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What do employers need to consider regarding healthcare benefits? Healthcare benefits are an ever-increasing portion of employee compensation costs, but offering healthcare benefits to employees is often vital to recruiting and retaining the best employees. There are several different types of healthcare benefits plans that employers use to fulfill their organizations’ healthcare benefits goals.
While the Affordable Care Act (ACA) left much of the current employer-based system intact, the reforms have affected nearly every employer in the country. While there is still no federal law that requires employers to provide employees with healthcare insurance, employers with more than 50 employees that do not offer coverage, or do not offer sufficient coverage, are subject to financial penalties. In addition, U.S. citizens and legal residents, with few exceptions, are required to have qualifying health coverage.
The drive to control the cost of healthcare benefits continues to cause employers to implement a variety of cost-cutting and cost-shifting strategies ranging from self-insurance and managed care to defined-contribution, or consumer-directed, health plans. For information on other requirements relating to healthcare benefits, Please see the national Health Care Insurance, national Health Information Privacy, national Health Insurance: Play or Pay?, and national Health Insurance Continuation/COBRA. sections.
A variety of employer-sponsored group health plans are now used as employers and employees try to balance the needs to control costs, to provide quality coverage, and to provide choice in the selection of providers.
The major types of healthcare coverage now available include the following:
Traditional fee-for-service plans or indemnity plans. These plans reimburse providers for services and procedures provided to participants who are covered by the plan. Insurers may pay claims based on a schedule of fees based on the usual, customary, and reasonable standard of fees charged in the particular geographic area.
Preferred provider organizations (PPO). PPOs provide a structure for implementing many “managed care” concepts. PPOs are comprehensive networks of healthcare providers that are set up by employers, by insurers, and by major providers, such as hospitals and groups of doctors. The PPO sponsor negotiates for reduced fees for services contracted through the PPO. Under a PPO plan, the patient also has the choice of seeing nonparticipating doctors, but those doctors' services may not be fully covered.
Health maintenance organizations (HMO). HMOs offer comprehensive health care for a prepaid fee instead of reimbursing the provider on a fee-for-service basis, thereby shifting the risk of unexpected costs to the provider. HMOs were expected to reduce costs by cutting administrative and claims expenses, providing preventive care, and reducing unnecessary care. Staff model HMOs provide services at one or more locations solely to members through professionals who are full- or part-time employees of the HMO. Individual practice associations (IPAs) deliver services through a group of professionals who incorporate to care for HMO members. IPAs offer a wider choice of available physicians and, sometimes, more convenient locations. Group model HMOs deliver services through physicians' groups and local hospitals that the HMO contracts with to provide health services to members at designated health centers.
Medical expense reimbursement accounts. A popular alternative or supplement to traditional insurance is a medical reimbursement plan that allows employees to allocate a portion of their salary for reimbursement of medical costs not covered by insurance on a pretax basis. These accounts may be either a substitute for regular insurance plans or may be used to soften the blow of shifting the cost of health coverage to employees. If the reimbursement account is provided under a flexible spending account (FSA) authorized by Section 125 of the Internal Revenue Code, the employees' share of health insurance premiums and other out-of-pocket healthcare expenses may be exempt from federal taxation. Please see the national Flexible Benefits/Cafeteria Plans section.
Consumer-directed health plans--health savings accounts (HSAs), health reimbursement accounts (HRAs), and medical savings accounts (MSAs). One trend in health plan design that has continued to gain popularity is consumer-driven health care, including defined-contribution health plans intended to make employees more conscious and responsible for the cost of their health care. In its simplest form, the employer provides a fixed sum for the employee to buy insurance on his or her own. Under another scheme, the employer provides a voucher for a fixed sum per year for health coverage and allows the employee to choose from an array of less- to more-expensive plans. Hybrid defined-contribution plans combine a high-deductible plan with a tax exempt medical expense savings account that could cover the deductible, copayments, or the cost of out-of-network care. Another type of plan provides a fixed sum for routine care and a high-deductible insurance plan to cover major illnesses. Currently, HSAs, HRAs, and MSAs are the three types of tax-favored consumer-directed plans that have legal authorization. While HSAs and MSAs require coverage under a high-deductible health plan (HDHP), HRAs are also frequently coupled with an HDHP.
The ACA reform process, implemented in stages, encompasses several major steps:
• Measures to encourage more employers to provide coverage such as the small employer tax credit and health insurance exchanges;
• Insurance reform measures to require insurers and employers to provide better coverage such as the elimination of lifetime and annual limits and preexisting condition restrictions;
• Measures to reduce costs such as grants for wellness programs and the provision of larger incentives in wellness programs; and
• Measures to greatly reduce the number of uninsured such as the expansion of Medicaid; the requirement that large employers provide coverage or face financial penalties; the requirement that individuals obtain coverage or face penalties; and mandates to coverage adult dependent children.
Note: The Supreme Court has ruled the ACA is constitutional, including the individual mandate (National Federation of Independent Business v. Sebelius,132 S. Ct. 2566 (2012)) and the ACA exchange subsidies (King v. Burwell,135 S. Ct. 2580 (2015)).
The ACA provides a tax credit to certain small employers that provide healthcare coverage to their employees. The Internal Revenue Service (IRS) has issued final regulations and other various guidance regarding the credit (26 CFR 1.45R-1 et seq.).
