calendar year 2010. Beginning in 2011, institutes a 50 percent discount on prescription drugs in the donut hole; also completely closes the donut hole by 2020.
- Eliminates co-payments for preventive services and exempts preventive services from deductibles under the Medicare program. Effective beginning January 1, 2011.
- Requires new health plans and certain grandfathered plans to allow young people up to their 26th birthday to remain on their parents’ insurance policy, at the parents’ choice. Effective six months after enactment.
- Creates a temporary re-insurance program (until the Exchanges are available) to help offset the costs of expensive premiums for employers and retirees for health benefits for retirees ages 55 to 64. Effective in 2010.
- Prohibits health insurance companies from placing lifetime caps on coverage. Effective six months after enactment.
- Tightly restricts the use of annual limits to ensure access to needed care in all new plans and grandfathered group health plans. These tight restrictions will be defined by U.S. Department of Health and Human Services. Effective six months after enactment. Beginning in 2014, the use of any annual limits would be prohibited for all new plans and grandfathered group health plans.
- Requires new private plans to cover preventive services with no co-payments and with preventive services being exempt from deductibles. Effective six months after enactment.
- Ensures consumers in new plans have access to an effective internal and external appeals process to appeal decisions by their health insurance plan. Effective six months after enactment.
- Requires plans in the individual and small group market to spend 80 percent of premium dollars on medical services, and plans in the large group market to spend 85 percent. Insurers that do not meet these thresholds must provide rebates to policyholders. Effective on January 1, 2011.
- Increases funding for Community Health Centers to allow for nearly a doubling of the number of patients seen by the centers over the next five years. Effective beginning in fiscal year 2011.
- Provides new investments to increase the number of primary care practitioners, including doctors, nurses, nurse practitioners, and physician assistants. Effective beginning in fiscal year 2011.
- Prohibits new group health plans from establishing any eligibility rules for health care coverage that have the effect of discriminating in favor of higher wage employees. Effective six months after enactment.
- Provides aid to states in establishing offices of health insurance consumer assistance in order to help individuals with the filing of complaints and appeals. Effective beginning in fiscal year 2010.
- Creates a grant program to support states in requiring health insurance companies to submit justification for all requested premium increases, and insurance companies with excessive or unjustified premium Exchanges may not be able to participate in the new Health Insurance Exchanges. Starting in plan year 2011.
“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.
• Key point. For tax-exempt employers, the IRS will provide further information on how to claim the credit. Note that the law does not exclude religious organizations from this credit. It states that the term “tax-exempt eligible small employer” means “an eligible small employer which is any organization described in section 501(c) which is exempt from taxation under section 501(a).” This language applies to all public charities, including religious organizations.
4. Revenue Raisers
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:
1. Excise tax on high cost employer-sponsored health coverage. An excise tax of 40 percent on insurance companies and plan administrators for any health coverage plan that is above the threshold of $10,200 for single coverage and $27,500 for family coverage. The tax applies to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). The tax does not apply to standalone dental and vision coverage. The tax applies to the amount of the premium in excess of the threshold. The threshold is indexed at Consumer Price Index—Urban Areas (CPI-U) plus one percentage point in year 2019 and CPI-U in years thereafter. An increase in the threshold amount of $1,650 for singles and $3,450 for families is available for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. This provision also includes an adjustment for firms whose health costs are higher due to the age or gender of their workers and adjusts the initial threshold if there is unexpected high growth in premiums before 2018.
2. Inclusion of cost of employer-sponsored health coverage on W-2. For tax years beginning after 2010, employers will be required to disclose the value of the benefit provided by the employer for each employee’s health insurance coverage on the employee’s annual Form W-2.
• Example. A church provides health insurance for its employees. The 2011 W-2 form will be modified to include a box for employers to report the value of the health care insurance they provide for their employees.
