LittlerEmpbymnt & Labor Law Solorrons WonLdwidn

CALIFORNIA HOSPITALASSOCIATION

LABOR AND EMPLOYMENT LAWSEMINAR

HEAL TH CARE REFORM

November 1 and 8, 2011

Supplementary Materials

Bruce). Sarchet, Esq.916.830.7272949.705.3038

HttIercom

A Littler Mendelson Report InSightHealth Care Reform One Year Later: The Statusof the Patient Protection and Affordable Care ActImplementation

By Nyse Schuman, Steven Friedman and David Sawyer

The Patient Protection and Affordable Care Act was signed into law on March 23,2010. Amendments to the PPACA were included in the Health Care and EducationReconciliation Act of 2010, which was enacted on March 30, 2010 (these two Acts arecollectively referred to as “PPACA”). One year later, employers have already begunto feel the impact of this sweeping legislation, even though key provisions are stillyears away from becoming effective. The law imposes significant new responsibilitieson employers. However, the statute itself offers little in the way of clear guidance toemployers about their compliance obligations. The task of implementing the healthcare reform law largely rests with the federal regulators at the Departments of Healthand Human Services (HHS), Labor (DOL) and Treasury. The flurry of regulatory activityover the past year has generated some clarity, but also challenges and questions foremployers.

The following is an updated summary and timeline of key provisions of the PPACA,reflecting the regulations and guidance issued to date. Much of the PPACA regulatoryactivity has come in the form of interim final regulations. Unlike the normal rulemakingprocess, the agencies have issued binding rules prior to consideration of publiccomments. This expedited rulemaking process has led to a continuing stream of rules,modifications, and, in some cases, delays in enforcement. Employers can expectmore changes ahead as existing interim regulations are finalized and new regulationsare released amidst challenges in Congress and the courts. Those taking a long-term strategic approach to health care reform and the health and productivity of theirworkforce will be better positioned to navigate the ever-evolving regulatory, legislativeand legal landscape of PPACA.

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Date of Enactment (March 23, 2010) or No Specified EffectiveDate

• Grandfather Provision: The health care reform law contains health insurancemarket reforms that will impact employers sponsoring group health plans andhealth issuers offering group and individual policies. “Grandfathered” plans, those

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In This ssue:

March 2011

One year after the PatientProtection and AffordableCare Act was signed into law,employers have already begun tofeel the impact of the sweepinghealth care reform legislation,even though key provisions arestill years away from becoming

effective, The following summary

is an updated timeline of thelaw’s requirements, reflectingregulations and guidance issuedto date.

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in existence on the date of enactment of the PPACA, are exempt from some, but not all, of the new insurance market reformrequirements. While the statute explicitly allows grandfathered plans to enroll new employees and family members and maintain“grandfathered” status, it is silent about what changes to the plan would cause a plan to lose this status. The statute itself was silentabout what changes would cause a health plan that was in place on March 23, 2010, to lose its grandfathered status. However,interim final regulations published on June 17, 2010, set forth strict criteria for maintaining grandfathered status.1 Any one of thefollowing six changes, measured from March 23, 2010, will cause a plan to cease to be grandfathered:

• Elimination of all or substantially all benefits to diagnose or treat a particular condition.

• Increase in a percentage cost-sharing requirement (e.g., raising an individual’s coinsurance requirement from 20% to 25%).

• Increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus 15 percentage points.

• Increase in a co-payment by an amount that exceeds medical inflation pIus 15 percentage points (or, if greater, $5 plus medicalinflation).

• Decrease in an employers contribution rate towards the cost of coverage by more than 5 percentage points.

• Imposition of annual limits on the dollar value of all benefits below specified amounts.

The regulations also contain an anti-abuse feature to stop employers from certain business reorganizations or transfers amongdivisions or between employers to avoid losing grandfathered status. Grandfathered plans must provide written notice to allparticipants and beneficiaries about the grandfathered status of the plan. Insurance reforms applicable to grandfathered healthplans apply to collectively bargained plans with no delay in effective date. However, insured health plans maintained pursuant toone or more collective bargaining agreements that were ratified before the date of enactment of PPACA can be modified beforethe last expiration date without losing grandfathered status at that time. The regulatory requirements for maintaining grandfatheredstatus significantly restrict plans from making cost-saving changes, which may well outweigh the value of maintaining such status.

Small Business Tax Credits: Employers with no more than 25 full-time equivalent employees and annual average wages of lessthan $50,000 can receive a tax credit for purchasing health insurance for their employees. To receive this credit, employers arerequired to cover at least 50% of the total premium cost. The number of full-time equivalent employees is determined by dividing: (i)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 (ii) 2,080.

• For tax years 2010 through 2013, the tax credit will be up to 35% of the employer’s contribution, with the full credit of 35%available to employers with 10 employees or less and average annual wages of $25,000 or less.

• Beginning in tax year 2014, the credit will be increased to 50% of the employer’s contribution.2

Automatic Enrollment: The PPACA amended the Fair Labor Standards Act (FLSA) to require employers with more than 200 full-time employees that offer health coverage to automatically enroll new full-time employees in a plan. An employee may opt-out ofcoverage. The PPACA does not specify an effective date, however, the DCL issued question-and-answer guidance indicating thatuntil regulations are issued and effective, employers are not required to comply with the automatic enrollment requirement. The DCLannounced that it intends to issue final regulations by 2014.

Reasonable Break Time for Nursing Mothers: The PPACA amended the FLSA to require employers to provide nursing mothers,for up to one year after the birth of their child, a reasonable break time each time the employee needs to express milk. Employersmust provide nursing mothers a place to express milk, other than a bathroom, that is shielded from view and free from intrusionfrom coworkers and the public. An employer with less than 50 employees is not required to comply if the requirement would imposesignificant difficulty or expense. The PPACA provides that an employer is not required to compensate an employee receiving suchreasonable break time for any work time spent for such purpose. The new federal requirement, which became effective on the dateof enactment, does not preempt state law that provides greater protection. DCL has issued a fact sheet on the new requirement4and has solicited information from the public on its application.5

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Protections for Employees: The PPACA amends the FLSA to prohibit employers from discharging or discriminating against anyemployee because the employee:

• received a federal tax credit or cost-sharing subsidy to purchase health insurance;

• provided or is about to provide to the employer, federal government, or state attorney general information relating to a violation,or what the employee reasonably believes to be a violation, of Title I of the PPACA;

• testified or is about to testify in a proceeding about such violation;

• assisted or participated, or is about to assist or participate, in such a proceeding; or

• objects to or refuses to participate in any activity the employee reasonably believes to be a violation of Title I of the PPACA

The complaint procedure for retaliation claims follows that of the whistleblower protection provisions of the Consumer Product SafetyImprovement Act of 2008.

90 Days After Enactment (June 23, 2010)

Retiree Reinsurance: Effective June 1, 2010, a federal reinsurance program was established to reimburse sponsors of employment-based plans that provide health benefits to retirees age 55 or older who are not Medicare eligible. The interim final regulations6implementing the provisions of the Early Retiree Reinsurance Program (ERRP) were issued on May 5, 2010. Sponsors can apply forreimbursement of 80% of claims paid between $15,000 and $90,000. The sponsor must implement cost-saving programs for high-cost and chronic conditions. Reimbursement must be used to reduce costs for participants. The $5 billion in funds for the programwill only be available until the earlier of 2014 or when the funds are depleted. As of December31, 2010, more than 5,000 employershad been accepted into ERRF and more than $535 million in health benefit costs had been reimbursed through the program.7

• Temporary High Risk Pool: A temporary high risk pool must be established to provide coverage for individuals with preexistingconditions who have been uninsured for at least six months. Insurers or employers who are found to have encouraged individualsto disenroll in existing plans and enroll in the high risk pool must reimburse the pool. The program will exist until January 1 2014.A total of 27 states have decided to run their own state programs, while 23 states deferred to HHS-run plans.8

Plan Years Beginning On or After Six Month Post-Enactment (September 23, 2010, or January 1,2011, for Calendar Year Plan)

• Insurance Market Reforms that Apply to New and Grandfathered Plans

• Extension of DeDendent Coverage uo to Age 26: Group health plans and insurers that provide dependent health coveragemust extend that coverage to children up to age 26. Prior to 2014, a grandfathered group health plan must only extenddependent coverage to age 26 if the child is not eligible for other employer-sponsored coverage. Children of adult dependents(grandchildren of the covered employee) do not have to be offered coverage under the plan. The coverage is not taxable to theemployee or child. (Before the PPACA, adult dependent coverage was generally taxable with limited exceptions.) On May 13,2010, the DOL issued interim final regulations9implementing the dependent coverage provisions of the Affordable Care Act.Prior to the child’s 26th birthday, the plan may not restrict coverage of dependents based on financial dependency, residency,student status, or employment status, nor may plans vary the level or terms of dependent coverage based on age. Theregulation creates a special enrollment opportunity and notice requirement for children who lost coverage or were not eligiblefor coverage under the plan’s existing age limits as of the effective date.