Eligible small employers. Small employers that provide healthcare coverage to their employees and that meet certain requirements (qualified employers) generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer:
• An employer must have fewer than 25 full-time equivalent employees (FTEs) for the tax year;
• The average annual wages of its employees for the year must be less than $50,000 per FTE (as adjusted for inflation beginning in 2014); and
• The employer must pay the premiums under a “qualifying arrangement,” which means purchasing insurance through the Small Business Health Options Program (also known as SHOP exchanges, SHOP marketplaces, or SHOPs).
The IRS has stated that tax-exempt organizations are entitled to the credit, but must calculate the credit under special rules.
Calculation of the credit. The tax credit available to an eligible small employer equals 50 percent of the eligible small employer’s premium payments made on behalf of its employees under a qualifying arrangement. In the case of a tax-exempt eligible small employer, the tax credit available equals 35 percent of the employer’s premium payments made on behalf of its employees under a qualifying arrangement.
The amount of an eligible small employer’s premium payments that are taken into account in calculating the credit is limited to the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the rating area in which the employee enrolls for coverage were substituted for the actual premium (26 CFR 1.45R-3).
Maximum credit amount.For tax years 2014 and beyond:
• The maximum credit is 50 percent (35 percent for small tax-exempt qualified employers) of premiums paid for small business employers;
• In order to be eligible for the credit, small business employers must pay premiums on behalf of employees enrolled in a qualified health plan offered through a SHOP marketplace; and
• The credit is available to eligible employers for 2 consecutive taxable years.
Credit reductions. If the number of FTEs exceeds 10, or if average annual wages exceed approximately $25,000 per employee (this amount is regularly adjusted for inflation), the amount of the credit is reduced in one of the following ways:
• If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction (# of FTEs in excess of 10 ÷ 15).
• If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction (amount by which average annual wages exceed $25,000 ÷ $25,000).
In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions.
Determining the number of FTEs. The number of an employer’s FTEs is determined by dividing the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080 (26 CFR 1.45R-2 ). The result, if not a whole number, is then rounded to the next lowest whole number. If, however, after dividing the total hours of service by 2,080, the resulting number is less than one, the employer rounds up to one FTE.
Determining the number of hours of service worked by employees. An employee’s hours of service for a year include the following:
• Each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer during the employer’s taxable year; and
• Each hour for which an employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
Note: No more than 160 hours of service are required to be counted for an employee on account of any single, continuous period during which the employee performs no duties.
Employers may choose the most favorable method of determining hours worked. In calculating the total number of hours of service that must be taken into account for an employee during the taxable year, eligible small employers do not have to use the same method for all employees. They may apply different methods for different classifications of employees if the classifications are reasonable and consistently applied. Additionally, eligible small employers may change the method for calculating employees’ hours of service for each taxable year.
An eligible small employer may use any of the following three methods:
Actual hours worked. Determining actual hours of service from records of hours worked and hours for which payment is made or due (payment is made or due for vacation, holiday, illness, incapacity, etc.);
Days-worked equivalency. An employee is credited with 8 hours of service for each day for which the employee would be required to be credited with at least 1 hour of service; or
Weeks-worked equivalency. An employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least 1 hour of service.
Determining the amount of average annual wages. The amount of average annual wages is determined by first dividing the total wages paid by the employer to employees during the employer’s tax year by the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000.
Disregarded workers. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year (26 CFR 1.45R-3). A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit (26 CFR 1.45R-1). Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTE employees or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.
A family member of any of the business owners or partners or a member of the business owner’s or partner’s household is also not considered an employee for purposes of the credit. For this purpose, a “family member” is defined as a child (or descendant of a child); a sibling or stepsibling; a parent (or ancestor of a parent); a stepparent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. A spouse of any of these family members is also considered a family member.
Controlled groups. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit (26 CFR 1.45R-2 ). Thus, for example, all employees of the controlled group or affiliated service group and all wages paid to employees by the controlled group or affiliated service group are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer.
Claiming the credit. The credit is claimed on the employer’s annual income tax return (26 CFR 1.45R-5). Form 8941, Credit for Small Employer Health Insurance Premiums, is used to calculate the credit. Tax-exempt organizations are to include the amount on line 44f of Form 990-T, Exempt Organization Business Income Tax Return. Applicable organizations must file Form 990-T to claim the credit, even if they would not ordinarily do so.
Small business employers may be able to carry the credit back or forward. Additionally, tax-exempt employers may be eligible for a refundable credit.
Additional information. For additional information on the small employer healthcare tax credit, visit http://www.irs.gov.
Health insurers in the individual and small group market must maintain a medical loss ratio (MLR) of 80 percent, and insurers in the large group market must maintain an MLR of 85 percent. Insurers must provide a rebate to each enrollee on a pro rata basis equal to the amount of premium revenue spent on nonmedical costs that exceed the percentage limits.
The MLR is the ratio of the amount of premium revenue expended by the issuer on reimbursement for clinical services provided to enrollees and for activities that improve healthcare quality to the total amount of premium revenue (excluding federal and state taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and specified reinsurance for the plan year).
Group health plans and health insurance issuers offering group or individual health insurance coverage are required to report information on benefits and healthcare provider reimbursement structures that improve health outcomes through the implementation of certain activities (PHSA Sec. 2717). Examples of the categories of activities to be reported include:
• Quality reporting, effective case management, care coordination, chronic disease management, and medication and care compliance initiatives;
• Activities to prevent hospital readmissions through a comprehensive program for hospital discharge that includes patient-centered education and counseling, comprehensive discharge planning, and postdischarge reinforcement by an appropriate healthcare professional;
• Activities to improve patient safety and reduce medical errors through the appropriate use of best clinical practices, evidence-based medicine, and health information technology under the plan or coverage; and
• Wellness and health promotion activities.
