Health Care Reform

HEB Business Solutions

375 South 300 WestSalt Lake City, UT 84101

Ph:801-328-5000/Fax: 801-328-5009www.hebsolutions.com

Health Care Reform

By JJ Jones, R.H.U.

and

Dave Lewis, C.P.A.

About the Law

• Health Care Reform:– The Patient Protection and Affordable Care Act (HR 3590),

signed by President Obama on 03/23/2010. (2,409 Pages)– Healthcare and Education Reconciliation Act of 2010 (HR4782) ,

signed by President Obama on 03/30/2010 (55 Pages)– $940 Billion over 10 Years– Expand coverage to many more people (No Pre-Existing

Conditions)– Eliminates Provisions to prevent selection

- Add Taxes, Penalties, and give tax credits

- Give Employees Vouchers to Opt out of Group Plans

- Establish Exchanges to Purchase Insurance

- Force Employers to Track Salary in Relation to Benefit Cost

- Change Flex Plan Maximums

- Limits Insurance Administrative Expenses

- Increases Funds to Community Health Centers

- Creates a Voluntary Long Term Care Insurance Program

- Change W-2 Reporting

Health Care ReformNo Pre-Existing Conditions

WHAT Effective What is it? What it means to you

Eliminating Pre-Existing

Conditions Clauses

Effective on First Plan Year

After September 23, 2010

Can no longer deny coverage to children with

pre-existing conditions under the age of 19.

(All Plans)

Where hospitals used to write these

claims off and increased costs to those that pay their bill, they will now go

to insurance companies and the cost will be passed along to consumers

in the form of premium increases. The question is, will

hospitals reduce rates?

Health Care ReformNo Lifetime Maximums


No Lifetime Maximums

First Plan Year after September

23rd, 2010

Eliminates lifetime

maximums in health plans.

(All Plans)

Will probably add

approximately $.25 per

member per month to your

premiums. The greatest effect will be on self-insured stop

loss premiums.

Health Care ReformNo Annual Maximums


No Annual Maximums

First plan year after September 23, 2010 & 2014

Limits annual maximums to

“Essential Health Benefits” only. In 2014 – Eliminates all annual limits.

(All plans)

Plans have been allowed to

cap benefits such as dialysis to keep the plan viable. This will increase costs, but the severity of the impact is not known at this time as

each group is specific to its own limits.

Health Care ReformNo More Co-Pays?


First Dollar Preventive Services

First plan year after September

23rd, 2010

“New” plans must cover preventive

services without a co-pay or deductible applying.

Will add about 1% to the total premium for these “new”

plans.

Health Care ReformBeing Forced to Purchase?


Individual Mandated Coverage

January 2014 All citizens must have coverage or face a tax

penalty consequences

Currently being challenged by 41 states as

unconstitutional. If it is deemed unconstitutional

it will really mess things up.

Health Care ReformEmployer Penalty


Employer Coverage Mandate

January 2014 Employers must provide

employee coverage or pay

penalty of $2,000 per

employee (not counting the first

30).

Do you pay the penalty and

cancel coverage or keep plans in place with all of

the administrative concerns. Keep in mind it could be

much cheaper for an employer to pay a $2,000 penalty if they cover a lot of

families.

Health Care ReformWaiting Periods


Waiting Period Rules

2014 Waiting periods are limited to no more than 90-

days.

This will bring employees onto

plans sooner and may affect

seasonal employment, but I do not

expect this to be a big issue.

Health Care ReformMaximum Out-Of-Pockets


Out-of-Pocket Limits

Established

2014 Out-of-pocket limits can not exceed HDHP limits of $5,000 individual and

$10,000 family.

This could be the biggest cost hit impact to new

plans, as many employers have high deductible plans with high out-of-pocket maximums.

Depending on the plan this could

increase cost by 20% over a

competitors plan.

Health Care ReformEmergency Room – Utah (BIG DEAL)


Emergency Non-PPO Care

Immediately effective for new

plans

Emergency care must be paid at

PPO levels.