• Prohibition on Rescissions: Group health plans and insurers are prohibited from rescinding, or canceling, health coverage ofan enrollee except in the case of fraud or intentional misrepresentation of material fact. The IRS, DOL and HHS issued interimfinal regulations on June 28, 2010, which clarified that rescissions refer to retroactive cancellation of coverage.10

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• Prohibition on Pre-existing Condition Exclusions: Group health plans and insurers are prohibited from imposing pre-existingcondition exclusions for children under the age of 19. Beginning in 2014, plans are prohibited from including a pre-existingcondition exclusion for any participant. This issue is addressed in the IRS, DCL and HHS interim final regulations.11

• Prohibition on Lifetime Benefit Limits: Group health plans and insurers are prohibited from imposing a lifetime dollar limit onessential health benefits. PPACA lists broad categories of benefits and services deemed “essential health benefits.” The interimfinal regulations did not provide further guidance on the definition of “essential health benefits.”12Plans that had imposed lifetimelimits must provide special notice and reenrollment opportunities.

• Restriction on Annual Benefit Limits: Prior to 2014, group health plans may impose annual limits on the dollar value of essentialhealth benefits only as determined by the Secretary of Health and Human Services. Beginning in 2014, annual dollar limitsare prohibited for all essential health benefits. The agencies issued interim final regulations13 setting the threshold for annuallimits as follows: $750,000 for the plan year on or after September 23, 2010; $1.25 million for the following plan year; and $2million for plan years after that. Limited benefit or so-called mini-med plans can apply for a waiver from the annual restrictionsif they can demonstrate that meeting the requirements would result in a significant decrease in access to benefits or cause asignificant increase in premiums. As of March 1, 2011, HHS has granted a total of 1,040 one-year annual benefit limit waivers.14

Insurance Market Reforms that Apply to New Plans, but Do Apply to Grandfathered Plans

• Preventive Care: Group health plans and insurers must cover certain preventative care services without cost-sharing, includingpreventative services rated A or B by the U.S. Preventative Task Force, recommended immunizations, preventative care andscreenings for infants, children, and adolescents, and additional preventative care and screenings for women. The agenciespublished interim final regulations on July 19, 2010, clarifying that plans are not required to provide coverage for recommendedout-of-network preventive services and that cost-sharing can be imposed on out-of-network preventive services.15

• ADoeals Process: A new appeals process that includes both internal and external reviews will be required to be provided byemployers to employees for appeals of coverage determinations and claims. On July 23, 2010, the IRS, DCL and HHS issuedinterim final regulations modifying or expanding existing internal claims requirements for ERISA plans.16 On September 20,2010, the DOL issued a technical release document that gives health insurance issuers a grace period until July 1, 2011, tocomply with certain new internal claims and appeals procedure requirements. Self-funded plans can follow an interim “safeharbor” procedure for external review until further guidance is issued.17

• Nondiscrimination in Favor of Highlv-Comensated EmDloyees: Section 105(h) of the Internal Revenue Code prohibitsdiscrimination in favor of highly compensated individuals with respect to plan eligibility and benefits by self-insured plans. ThePPACA extends this restriction to non-grandfathered fully-insured plans. Under the PPACA, an excise tax of $100 per dayapplies for each individual to whom the violation relates, up to an annual cap of the lesser of 10% of the cost of the plan or$500,000. On December 22, 2010, the IRS announced that enforcement of this provision was delayed until further guidanceis issued,18

• Emeraencv Services: Group health plans and insurers must cover emergency services without prior authorization andin-network requirements. The agencies issued interim final regulations on patient protections on June 28, 2010, which includedguidance on the emergency services requirement.19

• Physician Selection: Group health plans and insurers that provide for or require the designation of a participating primary careprovider must permit each participant to designate any participating primary care provider who is available to accept suchindividual. The plan must permit a participant to designate a pediatrician as the primary care provider for a child. Plans areprohibited from requiring authorization or referral for an OB-GYN. Interim final regulations require non-grandfathered plans toprovide participants notice of these protections.2°

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2011

W-2 Reporting: Starting in tax year 2011, PPACA requires employers to report the value of the health insurance coveragethey provide employees on each employee’s annual Form W-2. This reporting requirement does not change the tax treatmentof employer-provided health coverage. To provide employers the time they need to make changes to their payroll systems orprocedures in preparation for compliance with this requirement, the IRS will defer the reporting requirement for 2011, making thatreporting by employers optional for 2011 Forms W-2 (furnished to employees in January 2012)21 The IRS provided further relieffor smaller employers filing fewer than 250 W-2 forms by making this requirement optional for them at least for 2012 Forms W-2(furnished to employees in January 2013) and continuing this optional treatment for smaller employers until further guidance isissued 22

• Qualified Medical Expenses: Over-the-counter drugs are no longer eligible for reimbursement from a flexible spending account(FSA), health savings account (HSA), health reimbursement account (HRA), or Archer medical savings accounts (MSA5) unless aprescription in obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expensessuch as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases madeon or after January 1,2011.23

• Increased Penalty for Nonquallfied Withdrawals: Effective January 1, 2011, the penalty for withdrawals from HSAs that are notused for qualified medical expenses was increased from 10% to 20%, and the penalty for unqualified withdrawals from Archer MSAswill increase from 15% to 20%.

• Drug Manufacturer and Importer Fee: An annual fee on manufacturers and importers of branded drugs is imposed beginning in2011.

• CLASS Act: A voluntary federal insurance program for employees to purchase long-term care became effective on January 1, 2011;however, HHS has until October 1, 2012, to designate a final benefit plan. Employers may elect to automatically enroll employeesin the CLASS program, and employees may opt-out. Faced with questions about the fiscal sustainability of the program, HHSannounced it is exploring areas within its statutory flexibility to strengthen the CLASS program to help enrollees plan for their futurewhile ensuring program solvency.24

2012

• Form 1099: Effective January 1, 2012, businesses must provide a Form 1099 for all corporate service providers receiving morethan $600 per year for services or goods, not just for non-corporate service providers. This provision has generated significantcontroversy, and repeal is considered likely. The House and Senate have each approved different bills to repeal the requirement.

• Uniform Explanation of Coverage Documents:

Upon application, enrollment and re-enrollment, all health insurance issuers and sponsors of self-insured group health plans(including grandfathered plans) must provide a summary of benefits and coverage to enrollees and applicants.

By no later than 60 days prior to the effective date of any mid-year change, group health plans also must provide notice of anymaterial changes to the plan coverage. The Secretary of Health and Human Services will establish the format for this summarydescription, which must begin to be issued no later than March 23, 2012.

• Quality of Care Reporting: Not later than March 23, 2012, the Secretary of Health and Human Services must develop reportingrequirements for use by plans and insurers regarding plan benefits and reimbursement structures, including those that improvehealth outcomes and implement wellness and health promotion activities, (Not applicable to grandfathered plans).

• Comparative Effectiveness Research Fee: For the plan year ending after September 30, 2012, there will be a $1 per enrolleetax on fully-insured and self-funded group health plans to fund comparative effectiveness research. For plan years ending afterSeptember 30, 2013, the fee increases to $2 per enrollee. This fee sunsets after 2019.

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2013

• FSA Limits: Effective January 1, 2013, annual contributions to FSAs will be limited to $2,500. This amount will be indexed to CPI.

• Medicare Part D Retiree Subsidy: The employer’s deduction for the amount of the Medicare Part D retiree drug subsidy will beeliminated.

• Device Manufacturer and Importer Fee: An excise tax on manufacturers and importers of medical devices will be imposed.

• Medicare PayroU Tax: An additional 0.9% Medicare tax will be imposed on employees with wages over $200,000 ($250,000 forjoint filers).

• Medicare Contribution on Investment Income: A 3.8% tax on unearned income will be imposed on those with income over$200,000 ($250,000 for joint filers).