Plans and insurers must annually report to HHS whether the benefits under the plan or coverage satisfy these elements. The report must be made available to plan enrollees during each open enrollment period. HHS will make the reports available to the public on an Internet site.
HHS is to develop uniform standards to reduce the clerical burden on patients, healthcare providers, and health plans. The standards and associated operating rules should:
• Enable determination of an individual’s eligibility and financial responsibility for specific services before or at the point of care;
• Be comprehensive, requiring minimal added paper or other communications;
• Provide for timely acknowledgment, response, and status reporting that supports a transparent claim management process (including adjudication and appeals); and
• Describe all data elements in unambiguous terms, require that data elements be required or conditioned on set values in other fields, and prohibit additional conditions (except where necessary to implement state or federal law, or to protect against fraud and abuse).
HHS must reduce the number and complexity of forms (including paper and electronic forms) and data entry required by patients and providers.
HHS must also adopt the following:
• Rules establishing a single set of operating rules for eligibility verification and claims status
• Rules for electronic funds transfer and healthcare payment and remittance rules
• Rules for health claims or equivalent encounter information, enrollment and disenrollment in a health plan, health plan premium payments, and referral certification and authorization rules
Employers are to provide existing employees and new employees at the time of hiring with a written notice informing them of the following:
• The existence of an exchange, including a description of the services provided by such an exchange and how the employee may contact the exchange to request assistance;
• 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, that the employee may be eligible for a premium tax credit under IRC Sec. 36B if the employee purchases a qualified health plan through the Exchange; and
• If the employee purchases a qualified health plan through the exchange, the employee may 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 (29 USC 218b).
U.S. citizens and legal residents are required to have qualifying health coverage. Those who do not have coverage and who do not qualify for an exemption will be required to pay a yearly financial penalty (phased in from 2014 through 2016). The U.S. Supreme Court has upheld the constitutionality of the individual mandate.
Requirement to maintain minimum essential coverage. The basis of the individual mandate is the requirement to maintain minimum essential coverage. This provision requires an applicable individual to ensure that he or she, and any of his or her dependents who are applicable individuals, are covered under minimum essential coverage each month.
Exemptions. An applicable individual is anyone who does not qualify for a statutory exemption. Such exemptions include:
• Members of religious sects that are recognized as conscientiously opposed to accepting any insurance benefits;
• Members of recognized healthcare sharing ministries;
• Members of federally recognized Indian tribes;
• Individuals whose household income is below the minimum threshold for filing a tax return;
• Individuals who went without coverage for less than three consecutive months during the year;
• Individuals who are certified by a healthcare exchange as having suffered a hardship that makes them unable to obtain coverage;
• Individuals who cannot afford coverage because the minimum amount they must pay for the premiums is more than eight percent of their household income;
• Incarcerated individuals; and
• Individuals who are unlawfully present in the United States.
Minimum essential coverage. Minimum essential coverage means coverage under any of the following:
• Employer-sponsored coverage (including COBRA coverage and retiree coverage);
• Coverage purchased in the individual market;
• Medicare Part A coverage and Medicare Advantage;
• Most Medicaid coverage;
• Children's Health Insurance Program (CHIP) coverage;
• Certain types of veterans health coverage administered by the Veterans Administration;
• TRICARE;
• Coverage provided to Peace Corps volunteers;
• Coverage under the Nonappropriated Fund Health Benefits Program;
• Grandfathered health plans; and
• Other health benefits coverage designated by HHS.
Eligible employer-sponsored plan. An eligible employer-sponsored plan is a group health plan or group health insurance coverage offered by an employer to its employees that is a governmental plan or any other plan or coverage offered in the small or large group market within a state, including a grandfathered health plan offered in a group market.
The ACA requires employers to share healthcare responsibility by either providing coverage or paying penalties. This type of scheme is referred to as "play or pay." Under this particular part of the ACA, applicable large employers must decide if they want to play by providing affordable, adequate coverage to substantially all of their full-time employees or pay fines assessed under IRC Sec. 4980H.
Please see the national Health Insurance: Play or Pay? section.
The ACA requires the establishment of health insurance exchanges (also known as “marketplaces”) to provide individuals and small employers with access to affordable insurance coverage. States had the flexibility to design and operate exchanges that best meet their unique needs while meeting ACA’s statutory and regulatory standards. Each state was given the choice of:
• Building a fully state-based exchange;
• Defaulting to a federal exchange (often referred to as a “federally facilitated exchange”); or
• Entering into a state partnership exchange with the federal government.
For more information on exchanges, Please see the national Healthcare Exchanges section.
Effective January 1, 2020, an excise tax is imposed on insurers of employer-sponsored health plans with total values that exceed $10,200 for individual coverage and $27,500 for family coverage.
Managed care. Managed care is a broad label that includes concepts such as:
• Cost-sharing, in which an employee pays a preset portion of the fee for a particular service;
• Coinsurance, in which an employee pays a portion of the insurance premium; contracting for services at discounts from provider groups;
• Utilization review, such as mandatory second opinions and preadmission certification; and
• Consumer-directed/defined-contribution plans.
These strategies are designed (1) to make all the parties involved, including employers, employees, insurers, and providers, more cost-conscious; (2) to provide cost-cutting incentives for making decisions on how healthcare services are provided and used; and (3) to reduce the incidence of expensive medical problems, such as problem pregnancies, by making preventive care easily available.