3. Increase in additional tax on distributions from HSAs not used for qualified medical expenses. Under existing law individuals with a high deductible health plan (and generally no other health plan) are able to establish and make tax-deductible contributions to a health savings account (“HSA”). An HSA is a tax-exempt account held by a trustee or custodian for the benefit of the individual. An HSA is subject to a condition that the individual is covered under a high deductible health plan (purchased either through the individual market or through an employer). The decision to create and fund an HSA is made on an individual-by- individual basis and does not require any action on the part of the employer.
Subject to certain limitations, contributions made to an HSA by an employer, including contributions made through a cafeteria plan through salary reduction, are excluded from income (and from wages for payroll tax purposes). Contributions made by individuals are deductible for income tax purposes, regardless of whether the individuals itemize their deductions on their tax return (rather than claiming the standard deduction). Income from investments made in HSAs is not taxable and the overall income is not taxable upon disbursement for medical expenses.
For 2010, the maximum aggregate annual contribution that can be made to an HSA is $3,050 in the case of self-only coverage and $6,150 in the case of family coverage. The annual contribution limits are increased for individuals who have attained age 55 by the end of the taxable year (referred to as “catch-up contributions”). In the case of policyholders and covered spouses who are age 55 or older, the HSA annual contribution limit is greater than the otherwise applicable limit by $1,000 in 2010 and thereafter. Contributions, including catch-up contributions, cannot be made once an individual is enrolled in Medicare.
A high deductible health plan is a health plan that has an annual deductible that is at least $1,200 for self-only coverage or $2,400 for family coverage for 2010 and that limits the sum of the annual deductible and other payments that the individual must make with respect to covered benefits to no more than $5,950 in the case of self-only coverage and $11,900 in the case of family coverage for 2010.
Distributions from an HSA that are used for qualified medical expenses are excludible from gross income. Distributions from an HSA that are not used for qualified medical expenses are includible in gross income. An additional 10 percent tax is added for all HSA disbursements not made for qualified medical expenses. The additional 10 percent tax does not apply, however, if the distribution is made after death, disability, or attainment of age of Medicare eligibility (currently, age 65). Unlike reimbursements from a flexible spending arrangement or health reimbursement arrangement (HRA), distributions from an HSA are not required to be substantiated by the employer or a third party for the distributions to be excludible from income.
The health care reform legislation increases the additional tax on distributions from an HSA that is not used for qualified medical expenses from 10 percent to 20 percent of the disbursed amount. This change is effective for disbursements made during tax years starting after December 31, 2010.
• Key point. As of January 1, 2011, the health care reform legislation conforms the definition of “qualified medical expenses” for FSAs, HSAs, and HRAs to the definition used for the medical expense itemized deduction. Over-the-counter medicine obtained with a prescription continues to qualify as a qualified medical expense, but nonprescription over-the-counter medications no longer qualify.
4. Limitation on health flexible spending arrangements under cafeteria plans. A flexible spending arrangement for medical expenses under a cafeteria plan (“Health FSA”) is health coverage in the form of an unfunded arrangement under which employees are given the option to reduce their current cash compensation and instead have the amount of the salary reduction contributions made available for use in reimbursing the employee for his or her medical expenses. Health FSAs are subject to the general requirements for cafeteria plans, including a requirement that amounts remaining under a Health FSA at the end of a plan year must be forfeited by the employee (referred to as the “use it or lose it rule”). A Health FSA is permitted to allow a grace period not to exceed two and one-half months immediately following the end of the plan year during which unused amounts may be used. A Health FSA can also include employer flex-credits which are non-elective employer contributions that the employer makes for every employee eligible to participate in the employer’s cafeteria plan, to be used only for one or more tax excludible qualified benefits (but not as cash or a taxable benefit).
