Key point. See the end of this article for the implementation dates of key provisions in the Affordable Care Act.
In 2010, Congress enacted the 2,500- page Patient Protection and Affordable Care Act (the “Act” or “Affordable Care Act”) in order to increase the number of Americans covered by health insurance and decrease the cost of health care. On the day President Obama signed the Act into law, Florida and 12 other states filed a complaint in the federal district court for the Northern District of Florida. Those plaintiffs were later joined by 13 more states, several individuals, and the National Federation of Independent Business. The plaintiffs alleged, among other things, that the “individual mandate” provisions of the Act exceeded Congress’s powers under the Constitution. The district court agreed, holding that Congress lacked constitutional power to enact the individual mandate. The district court determined that the individual mandate could not be severed from the remainder of the Act, and therefore struck down the Act in its entirety.
A federal appeals court agreed that the individual mandate exceeded Congress’s power under the Constitution. The court unanimously agreed that the individual mandate did not impose a tax, and so could not be authorized by Congress’s power under the Constitution to “lay and collect Taxes.” The court also held that the individual mandate was not supported by Congress’s power under the Constitution to “regulate Commerce … among the several States.”
The United States Supreme Court agreed to determine the constitutionality of the Act, and issued its ruling on June 28, 2012.
One of the key provisions in the Act is the “individual mandate,” which requires most Americans to maintain “minimum essential” health insurance coverage as defined by the Secretary of Health and Human Services. The mandate does not apply to some individuals, such as prisoners and undocumented aliens. Many individuals will receive the required coverage through their employer, or from a government program, such as Medicaid or Medicare. But for individuals who are not exempt and do not receive health insurance through a third party, the means of satisfying the requirement is to purchase insurance from a private company.
The purpose of the individual mandate is to bring millions of uninsured healthy young people into the insurance system in order to prevent the dramatic increase in premiums that otherwise would occur due to the Act’s requirement that health insurers provide coverage for unhealthy persons with prior conditions.
Beginning in 2014, those who do not comply with the mandate must make a “shared responsibility payment” to the federal government. That payment is calculated as a percentage of household income, subject to a floor based on a specified dollar amount and a ceiling based on the average annual premium the individual would have to pay for qualifying private health insurance. In 2016, for example, the penalty will be 2.5 percent of an individual’s household income, but no less than $695 and no more than the average yearly premium for insurance that covers 60 percent of the cost of 10 specified services (including prescription drugs and hospitalization). The Act provides that the penalty will be paid to the Internal Revenue Service with an individual’s taxes, and “shall be assessed and collected in the same manner” as tax penalties, such as the penalty for claiming too large an income tax refund. The Act, however, bars the IRS from using several of its normal enforcement tools, such as criminal prosecutions and levies. And some individuals who are subject to the mandate are nonetheless exempt from the penalty—for example, those with income below a certain threshold.
The Supreme Court, in a 5-4 decision written by Chief Justice John Roberts, ruled that the individual mandate is not a valid exercise of Congress’s power to regulate commerce. The Court stressed that Congress is an “enumerated powers” institution that can only do those things that are expressly authorized by the Constitution. It acknowledged that the The Supreme Court, in a 5-4 decision written by Chief Justice John Roberts, ruled that the individual mandate is not a valid exercise of Congress’s power to regulate commerce. The Court stressed that Congress is an “enumerated powers” institution that can only do those things that are expressly authorized by the Constitution. It acknowledged that the Constitution grants Congress the power to “regulate Commerce.” But, it noted that the power to regulate commerce presupposes the existence of commercial activity to be regulated:
The individual mandate, however, does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority. Every day individuals do not do an infinite number of things. In some cases they decide not to do something; in others they simply fail to do it. Allowing Congress to justify federal regulation by pointing to the effect of inaction on commerce would bring countless decisions an individual could potentially make within the scope of federal regulation, and—under the Government’s theory—empower Congress to make those decisions for him ….
The individual mandate forces individuals into commerce precisely because they elected to refrain from commercial activity. Such a law cannot be sustained under a clause authorizing Congress to “regulate Commerce.”
To the surprise of many Court-watchers, the Court went on to rule that Congress had the authority to create the individual mandate under its constitutional authority to collect taxes. The Court observed:
The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness ….