New plans can go to all

emergency room facilities at

P.P.O. levels.

Health Care ReformBetter Shot at Appeals?


Requires Established

Appeals Process


plans

An Internal/ External appeal

process for claimants to

appeal denied claims.

Most plans in Utah and

surrounding states have

strong appeals processes in place so this should not

impact plans significantly.

Health Care ReformP.C.P.’s


Primary Care Doctor Selection


plans

Applicants can designate an OB/GYN or

Pediatrician as a Primary Care

Physician.

Most plans in the West no

longer require a PCP

designation so this is not an

issue.

Health Care ReformEnrollment


Auto Enrollment Required

Immediately, OR 2014 – the

law is not specific

Large employers (over 200 employees) must auto-enroll

employees in the least

expensive plan option and

provide adequate notice

on how to opt out.

Little effect for most plans. Will put pressure on employees to

“opt out” versus “opt in”.

Health Care ReformDependent Definitions


Changes the Definition of a

Child


23rd, 2010

Child age limit is moved to age

26 (through age 25) for the purpose of health plan

eligibility (All Plans).

This is currently the Utah Law. No change for

Utah Plans except married

dependent children can

continue through age 25.

Health Care ReformAdministration Cost/Insurers


Making Premium Pay

Provision

January 2011 Will require insurers for

individual and small groups to spend 80% of

premium dollars on medical

services. Large groups is 85% and allows for

rebates to premium payers

if not done.

This one is interesting. Some

states currently impose fees to insurers for risk pools, premium taxes and other

surcharges which will make it more

difficult for insurers to meet the

administrative percentage rules. This could cause

lay-offs and quality reductions at the

insurers.

Health Care ReformNo Rescissions


Eliminates Rescission of

Coverage


23rd, 2010

No rescissions of coverage

Generally will not affect

insured plans as most in the West do not

rescind coverage

Health Care Reform125 Plan Changes


Flex Plan Changes

January 2011, but could be earlier if your

plan runs mid- year 2010 into

2011

Removes over-the-counter

medications that do not have a

doctors prescription from being reimbursed under FSA,

HRA, HSA’s.

This eliminates these

reimbursements for those extra funds you have in your FSA at the end of the

year. Employees will

reduce FSA elections,

employers lose small tax benefit.

Health Care ReformBreaking news from Newsmax.com

• Obama Threatens Veto of Obamacare as Cost Estimates Soar Above $1 Trillion– Reacting to the surprise announcement that

congressional budget referees now predict healthcare reform could top $1 trillion, the Obama administration threatened Wednesday, May 12th, to veto parts of its own healthcare bill.

Health Care ReformMoving Forward

• Individual meetings with our groups - Now through September 23, 2010 - Now through renewal date

• Determine how this will affect each of you• Keep Employers in compliance with the

law• Financially what makes the most common

sense• Tax Implications / Tax Savings (Dave)

Health Care Reform

• Provisions for Individuals– Premium Assistance Credit– Excise tax on uninsured individuals– Medical care itemized deduction threshold– Additional hospital insurance tax of .9%– Additional Medicare tax on investment income of 3.8%– Various other provisions

Health Care Reform• Premium Assistance Credit

– Refundable tax credit for eligible taxpayers– Used to offset costs of state exchange premiums (not available

for Employer plans)– Can be paid directly to insurer or credit can be taken on tax

return for eligible taxpayers– Available for taxpayers with incomes between 100% and 400%

of poverty level (two prior years considered – for 2010 the max amount for a family of 4 is $88,200)

– Credit is determined based on premiums that exceed thresholds based on % of income and family size

– Effective for years after 2013.