• Key point. Rather than offering a Health FSA through a cafeteria plan, an employer may specify a dollar amount that is available for medical expense reimbursement. These arrangements are commonly called health reimbursement arrangements (HRAs). Some of the rules applicable to HRAs and Health FSAs are similar (e.g., the amounts in the arrangements can only be used to reimburse medical expenses and not for other purposes), but the rules are not identical. In particular, HRAs cannot be funded on a salary reduction basis and the use-it-or-lose-it rule does not apply. Thus, amounts remaining at the end of the year may be carried forward to be used to reimburse medical expenses in following years. The health reform legislation does not limit the amount permitted to be available for reimbursement under employer-provided health coverage offered through an HRA, including a flexible spending arrangement within the meaning of section 106(c)(2) of the tax code that is not part of a cafeteria plan.
The health reform legislation made the following change in Health FSAs effective for tax years beginning after 2012. In order for a Health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee’s dependents, and any other eligible beneficiaries with respect to the employee, under the Health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500. The $2,500 limitation is indexed to the CPI-U (consumer price index—urban areas) with any increase that is not a multiple of $50 rounded to the next lowest multiple of $50 for years beginning after December 31, 2012.
A cafeteria plan that does not include this limitation on the maximum amount available for reimbursement under any FSA is not a cafeteria plan within the meaning of section 125 of the tax code. As a result, when an employee is given the option under a cafeteria plan maintained by an employer to reduce his or her current cash compensation and instead have the amount of the salary reduction be made available for use in reimbursing the employee for his or her medical expenses under a Health FSA, the amount of the reduction in cash compensation pursuant to a salary reduction election must be limited to $2,500 for a plan year.
• Example. A church has 10 employees, and several years ago it implemented a Health FSA plan to assist employees with their medical expenses. Beginning in 2013, in order for a Health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses under the Health FSA for a plan year must not exceed $2,500. A cafeteria plan that does not include this limitation is not a cafeteria plan within the meaning of section 125 of the tax code.
• Example. A church does not provide health insurance for its employees, but has established a “health fl exible saving account” (Health FSA). There is no limit on the amount of money that can be contributed to a Health FSA by an employee, but the plan must prescribe a maximum dollar amount. The church’s FSA allows employees to contribute up to $5,000 annually. The entire balance in a Health FSA must be used for qualifying medical expenses by the end of the year (“use it or lose it”). For 2010, Pastor Ted elected to have his salary reduced by $4,000 to fund his FSA. Pastor Ted is not required to pay income taxes or self-employment taxes on the $4,000 salary reduction. However, if he incurs less than $4,000 in medical expenses, any balance in the account at the end of the year is forfeited (subject to a grace period that runs until March 15 of the following year, if certain conditions apply). Withdrawals from a Health FSA are tax-free to an employee only if used for qualifying medical expenses (i.e., expenses that would qualify for the medical and dental expenses itemized deduction). However, even though non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for FSA purposes.
• Example. Same facts as the previous example, except that the year is 2013. Note the following changes: (1) The most that Pastor Ted can contribute to his Health FSA is $2,500. If the church fails to impose this cap on its FSA plan, the plan loses tax benefits that would otherwise apply. This means that the entire amount that Pastor Ted contributes to his FSA is taxable. (2) As of January 1, 2011, tax-free withdrawals from an FSA can no longer be used to pay for nonprescription over-the-counter medications. (3) Beginning in 2011, eligible small employers are provided 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 (explained later).
• Key point. As of January 1, 2011, the health care reform legislation conforms the definition of “qualified medical expenses” for FSAs, HSAs, and HRAs to the definition used for the medical expense itemized deduction. Over-the-counter medicine obtained with a prescription continues to qualify as a qualified medical expense, but nonprescription over-the-counter medications no longer qualify.
5. Expansion of information reporting requirements. Section 6041 of the tax code requires all persons engaged in a trade or business who make payments in any tax year aggregating $600 or more in the course of that trade or business to a single payee to report the payments to the IRS on a Form 1099- MISC. This reporting requirement is designed to improve tax compliance based on the assumption that payees are more likely to correctly report their taxable income if they realize that payors are reporting that income to the IRS.