The Federal Government does not have the power to order people to buy health insurance. [The individual mandate] would therefore be unconstitutional if read as a command. The Federal Government does have the power to impose a tax on those without health insurance. [The mandate] is therefore constitutional, because it can reasonably be read as a tax.
“To say that the individual mandate merely imposes a tax is not to interpret the statute but to rewrite it. Judicial tax-writing is particularly troubling. Taxes have never been popular, and in part for that reason, the Constitution requires tax increases to originate in the House of Representatives. That is to say, they must originate in the legislative body most accountable to the people, where legislators must weigh the need for the tax against the terrible price they might pay at their next election, which is never more than two years off. The Federalist No. 58 “defended the decision to give the origination power to the House on the ground that the Chamber that is more accountable to the people should have the primary role in raising revenue.” We have no doubt that Congress knew precisely what it was doing when it rejected an earlier version of this legislation that imposed a tax instead of a requirement-with-penalty. Imposing a tax through judicial legislation inverts the constitutional scheme, and places the power to tax in the branch of government least accountable to the citizenry.” From the dissenting opinion, disagreeing with the Court’s majority that the Affordable Care Act was a legitimate exercise of the power of Congress to collect taxes.
Another key provision of the Act is the Medicaid expansion. The current Medicaid program offers federal funding to states to assist pregnant women, children, needy families, the blind, the elderly, and the disabled in obtaining medical care. The Act expands the scope of the Medicaid program and increases the number of individuals the states must cover. For example, the Act requires state programs to provide Medicaid coverage by 2014 to adults with incomes up to 133 percent of the federal poverty level, though many states now cover adults with children only if their income is considerably lower, and do not cover childless adults at all. The Act increases federal funding to cover the states’ costs in expanding Medicaid coverage. But if a state does not comply with the Act’s new coverage requirements, it may lose not only the federal funding for those requirements, but all of its federal Medicaid funds.
Plaintiffs challenged this expansion. The Court acknowledged that the Act dramatically increases state obligations under Medicaid, by requiring states to expand their Medicaid programs by 2014 to cover all individuals younger than the age of 65 with incomes below 133 percent of the federal poverty line. It agreed that Congress has the authority “to offer funds under the Affordable Care Act to expand the availability of health care, and requiring that states accepting such funds comply with the conditions on their use.” But, “what Congress is not free to do is to penalize states that choose not to participate in that new program by taking away their existing Medicaid funding.” As a result, the portion of the Act giving the Secretary of Health and Human Services the authority to do so was unconstitutional. The Court observed:
Congress has no authority to order the states to regulate according to its instructions. Congress may offer the states grants and require the states to comply with accompanying conditions, but the states must have a genuine choice whether to accept the offer. The states are given no such choice in this case: They must either accept a basic change in the nature of Medicaid, or risk losing all Medicaid funding. The remedy for that constitutional violation is to preclude the Federal Government from imposing such a sanction. That remedy does not require striking down other portions of the Affordable Care Act.
The Court concluded: “The Framers created a Federal Government of limited powers, and assigned to this Court the duty of enforcing those limits. The Court does so today. But the Court does not express any opinion on the wisdom of the Affordable Care Act. Under the Constitution, that judgment is reserved to the people.”
Impact on church employees
What is the significance of the Supreme Court’s ruling upholding the constitutionality of the Affordable Care Act? Consider the following:
• All of the deadlines and requirements in the Act remain intact, except for the Medicaid expansion (see above). The more important deadlines and requirements for churches are summarized below:
– 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 of the greater of $95 or 1 percent of income in 2014, $325 or 2 percent of income in 2015 and $695 or 2.5 percent of income in 2016, up to a cap. 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.
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, individuals not lawfully present in the United States, incarcerated individuals, and members of “health care sharing ministries.”
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.
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.
– Individuals are free to keep their existing insurance under a “grandfather” provision, subject to some conditions.
– 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.
– Health insurers can’t exclude coverage for children with pre-existing conditions.
– A new program will receive $5 billion in federal support to provide affordable coverage to uninsured Americans with pre-existing conditions until new Exchanges are operational in 2014.
– Insurers can’t impose lifetime limits on benefits.
– Insurers no longer can rescind insurance when claims are filed, except in cases of fraud or intentional misrepresentation of material fact.
Key point. See the table at the end of this article on the implementation dates for the key provisions in the Affordable Care Act.