• Executive Compensation: Beginning in 2013 and only with respect to services performed after 2009, the deduction for current anddeferred compensation paid to officers, directors, employees, or service providers of health insurance issuers is limited to $500,000per year.

• Employer Notice Requirements: Beginning on March 1, 2013, employers must provide employees written notice: (i) of the existenceof the health insurance exchange; (ii) of potential eligibility for federal assistance if the employer’s health plan is “unaffordable” basedon criteria under PPACA and if employee household income is below certain thresholds; and (iii) that they may lose the employer’scontribution to health coverage if they purchase health insurance through the health insurance exchange.

2014

• Health Insurance Exchanges: State-established health insurance exchanges (Exchanges) must begin to operate on January 1,2014. The Exchanges are virtual marketplaces that allow individuals and eligible employers to purchase health insurance. Initially in2014, only employers with up to 100 employees can purchase insurance for their employees through the Exchange. Prior to 2016,states can reduce this limit to businesses with up to 50 employees. Beginning in 2017, states can allow employers with more than100 employees to purchase health insurance for their employees through the Exchange.

• Individual Responsibility— Penalty: Individuals generally will be required to obtain “minimum essential coverage” or pay a penalty.

• For 2014, the penalty is $95 for each uninsured adult in a household or 1% of household income over filing threshold.

• For 2015, the penalty increases to $325 or 2% of household income over filing threshold.

• For 2016 and after, the penalty increases to $695 or 2.5% of household income over filing threshold.

This so-called individual mandate is at the heart of the legal challenges to PPACA. With federal courts differing on whether theprovision is constitutional, the decision will ultimately rest with the U.S. Supreme Court.25

• Federal Tax Credits and Cost-Sharing Subsidies: Individuals with household incomes up to 400% of the federal poverty level(currently approximately $88,000 for a family of four) may be eligible for federal premium tax credits or cost-sharing subsidies topurchase insurance through an Exchange. Individuals with employer-sponsored coverage may still be eligible for federal assistanceif such coverage is either: (i) unaffordable because the employee’s required contribution is more than 9.5% of their householdincome; or (ii) the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of such costs.

• Employer Responsibility — Penalty: The new health care reform law does not require employers to offer health coverage to theiremployees. However, large employers will be subject to a penalty beginning in 2014 if they do not: (i) offer coverage; (ii) offercoverage that is affordable; or (iii) offer coverage that meets the minimum value standards.

• Large EmDloyers: For purposes of the penalty, a “large employer” is an employer who has 50 or more full-time employees

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and full-time equivalents. Full-time employees are defined as those that work 30 or more hours a week calculated on amonthly basis. Full-time equivalents are also counted in the determination of whether an employer is a “large employer”for purposes of the penalty. The monthly number of hours worked by part-time employees is aggregated and dividedby 120 for this purpose. To determine whether an employer is deemed a “large employer” subject to the penalty, thenumber of full-time employees is added to the number of full-time equivalents. If that number is 50 or more, the employeris subject to a penalty as described below, Employers falling below the threshold will not be subject to a penalty.Even though the hours of part-time workers are counted for purposes of determining whether an employer is a “large” employer,the penalty only applies with respect to full-time employees. An employer is not considered a “large” employer if it employsmore than 50 people for 120 days or less during the calendar year and the employees in excess of 50 employed during such120-day period were seasonal workers. The controlled group rules (i.e., the rules under Section 414(b), (c), (m), and (o) of theInternal Revenue Code of 1986) that apply to qualified retirement plans will similarly apply in determining whether an employingentity is a large employer.

• Large Employers that Do Not Offer Health Coverage: Large employers that do not offer to full-time employees (and dependents)an opportunity to enroll in minimum essential coverage will pay a penalty if at least one of its full-time employees receivesfederal assistance to purchase insurance through an Exchange. The penalty will be equal to $2,000 multiplied by the totalnumber of full-time employees, subtracting 30 from the total number of full-time employees.

• Large Employers that Do Offer Health Coverage: Large employers that offer minimum essential coverage to full-time employees(and dependents) will also be subject to a penalty if the health coverage offered is either: (i) unaffordable because the employee’srequired contribution is more than 9.5% of their household income; or (ii) the actuarial value of the employer’s plan is less than60%, meaning the plan pays for less than 60% of covered health care expenses. In either case, the employer will pay a penaltythat is the lesser of $3,000 for each full-time employee receiving federal assistance to purchase health insurance through anExchange $2,000 multiplied by all full-time employees, subtracting 30 from the total number of full-time employees.

• Free Choice Vouchers: Beginning in 2014, employers that offer health coverage to their employees may also have to provide“free choice vouchers” for certain employees that would rather purchase health insurance through the Exchange instead ofthrough the employer. Employees with household incomes at or below 400% of the federal poverty level and whose premiumpayment is between 8% and 9.8%26 of their household income are eligible for the free choice vouchers. The amount of the freechoice voucher is the amount the employer would have contributed toward such employee’s coverage (or family coverage atthe employee’s option) with respect to the plan to which the employer pays the largest portion of the cost. The employee cankeep the difference, if any, between the amount of the voucher and the cost of purchasing insurance through the Exchange.The amount of the voucher is deductible to the employer. No penalties are imposed for employees who receive free choicevouchers.

• Employer Reporting Requirements: Employers must annually report to the federal government whether they offer healthcoverage to their full-time employees and dependents, the total number and names of full-time employees receiving healthcoverage, the length of any waiting period, and other information about the cost of the plan.

Insurance Market Reforms and Benefit Mandates

Essential Health Benefits: Qualified health plans and insurers in the individual and small group markets must offer coveragethat includes the “essential health benefits package.” A small group is defined as one with no more than 100 employees. Ahealth plan providing the essential health benefits package will be prohibited from imposing an annual cost-sharing limit thatexceeds the thresholds applicable to Health Saving Accounts (HSAs). Small group health plans providing the essential healthbenefits package will be prohibited from imposing a deductible greater than $2,000 for self-only coverage or $4,000 for anyother coverage. (Does not apply to grandfathered plans.)

• Excessive waiting periods: For plans years beginning on or after January 1, 2014, self-insured group health plans and insurers

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are prohibited from imposing a waiting period greater than 90 days. The waiting period is the time period that must pass beforean individual is eligible to use health benefits. (Applies to grandfathered plans.)

Prohibition on ore-existing condition exclusions: For plan years beginning on or after January 1, 2014, self-insured group healthplans and insurers are prohibited from including a pre-existing condition exclusion for any participant. (Applies to grandfatheredplans.)

• Prohibition on annual benefit limits: Group health plans and insurers are prohibited from imposing an annual dollar limit onessential health benefits, (Applies to grandfathered plans.)

• Health Status: Group health plans and insurers are prohibited from basing eligibility on health-status related factors. (Does notapply to grandfathered plans.)

• Clinical trials: Group health plans and insurers cannot deny coverage for participation in clinical trials for life-threateningdiseases. The benefits must otherwise be covered by the plan and may be subject to out-of-network provider restrictions. (Doesnot apply to grandfathered plans.)

• Wellness Program Incentives: The PPACA codifies the existing HIPAA rules allowing wellness programs to offer an incentive,such as a premium reduction, for achieving a health standard. However, the maximum amount of the incentive is increasedfrom 20%, as the current HIPAA rules allow, to 30% of the cost of employee-only coverage under the plan, with Secretarialdiscretion to increase the cap to 50%. The agencies released guidance in the form of frequently asked questions stating thatthey intend to propose regulations that use existing regulatory authority under HIPAA to raise the percentage for the maximumreward that can be provided under a health-contingent wellness program to 30% before the year 2014. The agencies are alsoconsidering what accompanying consumer protections may be needed to prevent the program from being used as a subterfugefor discrimination based on health status.27

Health Insurer Fee: Beginning in 2014, an annual fee on health insurance providers will be imposed.

2018

Excise Tax on High-Cost “Cadillac” Health Plans: Beginning in 2018, and with respect to employer-sponsored health plans thatprovide coverage where the value of such coverage exceeds $10,200 for single coverage and $27,500 for family coverage, a 40%excise tax will be imposed on health insurance issuers and persons that administer plan benefits. The excise tax is imposed on thevalue of coverage in excess of the threshold. For retirees and employees in high-risk professions, the threshold is $11,850 for single and$30,950 for families. The amount of coverage includes both employer and employee premium payments. The threshold may be adjustedfor age and gender demographics that are different from a national pool. It may also be adjusted if actual health inflation exceeds thegovernment’s estimate of health inflation between now and 2018. The threshold will then be periodically adjusted for inflation subsequentto 2018.