The income tax regulations specify that “all persons engaged in a trade or business” includes not only for-profit organizations, but also nonprofit and tax-exempt organizations. Treas. Reg. 1.6041-1(b)(1).
Exempted from this reporting requirement are most payments made to corporations.
The health care reform law amends the tax code to require the issuance of a Form 1099-MISC to corporations that are paid $600 or more during the year in the course of the payor’s trade or business (with a copy going to the IRS). Exempted from this requirement are payments made to tax-exempt corporations. This provision applies to payments made after December 31, 2011.
• Example. In 2010 a church hires a local landscaping contractor to provide landscaping services for the church for an annual fee of $5,000. The contractor is unincorporated and self-employed. The church is required to issue the contractor a Form 1099-MISC reporting the compensation paid to him. It sends a copy of the Form 1099-MISC to the IRS. Example. Same facts as the previous example except that the contractor is incorporated. The church is not required to issue a Form 1040-MISC to a corporation since it is assumed that the corporation will issue the appropriate form (W-2 or 1099) to the contractor.
• Example. Same facts as the previous example, except that the year is 2012. The church is required to issue a Form 1099- MISC to the contractor, even though he is incorporated, with a copy going to the IRS.
• Example. A self-employed, unincorporated evangelist conducts religious services at a church on two occasions during 2010, and is paid $1,000 on each occasion. The church also reimburses the evangelist’s substantiated travel expenses under its accountable reimbursement plan. The church should issue a Form 1099-MISC to the evangelist, and send a copy to the IRS.
• Example. Same facts as the previous example, except that the evangelist is incorporated. The church is not required to issue a Form 1040-MISC to a corporation since it is assumed that the corporation will issue the appropriate form (W-2 or 1099) to the contractor.
• Example. Same facts as the previous example, except that the year is 2012. The church is not required to issue a Form 1099-MISC to the evangelist, even though he is incorporated, since the health care reform legislation exempts payments to tax-exempt corporations from the Form 1099-MISC reporting requirement.
• Key point. When this provision takes effect in 2012 it will relieve churches of the obligation of determining if payees are incorporated or unincorporated, since a Form 1099-MISC must be issued to either (assuming the payee receives annual compensation of $600 or more). In the past, some unscrupulous contractors would inform church bookkeepers that they were incorporated so that no Form 1099-MISC would be submitted to the IRS, resulting in unreported income. This possibility still exists for evangelists, even after the new law takes effect in 2012, since churches are not required to issue a Form 1099-MISC to evangelists who are tax-exempt corporations, meaning that they have incorporated as nonprofit corporations and received recognition of tax-exempt status from the IRS. It is a good practice for churches to confirm an evangelist’s representation that he or she is a tax-exempt corporation. This is easily done by checking the website of the secretary of state in the state of incorporation to confirm corporate status.
• Key point. It is important for church leaders to be aware of this new reporting requirement beginning in 2012, since a failure to issue a Form 1099-MISC to corporate service providers can result in penalties under sections 6721, 6722, and 6723 of the tax code.
6. Modification of itemized deduction for medical expenses. Increases the adjusted gross income threshold for claiming the itemized deduction for medical expenses from 7.5 percent to 10 percent. Individuals age 65 and older would be able to claim the itemized deduction for medical expenses at 7.5 percent of adjusted gross income through 2016.
7. Additional hospital insurance tax on high-income taxpayers. Increases the hospital insurance tax rate by 0.9 percentage points on an individual taxpayer earning more than $200,000 ($250,000 for married couples filing jointly). The revenues from this tax will be credited to the HI trust fund. As amended by Section 1402 of the Reconciliation Act, expands the hospital insurance tax to include a 3.8 percent tax on income from interest, dividends, annuities, royalties and rents which are not derived in the ordinary course of trade or business, excluding active S corporation or partnership income, on taxpayers with income above $200,000 for singles ($250,000 for married filing jointly).
