Health Care Reform FAQ
Employer Shared Responsibility
What are the Employer Shared Responsibility provisions?
Beginning in 2015, the Patient Protection and Affordable Care Act places responsibility on applicable large employers (i.e., employers with 50 or more full-time equivalent employees) to offer group health insurance coverage to their full-time employees, or potentially pay a penalty if at least one full-time employee obtains a subsidy for coverage through a health insurance marketplace. These provisions are commonly known as Employer Shared Responsibility (ESR) or "pay-or-play" requirements.
When do these provisions go into effect?
The ESR provisions go into effect for applicable large employers with 100 or more full-time employees on January 1, 2015. Employers with 50-99 full-time employees will see enforcement on ESR provisions beginning on January 1, 2016. Employers will use their employee information in 2014 to determine whether they have enough employees to be subject to these new provisions in 2015. The process for identifying potential fines for non-compliance will begin in 2015.
Where can I find more information on the ESR provisions?
Please visit our Employer Shared Responsibility pages for more information, or review the IRS guidance on these provisions.
What are PCORI fees, and how do they affect me?
The Affordable Care Act created an entity known as the Patient-Centered Outcomes Research Institute (PCORI). The institute researches and compares the clinical effectiveness of different medical treatments, and it will be funded by clinical effectiveness research fees (PCORI fees). These fees will be assessed on insurance carriers and plan sponsors by the ACA, and depending on how you handle your health insurance, you may be liable.
- Section 4375 of the ACA imposes the PCORI fees on each specified health insurance policy. For insured plans, the insurance carrier is responsible for paying the PCORI fees, and, in many cases, the carriers are passing along the cost to the employers.
- Section 4376 of the ACA imposes the PCORI fees on the plan sponsor of an applicable self-insured health plan. These include plans maintained by employers for the benefit of their employees, which provide accident or health coverage where any portion of the coverage is provided other than through an insurance policy. For self-insured plans, the plan sponsor is responsible for paying the PCORI fees.
For policy and plan years ending after September 30, 2012, and before October 1, 2013, the fee is one dollar multiplied by the average number of lives covered under the plan for the plan year. For policy and plan years ending after September 30, 2013, and before October 1, 2014, the fee will be increased to two dollars multiplied by the average number of lives covered under the plan. For plan years ending on or after October 1, 2014, and before October 1, 2019, the fee is increased based on increases in the projected per capita amount of National Health Expenditures as released by the Department of Health and Human Services.
The regulations provide procedural rules for how insurers and plan sponsors will report and pay the required fees. These fees must be reported using Form 720 (Quarterly Federal Excise Tax Return), which may be filed electronically. The filing and payment of fees must be completed and paid by July 31 of the calendar year immediately following the end of the plan year.
What plans are affected?
The PCORI fees affect each plan year ending on or after October 1, 2012, and before October 1, 2019, and apply to:
- Major medical plans;
- Retiree-only plans;
- Health reimbursement arrangements (HRAs);
- Dental and vision plans, unless they satisfy the requirements of a “limited scope dental or vision benefit” under the Health Insurance Portability and Accountability Act of 1996 (HIPAA);
- Health flexible spending accounts (health FSAs), unless they satisfy the requirements of an “excepted benefit” under HIPAA; and
- Employee assistance plans, disease-management programs, or wellness programs if the program provides significant benefits in the nature of medical care or treatment.
What else do I need to know?
- The regulations permit a plan sponsor that provides health coverage under two or more self-insured plans to treat them as one plan when calculating the PCORI fees, so long as the programs have the same plan year.
- Multi-employer plan sponsors whose sole purpose is to sponsor and administer the multi-employer plan may pay the PCORI fees from plan assets held in a trust. Employers who act as a plan sponsor and exist for additional reasons beyond sponsoring and administering the plan may not use plan assets to pay the PCORI fees.
- For self-funded plans maintained by two or more employers that are part of a controlled group or affiliated service group, each participating employer is responsible for reporting and paying the PCORI fees with respect to its own employees. This is true unless, before the date the fees must be reported and paid, (1) the governing plan documents designate one of the participating employers as the plan sponsor (or as the plan sponsor for purposes of reporting and paying the PCORI Fees), and (2) such employer has consented to the designation.
- There are three methods for determining the number of covered lives for purposes of calculating the PCORI fee. While a plan sponsor may choose to utilize any three of these methods, they must use the same method consistently for the duration of the plan year. A plan sponsor may choose a different method from one plan year to the next. The following are the acceptable methods for calculating the fee:
- Actual Count Method: Calculates the sum of the lives covered for each day of the plan year and divides the sum by the number of days in the plan year.