Next Steps for EmployersOne-year after becoming law, the Patient Protection and Affordable Care Act remains both overwhelming and uncertain for manyemployers. While questions about many of its provisions still exist, the magnitude of the law’s impact on employers has become moreclear. Employers have responded to the initial flurry of insurance reforms and other mandates. However, the bigger challenges still lieahead with the employer “play or penalty” that begins in 2014 and the “Cadillac plan” excise tax in 2018.

With health care costs continuing to rise, navigating health care reform becomes even more complex and critical. A recent employersurvey by Towers Watson and the National Business Group on Health found that employers expect average costs for active healthcare benefits to increase by 7% in 2011, up from a 6% increase in 2010,28 Rising health care costs and the anticipated impact of healthcare reform are driving many employers toward bolder health care benefit design decisions, according to the survey. While employersshould ensure they are in compliance with the short-term changes mandated by PPACA, they cannot afford to ignore its longer-termimplications, This includes taking the following actions:

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Review plan documents and summaries for compliance with near-term insurance market reforms and ensure timely distribution ofrequired notices.

Evaluate whether any post-March 23, 2010, or proposed plan changes would cause a loss of grandfathered status and consideradvantages of retaining grandfathered status versus advantages of plan changes.

• Revise health FSA, HSA and HRA open enrollment materials.

Consider effective use of wellness programs.

• Begin to evaluate benefit and employment policies in light of the 2014 “play or pay” penalty:

How does the cost of coverage compare to penalty?

• Does your plan provide “minimum value?”

• Is your plan likely to be “affordable?”

• Determine whether your plan is a “Cadillac plan.”

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Ilyse Schuman is a Shareholder in Littler Mendelson’s Washington D.C. office, Steven Friedman is a Shareholder in the New York City office, andDavid Sawyer is a Shareholder in the Pittsburgh office. If you would like further information, please contact your Littler attorney at 1 .888.Littler, info@Iittler.com, Ms. Schuman at ischuman@littler.com, Mr. Friedman at sfriedman@littler.com, or Mr. Sawyer at dsawyerlittler.com.

1 75 Fed. Reg. 34,538 — 34,570 (June 17, 2010). For more analysis, see llyse Schuman & Melissa Kurtzman, Healthcare Reform: Long-Awaited “Grandfathered” Regulations Released - What Do Employers Need to Know?, LITTLER ASAP, June 2010, available at www.littler.com/PressPublications!Pages/ASAPs.aspx.

2 For more information on the small business tax credits, see www.irs.gov/newsroom/article/0,,id=220839,00.html.

See Q&A-3 of the FAQs issued on December 22, 2010, available on the EBSA website at www.dol.gov/ebsa/healthreforrn/.

U.S. Department of Labor, Wage and Hour Fact Sheet #73: Break Time for Nursing Mothers, available at www.dol.gov/whd/regs/compliance/whdfs73.pdf.

75 Fed. Reg. 80,073 (Dec. 21, 2010).6 75 Fed. Reg. 24,450—24,470 (May 5, 2010).

HHS New Release March 2, 2011, available at www.hhs.gov/newslpress/2011 preslO3l2Ol 1 0302a.html.

8 See www.pcip.gov/StatePlans.html.

75 Fed. Reg. 27,122 140 (May 13, 2010).° 75 Fed. Reg. 37,188 (June 28, 2010).

Id.

12 Id,

13 Id.14 See http://cciio.cms.gov/resources/files/approved_applications,,,,for_waiver.html.15 75 Fed. Reg. 41,726 (July 19, 2010).

16 75 Fed. Reg. 43,330 —43,364 (July 23, 2010).17 75 Fed. Reg. 52,597 (Aug. 26, 2010).18 Internal Revenue Service Notice 2011-1, available at www.irs.govfnewsroom/article/0,,id=220809,00.html?portlet=6.

75 Fed. Reg. 37,188 (June 28, 2010).

9

rSivht a pubhshed by Littler Mendelsorr its order to review the latest developments irs employment law, InSight is designed to provide accurate and informative information and ahould not be considered legal advice

20 Id.

21 Internal Revenue Service Notice 2011-1, available at www.irs.gov/newsroorn/article/0,,id=220809,00.htrnl?portlet=6.

22 Internal Revenue Service 2011-28, available at www.irs.gov/newsroom/article/0,,id=237870,00.html.

23 Internal Review Service Notice 2010-59, available at www.irs.gov/newsroom/article/0,,ith220809,00.html?portlet=6.

24 See Statement by Kathy Greenlee, Assistant Secretary for Aging, HHS before the Committee on Energy and Commerce, Subcommittee on Health,U.S. House of Representatives (March 17, 2011), available atwww.hhs.gov/asl/testify/2011/03/t20110317b.htrnl.

25 For more information, seefinding-affordable-care-act-invalid/.

26 The Health Care and Education Reconciliation Act reduced the affordability threshold for a federal subsidy from 9.8 to 9.5% of household income.However, such Act did not make a corresponding change to the free choice voucher provision.

27 Available at www.dol.gov/ebsalfaqs/faq-aca5.html.

28 Employers are expected to pay approximately $8,516 per active employee in total health care costs, up from an average of $8,000 in 2010. See 16thAnnual Towers Watson/National Business Group on Health Employer Survey on Purchasing Value in Health Care, available at wwwtowerswatson.com/united-states/research/3946#.

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pib1ohe by L1tler Mendelson Os order to revew the latest developments in esssnloymens law, InSight is designed to provide accurate and infos,natsve inlormation and should not be considered legal advice

A Timely Analysis of Legal Developments A S A P®

2011 Deadlines Loom for Plan Amendments for HealthFSA Over-the-Counter Medication and Other HealthCare Reform Requirements

By Russell Chapman and Adam J. Peters

Among the numerous changes to health care laws under the Patient Protection andAffordable Care Act (PPACA), several require group health plan amendments in 2011with the next deadline being June 30, 2011. The PPACA revised the definition of medicalexpenses” for employer-provided accident and health plans, including health flexiblespending arrangements (health FSA5) and health reimbursement arrangements (HRAs)to limit an employer’s ability to reimburse for certain over-the-counter medications. ThePPACA also revised the definition of “qualified medical expenses” under health savingsaccounts (HSAs) and Archer medical savings accounts (Archer MSAs) to similar effect,FSAs, HRAs, HSAs and Archer MSA5 are sometimes referred to as “account-basedhealth programs.”

As of January 1, 2011, an account-based health program may not reimburse a participantfor the purchase of over-the-counter medicines and drugs (other than insulin) unless theparticipant obtains a prescription. Because debit cards used for account-based healthprograms operate through systems not capable of differentiating between medicationspurchased with or without a prescription, as of January 1, 2011, debit cards cannot beused to purchase over-the-counter medicines and drugs with or without a prescription.Medical supplies, however — such as crutches, bandages, or blood sugar test kits —are not affected by the new rules, These items may still qualify as medical care underInternal Revenue Code section 213(d)(1), which covers expenses for the “diagnosis,cure, mitigation, treatment or prevention of disease, or for the purpose of affecting anystructure or function of the body.”

Account-based health programs that previously provided for reimbursement of over-the-counter medications must be amended to conform to the new over-the-counter medicineand drug requirements. Although the IRS acknowledges that plan amendments toa cafeteria plan may generally be made only on a prospective basis, for expensesincurred after December 31, 2010, the IRS allows plan amendments incorporating thenew rules to be adopted up to June 30, 2011. In any case, the plan must be operatedin conformity with the new rules until the formal amendment is in place.

Other Upcoming Amendment Deadlines• • Effective for Group Health Plan Years Beginning on or after September 23,

Iittler 2010 (generally, effective January 1, 2011 for calendar year plans):Ewpornw & Labo Law SohtonsWoddwid Littler Mendelson, P.C. • littler.com • 1.888,littler • nfo@Itter.com

©2011 Utter Mendelson, P.C. All rights reserved.

In This Issue:

June 2011

Among the numerous changes tohealth care laws under the PatientProtection and Affordable Care Act(PPACA), several require grouphealth plan amendments in 2011. Forexample, plans involving certain tax-favored vehicles that pay for over-the-counter medicines and drugs, such ashealth flexible spending arrangements,health reimbursement arrangements,and health savings accounts, mustbe amended by the deadline of June30, 2011, to exclude those chargeseffective as of the first day of the planyear.