Trends. The continuing rapid evolution of managed care is a major concern of employees, employers, insurers, and healthcare providers. One trend in managed care is toward more complex multilevel benefit options with different copay levels rather than a restriction on choice as the primary means of controlling costs. These types of multilevel benefits are most common for prescription coverage with different copays for drugs on an approved list, for generics, and for other prescriptions. Tiered programs are becoming more common in other areas, such as hospitals with different copayments or reimbursement rates applying depending on the hospital that a covered person chooses to utilize. Communicating complex benefit structures, as hard as that is, will be easier to deliver to employees than a very narrow choice message.
Consumer-directed/defined-contribution plan designs encourage employees to be conscious of healthcare costs by providing a annual fixed sum to pay for most routine medical costs combined with a high deductible plan to cover for large expenses such as hospitalizations. If employees are allowed to carry over there annual allocations, they have an incentive to economize when making their healthcare decisions that they do not have with traditional insurance plans. Additional incentives include the ability to maintain ownership of the healthcare funds after leaving the current employer, no tax consequences if the funds are used for medical expenses, and the ability to even take taxable distributions of the funds to use for nonmedical expenses.
Practice tip: In order to communicate these difficult messages, employers must move away from the mind-set in which healthcare communications are delivered once a year during open enrollment to an ongoing communications mind-set.
Self-insurance. Self-insurance, once the province of large companies, has been attracting many employers, large and small, for two reasons: (1) It takes some of the insurance company's profits and puts them into the employer's pocket, usually in the form of reduced premiums; and (2) self-insured plans can save money because they are exempt from many state laws “mandating” benefits for specific conditions or beneficiaries and state taxes on insurance premiums. Although self-insurance theoretically puts the burden of administering claims and risk of paying unexpected costs on the employer, these can be handled easily through third-party administrators and reinsurance.
Increased share of premiums. In recent years, a majority of employers have moved away from plans under which they pay all of the employee's premiums. They have also reduced the percentage of premiums paid for dependents. In addition to saving premium costs, this caused many employees to avoid double coverage and/or elect to be covered under a spouse's plan.
Spousal surcharges. Employers that still pay a larger-than-average share of premiums for coverage of spouses and other dependents or have a rich benefit package often end up covering spouses and dependents who have access to other coverage. When healthcare insurance costs were low, both spouses in two-earner families enrolled for family coverage in their own employer's plan. Coordination of benefit (COB) rules allocated the payment of each spouse’s claims first to their own employer's plan. If one employer increases the employee’s share of premiums, the other employer will end up being the sole insurer for the family. One way to discourage this trend is the so-called "spousal surcharge." Under a spousal surcharge, a plan will charge an employee an additional amount each month to cover his or her spouse unless the employee certifies that the spouse does not have access to or has enrolled in his or her employer's health plan. There are potential negatives to spousal surcharges, including having to police the certificates, adverse selection of employees who pay the charge, and the administrative and communication problems with running such a program. Employers would also need to make sure that spousal surcharges are legal under state law.
Alternatives to spousal surcharges. Other methods for discouraging enrollment of spouses and keeping down the costs of family coverage include:
• Opt-out credits where the employees are paid a credit when their spouse opts out of the plan;
• Spousal carve-outs where a spouse is not allowed to enroll in a plan unless he or she can prove that other employer coverage is not available; and
• Periodically auditing the eligibility of dependents and removing those who are not eligible.
Although there is no requirement that employers provide health insurance to retirees, this is an increasingly volatile issue. Many employers are concerned about the cost of providing such benefits and are adopting strategies to contain their exposure. These include requiring contributions from current retirees and/or from future retirees, setting dollar limits on benefits, introducing and increasing deductibles and copayments, coordinating plans with Medicare, encouraging retirees to join HMOs and other forms of managed care plans, and funding retiree health benefits through qualified retirement plans. Employers sometimes soften the blow of reduced or eliminated health benefits through increased pensions. The Medicare prescription drug benefit program (Medicare Part D) also offers a variety of financial incentives for employers to maintain retiree health insurance coverage.
Accounting rules. If an employer does provide health insurance to retirees, Financial Accounting Standard (FAS) 106 comes into play. FAS 106 requires companies to value and disclose the cost of future nonpension postretirement benefits on their financial statements. This rule can have a big effect on expenses and has caused many companies to rethink their postretirement benefit offerings, especially health insurance for retirees. Employers that are considering eliminating or reducing benefits should make sure that plan documents, including summary plan descriptions, contain unambiguous language giving the employer the right to terminate or amend the plan. The plan document should include a procedure for amending the plan and designate who has the authority to do so.
Subsidies for retiree drug costs. To encourage employers that provide retiree healthcare insurance benefits to continue prescription drug coverage after the Medicare prescription drug benefit (Medicare Part D) took effect, the law included a provision to pay employers 28 percent of each qualifying covered retiree’s allowable retiree costs under the qualified retiree prescription drug plan. To qualify for the subsidy, employers sponsoring retiree healthcare insurance plans must show that the plan's coverage is as generous as, or more generous than, defined standard coverage under the Medicare prescription drug benefit. The subsidy applies only to retirees eligible for but not enrolled in a Part D plan. The tax deduction for employers that receive Medicare Part D retiree drug subsidy payments has been eliminated.
Last reviewed on June 30, 2016.