Impact on churches
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.
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.
An employer is an applicable large employer with respect to any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year. In counting the number of employees for purposes of determining whether an employer is an applicable large employer, a full-time employee (meaning, for any month, an employee working an average of at least 30 hours or more each week) is counted as one employee and all other employees are counted on a pro-rated basis in accordance with regulations prescribed by the Secretary of HHS.
An applicable large employer that offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan is subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a state Exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees.
The penalty is an excise tax that is imposed for each employee who receives a premium tax credit or cost-sharing reduction for health insurance purchased through a state Exchange. For each fulltime 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 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.
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 60 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.
What About Ministers?
Note the following two points regarding the treatment of ministers for purposes of the health insurance tax credit:
1. If a minister is an employee under the so-called “common law employee test,” he or she is taken into account in determining an employer’s FTEs for purposes of the health care tax credit. Also, premiums paid by the church for the health insurance coverage of a minister who is an employee can be taken into account in computing the credit, subject to limitations on the credit. If the minister is self-employed for income tax reporting purposes, he or she is not taken into account in determining an employer’s FTEs or premiums paid.
2. Compensation paid to ministers who are employees for duties performed in the exercise of their ministry is not subject to FICA taxes and is not wages subject to income tax withholding. As a result, their wages are not taken into account for purposes of computing average annual wages.
The fact that ministers are taken into account in determining a church’s FTE count, but their wages are not considered in computing the average annual wages paid by a church, makes it more likely that some churches will benefit from the credit since the generally higher wages paid to ministers are removed from consideration.
See chapter 2 in Richard Hammar’s annual Church & Clergy Tax Guide for a full explanation of the common law employee test. This is one of the tests used by the IRS and the courts in determining a minister’s reporting status for federal income tax reporting purposes.
The small employer health insurance tax credit
One of the main objectives of the Affordable Care Act is universal health coverage. The Act contains several provisions to achieve this goal. One of them is a tax credit that will help small businesses and tax-exempt organizations afford the cost of providing health insurance for their employees. The credit is up to 25 percent of the cost of health insurance premiums paid by a qualifying employer for its employees.
The Supreme Court’s decision in June did not alter this tax credit, meaning eligible small employers, including churches, may apply for it.
In order for an employer to qualify for the credit, it must meet the following three requirements:
- it has fewer than 25 “full-time equivalent employees” (FTEs) for the tax year;
- the average annual wages of its employees for the year is less than $50,000 per FTE; and,
- it pays premiums for health insurance coverage under a “qualifying arrangement.”
The credit is reduced for employers with more than 10 FTEs for the tax year. It is reduced to zero for employers with 25 or more FTEs. Further, the credit is reduced for employers that paid average annual wages of more than $25,000 for the year. It is reduced to zero for employers that pay average annual wages of $50,000 or more.
Note that a church with 25 or more employees may qualify for the credit if some of its employees are part-time. This is because the limitation on the number of employees is based on FTEs. So, a church with 25 or more employees could qualify for the credit if some of its employees work part-time.
Key point. The $50,000 average annual wage limit is adjusted for infl ation beginning in 2013.
Only premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. However, a qualifying arrangement also includes an arrangement under which the employer pays at least 50 percent of the premium cost for single (employee-only) coverage for each employee enrolled in any health insurance coverage offered by the employer.
For tax years beginning in 2010 through 2013, only premiums paid to a health insurance provider for health care coverage are counted for purposes of the credit. A health insurance provider is either an insurance company or another entity licensed under state law to provide health insurance coverage.
The IRS has clarified that the term health insurance provider also includes “an arrangement under which an otherwise qualifying small church employer pays premiums for employees who receive medical care coverage under a church welfare benefit plan.” This conclusion is based on the Church Plan Parity and Entanglement Prevention Act of 1999 which states that “for purposes of enforcing provisions of state insurance laws that apply to a church plan that is a welfare plan, the church plan shall be subject to state enforcement as if the church plan were an insurer licensed by the state.” Based on this provision, the IRS concluded that a church welfare benefit plan is subject to state insurance law enforcement as if it were licensed as an insurance company, and therefore meets the definition of a health insurance provider for purposes of the credit. As a result, insurance premiums paid by churches to many denominational health plans will be counted for purposes of the credit.