Health Care Reform

• Premium Assistance Credit (continued)– EXAMPLE: The premium assistance credit operates on a sliding

scale that begins at 2% of income for taxpayers at 100 % of the FPL and at 9.5 % of income for those at 300-400% of the FPL. For instance, if the credit were in effect for 2010, the premium for the second lowest cost silver health plan for family coverage would be $11,500, and if a family of four had household income of $88,000 (approximately 400% of the current FPL), the credit would be $3,140 ($11,500 - $8,360 ($88,000 x .095)) since the taxpayer would be expected to pay 9.5% of income, or $8,360, for health insurance premiums. In contrast, if the family’s household income was $29,000 (approximately 133% of the current FPL), the credit would be $10,920 ($11,500 - $580 ($29,000 x .02)) because the taxpayer would be expected to pay only 2% of income, or $580, for health insurance premiums.

Health Care Reform

• Free-Choice Vouchers– Employers that offer coverage are required to provide “Free

Choice Vouchers”– Applicable only to employees whose income is <400% of the

poverty level.– Employees portion of insurance cost must be >8% of household

income (but not more than 9.5%)– Employee must elect to get coverage through the state

exchange– The voucher would generally be the amount the employer would

have contributed to the plan

Health Care Reform

• Free-Choice Voucher (continued)– EXAMPLE: Employee (1 of 25) falls into the <400% poverty

level. The total premium for the group insurance is $1,000 per month. The employer pays $500 of it. That leaves $500 for the employee to pay. The employee makes $6,000 per month. The employee portion is 8.3% of total income, and therefore, he qualifies to elect out of the employer group plan and elect state exchange coverage. The employer will provide a voucher for $500 per month to subsidize the employees outside insurance.

Health Care Reform

• Excise tax on uninsured individuals– US citizens and legal residents must maintain minimum

coverage.– Penalty will be the greater of

• 2.5% of the amount by which the taxpayer’s income for the year exceeds threshold amount of income required for filing or

$695 per uninsured adult in the household (half for those <18 yrs. of age)

– The penalty will be phased in from 2014-2016– Liens, seizures, criminal penalties not authorized to enforce

provision– Most criticized part of the bill and the basis for legal challenges

in many states.– Applies to years after 2013. Fully effective in 2016.

Health Care Reform• Excise tax on uninsured individuals (continued)

– EXAMPLE: The Johnsons are married and file a joint return for 2014. They are applicable individuals who are not exempt from the penalty for failure to maintain minimum essential coverage. Their household income is $45,000, and their filing threshold is $23,900. They and their four dependents are all uninsured for the entire calendar year. One dependent is an adult, and the other three are under the age of 18 for the entire year. The Johnsons’ shared responsibility payment is calculated as follows:

• They are jointly and severally liable for the penalty for themselves and their four uninsured dependents.

• For purposes of the flat dollar penalty, the applicable dollar amount for 2014 is $95. This amount is halved for applicable individuals under the age of 18.

Thus, the Johnsons’ total penalty would be $427.50 ($95 for each of the three adults, and $47.50 for each of the three children). However, the flat dollar amount is limited to 300% of the applicable dollar amount, with no adjustment for individuals under 18. Thus, the Johnsons’ flat dollar penalty is $285 ($95 x 3).

• The Johnsons’ household income exceeds their filing threshold by $21,100 ($45,000 - $23,900). Thus, their percentage of income penalty is $211 (1.0% of $21,100).

• The Johnsons’ actual penalty is the lesser of (i) their penalty amount, which is $285 (the greater of $285 of $211) or (ii) the average national annual premium for qualified health plans that offer bronze-level of coverage for a family of six through an Exchange. They must include the penalty amount with their 2014 return.

Health Care Reform

• Medical care itemized deduction threshold– The medical deduction threshold used on schedule A to limit

itemized deductions was raised from 7.5% to 10%– EXAMPLE: AGI of $100,000 will require qualified medical

expenses exceed $10,000 instead of the prior $7,500 amount to obtain any benefit.

– Applies to years after 2012

Health Care Reform

• Additional hospital insurance tax of .9%– The employee portion of the Medicare (currently at 1.45%) will

increase by .9%– Applies to wages exceeding $250,000 on combined wages

($200,000 for single filers).– Employers will withhold on earnings above $200,000. This

means additional amounts may be due upon filing and presumably refunds if combined earnings don’t exceed $250,000.