Related Topics:
National
What do employers need to consider regarding healthcare benefits? Healthcare benefits are an ever-increasing portion of employee compensation costs, but offering healthcare benefits to employees is often vital to recruiting and retaining the best employees. There are several different types of healthcare benefits plans that employers use to fulfill their organizations’ healthcare benefits goals.
While the Affordable Care Act (ACA) left much of the current employer-based system intact, the reforms have affected nearly every employer in the country. While there is still no federal law that requires employers to provide employees with healthcare insurance, employers with more than 50 employees that do not offer coverage, or do not offer sufficient coverage, are subject to financial penalties. In addition, U.S. citizens and legal residents, with few exceptions, are required to have qualifying health coverage.
The drive to control the cost of healthcare benefits continues to cause employers to implement a variety of cost-cutting and cost-shifting strategies ranging from self-insurance and managed care to defined-contribution, or consumer-directed, health plans. For information on other requirements relating to healthcare benefits, Please see the national Health Care Insurance, national Health Information Privacy, national Health Insurance: Play or Pay?, and national Health Insurance Continuation/COBRA. sections.
A variety of employer-sponsored group health plans are now used as employers and employees try to balance the needs to control costs, to provide quality coverage, and to provide choice in the selection of providers.
The major types of healthcare coverage now available include the following:
Traditional fee-for-service plans or indemnity plans. These plans reimburse providers for services and procedures provided to participants who are covered by the plan. Insurers may pay claims based on a schedule of fees based on the usual, customary, and reasonable standard of fees charged in the particular geographic area.
Preferred provider organizations (PPO). PPOs provide a structure for implementing many “managed care” concepts. PPOs are comprehensive networks of healthcare providers that are set up by employers, by insurers, and by major providers, such as hospitals and groups of doctors. The PPO sponsor negotiates for reduced fees for services contracted through the PPO. Under a PPO plan, the patient also has the choice of seeing nonparticipating doctors, but those doctors' services may not be fully covered.
Health maintenance organizations (HMO). HMOs offer comprehensive health care for a prepaid fee instead of reimbursing the provider on a fee-for-service basis, thereby shifting the risk of unexpected costs to the provider. HMOs were expected to reduce costs by cutting administrative and claims expenses, providing preventive care, and reducing unnecessary care. Staff model HMOs provide services at one or more locations solely to members through professionals who are full- or part-time employees of the HMO. Individual practice associations (IPAs) deliver services through a group of professionals who incorporate to care for HMO members. IPAs offer a wider choice of available physicians and, sometimes, more convenient locations. Group model HMOs deliver services through physicians' groups and local hospitals that the HMO contracts with to provide health services to members at designated health centers.
Medical expense reimbursement accounts. A popular alternative or supplement to traditional insurance is a medical reimbursement plan that allows employees to allocate a portion of their salary for reimbursement of medical costs not covered by insurance on a pretax basis. These accounts may be either a substitute for regular insurance plans or may be used to soften the blow of shifting the cost of health coverage to employees. If the reimbursement account is provided under a flexible spending account (FSA) authorized by Section 125 of the Internal Revenue Code, the employees' share of health insurance premiums and other out-of-pocket healthcare expenses may be exempt from federal taxation. Please see the national Flexible Benefits/Cafeteria Plans section.
Consumer-directed health plans--health savings accounts (HSAs), health reimbursement accounts (HRAs), and medical savings accounts (MSAs). One trend in health plan design that has continued to gain popularity is consumer-driven health care, including defined-contribution health plans intended to make employees more conscious and responsible for the cost of their health care. In its simplest form, the employer provides a fixed sum for the employee to buy insurance on his or her own. Under another scheme, the employer provides a voucher for a fixed sum per year for health coverage and allows the employee to choose from an array of less- to more-expensive plans. Hybrid defined-contribution plans combine a high-deductible plan with a tax exempt medical expense savings account that could cover the deductible, copayments, or the cost of out-of-network care. Another type of plan provides a fixed sum for routine care and a high-deductible insurance plan to cover major illnesses. Currently, HSAs, HRAs, and MSAs are the three types of tax-favored consumer-directed plans that have legal authorization. While HSAs and MSAs require coverage under a high-deductible health plan (HDHP), HRAs are also frequently coupled with an HDHP.
The ACA reform process, implemented in stages, encompasses several major steps:
• Measures to encourage more employers to provide coverage such as the small employer tax credit and health insurance exchanges;
• Insurance reform measures to require insurers and employers to provide better coverage such as the elimination of lifetime and annual limits and preexisting condition restrictions;
• Measures to reduce costs such as grants for wellness programs and the provision of larger incentives in wellness programs; and
• Measures to greatly reduce the number of uninsured such as the expansion of Medicaid; the requirement that large employers provide coverage or face financial penalties; the requirement that individuals obtain coverage or face penalties; and mandates to coverage adult dependent children.
Note: The Supreme Court has ruled the ACA is constitutional, including the individual mandate (National Federation of Independent Business v. Sebelius,132 S. Ct. 2566 (2012)) and the ACA exchange subsidies (King v. Burwell,135 S. Ct. 2580 (2015)).
The ACA provides a tax credit to certain small employers that provide healthcare coverage to their employees. The Internal Revenue Service (IRS) has issued final regulations and other various guidance regarding the credit (26 CFR 1.45R-1 et seq.).