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• Extension of Deoendent Coverage uo to Aae 26. Group health plans and insurers that provide health coverage to dependentchildren must extend that coverage to dependent children up to age 26, even if the dependent child is married.

• Prohibition on Rescissions. Group health plans and insurers are prohibited from rescinding (terminating retroactively) healthcoverage of a participant, except in the case of fraud or intentional misrepresentation of material fact.

• Prohibition on Pre-existing Condition Exclusions. Group health plans and insurers are prohibited from imposing pre-existingcondition exclusions for any participant under the age of 19 (note that this prohibition applies to both covered employees aswell as dependent children). Beginning in 2014, pre-existing condition exclusions are prohibited for any participant regardlessof age.

Prohibition on Lifetime Benefit Limits. Group health plans and insurers are prohibited from imposing a lifetime dollar limit onessential health benefits.

• Restriction on Annual Benefit Limits. Group health plans may only impose annual limits on the dollar value of essential healthbenefits of $750,000 in 2011 and $1.25 million in 2012. Beginning in 2014, annual dollar limits are prohibited for all essentialhealth benefits.

• Preventative Care. Non-grandfathered group health plans and insurers must cover certain preventative care services withoutcost-sharing, including recommended immunizations, preventative care and screenings for infants, children, and adolescents,and additional preventative care and screenings for women. For an explanation of “grandfathered” and “non-grandfathered’group health plans under PPACA, see the Littler ASAP: “Healthcare Reform: Long-Awaited Grandfathered’ RegulationsReleased — What Do Employers Need to Know?” June 2010.

• Appeals Process. For non-grandfathered plans, a new appeals process for participants is required, including both internal andexternal reviews and strict compliance with the claim procedures.

• Nondiscrimination in Favor of Highly Comoensated Emoloyees. Non-grandfathered, fully insured plans are now subject toInternal Revenue Code section 105(h) nondiscrimination rules; however, implementation of the new rules has been postponeduntil after regulations are issued.

• Emergency Services. Non-grandfathered group health plans and insurers must cover emergency services without priorauthorization or in-network requirements.

• Physician Selection. Non-grandfathered group health plans and insurers providing for or requiring the designation of a primarycare provider must permit each participant to designate any participating primary care provider available, The plan must alsopermit a participant to designate a pediatrician as the primary care provider for a child. Plans are prohibited from requiringauthorizations or referrals for an OB-GYN.

Plan sponsors must take care to make sure they are in compliance with the new requirements, and that required amendments are madeon time.

What to Do NowReview all group health plan documents to make sure all are in compliance with ERISA and PPACA requirements.

• Contact insurers to assure administrative and document compliance.

Plan sponsors also should take immediate action to assure that the any account-based health plan documents (such as health FSAsor HRAs) are in compliance with the exclusion for over-the-counter medications without a prescription.

Russell Chapman is Of Counsel, and Adam J. Peters is an Associate, in Littler Mendelson’s Dallas office. If you would like further information, pleasecontact your Littler attomey at 1.888.Littler, info@liffler.com, Mr. Chapman at rchapman@littler.com, or Mr. Peters at apetersIittler.com.

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©2011 Litt’ Mendesr. PC. AC rght rervI

A Timely Analysis of Legal Developments A S A P®

In This Issue: Agencies Issue Proposed Rule Outlining PPACARequirements for Summary of Benefits and Coverage

August 2011By Ilyse Schuman and Steven Friedman

On August 22, 2011, the Departmentof Health and Human Services (HHS)along with the Departments of Labor

On August 22, 2011, the Department of Health and Human Services (HHS) alongand Treasury published a proposed

with the Departments of Labor and Treasury published a proposed rule (Proposedrule setting forth the requirements

Rule) setting forth the requirements of the Summary of Benefits and Coverage (SBC)of the Summary of Benefits and

disclosure that health insurers and group health plans must provide to consumers underCoverage (SBC) disclosure that healththe Patient Protection and Affordable Care Act (PPACA). To help consumers understand

insurers and group health plans mustand evaluate their health insurance choices, consumers will also receive a uniform

provide to consumers under theglossary of terms commonly used in health insurance coverage.

Patient Protection and Affordable CareAct (PPACA). Employers should take note of this rule which will soon require them to make yet

another disclosure under the PPACA to their employees,

BackgroundThe PPACA mandates that group health plans and health insurance issuers offeringgroup or individual health insurance coverage provide to enrollees a summary ofbenefits and coverage explanation that accurately describes a plans benefits andcoverage. The SBC requirement applies to both grandfathered and non-grandfatheredhealth plans.

The law mandated that the Departments develop standards governing the summaryby March 23, 2011, 12 months after the PPACA’s enactment, and directed HHS toconsult with the National Association of Insurance Commissioners (NAIC) regarding thecontent of the summary. The statute provides that plans and issuers must comply withthe disclosure requirement 24 months after enactment, or March 23, 2012. Commentson the Proposed Rule are due October 21, 2011.

The Proposed RuleThe Proposed Rule outlines the standards that will govern who provides an SBC,who receives an SBC, when the SBC will be provided, and how it will be provided. Inconjunction with the proposal, the agencies are issuing a proposed template for theSBC, instructions, sample language, a guide for coverage examples calculations to be

Liftierused in completing the template, and a uniform glossary that would satisfy the law’sdisclosure requirements.

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Delivery of the SBC by a Group Health Plan and Group Health Insurance Issuer to Participants and Beneficiaries

The plan or issuer must provide an SBC free of charge to participants and beneficiaries with respect to each benefit package for whichthe participant and beneficiary is eligible. In the case of a self-insured group health plan, the Proposed Rule would make the planadministrator responsible for providing the SBC to participants and beneficiaries. For insured group health plans, either the group healthplan or the issuer can deliver the SBC to enrollees. To avoid unnecessary duplication with respect to group health plans, the ProposedRule states that the plans obligation to deliver the SBC will be satisfied if the issuer properly delivers the SBC to the plan’s participantsand beneficiaries, Specifically, the rules permit the plan or issuer to send a single SBC to the same address where participants andbeneficiaries are known to reside. However, the plan or issuer must send a separate SBC to a beneficiary if their last known addressis different from that of the participant.

Enrollment: The plan or issuer must include the SBC with any written application materials the plan distributes for enrollment. Ifthe plan does not distribute written application materials for enrollment, the SBC must be distributed no later that the first date theparticipant is eligible to enroll in coverage. The plan or issuer must update and provide a current SBC no later than the first day ofcoverage if there is any change to the SBC. The plan or issuer must also provide the SBC to a Health Insurance Portability andAccountability Act (HIPAA) special enrollee within seven days of a request for enrollment.

• Renewal: In addition, if a written application is required for renewal, the plan or issuer must provide the SBC to participants andbeneficiaries no later than the date renewal materials are distributed. If renewal is automatic, the plan or issuer must provide theSBC no later than 30 days prior to the first day of coverage in the new plan year. The plan and issuer only need to automaticallyprovide a new SBC for the benefit package in which a participant or beneficiary is enrolled. However, the plan or issuer must providethe SBC of another benefit package for which the participant or beneficiary is eligible but not enrolled upon request.

• Uion Request: The plan or issuer must also provide the SBC within seven days of a request by a participant or beneficiary for thesummary.

Therefore, if enrollment is on a calendar year basis, employers may first need to make this disclosure to new enrollees who join the planon or after Mach 23, 2012, and to those who request the SBC on or after this date. With respect to all other participants, it is likely thefirst disclosure with enrollment materials will be made for the 2013 plan year.

Delivery of the SBC by a Group Health Insurance Issuer to a Group Health Plan

The Proposed Rule describes group health insurance issuer’s obligation to provide an SBC to the group health plan.

• Enrollment: The issuer must provide the SBC to the plan, or its sponsor, upon application or request for information about healthcoverage within seven days following the request. If the plan subsequently applies [?] for health coverage, the issuer must send asecond SBC only if there has been a change. The issuer must update and provide a current S8C to the plan no later than the dateof the offer or first day of coverage if there is any change to the SBC.

• Renewal: The issuer must also provide a new SBC to the plan upon renewal or reissuance of the policy. If a written applicationis required for renewal, the issuer must provide the SBC to the plan no later than the date materials are distributed. If renewal isautomatic, the issuer must provide the SBC no later than 30 days prior to the first day of coverage in the new plan year.