Premiums for health care coverage that cover a wide variety of conditions, such as a major medical plan, are counted and premiums for certain coverage that is more limited in scope, such as limited scope dental or vision coverage, are also counted. However, if an employer offers more than one type of coverage, such as a major medical plan and a separate limited scope dental or vision plan, the employer must separately satisfy the requirements for a qualifying arrangement with respect to each type of coverage the employer offers (meaning the employer cannot aggregate these different plans for purposes of meeting the qualifying arrangement requirement).
Key point. An arrangement under which an otherwise qualifying small church employer pays premiums for employees who receive medical care coverage under a church welfare benefit plan may be a qualifying arrangement for purposes of the small business health care tax credit.
Key point. Employer contributions to health reimbursement arrangements (HRAs), health fl exible spending arrangements (FSAs), and health savings accounts (HSAs) are not taken into account for purposes of the small business health care tax credit.
For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer’s premium expenses that count toward the credit. However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., hospital insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages for the year.
If a minister is an employee for income tax reporting purposes, he or she is taken into account in determining an employer’s FTEs for purposes of the health care tax credit. Also, premiums paid by the church for the health insurance coverage of a minister who is an employee can be taken into account in computing the credit, subject to limitations on the credit. If the minister is self-employed for income tax reporting purposes, he or she is not taken into account in determining an employer’s FTEs or premiums paid.
The maximum credit goes to smaller employers—those with 10 or fewer full-time equivalent (FTE) employees—paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.
Small businesses, nonprofits, and churches can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 35 percent of premiums paid by eligible tax-exempt organizations.
Tax-exempt organizations will first use Form 8941 to figure their refundable credit, and then claim the credit on Line 44f of Form 990-T. Though primarily filed by those organizations liable for the tax on unrelated business income, Form 990-T will also be used by any eligible tax-exempt organization to claim the credit, regardless of whether they are subject to this tax. Form 990-T has been revised for the 2011 filing season to enable eligible tax-exempt organizations to claim the health care tax credit.
The deadline for filing Form 990-T is the 15th day of the fifth month following the end of a church’s tax year (May 15 of the following year for most churches). To illustrate, to claim the credit for 2012, a church with a calendar fiscal year that ended on December 31 will need to file Form 990-T by May 15, 2013. For churches that operate on a fiscal year basis, the deadline is the 15th day of the fifth month following the end of their fiscal year.
Note that qualifying tax-exempt employers (including churches) having no taxable income to be offset with a tax credit will claim a “refundable” tax credit, meaning that the amount of the credit that would otherwise have offset taxable income is refunded to them.
Key point. The credit is refundable so long as it does not exceed the employer’s income tax withholding and Medicare tax liability.
Key point. Although the tax code requires section 501(c)(3) organizations to make their Form 990-T available for public inspection, this requirement does not apply to returns filed only to request a credit for the small employer health insurance premiums. Also, there is no requirement that section 501(c) (3) organizations make Form 8941 available for public inspection. An organization filing a Form 990-T only to request a credit for the small employer health insurance premium must write “Request for 45R Credit Only” across the top of the Form 990-T.
The credit is initially available for any taxable year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. As noted above, the IRS has clarified that qualifying health insurance includes “an arrangement under which an otherwise qualifying small church employer pays premiums for employees who receive medical care coverage under a church welfare benefit plan.”
For taxable years beginning in years after 2013, the credit is only available to a qualified small employer that purchases health insurance coverage for its employees through a state “exchange” and is only available for a maximum coverage period of two consecutive taxable years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.
The maximum two-year coverage period does not take into account any taxable years beginning in years before 2014. As a result, a qualified small employer could potentially qualify for this credit for six taxable years, four years under the first phase and two years under the second phase.
The Affordable Care Act will impose massive new costs upon the federal government. Those costs will be offset, in part, through several revenue provisions, including the following:
- 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.
- An increase in the additional tax on distributions from a Health Savings Account 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.
- 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 twelvemonth 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.
- The Act increases the adjusted gross income threshold for claiming the itemized deduction for medical expenses from 7.5 percent to 10 percent. Individuals age 65 or older would be able to claim the itemized deduction for medical expenses at 7.5 percent of adjusted gross income through 2016.
- The Act imposes an additional “hospital insurance” FICA tax on high-income taxpayers for compensation received and taxable years beginning after December 31, 2012.