– Provision applies to years after 2012.

Health Care Reform

• Example: Linda works for Acme. She earns $100,000, and her husband Ted makes $210,000 at his job. Their combined wages of $310,000 are $60,000 over the $250,000 threshold for joint filers. However, Acme is not required to withhold any portion of the additional Medicare tax from Linda’s salary since it is under $200,000, and Ted’s employer withholds the additional .9% tax only on $10,000, the earnings in excess of $200,000 since their employers don’t withhold enough to cover all of their additional Medicare tax liability. Linda and Ted should take the shortfall into account for estimated tax payment purposes.

Health Care Reform• Additional Medicare tax on investment income of 3.8%

– Tax is equal to 3.8% of the lesser of• Individuals net investment income for the year or

• The amount by which the modified adjusted gross income exceeds a threshold amount.

– Married filing joint threshold is $250,000. Single is $200,000.– Net investment income includes gross income from interest,

dividends, annuities, royalties, rents, net capital gain, and income earned from passive sources. Does not include retirement plan distributions, IRA distributions, S-Corp or Partnership income if non-passive.

Health Care Reform

• Example: David is single and has modified AGI of $230,000. Of that amount, $100,000 is net investment income. 3.8% of investment income is $3,800. 3.8% of the excess of $230,000 over $200,000 is $30,000 x 3.8% or $1,140. His liability for the unearned income Medicare contribution tax is $1,140.

Health Care Reform

• Example: Abby, a single taxpayer, has modified AGI of $310,000 and net investment income of $100,000. Her unearned income Medicare contribution tax is 3.8% of $100,000, the full amount of her net investment income, since that amount is less than $110,000 (the excess of modified AGI over $200,000, the threshold for her filing status).

Health Care Reform

• Planning & Analysis– The highest marginal rate will soon go from 35% to 43.4%– S-Corp Advantage– Increase retirement plan savings– Borrow inside of entities to reduce income (AGI)– Increase usage of Family Limited Partnerships– Consider Roth Conversions– Consider investments in Annuities & Municipal securities

Health Care Reform

• Various other provisions– Flex spending accounts max contribution set at $2,500 (effective

2013).– Penalty on non-qualifying HSA distributions increased from 10%

to 20% (effective in 2011).

Health Care Reform

• Provisions for Businesses– Small Business Tax Credit– Employer responsibility– Reporting requirements– Fees on health plans– Excise tax on high-cost employer plans– Medical device excise tax– SIMPLE cafeteria plans for Small Businesses– Non Health-Care Related Provisions

Health Care Reform

• Small Business Tax Credit– Small business defined as

• 25 or fewer employees

• Average annual wages < $50,000

– Credit is up to 50% of premiums made by employer– Employers with 10 or fewer employees with average wages

< $25,000 could get 100% credit.– The credit is available in 2010 to 2013 in phased in amounts

(35% max credit) and fully effective in 2014.– 5% owners and 2% S-corp shareholders are not included in the

definition of an employee (Leased employees are counted).

Health Care Reform

• Employer responsibility– Large employers are penalized for not sponsoring a plan.– Large employers are defined as

• Having on average at least 50 full time employees (measured on the basis of the prior year)

– The penalty applies where the employer offers:• Non minimum essential coverage

• Minimum essential coverage that is “unaffordable” (it costs the employee more than 9.5% of household income), or

• Minimum essential coverage for which the plan’s share of the total cost is less than 60%.

• The employer must also have at least one employee who received a premium tax credit.

Health Care Reform

• Employer responsibility (continued)– For employers that offer no coverage the penalty is generally

$2,000 per full-time employee per year. The act excludes the first 30 employees from the penalty calculation.

– For employers that offer insufficient coverage the penalty is $3,000 per employee receiving the premium tax credit or $2,000 per employee, whichever is less.