Uoon Request: The issuer must provide the SBC to the plan within seven days of a request.

Prior Notice of Mid-Year Material Modifications

Plan modifications may result in a requirement for an employer to issue an off-cycle SBC. The rules provide that if a plan or issuermakes any material modification in any of the terms or conditions of coverage that would affect the content of the SBC other than inconnection with renewal, the plan or issuer must provide notice of the modification to enrollees at least 60 days before the modificationbecomes effective. A material modification is defined under the Employee Retirement Income Security Act (ERISA) section 102, andthe Departments note that the term includes any modification to the coverage offered under a plan or policy that, independently, orin conjunction with other contemporaneous modifications or changes, would be considered by an average plan participant to be animportant change in covered benefits or other terms of coverage under the plan or policy. The preamble to the Proposed Rule states thatthis notice could be satisfied either by a separate notice describing the material modification or by providing an updated SBC.

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Significantly, for ERISA-covered group health plans, this notice is in advance of the timing required for the provision of a summary ofmaterial modification (SMM), which is generally not later than 210 days after the close of the plan year in which the modification orchange was adopted, or, in the case of a material reduction in covered services or benefits, not later than 60 days after the date ofadoption of the modification or change. In situations where a complete notice is provided in a timely manner under the new PPACAnotice requirement, the preamble to the Proposed Rule states that an ERISA-covered plan will also satisfy the requirement to providean SMM under Part 1 of ERISA. The Departments invite comments on this expedited notice requirement, including whether there are

any circumstances where 60-day advance notice might be difficult.

Content

Generally, under the Proposed Rule, the SBC will summarize the key features of the plan or coverage, including the covered benefits,cost-sharing provisions, and coverage limitations and exceptions. In order to help consumers compare plans, the SBC will also includeCoverage Examples, a standardized health plan comparison tool akin to nutrition label information. The Coverage Examples wouldillustrate what proportion of care expenses a health insurance policy or plan would cover for three common benefits scenarios—havinga baby, treating breast cancer, and managing diabetes. Plans and issuers would also have to illustrate how claims would be processedunder each scenario, The proposed template document includes specific instructions and details about an HHS website that can assist

with this simulation. According to the HHS, additional scenarios — but no more than six in total — may be required in future SBCs.

Overall, the Proposed Rule follows the requirements set forth in the statute, which states that an SBC must include:

• Uniform definitions of standard insurance terms and medical terms so that consumers may compare health coverage and understand

the terms of (or exceptions to) their coverage;

• A description of the coverage, including cost sharing, for each category of benefits identified by the Departments;

• The exceptions, reductions, and limitations on coverage;

• The cost-sharing provisions of the coverage, including deductible, coinsurance, and co-payment obligations;

• The renewability and continuation of coverage provisions;

• A coverage facts label that includes examples to illustrate common benefits scenarios (including pregnancy and serious or chronic

medical conditions) and related cost sharing based on recognized clinical practice guidelines;

• For coverage beginning on or after January 1, 2014, a statement about whether the plan provides minimum essential coverage (asdefined under section 5000A(f) of the Internal Revenue Code), and whether the plan’s or coverage’s share of the total allowed costsof benefits provided under the plan or coverage meets applicable requirements;

• A statement that the SBC is only a summary and that the plan document, policy, or certificate of insurance should be consulted todetermine the governing contractual provisions of the coverage; and

• A contact number to call with questions and an Internet web address where a copy of the actual individual coverage policy or groupcertificate of coverage can be reviewed and obtained.

The Proposed Rule also includes four additional elements for the SBC consistent with NAIC’s recommendations: (1) for plans andissuers that maintain one or more networks of providers, an Internet address (or similar contact information) for obtaining a list of thenetwork providers; (2) for plans and issuers that maintain a prescription drug formulary, an Internet address where an individual mayfind more information about the prescription drug coverage under the plan or coverage; (3) an Internet address where an individual mayreview and obtain the uniform glossary; and (4) premiums (or cost of coverage for self-insured group health plans).

The proposal notes that the insurance exchanges are set to be operational in 2014. Therefore, because the statutory SBC elementsinclude the information in the minimum essential coverage statement, the Departments invite comments on how employers might providethis information to employees and the Exchanges in a manner that minimizes duplication and burden. The agencies also acknowledgethat some of the plan level information that is required to be provided in the SBC is already required to be provided under the Internal

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Revenue Code, and therefore, government agencies are coordinating their efforts to determine how and whether the same data can beused for multiple purposes.

The agencies also request comment as to whether it would be feasible or desirable to permit plans and issuers to input plan- or policy-specific information into a central Internet portal, such as the federal health care reform website (www.healthcare.gov), that would usethe information to generate the coverage examples for each plan or policy.

Appearance and Format

The SBC must be presented in a uniform format, use terminology understandable by the average plan enrollee, not exceed four double-sided pages in length, and not include print smaller than 12-point font.

Under the Proposed Rule, a group health plan or a health insurance issuer will provide the SBC as a stand-alone document. Theagencies acknowledged concerns about the potential redundancies and additional costs of the new SBC requirement for those plansand issuers that already provide a Summary Plan Description. The agencies have invited comments on whether and how the SBC mightbest be coordinated with the Summary Plan Description and other group health plan disclosure materials. For example, the agenciesask whether they should allow the SBC to be provided immediately after the cover page and table of contents of the Summary PlanDescription.

To facilitate faster and less burdensome disclosure of the SBC, the proposed regulations set forth rules to facilitate electronic transmittalof the SBC, where appropriate. Specifically, an SBC provided by a plan or issuer to a participant or beneficiary may be provided inpaper form. Alternatively, for plans and issuers subject to ERISA or the Internal Revenue Code, the SBC may be provided electronicallyif the requirements of the Department of Labor’s electronic disclosure safe harbor are met. An issuer may provide the SBC to the grouphealth plan in paper or electronically if: (1) the format is readily accessible by the plan; (2) the SBC is provided in paper form free ofcharge upon request; and (3) for internet postings, the plan is notified by paper or e-mail that the documents are available on the webif the web address is given.

Language

The SBC must be presented in a “culturally and linguistically appropriate manner.” The Proposed Rule explains that a plan or issueris considered to satisfy this requirement if the SBC meets the thresholds and standards for a “culturally and linguistically appropriatemanner” that apply to the PPACA internal appeals process.

Template and Uniform Glossary of Terms

Group health plans and issuers must make the uniform glossary of health coverage related terms available to participants andbeneficiaries upon request within seven days either in paper form or electronically. As to the definitions to be included in the uniformglossary, the new section to the Public Health Service (PHS) Act added by the PPACA directs agencies to develop standards anddefinitions for a number of insurance- and medical-related terms. In addition to the ones listed in the statute, the Proposed Rule includesstandards and definitions for the following terms: allowed amount; balance billing; complications of pregnancy; emergency medicalcondition; emergency services; habilitation services; health insurance; in-network co-insurance; in-network co-payment; medicallynecessary: network; out-of-network coinsurance; plan; preauthorization; prescription drugs; primary care physician; primary careprovider; provider: reconstructive surgery; specialist; and urgent care.

The agencies are seeking comments on the uniform glossary, including the content of the definitions and whether there are additionalterms that are important to include in the uniform glossary so that individuals and employers may understand and compare the terms ofcoverage and the extent of medical benefits (or exceptions to those benefits).

With respect to the sample template, the agencies seek comment on the following issues:

The SBC template is intended to be used by all types of plan or coverage designs. The agencies seek input on issues that mayarise from the use of this template for different types of plan or coverage designs.

• Comments are sought regarding any modifications needed for use by group health plans.

4

I SCC c puThv1 1t PC AC nqht recei.

• The agencies ask whether the content of the SBC should require inclusion of additional information that might be important forindividuals to know about their coverage.

• The fourth page of the SBC template includes a list of services that plans and issuers must indicate as either excluded or coveredin the Excluded Services & Other Covered Services” chart. The agencies are asking whether services should be added or removedfrom this list, as well as whether the disclosure stating that the list is not complete is adequate.

• The SBC template includes a disclosure on the first page indicating to consumers that the SBC is not the actual policy and doesnot include all of the coverage details found in the actual policy. The agencies seek comment on the sufficiency of this disclosure.

Penalties

A group health plan or health insurance issuer that willfully fails to provide the SBC to a participant or beneficiary as required is subjectto a fine of not more than $1,000 for each failure. A separate fine may be imposed for each participant and beneficiary to whom thefailure relates.