Eligible small employers. Small employers that provide healthcare coverage to their employees and that meet certain requirements (qualified employers) generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer:
• An employer must have fewer than 25 full-time equivalent employees (FTEs) for the tax year;
• The average annual wages of its employees for the year must be less than $50,000 per FTE (as adjusted for inflation beginning in 2014); and
• The employer must pay the premiums under a “qualifying arrangement,” which means purchasing insurance through the Small Business Health Options Program (also known as SHOP exchanges, SHOP marketplaces, or SHOPs).
The IRS has stated that tax-exempt organizations are entitled to the credit, but must calculate the credit under special rules.
Calculation of the credit. The tax credit available to an eligible small employer equals 50 percent of the eligible small employer’s premium payments made on behalf of its employees under a qualifying arrangement. In the case of a tax-exempt eligible small employer, the tax credit available equals 35 percent of the employer’s premium payments made on behalf of its employees under a qualifying arrangement.
The amount of an eligible small employer’s premium payments that are taken into account in calculating the credit is limited to the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the rating area in which the employee enrolls for coverage were substituted for the actual premium (26 CFR 1.45R-3).
Maximum credit amount.For tax years 2014 and beyond:
• The maximum credit is 50 percent (35 percent for small tax-exempt qualified employers) of premiums paid for small business employers;
• In order to be eligible for the credit, small business employers must pay premiums on behalf of employees enrolled in a qualified health plan offered through a SHOP marketplace; and
• The credit is available to eligible employers for 2 consecutive taxable years.
Credit reductions. If the number of FTEs exceeds 10, or if average annual wages exceed approximately $25,000 per employee (this amount is regularly adjusted for inflation), the amount of the credit is reduced in one of the following ways:
• If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction (# of FTEs in excess of 10 ÷ 15).
• If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction (amount by which average annual wages exceed $25,000 ÷ $25,000).
In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions.
Determining the number of FTEs. The number of an employer’s FTEs is determined by dividing the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080 (26 CFR 1.45R-2 ). The result, if not a whole number, is then rounded to the next lowest whole number. If, however, after dividing the total hours of service by 2,080, the resulting number is less than one, the employer rounds up to one FTE.
Determining the number of hours of service worked by employees. An employee’s hours of service for a year include the following:
• Each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer during the employer’s taxable year; and
• Each hour for which an employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
Note: No more than 160 hours of service are required to be counted for an employee on account of any single, continuous period during which the employee performs no duties.
Employers may choose the most favorable method of determining hours worked. In calculating the total number of hours of service that must be taken into account for an employee during the taxable year, eligible small employers do not have to use the same method for all employees. They may apply different methods for different classifications of employees if the classifications are reasonable and consistently applied. Additionally, eligible small employers may change the method for calculating employees’ hours of service for each taxable year.
An eligible small employer may use any of the following three methods:
Actual hours worked. Determining actual hours of service from records of hours worked and hours for which payment is made or due (payment is made or due for vacation, holiday, illness, incapacity, etc.);
Days-worked equivalency. An employee is credited with 8 hours of service for each day for which the employee would be required to be credited with at least 1 hour of service; or
Weeks-worked equivalency. An employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least 1 hour of service.
Determining the amount of average annual wages. The amount of average annual wages is determined by first dividing the total wages paid by the employer to employees during the employer’s tax year by the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000.
Disregarded workers. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year (26 CFR 1.45R-3). A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit (26 CFR 1.45R-1). Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTE employees or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.
A family member of any of the business owners or partners or a member of the business owner’s or partner’s household is also not considered an employee for purposes of the credit. For this purpose, a “family member” is defined as a child (or descendant of a child); a sibling or stepsibling; a parent (or ancestor of a parent); a stepparent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. A spouse of any of these family members is also considered a family member.
Controlled groups. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit (26 CFR 1.45R-2 ). Thus, for example, all employees of the controlled group or affiliated service group and all wages paid to employees by the controlled group or affiliated service group are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer.
Claiming the credit. The credit is claimed on the employer’s annual income tax return (26 CFR 1.45R-5). Form 8941, Credit for Small Employer Health Insurance Premiums, is used to calculate the credit. Tax-exempt organizations are to include the amount on line 44f of Form 990-T, Exempt Organization Business Income Tax Return. Applicable organizations must file Form 990-T to claim the credit, even if they would not ordinarily do so.
Small business employers may be able to carry the credit back or forward. Additionally, tax-exempt employers may be eligible for a refundable credit.
Additional information. For additional information on the small employer healthcare tax credit, visit http://www.irs.gov.
Health insurers in the individual and small group market must maintain a medical loss ratio (MLR) of 80 percent, and insurers in the large group market must maintain an MLR of 85 percent. Insurers must provide a rebate to each enrollee on a pro rata basis equal to the amount of premium revenue spent on nonmedical costs that exceed the percentage limits.
The MLR is the ratio of the amount of premium revenue expended by the issuer on reimbursement for clinical services provided to enrollees and for activities that improve healthcare quality to the total amount of premium revenue (excluding federal and state taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and specified reinsurance for the plan year).
Group health plans and health insurance issuers offering group or individual health insurance coverage are required to report information on benefits and healthcare provider reimbursement structures that improve health outcomes through the implementation of certain activities (PHSA Sec. 2717). Examples of the categories of activities to be reported include:
• Quality reporting, effective case management, care coordination, chronic disease management, and medication and care compliance initiatives;
• Activities to prevent hospital readmissions through a comprehensive program for hospital discharge that includes patient-centered education and counseling, comprehensive discharge planning, and postdischarge reinforcement by an appropriate healthcare professional;
• Activities to improve patient safety and reduce medical errors through the appropriate use of best clinical practices, evidence-based medicine, and health information technology under the plan or coverage; and
• Wellness and health promotion activities.
