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The Patient Protection and Affordable Care Act: Immediate and Important Focus Items for Group Health Plans

April 7, 2010


The Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act (signed into law on March 23, and March 30, 2010 respectively) (collectively the “Act”), substantially changes the way group health plans will operate in the future.  Many of the Act’s provisions will not be effective for some years.  Other provisions, however, must be addressed soon.  This Montgomery McCracken Benefits Alert summarizes those provisions of the Act that are either effective in the near future or of substantial consequence so that employers who sponsor group health plans can begin focusing on the various compliance issues.

(NOTE:  Certain “grandfathered plans” (see last bullet below for discussion) are exempt from some of these provisions as indicated below.)

  • Changes to Health Flexible Spending Accounts (“HFSA”)

New Deferral Limit:  Effective for plan years beginning after December 31, 2012, the maximum amount that an employee may defer to a HFSA is $2,500.

Over-the-Counter Drugs No Longer Reimbursable:  Effective for plan years beginning after December 31, 2010, non-prescription drugs are not eligible for reimbursement from an HFSA, Health Savings Account (HSA), Archer Medical Spending Account (MSA), or Health Reimbursement Arrangement (HRA).

  • Dependents Covered Through Age 26

Group health plans are now required to cover all un-married dependents until age 26.  This is effective for plan years beginning on or after September 23, 2010.  For calendar year plans, this effectively means a January 1, 2011 start date.  This applies to all plans, including “grandfathered plans.”

  • No Pre-Existing Condition Exclusions

Effective for plan years beginning on or after September 23, 2010, children 18 or younger may not be subject to any pre-existing condition exclusions.  And, effective for plan years beginning after December 31, 2013, no one, regardless of age, can be excluded from coverage due to a pre-existing condition.  This applies to all plans, including “grandfathered plans.”

  • No Deduction for Retiree Drug Subsidy

The tax deduction that many employers took for the subsidy they received in order to continue a retiree prescription drug program will be discontinued effective for tax years beginning after December 31, 2012.

  • Annual and Lifetime Maximums

Effective for plan years beginning on or after September 23, 2010, lifetime maximums on benefits and most annual limits imposed by group health plans will be prohibited.  (Exception: For certain “essential” benefits, limits may continue on a restricted basis.)  This applies to all plans, including “grandfathered plans.”  Effective for plan years beginning after December 31, 2013, all annual limits will be prohibited.

  • Preventive Services at No Cost to Participants

Certain preventive services (e.g., immunizations and child screenings) must be provided free of charge to the plan participant effective for plan years beginning on or after September 23, 2010.

  • Reinsurance Fund for Early Retiree Medical Claims

The Act establishes a temporary $5 billion reinsurance fund to help employers cover the cost of early retiree medical claims.  The fund will insure 80% of any claim that is between $15,000 and $90,000 for a retiree between the ages of 55 and 64.  The fund will be available as of June 21, 2010 and end on the earlier of the date on which the funds are exhausted or January 1, 2014.

  • Coverage Cannot Be Rescinded

Generally, group health plans will not be permitted to rescind coverage once a participant becomes covered.  This is effective for plan years beginning on or after September 23, 2010.  This applies to all plans, including “grandfathered plans.”

  • Coverage Requirements

Employers with 50 or more full-time employees must provide coverage to their full-time employees or face a penalty of $2,000 per full-time employee.  A full-time employee is someone who works 30 hours a week or more. The manner in which this full-time employee definition will apply to seasonal workers is unclear at this time.

Employers with 200 or more full-time employees will be required to automatically enroll all employees in the group health plan, though employees can opt out.  These provisions are effective for plan years beginning after December 31, 2013.

  • Code Section 105 Non-Discrimination Testing

The non-discrimination requirements in Internal Revenue Code Section 105 that currently only apply to self-funded health plans will also apply to fully insured health plans, effective for plan years beginning on or after September 23, 2010. This new rule may have a significant effect on executive medical plan coverage.

  • Form W-2

For tax years beginning on or after January 1, 2011, employers will be required to report on Form W-2 the aggregate cost of the employer’s health coverage that is excludable from the employee’s gross income (without regard to any HFSA, HSA, or MSA amounts).

  • Grandfathered Plans

Group health plans that were in effect on March 23, 2010 (“grandfathered plans”), were originally exempt from substantially all of these provisions.  However, the reconciliation bill cut back many of the benefits of grandfathered status.  Currently, grandfathered plans remain exempt from some of the new requirements as indicated above.