Extension of dependent coverage
The Affordable Care Act 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 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 September 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 plans 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.
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 employerbased 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.
(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 Affordable Care Act 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.”
The Affordable Care Act:
- Affirms that a state may prohibit abortion coverage in qualified health plans offered through an Exchange if the state enacts a law to provide for such prohibition.
- Ensures that plans may elect whether or not to cover abortion. It 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. It also 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.
Contraception and abortifacients
The Affordable Care Act requires that most health insurance plans cover women’s preventive services without charging a co-pay or deductible beginning in August 2012. These preventive health services include coverage, without cost sharing, for “all Food and Drug Administration approved contraceptive methods, sterilization procedures, and patient education and counseling for all women with reproductive capacity,” as prescribed by a provider. Most group or individual health insurance coverage is required to provide this coverage.
The HHS website states: “Women will have access to all Food and Drug Administration-approved contraceptive methods, sterilization procedures, and patient education and counseling. These recommendations do not include abortifacient drugs. Most workers in employersponsored plans are currently covered for contraceptives. Family planning services are an essential preventive service for women and critical to appropriately spacing and ensuring intended pregnancies, which results in improved maternal health and better birth outcomes.”
The requirement that churches and other religious employers provide contraception, and certain “morning after” drugs—such as “Plan B” and “Ella” that are not regarded as abortifacients by HHS because they prevent conception rather than “interfere with pregnancy”—unleashed a tidal wave of opposition by the Catholic Church and many Protestants. The United States Conference of Catholic Bishops drafted a letter expressing outrage at the rule and insisting on a change. The letter stated: “The drugs that Americans would be forced to subsidize under the new rule include Ella, which was approved by the FDA as an ’emergency contraceptive’ but can act like the abortion drug RU-486. It can abort an established pregnancy weeks after conception. The pro-life majority of Americans—Catholics and others—would be outraged to learn that their premiums must be used for this purpose.”
HHS regulations incorporate a narrow exemption for some religious employers, but many religious organizations consider it to be unacceptably narrow. The regulations define an exempt religious employer as one that:
- has the inculcation of religious values as its purpose;
- primarily employs persons who share its religious tenets;
- primarily serves persons who share its religious tenets; and,
- is a non-profit organization under section 6033(a)(1) and section 6033(a)(3)(A)(i) or (iii) of the tax code. Sections 6033(a)(3)(A)(i) and (iii) refer to churches, their integrated auxiliaries, and conventions or associations of churches, as well as to the exclusively religious activities of any religious order.
While this definition of an exempt religious emp loyer would cover some churches, it would not cover many religious organizations, agencies, schools, and parachurch ministries. To illustrate, many church-affiliated universities, seminaries, and social service agencies that provide social services for the underprivileged would not qualify.
• Key point. In May 2012, several Catholic dioceses, universities, and institutions filed a lawsuit in federal court claiming that the imposition of the contraceptive mandate on several Catholic entities contrary to their religious convictions violates the First Amendment guaranty of religious freedom. This case is pending.
Effective Dates under the Affordable Care Act
Note. This table summarizes the effective dates of the key provisions under the Affordable Care Act.
- Prohibits denial of coverage of children based on pre-existing conditions.
- In the past, insurance companies could search for an error, or other technical mistake, on a customer’s application and use this error to deny payment for services when he or she got sick. The Affordable Care Act makes this illegal.
- Insurance companies are prohibited from imposing lifetime dollar limits on essential benefits, like hospital stays.
- Insurance companies’ use of dollar limits on the amount of insurance coverage a patient may receive will be restricted for new plans in the individual m arket and all group plans. In 2014, the use of annual dollar limits on essential benefits, like hospital stays, will be banned for new plans in the individual market and all group plans.
- Consumers can appeal coverage determinations or claims to their insurance company; the Act also establishes an external review process.
- Up to 4 million small businesses are eligible for tax credits to help them provide insurance benefits to their workers. The first phase of this provision provides a credit worth up to 35 percent of the employer’s contribution to the employees’ health insurance. Small nonprofit organizations may receive up to a 25-percent credit.
- All new plans must cover certain preventive services, such as mammograms and colonoscopies, without charging a deductible, copay, or coinsurance.