Plans and insurers must annually report to HHS whether the benefits under the plan or coverage satisfy these elements. The report must be made available to plan enrollees during each open enrollment period. HHS will make the reports available to the public on an Internet site.
HHS is to develop uniform standards to reduce the clerical burden on patients, healthcare providers, and health plans. The standards and associated operating rules should:
• Enable determination of an individual’s eligibility and financial responsibility for specific services before or at the point of care;
• Be comprehensive, requiring minimal added paper or other communications;
• Provide for timely acknowledgment, response, and status reporting that supports a transparent claim management process (including adjudication and appeals); and
• Describe all data elements in unambiguous terms, require that data elements be required or conditioned on set values in other fields, and prohibit additional conditions (except where necessary to implement state or federal law, or to protect against fraud and abuse).
HHS must reduce the number and complexity of forms (including paper and electronic forms) and data entry required by patients and providers.
HHS must also adopt the following:
• Rules establishing a single set of operating rules for eligibility verification and claims status
• Rules for electronic funds transfer and healthcare payment and remittance rules
• Rules for health claims or equivalent encounter information, enrollment and disenrollment in a health plan, health plan premium payments, and referral certification and authorization rules
Employers are to provide existing employees and new employees at the time of hiring with a written notice informing them of the following:
• The existence of an exchange, including a description of the services provided by such an exchange and how the employee may contact the exchange to request assistance;
• 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, that the employee may be eligible for a premium tax credit under IRC Sec. 36B if the employee purchases a qualified health plan through the Exchange; and
• If the employee purchases a qualified health plan through the exchange, the employee may 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 (29 USC 218b).
U.S. citizens and legal residents are required to have qualifying health coverage. Those who do not have coverage and who do not qualify for an exemption will be required to pay a yearly financial penalty (phased in from 2014 through 2016). The U.S. Supreme Court has upheld the constitutionality of the individual mandate.
Requirement to maintain minimum essential coverage. The basis of the individual mandate is the requirement to maintain minimum essential coverage. This provision requires an applicable individual to ensure that he or she, and any of his or her dependents who are applicable individuals, are covered under minimum essential coverage each month.
Exemptions. An applicable individual is anyone who does not qualify for a statutory exemption. Such exemptions include:
• Members of religious sects that are recognized as conscientiously opposed to accepting any insurance benefits;
• Members of recognized healthcare sharing ministries;
• Members of federally recognized Indian tribes;
• Individuals whose household income is below the minimum threshold for filing a tax return;
• Individuals who went without coverage for less than three consecutive months during the year;
• Individuals who are certified by a healthcare exchange as having suffered a hardship that makes them unable to obtain coverage;
• Individuals who cannot afford coverage because the minimum amount they must pay for the premiums is more than eight percent of their household income;
• Incarcerated individuals; and
• Individuals who are unlawfully present in the United States.
Minimum essential coverage. Minimum essential coverage means coverage under any of the following:
• Employer-sponsored coverage (including COBRA coverage and retiree coverage);
• Coverage purchased in the individual market;
• Medicare Part A coverage and Medicare Advantage;
• Most Medicaid coverage;
• Children's Health Insurance Program (CHIP) coverage;
• Certain types of veterans health coverage administered by the Veterans Administration;
• TRICARE;
• Coverage provided to Peace Corps volunteers;
• Coverage under the Nonappropriated Fund Health Benefits Program;
• Grandfathered health plans; and
• Other health benefits coverage designated by HHS.
Eligible employer-sponsored plan. An eligible employer-sponsored plan is a group health plan or group health insurance coverage offered by an employer to its employees that is a governmental plan or any other plan or coverage offered in the small or large group market within a state, including a grandfathered health plan offered in a group market.
The ACA requires employers to share healthcare responsibility by either providing coverage or paying penalties. This type of scheme is referred to as "play or pay." Under this particular part of the ACA, applicable large employers must decide if they want to play by providing affordable, adequate coverage to substantially all of their full-time employees or pay fines assessed under IRC Sec. 4980H.
Please see the national Health Insurance: Play or Pay? section.
The ACA requires the establishment of health insurance exchanges (also known as “marketplaces”) to provide individuals and small employers with access to affordable insurance coverage. States had the flexibility to design and operate exchanges that best meet their unique needs while meeting ACA’s statutory and regulatory standards. Each state was given the choice of:
• Building a fully state-based exchange;
• Defaulting to a federal exchange (often referred to as a “federally facilitated exchange”); or
• Entering into a state partnership exchange with the federal government.
For more information on exchanges, Please see the national Healthcare Exchanges section.
Effective January 1, 2020, an excise tax is imposed on insurers of employer-sponsored health plans with total values that exceed $10,200 for individual coverage and $27,500 for family coverage.
Managed care. Managed care is a broad label that includes concepts such as:
• Cost-sharing, in which an employee pays a preset portion of the fee for a particular service;
• Coinsurance, in which an employee pays a portion of the insurance premium; contracting for services at discounts from provider groups;
• Utilization review, such as mandatory second opinions and preadmission certification; and
• Consumer-directed/defined-contribution plans.