The Federal Insurance Contributions Act imposes tax on employers based on the amount of wages paid to an employee during the year. The tax imposed is composed of two parts: (1) the old age, survivors, and disability insurance (“OASDI”) tax equal to 6.2 percent of covered wages up to the taxable wage base ($106,800 in 2010); and (2) the Medicare (“HI”) tax amount equal to 1.45 percent of covered wages. Generally, covered wages means all remuneration for employment. In addition to the tax on employers, each employee is subject to FICA taxes equal to the amount of tax imposed on the employer. The employee portion of the FICA tax generally must be withheld and remitted to the federal government by the employer.
• Key point. Ministers’ wages are exempted from FICA taxes, meaning that a church does not withhold FICA taxes from a minister’s wages. Instead, ministers are deemed to be self-employed for Social Security with respect to compensation received in the exercise of ministry, and so they pay the self-employment tax rather than FICA taxes, unless they have filed a timely exemption application that was approved by the IRS.
As a parallel to FICA taxes, the Self- Employment Contributions Act (“SECA”) imposes taxes on the net income from self employment of self employed individuals. The rate of the OASDI portion of SECA taxes is equal to the combined employee and employer OASDI FICA tax rates and applies to self employment income up to the FICA taxable wage base. Similarly, the rate of the HI portion is the same as the combined employer and employee HI rates and there is no cap on the amount of self employment income to which the rate applies.
Beginning in 2013, the health care reform legislation increases the employee portion of the Medicare (HI) tax by an additional tax of 0.9 percent on wages received in excess of the threshold amount. However, unlike the general 1.45 percent HI tax on wages, this additional tax is on the combined wages of the employee and the employee’s spouse, in the case of a joint return. The threshold amount 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.
However, in determining the employer’s requirement to withhold and liability for the tax, only wages that the employee receives from the employer in excess of $200,000 for a year are taken into account and the employer must disregard the amount of wages received by the employee’s spouse. Thus, the employer is only required to withhold on wages in excess of $200,000 for the year, even though the tax may apply to a portion of the employee’s wages at or below $200,000, if the employee’s spouse also has wages for the year, they are filing a joint return, and their total combined wages for the year exceed $250,000.
• Example. In 2013, a pastor earns $100,000 in church compensation. His wife, a physician, earns $200,000. The combined income of the husband and wife exceeds the threshold amount of $250,000, and so they are liable for an additional Medicare tax of 0.9 percent times compensation in excess of $250,000. However, neither spouse’s employer is required to withhold any portion of this additional tax from their wages even though the combined wages of the taxpayer and the taxpayer’s spouse are over the $250,000 threshold, since neither earned compensation of more than $200,000.
Uninsured Young Adults
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.
5. Miscellaneous Provisions
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. Quality, Affordable Health Care for All Americans
Immediate Improvements in Health Care Coverage for All Americans
Title I of the health care legislation contains several provisions addressing immediate improvements in health care coverage for all Americans, including the following:
1. No lifetime or annual limits. Prohibits plans from establishing lifetime limits, and annual limits beginning in 2014, on the dollar value of benefits. Prior to 2014, plans may only establish restricted annual limits as defined by the Secretary of Health and Human Services (HHS), ensuring access to needed services with minimal impact on premiums.
2. Prohibition on rescissions. Prohibits all plans from rescinding coverage except in instances of fraud or misrepresentation.
• Example. For several years a pastor has purchased health insurance for himself and his family directly from an insurance company. In 2011, the pastor is diagnosed with cancer. His insurance company will not be allowed to rescind his coverage.
3. Coverage of preventive health services. Requires all plans to cover preventive services and immunizations recommended by the U.S. Preventive Services Task Force and the CDC, certain child preventive services recommended by the Health Resources and Services Administration (HRSA), and women’s preventive care and screening recommended by HRSA, without any cost-sharing.
