High Court Health Care Ruling Leaves Open Questions on Benefits Structure, Lawyers Say
- Key Topic: High court ruling reduces some employer uncertainty about new rules for providing health benefits.
- Key Takeaway: How employers respond to the law’s pay-or-play penalties might reduce employment opportunities in low-wage industries.
By Florence Olsen
Employers will have difficult decisions to make following the Supreme Court’s June 28 ruling to uphold most of the 2010 federal health care system overhaul, especially about whether employers can avoid costly pay-or-play penalties under regulations still being drafted, employee benefit attorneys told BNA.
The lack of final regulations on major provisions of the Patient Protection and Affordable Care Act, including ones implementing employer penalties under tax code Section 4980H, means that many employers do not yet see clearly how they might restructure their employee benefits or, in some industries, restructure their workforces in response to the new law and regulations.
The employer penalty rules under Section 4980H and separate nondiscrimination rules for fully insured plans could make it difficult for companies to restructure, especially in industries such as retail, food service, and hospitality, “unless employers are willing to limit large portions of their workforces to less than 30 hours per week,” Alden J. Bianchi, employee benefits and executive compensation practice group leader at Mintz Levin Cohn Ferris Glvsky & Popeo in Boston, said in a June 27 email.
In a 5-4 decision, the Supreme Court upheld the individual mandate that is the centerpiece of the Patient Protection and Affordable Care Act (see related story in this issue). The court held that Congress was authorized to impose the mandate under the U.S. Constitution’s Taxing and Spending Clause. The mandate, which goes into effect in 2014, will require virtually all U.S. citizens to obtain health care insurance or pay a penalty.
At some point, many employers will question whether they should continue managing the cost of employee health benefits themselves or transfer that responsibility to publicly operated insurance exchanges, to be created by 2014 under the authority of the health care law. But until employers see the rules under Section 4980H, “this question is premature, since it’s all about cost to the employer,” Bianchi said.
“Every client is asking this question, although all the ones that have looked at it closely have decided to continue to provide some health coverage,” David R. Godofsky, a partner at Alston & Bird in Washington, said in a June 27 email.
According to Harvey D. Cotton, a principal at Ropes & Gray in Boston, nothing in the experience of employers in Massachusetts, which enacted a health care law similar to PPACA, suggests that employers in the rest of the states will stop offering health benefits once the states establish publicly operated insurance exchanges. That is assuming Congress does nothing to change the law, Cotton said in a June 27 email. “The final chapter has not yet been written,” he said.
But for employers in some industries, the answer could be different. “We expect the answer to be driven by industry trends, with some industries completely forgoing employer-based plans in 2014,” Steven J. Friedman, shareholder and chair of the employee benefits practice group at Littler Mendelson in New York, told BNA in a June 27 email.
Godofsky said that, in some industries, such as retail, food service, and hospitality, employers will respond to the health care law by restructuring their workforces. “Many employers will restructure, but not to allow employees to take advantage of subsidies,” he said.
“From the employer’s perspective, the goal is to reduce penalties while still leaving some employees out of their health insurance. That means employers will increasingly rely on part-time workers and refuse to allow them to work enough hours to become full time. Other employers will offshore some operations or concentrate hiring at the lateral rather than entry level,” he said.
From an employee perspective, he added, the health care law “is bad news for people just entering the workforce or who are unemployed and trying to find work.”
The Congressional Budget Office and Joint Committee on Taxation recently reported that PPACA will reduce the number of nonelderly people without health insurance coverage overall by 30 million to 33 million beginning in 2016. However, based on projections made before the Supreme Court ruling, CBO and JCT also reported that, for 2016 through 2019, PPACA will produce a net decrease in the range of 3 million to 5 million a year in the number of workers who receive health benefits from their employers compared with projections made before PPACA’s enactment (49 PBD, 3/14/12; 39 BPR 539, 3/20/12).
The figures for the number of people who will lose employer-provided health care are probably too low, Godofsky said. “The CBO/JCT underestimated the extent to which employers will game the system to avoid adding costs,” he said. “Employers will reduce hours so workers can’t reach full time and will increase employee premiums so that the employees themselves will drop out,” he said.
Friedman added that global competition is having a negative effect on “the generosity of American employers,” with the result that employers will not be providing the same level of health benefits to employees that they offered in the past.
No Immediate ‘Unwinding.’
A Supreme Court ruling to uphold most of the law’s major provisions will free employers from the task of unwinding provisions of the law they have implemented and are popular among workers, Greta E. Cowart, a partner at Haynes & Boone in Dallas, said in a June 27 email.
That said, the challenges of interpreting and implementing the law are just beginning, she told BNA June 28.
Some of those benefits, including permitting children up to age 26 to be covered by a parent’s employer-subsidized health insurance, are beneficial for employers as well as employees, Godofsky said. “Despite high unemployment, it is actually hard to find the workers you really want. Employers are going to be as focused on keeping their best workers as they are on keeping costs down,” he said.