Effective DateAlthough the rule has not been finalized, plans and issuers should begin preparing now for its implementation. The Proposed Rule comesfive months after the statutory deadline for the Departments to issue standards has passed, leaving plans and issuers with little timeto familiarize themselves with the new standards and draft the necessary documents before the SBC requirement is slated to becomeeffective on March 23, 2012. The agencies have delayed the effective dates for several other PPACA provisions. However, the effectivedate for the SBC provision has not been changed even though the Departments missed the deadline for issuing standards. The agencieshave invited comment on the feasibility of the March 23, 2012 deadline.

• , . * . S S S * S S S # S • S S S • • S S a a S S S S S S S S S S S S S S S S S a S S S S S S S S * S S S S S * 5 0 • S a 5 , a a • . a 55

Ilyse Schuman is a Shareholder in Littler Mendelson’s Washington D.C. office, and Steven Friedman is a Shareholder in the New York City office. Ifyou would like further information, please contact your Uttler attorney at 1.888.Littler or info@littler.com, Ms. Schuman at ischuman@littler.com, orMr. Friedman at sfriedman@littler.com.

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Littler

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L L Wm’*.

Healthcare Reform to Raise Costs, Add Administrative BurdemHow Staffing Firms Should Handle It

October 2010

print

By:George Reardon

The information outlined below is based on an interpretation of the PatientProtection and Affordable Care Act (the Act”) as amended by the Health Careand Education Reconciliation Act of 2010 and clarified by the report of the JointCommittee on Taxation, before comprehensive regulations are published. Thisarticle assumes that the Act will not be repealed, materially changed by pendinglitigation, or materially altered through legislative amendments before significantportions of the law take effect in 2014. This article focuses specifically on thestaff augmentation aspect of the staffing business and not on direct placements,PEO operations, or other business lines in which staffing firms may be engaged.

“Play or Pay”

The most significant impact of the Act on the staffing industry is likely to be thenew so-called “play or pay” costs scheduled to take effect in 2014. The Actdefines these costs as “assessable payments” under the “Shared Responsibilityfor Employers” section. Whether these costs are essentially taxes or penaltiesmay become issues in litigation challenging the Act. To avoid the cumbersomestatutory term and to avoid implying conclusions on these issues, this articlerefers to these new costs as “fees.”

In the United States, most commercial staffing firms offer and subsidize the costof health insurance for their staff employees (e.g., those employees working inthe staffing business itself). Most firms also make limited health insurancecoverage available for optional purchase by assigned employees (temporaryemployees, consultants, and other billable people who work on assignments tocustomers), but the firms do not subsidize the cost of this coverage. Some firmsthat place higher-skilled personnel may offer — and subsidize — comprehensivehealth insurance coverage, but only when specific customers request it. Stillother staffing firms offer and subsidize coverage for all employees all the time,and this analysis of “play or pay” fees would not apply to them.

Worst-case Scenario Under “Play or Pay”

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This worst-case scenario is possible for those staffing firms who offer coveragefor permanent employees but not for assigned employees. Such firms will bedetermined to be employers who do not offer qualifying employer coverage to allfull-time employees1if, for such firms, even a single full-time employee receivesa federal subsidy to purchase heath insurance through the newly created healthinsurance exchanges.2Under such circumstances, the Act imposes a $2,000annual fee, prorated to $166.67 per month, on the staffing firm for each of itsfull-time employees in excess of 30, with the definition of full-time employeesubject to further clarification.

Definition of Full-Time Emøloyee

For purposes of the fees, the Act defines a full-time employee as one “who, withrespect to a month, is employed on average at least 30 hours of service perweek.” By this definition, in most staffing firms, virtually all staff employees arefull-time. The number of a firm’s assigned employees who will be deemed full-time will depend on assignment patterns; day labor assignments are typicallyvery short and intermittent, while clerical and professional assignments tend tobe longer, with some continuing for years. Unlike earlier legislative proposals,which would have swept all assigned workers’ hours together and then divided by1,560 or 2,080 to produce the number of “full-time equivalents,” the Act’s feecalculation looks at each assigned worker’s full-time status separately.

The fee calculation also depends on further (forthcoming) clarifications of howthe definition of “full-time employee” applies to months in which assignedemployees are hired, fired, or placed on or taken off assignment in the middle ofthe month.4

Notably, the fee is imposed for all full-time staff or assigned employees,regardless of any coverage they might be receiving from the staffing firm or fromother sources (such as a spouse’s plan).

Strategy A for Minimizing Costs: Meet Minimum Affordability

Potentially less expensive calculation of “lav or av” fees

The Act provides a different fee calculation for employers who do offer qualifyingemployer coverage to all of their full-time employees (“full-time” as defined bythe Act). In that situation, a fee of $3,000 per year (tested and proratedmonthly) is charged only for those full-time employees who choose to receivegovernment healthcare assistance, which requires that they have low income(varying by family size) and that the employee cost of the company-offeredcoverage exceeds 9.5% of their family income or that the employer coveragedoes not provide a minimum value.5The total fees generated by this calculationmethod might be lower than the worst-case method described above, but theycannot be higher, since they are capped at the amount of the worst-case

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method.

Theoretical basis for minimizing costs

A staffing firm might offer coverage to all of its full-time staff and assignedemployees and pay for just enough of the cost of that coverage to make it“affordable” to most of its lower-paid employees, so that they would not qualifyfor the government health coverage assistance that triggers the $3,000 fees. TheAct requires that offered coverage satisfy certain criteria, but there is nominimum percentage of employer cost contribution required for an offer ofcoverage. “What the plan must pay in benefits” and “who must pay for the plan”are very different concepts.

This alternative gives rise to a financial balancing act. The degree to which astaffing firm subsidizes its offered coverage will affect the affordability of thatcoverage and thus will affect the number of the staffing firm’s employees whocould qualify for tax credits or cost-sharing reductions. The greater the staffingfirm’s premium contribution, the fewer of its employees could qualify for the taxcredits or cost-sharing reductions and the fewer $3,000 fees the staffing firmwould have to pay.

So, the question is: Can a staffing firm fashion a health plan for all of its full-timeemployees that is generous enough in its benefits to satisfy the government’scoverage requirements and still be inexpensive enough (after any premiumcontributions by the staffing firm)6 to prevent too many of the staffing firm’semployees from qualifying for the “unaffordability” tax credits that trigger the$3,000 per year per employee fee?

The financial comparison should be simple:

Cost of additional staffing firm premium contributions to the offered coverage

÷ Administrative expense of tracking the insurance and the tax credit status of employees÷ Cost of $3,000 fee for each full-time employee who qualifies for a tax credit

Total cost of alternative “play or pay” fee calculation

Compared to:

$2,000 per year fee for all of the staffing firms full-time employees (minus 30)

The actual “play or pay” fee would be the lesser of the two results shown above.The only problem with this idea is that typical staffing firms cannot preciselypredict which of these will be lower, since they do not collect data on the familysize and household incomes of their employees and also cannot predict howmany employees who qualify for tax credits or cost-sharing reductions willactually go through the administrative process of qualifying. Whether thisstrategy would be practical would depend on the degree to which these factorscould reasonably be estimated and whether they would be stable over time. Thestaffing industry may lobby to obtain changes that would make this alternative

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more promising by relaxing the requirements for offered coverage.

Strategy B for Minimizing Costs: The 29-Hour Work Week

An obvious technique for minimizing the cost of the new law would be a practiceof limiting assigned workers to a 29-hour work week or monitoring theIr monthlyhours to achieve a sub-30-hour-per-week monthly average.

For purposes of the fees, the Act defines a full-time employee as one “who, withrespect to a month, is employed on average at least 30 hours of service perweek.” Therefore, fees will not apply for those assigned employees working fewerthan 30 hours on average, because they are not statutory full-time employees.

These workers will nonetheless be expected to either acquire coverage or pay afee by 2014. It is possible that, long term, these costs will eventually also beshifted to the employer, but for now, it presents a unique opportunity forplacement growth of part-time workers0

This technique would seem more workable for assigned employees than for astaffing firm’s full-time employees, and the current level of unemployment wouldseem to make it achievable by giving more people shorter assignments withoutreducing the total amount of employment provided.