These strategies are designed (1) to make all the parties involved, including employers, employees, insurers, and providers, more cost-conscious; (2) to provide cost-cutting incentives for making decisions on how healthcare services are provided and used; and (3) to reduce the incidence of expensive medical problems, such as problem pregnancies, by making preventive care easily available.
Trends. The continuing rapid evolution of managed care is a major concern of employees, employers, insurers, and healthcare providers. One trend in managed care is toward more complex multilevel benefit options with different copay levels rather than a restriction on choice as the primary means of controlling costs. These types of multilevel benefits are most common for prescription coverage with different copays for drugs on an approved list, for generics, and for other prescriptions. Tiered programs are becoming more common in other areas, such as hospitals with different copayments or reimbursement rates applying depending on the hospital that a covered person chooses to utilize. Communicating complex benefit structures, as hard as that is, will be easier to deliver to employees than a very narrow choice message.
Consumer-directed/defined-contribution plan designs encourage employees to be conscious of healthcare costs by providing a annual fixed sum to pay for most routine medical costs combined with a high deductible plan to cover for large expenses such as hospitalizations. If employees are allowed to carry over there annual allocations, they have an incentive to economize when making their healthcare decisions that they do not have with traditional insurance plans. Additional incentives include the ability to maintain ownership of the healthcare funds after leaving the current employer, no tax consequences if the funds are used for medical expenses, and the ability to even take taxable distributions of the funds to use for nonmedical expenses.
Practice tip: In order to communicate these difficult messages, employers must move away from the mind-set in which healthcare communications are delivered once a year during open enrollment to an ongoing communications mind-set.
Self-insurance. Self-insurance, once the province of large companies, has been attracting many employers, large and small, for two reasons: (1) It takes some of the insurance company's profits and puts them into the employer's pocket, usually in the form of reduced premiums; and (2) self-insured plans can save money because they are exempt from many state laws “mandating” benefits for specific conditions or beneficiaries and state taxes on insurance premiums. Although self-insurance theoretically puts the burden of administering claims and risk of paying unexpected costs on the employer, these can be handled easily through third-party administrators and reinsurance.
Increased share of premiums. In recent years, a majority of employers have moved away from plans under which they pay all of the employee's premiums. They have also reduced the percentage of premiums paid for dependents. In addition to saving premium costs, this caused many employees to avoid double coverage and/or elect to be covered under a spouse's plan.
Spousal surcharges. Employers that still pay a larger-than-average share of premiums for coverage of spouses and other dependents or have a rich benefit package often end up covering spouses and dependents who have access to other coverage. When healthcare insurance costs were low, both spouses in two-earner families enrolled for family coverage in their own employer's plan. Coordination of benefit (COB) rules allocated the payment of each spouse’s claims first to their own employer's plan. If one employer increases the employee’s share of premiums, the other employer will end up being the sole insurer for the family. One way to discourage this trend is the so-called "spousal surcharge." Under a spousal surcharge, a plan will charge an employee an additional amount each month to cover his or her spouse unless the employee certifies that the spouse does not have access to or has enrolled in his or her employer's health plan. There are potential negatives to spousal surcharges, including having to police the certificates, adverse selection of employees who pay the charge, and the administrative and communication problems with running such a program. Employers would also need to make sure that spousal surcharges are legal under state law.
Alternatives to spousal surcharges. Other methods for discouraging enrollment of spouses and keeping down the costs of family coverage include:
• Opt-out credits where the employees are paid a credit when their spouse opts out of the plan;
• Spousal carve-outs where a spouse is not allowed to enroll in a plan unless he or she can prove that other employer coverage is not available; and
• Periodically auditing the eligibility of dependents and removing those who are not eligible.
Although there is no requirement that employers provide health insurance to retirees, this is an increasingly volatile issue. Many employers are concerned about the cost of providing such benefits and are adopting strategies to contain their exposure. These include requiring contributions from current retirees and/or from future retirees, setting dollar limits on benefits, introducing and increasing deductibles and copayments, coordinating plans with Medicare, encouraging retirees to join HMOs and other forms of managed care plans, and funding retiree health benefits through qualified retirement plans. Employers sometimes soften the blow of reduced or eliminated health benefits through increased pensions. The Medicare prescription drug benefit program (Medicare Part D) also offers a variety of financial incentives for employers to maintain retiree health insurance coverage.
Accounting rules. If an employer does provide health insurance to retirees, Financial Accounting Standard (FAS) 106 comes into play. FAS 106 requires companies to value and disclose the cost of future nonpension postretirement benefits on their financial statements. This rule can have a big effect on expenses and has caused many companies to rethink their postretirement benefit offerings, especially health insurance for retirees. Employers that are considering eliminating or reducing benefits should make sure that plan documents, including summary plan descriptions, contain unambiguous language giving the employer the right to terminate or amend the plan. The plan document should include a procedure for amending the plan and designate who has the authority to do so.
Subsidies for retiree drug costs. To encourage employers that provide retiree healthcare insurance benefits to continue prescription drug coverage after the Medicare prescription drug benefit (Medicare Part D) took effect, the law included a provision to pay employers 28 percent of each qualifying covered retiree’s allowable retiree costs under the qualified retiree prescription drug plan. To qualify for the subsidy, employers sponsoring retiree healthcare insurance plans must show that the plan's coverage is as generous as, or more generous than, defined standard coverage under the Medicare prescription drug benefit. The subsidy applies only to retirees eligible for but not enrolled in a Part D plan. The tax deduction for employers that receive Medicare Part D retiree drug subsidy payments has been eliminated.
Last reviewed on June 30, 2016.
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