- Snapshot Method: Adds the total number of lives covered on one date in each quarter of the plan year, or an equal number of dates for each quarter, and divides the total by the number of dates on which a count was made.
- Form 5500 Method: Uses a formula that includes the number of participants actually reported on the Form 5500 for the plan year. Additional rules apply depending on whether a plan provides self-only coverage or additional options.
Where can I get more information?
- This chart created by the IRS details the various types of coverage and whether they are subject to the fee.
- This IRS Q&A answers many common questions about the fee.
What are MLR Rebates?
The Medical Loss Ratio (MLR) Rebate provision requires insurance carriers to issue rebates to affected employers and employees for the previous plan year.
How does the MLR provision work?
The MLR provision, effective January 2011, requires that a minimum percent of premium payments collected by health insurance carriers be applied toward medical claims and/or quality improvement.
Small group and individual plans must have had 80 percent of premiums apply toward payment of claims and/or quality improvement. Large group health plans must have applied at least 85 percent of premiums toward the payment of claims and/or quality improvement costs. The remaining percent of premiums could be applied to administrative and marketing expenses and profits. Small group health plans are for employers with up to 50 or 100 employees, depending on the state. Large group health plans are for employers with over 50 or 100 participants.
Carriers who do not meet these thresholds are required to send a rebate of the excess premium payments to either the affected businesses or policyholders. The rebates for the 2011 plan year were paid in August 2012.
Rebates are calculated based on aggregate market data for small and large groups in each state, not on a particular group health plan's experience.
The rebates are distributed in a variety of ways:
- If the employer pays 100 percent of the premium, the rebate is paid to the employer. If the premiums are paid 100 percent by the participants, the rebate is repaid to the participants. If the premiums are paid partially by the employer and partially by the participants, the rebate is reimbursed to each based on the percentage of the contribution.
- If either the employer or the participants pay a fixed amount toward the premium, the rebate cannot exceed the fixed amount.
- If the rebate is considered plan assets, it can be distributed to both current and former employees. However, if the distribution to former employees is minimal, and the cost of distributing the funds is approximately the amount of the proceeds, the plan sponsor could allocate all proceeds to current participants.
- If distributing the rebate is not cost-effective, the plan sponsor can use the rebate to fund future participant premiums, enrich benefits, or any other permissible within the plan.
Health insurance plans that are exempt from the MLR provision included:
- Fixed Indemnity
- Stand-Alone Dental
- Long-Term Disability
Who receives rebates?
According to the Department of Health and Human Services, an estimated $1.3 billion was expected to be paid in rebates in 2012, with $377 million going to small group health plans, $541 million to large group health plans, and $426 million to individually purchased plans. Employers and participants in Texas and Florida were projected to receive the greatest proportion of rebates with an estimated $186 million and $149 million, respectively.
For those covered by small group health plans, the average rebate was expected to be $76 per enrollee. Enrollees in the following states were anticipated to receive the highest average rebates in the small group health category:
- Alaska: $517
- Alabama: $203
- Oregon: $172
- Louisiana: $170
- Massachusetts: $167
The greatest number of rebates for small group enrollees was expected to be offered in:
- District of Columbia
- South Carolina
- New Jersey
Rebates were not expected in:
- North Dakota
- New Hampshire
- New Mexico
- Rhode Island
- South Dakota
Insurers send a letter to participants notifying them if they will or will not receive a rebate. Recipients should consult with their accountant or financial advisor to determine if the rebate is taxable. Factors will include whether the premium was paid with pre- or post-tax dollars.
Summary of Benefits and Coverage
What is required of health plans and insurance carriers according to the Summary of Benefits and Coverage provision?
In February 2012, the Department of Health and Human Services released the final rules mandating that consumers have access to two key documents provided by health insurance carriers and self-funded group health plans – a Summary of Benefits and Coverage (SBC) and a Uniform Glossary of commonly used terms.
The SBC is a summary of the plan or coverage, with a focus on key features such as:
- Covered benefits;
- Cost-sharing requirements;
- Limits on coverage; and
- Excluded benefits.
The rules state that consumers should receive the SBC:
- When shopping for coverage;
- When renewing coverage;
- Whenever material changes are made to the plan during the plan year; and
- On demand.
To whom do these rules apply?
These rules apply to health insurance carriers, group health plans, and their administrators. Paychex is prepared to help clients meet this requirement.
Please visit our Summary of Benefits and Coverage provision page for more details about this requirement.
FSA, HSA, HRA
What should I know about changes to Section 125 plans?