4. Extension of dependent coverage. The health care reform legislation contains two important provisions pertaining to health care coverage for children. Unfortunately, these provisions are not consistent, and have led to confusion. Here is a summary of the provisions.
(1) group health plans and health insurance providers
The health care reform legislation requires plans that provide dependent medical coverage of children to continue to make the coverage available for an adult child until the child turns age 26 even if the young adult no longer lives with his or her parents, is not a dependent on a parent’s tax return, or is no longer a student. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. This applies to all plans in the individual market, all new employer plans, and existing employer plans if the young adult is not eligible for employer coverage on his or her own.
There is a transition for certain existing group plans that generally do not have to provide dependent coverage until 2014 if the adult child has another offer of employer-based coverage aside from coverage through the parent. The new policy providing access for young adults applies to both married and unmarried children, although their own spouses and children do not qualify.
For plan or policy years beginning on or after September 23, 2010, plans and issuers must give children who qualify an opportunity to enroll that continues for at least 30 days regardless of whether the plan or coverage offers an open enrollment period. This enrollment opportunity and a written notice must be provided not later than the first day of the first plan or policy year beginning on or after September 23, 2010. The new policy does not otherwise change the enrollment period or start of the plan or policy year.
Any qualified young adult must be offered all of the benefit packages available to similarly situated individuals who did not lose coverage because of cessation of dependent status. The qualified individual cannot be required to pay more for coverage than those similarly situated individuals. The new policy applies only to health insurance plans that offer dependent coverage in the first place. While most insurers and employer-sponsored plans offer dependent coverage, there is no requirement to do so.
• Example. A church has a group health plan that provides medical insurance for its employees and their dependents. The plan year is the same as the church’s fiscal year, which is April 1 until March 31. The plan must continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. If the plan year begins on April 1 and ends on March 31, the expanded coverage of adult children until age 26 is not required until April 1, 2011.
• Example. Same facts as the previous example, except that the plan year is on a calendar year basis. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. In this case, that means not later than January 1, 2011.
• Example. Carla is a church employee. Her church provides medical insurance to its employees and their dependents. Carla’s son is 23 years old. He ceased to be covered under the church’s plan when he married and moved out of his mother’s home at age 21. He would like to be covered under his mother’s health care plan at the church until he turns 26. Is this possible? For plan or policy years beginning on or after September 23, 2010, plans and issuers must give children who qualify an opportunity to enroll that continues for at least 30 days regardless of whether the plan or coverage offers an open enrollment period. In addition, any qualified young adult must be offered all of the benefit packages available to similarly situated individuals who did not lose coverage because of cessation of dependent status. The qualified individual cannot be required to pay more for coverage than those similarly situated individuals.
Amending Your Church’s Cafeteria Plan by December 31, 2010
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:
Health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. This change immediately allows employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit.
Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010 forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.
Employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors have until the end of 2010 to amend their cafeteria plan language to incorporate this change.
Plans that provide dependent coverage of children should continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010.
• Example. A church provides health insurance coverage for its employees and their spouses and any child who has not attained age 27 as of the end of the taxable year. For 2010, church provides health care coverage to Pastor Steve and his daughter, Emily. Emily will not attain age 27 in 2010. Emily is not eligible for health care coverage from her own employer. She is not a dependent of Pastor Steve because she does not live with him and she provides more than half of her support. Because Emily will not attain age 27 during 2010, the health care coverage available to her under her father’s plan are excludible from his taxable income under sections 105(b) and 106 of the tax code for the period March 30, 2010 through the end of the year.
