Affordable Care Act
The Patient Protection and Affordable Care Act (ACA) was enacted in 2010. It is exceedingly complex and raises innumerable issues for employers. To add to the complexity, the new rules have varying effective dates, from 2010 to as late as 2018. The effective dates below are based on the legislation. Several provisions have been delayed by agency rules, and others will likely be delayed in the future. The current delays are noted where applicable.
Many of the rules for employers vary depending on the number of employees. The “large employer” threshold may be 25, 50, 100 or 200 employees, depending on the provision.
This is a brief summary of key employer obligations under ACA. This area is complex and substantial additional guidance from the IRS and other regulatory agencies is yet to be issued. For more information, see the official website for healthcare reform:
Grandfather rules apply to existing plans, and may alter or delay the requirements for those plans. A “grandfathered plan” is a group health plan or individual health policy that was in effect on the date of enactment (March 23, 2010). Grandfathered plans are exempt from some of the new rules and have later effective dates for others.
The rules relating to grandfathered plans are complex. In general, in order to maintain grandfathered status, a plan must include a statement in its plan materials describing the benefits under the plan and stating that the plan is believed to be grandfathered. The employer must also maintain records of plan provisions and benefits that were in effect on March 23, 2010. The loss of grandfathered status will be triggered by any of the following:
- reduction in benefits (that is, elimination of all or substantially all benefits to diagnose or treat a particular condition)
- any increase in a percentage cost-sharing requirement
- increases in fixed-amount cost-sharing requirements other than co-payments (that is, any increase after March 23, 2010, greater than medical inflation plus 15%)
- increases in fixed-amount co-payments (that is, any increase after March 23, 2010, exceeding the greater of medical inflation plus 15% or $5 increased by medical inflation)
- decrease in employer contribution rate of more than 5%
- reductions in annual limits.
Small business healthcare tax credit
The small business healthcare tax credit is limited to employers with no more than 25 employees (based on full-time equivalent), thus, employers with fewer than 50 half-time employees may be eligible. To be eligible for the tax credit, both of the following qualifications must be met:
- employers must pay at least 50% of premium cost
- employees must have annual full-time equivalent wages that average no more than $51,600.
Full credit is available only to employers with 10 or fewer full-time-equivalent employees (FTEs) with average wages less than $51,600. For more information, visit:
Credits phase out as company size and average wages increase and may be limited based on statewide average premium cost. Additionally, the tax credit may only be claimed for two consecutive years.
Dependent coverage extended
Group health plans (plans) and insurers that offer dependent coverage must allow uninsured children to remain on parent’s health insurance until age 26, regardless of student or marital status.
Lifetime and annual limits
Plans and insurers cannot impose lifetime limits on coverage of “essential health benefits.” Essential health benefits generally include the following categories of benefits under ACA, which are further defined by reference to particular state “benchmark” insured products:
- ambulatory patient services
- emergency services
- maternity and newborn care
- mental health and substance use disorder services
- prescription drugs
- rehabilitative and habilitative services
- laboratory services
- preventive and wellness services and chronic disease management
- pediatric services, including oral and vision care.
Preventative health services
Plans (not including grandfathered plans) must provide coverage for preventative services and immunizations with no cost-sharing.
Prohibition on rescissions
Plans and insurers may not rescind coverage, exception in cases of fraud or misrepresentation.
No pre-existing condition limitations for children under age 19.
Plans and insurers must implement an appeals process for appeals of both coverage determinations and claims. This process must meet all of the following requirements:
- include an internal claims appeal process
- provide notice of the appeals process and of the availability of assistance
- allow the participant to review his or her file and present testimony
- allow participant to receive continued coverage while an appeal is pending.
This provision is not applicable to grandfathered plans.
Insured group health plans are subject to the nondiscrimination rules of IRC § 105(h)(2) under ACA, which previously applied only to self-insured plans. Those rules generally prohibit discrimination in favor of the top paid 25% of employees with regard to both eligibility and benefits. This provision does apply to grandfathered plans.
All employers must reflect the value of health insurance provided to an employee on the employee’s W-2 Form.
Note: This does not mean that the benefit is taxable. The reporting is informational only.
Qualified medical expenses
The definition of qualified medical expense for health savings accounts (HSAs), flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) is amended to exclude over-the-counter medicine (except for insulin), unless obtained with a prescription.
The excise tax on distributions from HSAs not used for qualified medical expense is increased to 20%.
The maximum annual contribution to a health FSA under a cafeteria plan was reduced to $2,750 (indexed) for 2022.
Sample cafeteria plans
Small employers (under 100) may establish a “simple cafeteria plan.” A simple cafeteria plan is deemed to satisfy the nondiscrimination requirements that otherwise apply to cafeteria plans. The concept is similar to that of a safe harbor 401(k) plan. A simple cafeteria plan must provide for minimum employer contributions of either of the following two options:
- 2% or more of compensation whether or not the employee makes salary reduction contributions to the plan
- a matching contribution equal to 200% of each participant’s salary reduction contribution to the plan, capped at 6% of compensation.
- Note: The new simple cafeteria plan provisions do not change the rule that sole proprietors, partners, members of LLCs and 2% shareholders in S corporations are not eligible to participate in cafeteria plans.