– Penalty amounts are computed on a monthly basis.– Effective for years after 2013

Health Care Reform

• Employer responsibility (continued)– EXAMPLE: In 2014, Gama Corp. fails to offer minimum essential

coverage and has 90 full time employees, 10 of whom receive a premium tax credit for the year for enrolling in a state exchange offered plan. For 60 of its full-time employees (90 full time-employees, less 30), Gama owes $2,000 per employee, for a total assessable payment of $120,000 ($2,000 x 60 full-time employees), which is assessed on a monthly basis.

Health Care Reform• Employee Responsibility (continued)

– In 2014, Omega Corp. offers health coverage and has 100 full-time employees, 10 of whom receive tax credit for the year for enrolling in a state exchange offered plan. For each employee receiving a tax credit, Omega owes $3,000, for a total assessable payment of $30,000 ($3,000 x 10 employees). The maximum amount of the assessable payment for Omega is capped at the amount of the assessable payment that would have been assessed for a failure to provide coverage, or $140,000 ($2,000 x 70 full-time employees (100 full-time employees, less 30)). Since the calculated assessable payment ($30,000) is less than the overall limitation ($140,000), Omega owes the $30,000 assessable payment, which is assessed on a monthly basis.

Health Care Reform

• Reporting requirements– Insurers (including self insured employers) that provide minimum

essential coverage to any individual must report both to the individual and the IRS certain health insurance coverage information beginning in 2014.

– Employers must report on the W-2, the value of the employee’s health insurance coverage sponsored by the employer beginning in 2011.

– Another non-health care change is to require 1099 reporting to corporations in 2012.

Health Care Reform

• Fees on Health Plans– A fee is imposed on each specified health insurance policy. The

fee is $2 times the average number of lives covered under the policy. The insurer is liable for the fee.

– Begins in 2013 and may increase over time.– Self insured plans are subject to the fee as well.

Health Care Reform

• Excise tax on high-cost employer plans– The act imposes an excise tax on insurers if the aggregate

coverage amount for an employee exceeds a threshold amount.– The tax is equal to 40% of the amount by which the coverage

exceeds the threshold.– For 2018, the threshold amount is $10,200 for individuals and

$27,500 for family coverage– This is referred to as the Cadillac tax.

Health Care Reform

• Medical device excise tax– The act imposes a 2.3% excise tax on sales of certain medical

devices. Applies to sales of devices intended for humans, except eyeglasses, contact lenses, hearing aids, and medical devices generally sold at retail to the public for individual use.

– Begins in 2013

Health Care Reform

• Other provisions– SIMPLE cafeteria plans– Expansion of the adoption credit– 10% tax on indoor tanning services– Tax exempt insurers program

Health Care Reform

• Non Health Care Related Provisions– Code Section 179 Expensing Election back to $250,000– Employer Payroll Tax Holiday for newly hired workers (after

3/18/10) who were formerly unemployed– Employee Retention Credit of $1,000 for retaining qualified

newly hired workers for at least a year

Health Care Reform2010 Adoption credit increase

Adoption-assistance program increaseTanning excise tax

2011 Small business tax creditPrescription drug coverage deduction eliminatedW-2 reportingSIMPLE cafeteria plansRestrictions on use of HSA and FSA funds for over-the counter drugsTax on HSA distributions increase

2012 1099’s required for payments to corporationsAdoption credit sunsetAdoption-assistance programs sunset

2013 Increase in medical deduction threshold for taxpayers under age 65Additional hospital insurance tax on high-income taxpayersMedicare tax on investment incomeFees on health plans (after Oct. 1, 2012)Medical device excise tax Flexible spending arrangement maximum imposed

2014 Premium assistance creditExcise tax on uninsured individualsExcise tax on applicable large employersInsurer reporting requirementsEligible premiums included in cafeteria plans

2017 Increase in medical deduction threshold for taxpayers age 65 and over

2018 Excise tax on high-cost employer plans

Health Care Reform

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