• Example. A church provides health care coverage for its employees and their spouses and dependents. Effective May 1, 2010, the church amends the health plan to provide coverage for any employee’s child who has not attained age 26. The church provides coverage to Employee F and to F’s son, K, for the 2010 taxable year. K will attain age 22 in 2010. During the 2010 taxable year, F provides more than one half of K’s support. K lives with F and graduates from college on May 15, 2010 and thereafter is not a student. K has never worked for the church. Prior to K’s graduation from college, K is a dependent of F. Following graduation from college, K is no longer a dependent of F. For the 2010 taxable year, the health care coverage and reimbursements provided to K under the terms of the church’s plan are excludible from F’s gross income. For the period through May 15, 2010, the reimbursements and coverage are excludible because K was a dependent of F. For the period on and after March 30, 2010, the coverage is excludible because K is a child of F and because K will not attain age 27 during the 2010 taxable year. (Thus, for the period from March 30 through May 15, 2010, there are two bases for the exclusion.)
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.
• Key point. A simple cafeteria plan is permitted to provide for the matching contributions in addition to the minimum required but only if matching contributions with respect to salary reduction contributions for any highly compensated employee or key employee are not made at a greater rate than the matching contributions for any non-highly compensated employee. Nothing in this provision prohibits an employer from providing qualified benefits under the plan in addition to the required contributions.
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).
Immediate Action to Make Coverage More Affordable and More Available
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.
Quality Health Insurance Coverage for All Americans—Health Insurance Market Reforms
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.
Available Coverage for All Americans: Establishment of Qualified Health Plans
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:
- For the individual and small group markets, requires the Secretary of Health and Human Services to define essential health benefits, 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. 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
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. Also, if an insurer offers a qualified health plan, it must offer a child-only plan at the same level of coverage.
28. Abortion. The health care reform legislation:
- Affirms that a state may prohibit abortion coverage in qualified health plans offered through an Exchange in the state, and enacts a law to provide for such prohibition.
- Ensures that plans may elect whether or not to cover abortion. Requires a segregation of funds for subsidy-eligible individuals in plans that cover abortions for which the expenditure of Federal funds appropriated for the Department of Health and Human Services is not permitted. Subsidy-eligible individuals would pay one premium with two distinct payment transactions, with one going to an allocation account to be used exclusively for payment of such services. Requires state insurance commissioners to ensure compliance with the requirement to segregate federal funds in accordance with generally accepted accounting requirements and guidance from the Office of Management and Budget (OMB) and Government Accountability Office (GAO). Plans would be required to include in their benefit descriptions whether or not they cover abortion, as they will do for all other benefits. The allocation of the premium into its components would not be advertised or used in enrollment material. All applicants would see the same premium when they are choosing a plan.
- Includes conscience language that prohibits qualified health plans from discriminating against any individual health care provider or health care facility because of its unwillingness to provide, pay for, provide coverage of, or refer for abortions.
- Ensures that federal and state laws regarding abortion are not preempted.
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.
Consumer Choices and Insurance Competition through Health Benefit Exchanges
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:
- Establish certification criteria for qualified health plans, requiring such plans to meet marketing requirements, ensure a sufficient choice of providers, include essential community providers in their networks, be accredited on quality, implement a quality improvement strategy, use a uniform enrollment form, present plan information in a standard format, and provide data on quality measures.
- Develop a rating system for qualified health plans, including information on enrollee satisfaction, and a model template for an Exchange’s Internet portal. Determine an initial and annual open enrollment period, as well as special enrollment periods for certain circumstances.
- Allows States to require benefits in addition to essential health benefits, but States must defray the cost of such additional benefits.
- Section 10104 clarifies that states must make payments to cover the cost of additional benefits directly to individuals or plans, and not to Exchanges.
- Requires Exchanges to certify qualified health plans, operate a toll-free hotline and Internet website, rate qualified health plans, present plan options in a standard format, inform individuals of eligibility for Medicaid and CHIP, provide an electronic calculator to calculate plan costs, and grant certifications of exemption from the individual responsibility requirement.
- Beginning in 2015, requires Exchanges to be self-sustaining and allows them to charge assessments or user fees.
- Allows Exchanges to certify qualified health plans if they meet certification criteria and offering them is in the interests of individuals and employers, and requires Exchanges to consider the reasonableness of premium rate increases when determining whether to certify and offer plans.
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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