Fees Not Tax-Deductible

No matter how these variables and contingencies turn out, these fees are likelyto be very expensive. What will make these fees even more expensive is that thelaw makes them non-tax-deductible (unlike other direct labor costs that are tax-deductible “above the line,” such as FICA and workers’ compensation premiums).That means that, if the staffing firm is in tax-paying status, additional before-taxgross margin even greater than the $2,000 or $3,000 a year fee for each full-time (or tax-credit-qualified) assigned employee must be generated for thestaffing firm to pay the fees without suffering loss of profitability on its assignedemployee.

Finally, the basic fee amount will increase every year at the rate that insurancepremiums increase. As staffing firms weigh the cost of providing health carecoverage against the “play or pay” fees that become effective in 2014, they mustalso consider the impact and costs associated with the Act’s new insurancemarket reforms.

Effects on Staffing Firm Sales, Bill Rates and Margins

For those companies who retain staffing firms and use assigned employees andalready provide health insurance coverage to most or all of their employees, theAct may not increase their labor costs or may even decrease them. The labor

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costs of staffing firms, however, are sure to increase drastically.

There are only three ways that this extra labor cost can be absorbed — bystaffing customers through higher bill rates, by staffing firms through loweroperating margins, or by the assigned employees through lower wages.

Staffing Industry Analysts has estimated that, on average, the cost advantage toa staffing customer from using an assigned employee instead of using its owndirect employee is in the range of 10% to 20%.

To the extent that staffing customers absorb these costs as higher bill rates, thatcost advantage would shrink, staffing customers might accordingly decrease theirusage of assigned employees, and aggregate demand for staffing services mightdrop. To the extent that these costs are imposed on assigned employees throughlower wages, recruiting efforts and assigned employee quality might suffer. Tothe extent that staffing firms absorb these costs, the staffing industry’sprofitability going forward will be significantly burdened.

Contractual and Administrative Challenges Caused by the Fees

Many staffing firms have agreements In place with their customers permitting thestaffing firms to pass through to the customers any newly imposed or increasedgovernmental fees, taxes, contributions, or premiums that are directly related tothe labor of the assigned employees.

Although the terms of such contractual provisions may vary, such provisions mayallow the staffing firm to send a special “no markup” billing to the customer forthe new costs until the new costs can be integrated into the customer’scontractual billing rates at contract renewal. Therefore, the imposition of “play orpay” fees raises contractual and administrative issues for staffing firms and theircustomers.

Many assigned employees work irregular schedules, at different rates, formultiple customers. This pattern can raise issues, such as: whether a customer isliable for any portion of the fees when its usage of a full-time employee was lessthan 30 hours; how the monthly fees should be allocated to multiple customerswhen the employee is clearly full-time; how to allocate such costs when the payand bill rates of the various assignments are different; and how customers canaudit the allocation of these fees.

Other issues might include: whether the actual cost of the fee to the staffing firmis the before-tax cost or the after-tax cost; how to account to customers for abefore-tax cost; making contractual provision for the increases in the basic feeamount after 2014; and, perhaps most daunting in light of the staffing industry’sdominant weekly billing cycle, the monthly lag in determining whether eachassigned employee qualified as full-time for the previous month. Separate and

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delayed billings for these fees would increase and complicate the billing,collection, and accounting functions of staffing firms and their customers.

It would be possible to estimate these costs at an annual staffing-firm-wide leveland simply bill customers a flat, prorated fee amount or percentage for eachhour worked by assigned employees. That would be administratively convenient,but it might be a disadvantageously blunt instrument for purposes of competitionand purchasing efficiency. The per-employee fee amounts to approximately$1.00 per hour, and staffing firms compete over much smaller amounts of hourlycost.

Since many staffing contracts are for terms of three or more years, manycontracts now in force or being negotiated will still be in force when the law takeseffect. Staffing firms and staffing customers should already be thinking aboutand talking with each other about how to address these contingencies andcalculations to avoid disputes from arising when the “pay or play” fees take effecton January 1, 2014.

Proper planning is all the more Important to the extent that fees charged to thestaffing firms for staff employees are not directly passable to customers sincethey are not direct labor costs of the assigned employees.

Non-discrimination Rules

A portion of the new law that has not generated much discussion but which mayhave a significant impact on the staffing industry is a section that will requirequalified insured group health plans, and the insurance companies providingthem, to offer coverage only on a basis that does not discriminate in favor ofhighly compensated employees (defined as the highest-paid 25% of allemployees). That could mean that, even if a limited value plan could be offeredto assigned workers at a cost that would save on the staffing firm’s “play or pay”fees, the entire coverage scheme might fail to qualify unless the staff employeesare required to have the same low-value plan that is offered to the assignedemployees.

It is likely that the top 2S% of the most highly compensated employees ofstaffing firms will cover most or all of the firm’s internal employees. Such plansmay have difficulty showing that they are not discriminatory in favor of thehighly compensated under this new law. If plans are found to be discriminatory,the statutory penalties are very heavy — $100 per day of discrimination for eachperson against whom the plan discriminates.

If staffing firms are self-insured for health coverage, they are not directlyaffected by this new provision, because they are expressly excluded from it andbecause they already have to. comply with the non-discrimination requirementsfor tax purposes. However, this provision may draw new attention to the

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enforcement of the non-discrimination rules that the Act borrows from InternalRevenue Code section 105(h), whlch imposes adverse tax treatment inconnection with self-insured plans that discriminate in favor of the 2S% who arethe highest compensated employees.

For the indefinite future, the Act’s nondiscrimination provision will not apply to“grandfathered” health plans, but the catch is that grandfathered status isexpected to be extremely difficult for insured health plans to maintain for verylong, even assuming that insurance companies continue to make suchobsolescent plans available.

Silver Linings

There are also two possible upsides to the legislation.

Increased Health Care, IT, and Administrative Employment

The prospect of millions of additional Americans seeking healthcare mightsuggest a surge in demand for healthcare workers of all kinds, including thoseprovided by staffing firms.

However, very few Americans have actually been going without healthcare. As amatter of policy, ethics, and sometimes law, hospitals and other providers havetreated the poor and uninsured without regard for their ability to pay and havepassed those costs on to the paying institutions and individuals.

This Act expands insurance options and changes the distribution of costs, but itdoes not directly expand health care itself. Perhaps people who are newly insuredwill consume more services in an atmosphere of entitlement than they werereceiving on a charity basis, but even this increase in services might be offset bylimitations on services under the new system.

It may be that the heavy new administrative burdens placed on employers andothers will create new demand for IT services, clerical services, and consultingservices.

Transfers of Staffing Customers’ Uninsured Employees to Staffing Firms

Some staffing customers may have components of their workforces to whomthey do not offer health coverage. In order to become employers deemed to offercoverage to all of their full-time employees, such customers might want totransfer these employees to staffing firms. The customers would still be indirectlypaying the fees for the transferred employees, but they would be relieved ofpaying the fees for all of their remaining full-time employees.

Some Recommended Actions for Staffing Firms

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o Determine the “grandfathered” status of your present health plans.o Determine (with your insurance company, if you use one) what changes to

health coverage need to be made between now and 2014.o Learn the various new notice and reporting requirements.o Estimate the “play or pay” fees for your mix of employees and gross them

up for your marginal tax rate, to determine how much additional grossmargin would be required to cover this extra cost starting in 2014.

o Have your health plans tested for discrimination under the rules of InternalRevenue Code section 105(h).

o Develop an overall long-term strategy of health coverage for staff andassigned employees.

o Identify the extent to which existing timecards, purchase orders, andcontracts with your customers enable you to pass on the cost of “play orpay fees to those customers.

o Decide upon a strategy for adjusting to “play or pay costs (e.g., socializethem in company-wide bill rate levels; pass on to customers the costs oftheir assigned employees; absorb the fees with adjustments to specific payrates, bill rates, and margins, etc.)

o Develop model language to include in new or renegotiated contracts thatwould clarify who has the burden of “play or pay” fees and providecalculation, billing, and audit procedures for when they are passed on tocustomers.

o Identify potential opportunities for customers to transfer uninsuredemployee groups to your employ (if that continues to be a viable option).

1 The Act uses the phrase “offer to its full-time employees” to distinguish twocategories of fee-paying employers (those who do offer coverage and those whodon’t), but it does not expressly require the offer to be made to “all” suchemployees, leaving open the possibility that offering coverage to just someemployees, as staffing firms do, would be sufficient for them to qualify asemployers offering coverage. However, the report of the joint tax committee,which is the most formal legislative history available at this time, does use theword “all” when explaining this distinction.

2 The “play or pay” fees apply to “applicable large employers” — those em