Medicare Part D subsidy
Employers will no longer be allowed to deduct expenses allocable to Medicare Part D subsidies.
Plans and insurers cannot impose a waiting period that exceeds 90 days.
Wellness program rewards based on satisfaction of health standards may be as much as 30% of the cost of employee-only coverage. This change is not applicable to grandfathered plans.
Plans cannot have out-of-pocket limits greater than the limits for high-deductible health plans, which are paired with health savings accounts (HSAs) (currently $7,050 for individual coverage and $14,100 for family coverage). This is not applicable to grandfathered plans.
Plans must report to the IRS and provide a statement to employees regarding whether the employee was covered under the employer’s plan for minimum essential health coverage. The deadline is the same as for Form W-2. (First deadline was January 31, 2015.)
The free-choice voucher requirement has been repealed.
"Pay or play" penalties
Large employers must provide affordable insurance that meets minimum value to full-time employees. Large employers should confer with counsel to determine whether and when they are subject to the employer mandate and, if so, how to comply.
Large employers (50+ full-time employees or full-time equivalents) generally must offer “minimum essential coverage” to their employees or pay a penalty. There is no requirement for small employers to offer coverage. A penalty applies if at least one full-time employee is a Government Assistance Full-Time Employee (GAFTE). That is an employee who has met both of the following qualifications:
- has enrolled in a qualified health plan offered through an Exchange
- has received a premium tax credit or cost-sharing reduction
The amount of the penalty depends on whether the employer offers minimum essential coverage under an employer-sponsored plan.
If coverage is not offered, the annual penalty is $2,750 (indexed) for 2022 per full-time employee, except that the number of employees is reduced by 30 in calculating the penalty.
Employer ABC has 50 full-time employees and does not offer coverage.
The penalty is calculated as follows:
50 – 30 = 20 x $2,750 = $55,000
If coverage is offered, the annual penalty is $3,000 for each GAFTE. The penalty cannot exceed the amount of the penalty the employer would have incurred if it did not offer coverage.
The employer in Example 1 offers coverage, but 15 GAFTEs decline.
This penalty would be:
15 x $4,120 = $61,800, but the penalty is $55,000 (as calculated in Example 1) due to the operation of the penalty limitation.
Forms 1094-C and 1095-C
Beginning in the spring of 2016, large employers are required to file Forms 1094-C and 1095-C, which provides certain information to employees and/or the IRS, including:
- contact information for the employer
- the number of full-time employees
- for each full-time employee, information about the coverage (if any) offered to the employee, by month, including the lowest employee.
Individual coverage health reimbursement account
Effective January 1, 2020, employers of any size may sponsor an individual coverage health reimbursement account (ICHRA). ICHRAs reimburse employees’ premiums for major medical insurance purchased in the individual market and other qualified medical expenses. ICHRAs generally must be offered on the same terms and conditions to all employees within a class and cannot be offered to employees who are also offered coverage under a “traditional” group health plan. However, employers can offer traditional group health coverage to one class of employees and an ICHRA to another class – employees just can’t have an option between the two. Permitted classes of employees include full-time employees, part-time employees, salaried employees, hourly employees, temporary employees, employees covered by collective bargaining agreements and others.
To obtain reimbursement, employees must provide proof that they are (or will be) enrolled in either individual, nonexcepted benefit coverage purchased in the individual market or Medicare. ICHRAs are not subject to ERISA if the purchase of insurance is completely voluntary for participants and beneficiaries, the employer does not select or endorse any particular insurer or coverage or receive any consideration in connection with the employee’s selection or renewal of coverage, and participants are notified annually that the coverage is not subject to ERISA. Employers sponsoring an ICHRA must also provide a notice to eligible employees at least 90 days before the beginning of each plan year describing the terms of participation and other required information.
Essential health benefits disclosure
On August 27, 2021, Governor Pritzker signed the Consumer Coverage Disclosure Act (the act), which became effective immediately. The act requires Illinois employers (both private and governmental) to disclose to all new hires who are eligible for group health plan coverage and all group health plan participants annually an easy-to-understand comparison between the benefits provided under the plan and the “essential health benefits” required by the Illinois Department of Insurance (DOI) for individual and small group health insurance coverage. The act does not mandate coverage of essential health benefits, it merely mandates a disclosure that compares an employer’s current benefit coverage with the list of essential health benefits provided by the DOI. This comparison may be provided via email or posted to a website that an employee is able to regularly access.
The DOI issued FAQs regarding the act and included a sample comparison chart which lists Illinois’ list of essential health benefits for 2020-2022. That information can be found at:
Employers that sponsor group health plans should work with their third-party administrators and insurance carriers to prepare the disclosure. Given that the timing requirements under the act are similar to those that apply with respect to Summaries of Benefits and Coverage (SBC), many employers may want to plan to send the new disclosure along with the SBC.
The Illinois Department of Labor has enforcement authority under the act. Employers that fail to provide the disclosure will have 30 days to comply or face penalties.
Group health insurance coverage of children
Recent legislation passed in Illinois provides that an employer may remove a child from health insurance coverage if the employer either no longer provides a group health insurance plan or the child is no longer eligible for coverage due to federal or state restrictions.