- Funding begins for a new, $15 billion fund that will invest in proven prevention and public health programs, including smoking cessation and combating obesity.
- The Act provides new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition. States have the option of running this program. If a state chooses not to do so, a plan will be established by the Department of Health and Human Services in that state.
- Young adults are allowed to stay on their parents’ plan until they turn 26 years old. In the case of existing group health plans, this right does not apply if the young adult is offered insurance at work.
- To preserve employer coverage for early retirees until more affordable coverage is available through the new Exchanges by 2014, the Act creates a $5 billion program to provide needed financial help for employment-based plans to continue to provide valuable coverage to retirees until more affordable coverage is available through the new Exchanges by 2014, the Act creates a $5 billion program to provide needed financial help for employment-based plans to continue to provide valuable coverage to people who retire between the ages of 55 and 65, as well as their spouses and dependents.
- States will be able to receive federal matching funds for covering some additional low-income individuals and families under Medicaid for whom federal funds were not previously available. This will make it easier for states that choose to do so to cover more of their residents.
- Seniors who reach the coverage gap (“donut hole”) will receive a 50-percent discount when buying Medicare Part D covered brand-name prescription drugs. Over the next 10 years, seniors will receive additional savings on brand-name and generic drugs until the coverage gap is closed in 2020.
- To ensure premium dollars are spent primarily on health care, the law generally requires that at least 85 percent of all premium dollars collected by insurance companies for large employer plans are spent on health care services and health care quality improvement. For plans sold to individuals and small employers, at least 80 percent of the premium must be spent on benefits and quality improvement.
• Health care remains one of the few industries that relies on paper records. The Act institutes a series of changes to standardize billing and requires health plans to begin adopting and implementing rules for the secure, confidential, electronic exchange of health information. Using electronic health records will reduce paperwork and administrative burdens and cut costs, and officials hope, also reduce medical errors and improve the quality of care.
- To expand the number of Americans receiving preventive care, the law provides new funding to state Medicaid programs that choose to cover preventive services for patients at little or no cost.
- As Medicaid programs and providers prepare to cover more patients in 2014, the Act requires states to pay primary care physicians no less than 100 percent of Medicare payment rates in 2013 and 2014 for primary care services. The increase is fully funded by the federal government.
- The Act implements strong reforms that prohibit insurance companies from refusing to sell coverage or renew policies because of an individual’s pre-existing conditions. Also, in the individual and small group market, the law eliminates the ability of insurance companies to charge higher rates due to gender or health status.
- The Act prohibits new plans and existing group plans from imposing annual dollar limits on the amount of coverage an individual may receive.
- Insurers will be prohibited from dropping or limiting coverage because an individual chooses to participate in a clinical trial. This applies to all clinical trials that treat cancer or other life-threatening diseases.
- Tax credits to make it easier for the middle class to afford insurance will become available for people with income between 100 percent and 400 percent of the poverty line who are not eligible for other affordable coverage. The tax credit is advanceable, so it can lower your premium payments each month, rather than make you wait until you file your tax return. It’s also refundable, so even moderateincome families can receive the full benefit of the credit. These individuals may also qualify for reduced costsharing (copayments, co-insurance, and deductibles).
- Starting in 2014, if your employer doesn’t offer insurance, you will be able to buy it directly in an Affordable Insurance Exchange. An Exchange is a new, transparent, and competitive insurance marketplace where individuals and small businesses can buy affordable and qualified health benefit plans. Exchanges will offer you a choice of health plans that meet certain benefits and cost standards.
- The Act implements the second phase of the small business tax credit for qualified small businesses and small nonprofit organizations. In this phase, the credit is up to 50 percent of the employer’s contribution to provide health insurance for employees. There is also up to a 35-percent credit for small nonprofit organizations.
- Under the law, most individuals who can afford it will be required to obtain basic health insurance coverage or pay a fee to help offset the costs of caring for uninsured Americans. If affordable coverage is not available to an individual, he or she will be eligible for an exemption.
- Workers meeting certain requirements who cannot afford the coverage provided by their employer may take whatever funds their employer might have contributed to their insurance and use these resources to help purchase a more affordable plan in the new health insurance Exchanges.
• A new provision will tie physician payments to the quality of care they provide. Physicians will see their payments modified so that those who provide higher value care will receive higher payments than those who provide lower quality care.