In 2013, employee contributions to medical FSAs are limited to the lesser of $2,500 for the taxable year or company maximum. Adjustments to this cap will be made each year.
Over-the-counter medicines can no longer be eligible under a health FSA, HSA, or HRA unless they are prescribed by a medical practitioner.
Where can I find more information?
Refer to our Consumer-Directed Health Care page for more details.
What is the W-2 reporting provision?
Businesses filing 250 or more Forms W-2 in the previous tax year are required to comply with the provision. The provision is currently optional for businesses that filed fewer than 250 Forms W-2 in the previous tax year. The provision is effective beginning with 2012 Forms W-2.
Does this apply to non-employees who receive coverage?
Employers are not required to report health coverage amounts on Forms W-2 to non-employees such as a retiree or surviving spouse.
Where can I find more information?
More information is available on our Form W-2 Reporting provision page.
Additional Medicare Tax
What is this tax?
The Additional Medicare Tax increases the hospital insurance tax rate on certain high wage-earning individuals by 0.9 percent – from 1.45 to 2.35 percent. It goes into effect for taxable years starting after December 31, 2012.
How does this affect an employer’s match?
This change is to the employee portion of Medicare only; the employer portion of this tax has not changed. Employers must only match the first 1.45 percent of the Medicare tax.
Where can I find more information?
Please read the Frequently Asked Questions issued by the IRS about this tax.
Small Business Tax Credits
Who is eligible for the credits?
- Have less than 25 employees
- Have average annual wages less than $50,000 (as adjusted for inflation beginning in 2014)
- Contribute 50 percent or more of the aggregate single premium cost for each enrolled employee
- Purchase coverage through the Small Business Health Options Program (SHOP)
How can I figure out if I qualify?
Use our Small Business Tax Credit calculator to help you and your tax preparer determine if you are eligible, and if so, estimate how much you could receive.
Can I use tax credits to offset my payroll taxes?
Tax credits cannot be used to offset payroll taxes for non-tax-exempt businesses. Tax-exempt businesses can receive the credit based on their Medicare and employee income tax withholding.
How can I find more information?
Visit our Small Business Tax Credit page for more details.
What is a grandfathered plan?
A plan is grandfathered if it provided coverage to participants on, or before, March 23, 2010.
If I change the waiting period or employer contribution of my grandfathered plan, will that affect the grandfathered status of my plan?
In 2010, the Departments of Health and Human Services, Labor, and the Treasury issued interim final rules that address what changes can be made to health insurance coverage or a group health plan without causing it to lose its "grandfather" status. According to the rule, the following changes will cause a loss of a plan's grandfather state:
- Eliminating all or a substantial number of benefits to diagnose or treat a particular condition.
- Increasing a coinsurance or other percentage-based cost-sharing requirement above the level at which it was set on March 23, 2010.
- Increasing an annual deductible or out-of-pocket limit by a total percentage — measured from March 23, 2010 — that exceeds the sum of the medical inflation rate plus fifteen percentage points.
- Increasing a co-payment by an amount that exceeds the greater of (1) the amount just described for other fixed-amount, cost-sharing requirements, or (2) $5.00 increased by the medical inflation rate since March 23, 2010.
- Decreasing the rate of employer contributions by more than five percentage points below the rate that was in effect on March 23, 2010.
- Adopting or decreasing an annual benefit limit with the specific rules depending on whether the plan had already imposed an annual or lifetime limit as of March 23, 2010.
What is the penalty for individuals who do not obtain health insurance coverage?
Beginning in 2014, individuals will be required to maintain a minimum level of essential coverage (the individual mandate). Failure to maintain this monthly minimum level of coverage will result in penalties. The penalty is the greater of:
- In 2014 – $95 per uninsured person or 1 percent of household income over the filing threshold.
- In 2015 – $325 per uninsured person or 2 percent of household income over the filing threshold.
- In 2016 – $695 per uninsured person or 2.5 percent of household income over the filing threshold.
- After 2016 – will increase annually based on the cost of living.
Are there exceptions to this requirement?
Exceptions to the individual mandate include: financial hardship; religious objections; members of American Indian tribes; individuals having less than three months of coverage; incarcerated individuals; undocumented immigrants; individuals who cannot afford coverage (required contributions toward coverage exceed 8 percent of household income); and taxpayers with income below the tax filing threshold.
What type of notice are employers required to provide to employees relating to material modifications of health insurance plans?
By October 1, 2013, employers have to provide written notices to all employees about health coverage as well as federal and state health insurance marketplaces. The Department of Labor offers sample notices for employers who do and do not offer coverage.