Commenting June 28 on the Supreme Court decision itself, Godofsky said that “the [law] survives one more day, and employers and states need to work toward implementation.”
Friedman said the Supreme Court’s ruling “will have a significant effect on our practice because many clients have been on the fence about making the changes they will need to consider in connection with their health care offerings.”
With the certainty provided by the Supreme Court ruling, employers will now focus on provisions of the law and regulations that most concern them. Topping that list, Cowart said, are new requirements for employers to report the value of health benefits on employees’ W-2 forms, provide employees a uniform summary of benefits and coverage, amend health plan documents to reflect a $2,500 cap on employee contributions to health flexible spending accounts, and automatically enroll new full-time employees for health benefits if the employer has more than 200 full-time workers.
The automatic-enrollment requirement has been delayed until after the Department of Labor issues guidance. In recent comment letters, employers raised concerns about requirements for automatically enrolling employees to receive health benefits (69 PBD, 4/11/12; 39 BPR 732, 4/17/12).
The $2,500 annual limit on salary reduction contributions to health flexible spending arrangements applies to plan years starting in 2013 (104 PBD, 5/31/12; 39 BPR 1051, 6/5/12).
Doing Their SBCs.
Bianchi said his clients are most concerned about the summaries of benefits and coverage. “These rules are prescriptive and granular, and the penalties for noncompliance are steep,” he said.
Cotton said his clients are expending most of their energy on developing the required uniform summary of benefits and coverage that employers must give to employees during the next open enrollment season beginning on or after Sept. 23.
Federal regulators have said they generally will not take enforcement action against health plan issuers and group health plans for failure to comply fully during the first year that the rules on providing a standardized summary of benefits and coverage apply (92 PBD, 5/14/12; 39 BPR 939, 5/15/12).
Medicare Payroll Tax.
Employers also must prepare for the Medicare portion of the payroll tax to increase in 2013 by 0.9 percent to 2.35 percent of annual wage or self-employed income in excess of $200,000 for individuals or $250,000 for couples filing jointly (92 PBD, 5/14/10; 37 BPR 1140, 5/18/10).
“I would say the tax increase tops the list, but since there’s nothing to do about it, most [employers] aren’t giving it much thought,” Godofsky said. “The W-2 reporting is a nightmare because no one knows how to collect the data, and they’re supposed to be collecting it now,” he said.
In 2013, employees’ W-2s must reflect the aggregate cost of all reportable benefits that an employee received under all the group health plans in which he or she participated during all or part of the 2012 plan year (10 PBD, 1/18/12; 39 BPR 144, 1/24/12).
Many of the new requirements require what Cotton described as “administrative adjustments.” However, he said, most of his clients view the requirements as simply the “new normal” in terms how they must administer employee benefits.
Attorneys that BNA interviewed also said they expected that final rules centered on employer pay-or-play provisions in the health care law will provide workable definitions of “full-time” employee, “affordable” health benefits, and “minimum value” health plans.
“There are some pretty savvy organizations lobbying pretty hard on this, and the regulators understand fully the extent of the problem,” Bianchi said.
“I think the definitions will end up being workable,” Godofsky said. “The bigger issue is that employers are going to prevent workers from going full time,” he said. “This obviously hurts people who want or need to make more money, especially at the lowest wage levels,” he said.
Under the law, large employers, defined as having 50 or more full-time employees in the previous business year, are potentially liable for two separate pay-or-play penalties. One penalty would apply if a large employer does not offer health benefits to its full-time employees and has any employees who qualify for and are receiving federal tax credits or federal subsidies to buy health insurance through a PPACA exchange.
The pay-or-play penalty is calculated monthly based on $2,000 a year multiplied by the number of the employer’s full-time employees and indexed to the growth rate of health insurance premiums.
A separate penalty can be assessed on large employers for offering health benefits that are not affordable or that do not provide a certain minimum level of benefits if those employers have any employees who are receiving federal tax credits or other federal subsidies to buy health insurance through a PPACA exchange.
For those employers, the pay-or-play penalty is calculated monthly based on $3,000 a year multiplied by the number of employees receiving a federal tax credit or other federal subsidies to buy health insurance through an exchange.
Attorneys at McDermott Will & Emory told BNA June 28 that they are talking with federal officials about crafting rules under Section 4980H that will accommodate the business needs of employers with a seasonal or flexible workforce, such as retail and grocery chains. “How you characterize someone as a full-time employee is a big issue for some of our clients,” said Amy M. Gordon, a partner at McDermott Will & Emory in Chicago.
“We’re been working with the agencies on meaningful and practical rules on how to measure that,” said Susan M. Nash, also a partner in the Chicago office.
“We’ve also been helping clients understand what they have to do to make sure their coverage is not unaffordable,” Gordon added.
By Florence Olsen