In our February 2011 article, we provided a “status report” on health care reform nearly a year after enactment of the Affordable Care Act (“ACA”). Much more has happened since that article was written — in all three branches of the federal government.
As we predicted in February, Congress and the President eventually agreed on legislation repealing the ACA’s expanded Form 1099 reporting requirements. Those requirements were described in our April 2011 article, along with a summary of the changes that were made to the ACA as a way of offsetting the cost of this repeal.
Somewhat more surprisingly, Congress and the President also agreed to repeal the ACA provisions that would have required employers to issue “free choice vouchers.” The coalition backing that repeal included both large employers and unions. The “adverse selection” concerns underlying this repeal were outlined in a second April 2011 article. That article also noted some of the practical concerns arising from the need to determine each employee’s household income in order to determine which employees would have been entitled to a free choice voucher.
It seems unlikely that other significant elements of the ACA will be repealed before the 2012 elections. The Republican-controlled House of Representatives has been approving bills to rescind the authority to spend money that was appropriated by the ACA. At least five such rescission bills are on the GOP agenda. Because these rescissions are not favored by either the Democratic Senate or President Obama, they seem unlikely to be enacted in their current form. Given the nation’s current budget constraints, however, it is conceivable that some portion of these funding rescissions may eventually become law.
Decisions by the Courts
The courts have continued to address a number of challenges to the ACA’s constitutionality. In late April, the U.S. Supreme Court denied Virginia’s request for immediate review of two conflicting decisions issued by federal district courts in that state. As predicted in our February 2011 article, the Supreme Court has elected to let the appellate courts (in this case, the Fourth Circuit Court of Appeals) deal with the issue first.
Most knowledgeable observers now believe that any Supreme Court pronouncement on the ACA’s constitutionality will not come until 2012. Even then, the Court may not address all aspects of the issue. For instance, even if the ACA’s “individual mandate” is held to be beyond the scope of Congress’s authority, the remainder of the law may stay intact. If so, employers will remain subject to the ACA’s other mandates and potential tax penalties.
Guidance from the Executive Branch
That leaves only the executive branch of government. Although the three agencies charged with administering the ACA (the IRS, the Department of Labor , and the Department of Health and Human Services) have issued no formal regulations in this area since February, they have continued to issue less formal guidance.
For instance, in Technical Release 2011-01 (issued on March 18, 2011), the DOL granted a further limited extension of the deadline for employer health plans to comply with certain of the ACA’s new internal claims and appeals procedures. An article summarizing this latest extension appears elsewhere in this newsletter.
The DOL also posted yet another round of frequently asked questions. This sixth round of FAQs (dated April 1, 2011) answers a number of questions concerning the ACA’s “grandfathering” rules. The topics include the following:
- Guidance on the scope of the anti-abuse rule applicable to employees who are transferred from one benefit package to another;
- Flexibility to move prescription drugs among tiers of a drug formulary without losing grandfathered status;
- Clarification that “value-based insurance designs” may be applied to preventive care services (again, without undermining grandfathered status);
- Application of the “5% premium shifting rule” when an employer’s premium subsidy is based on a specified formula that effectively shifts any increase in cost to employees or retirees as the overall cost of providing a plan’s benefits increases; and
- The date as of which a change in a plan’s terms will cause a loss of grandfathered status.
The other key administrative guidance issued since February was IRS Notice 2011-36. Although phrased as a request for comments, this Notice actually telegraphs much of the IRS’s current thinking on issues associated with the tax penalties the ACA will impose on larger employers failing to provide affordable health coverage to their employees.
Once these “shared responsibility” provisions take effect (in 2014), a “larger employer” will owe a tax penalty if any full-time employee obtains federally subsidized coverage through a state-wide exchange and either (1) the employer fails to offer its full-time employees the opportunity to enroll in “minimum essential coverage” (a term that is yet to be defined), or (2) the employer offers such coverage but at a cost that is deemed to be “unaffordable” for any full-time employee (based on the employee’s household income). Obviously, these provisions require that an employer be able to identify all of its “full-time” employees.
Moreover, a “larger employer” is defined for this purpose as an employer that employed an average of 50 or more full-time employees — including “full-time equivalents” — on business days during the preceding calendar year. So any employer whose regular, full-time work force comes close to the 50-employee threshold will also need to know how to count full-time equivalents for this purpose.
The ACA defines a “full-time employee” as one working 30 or more hours per week. In Notice 2011-36, the IRS explains that its eventual regulatory guidance will likely treat 130 hours per month as equivalent to 30 hours per week. The IRS also proposes a 6-step process for calculating the number of full-time employees (including full-time equivalents) an employer had during the prior calendar year. This process includes a special rule allowing certain full-time, but “seasonal,” employees to be disregarded when determining an employer’s average number of full-time employees.
Technically, the ACA calls for any employer penalties to be calculated on a monthly basis. It would therefore be necessary to determine an employer’s number of full-time employees each month. To ease the administrative burdens associated with such monthly calculations, the Notice offers the possibility of allowing employers to determine their number of full-time employees by using a “look-back/stability period safe-harbor.”
Under this proposed safe harbor, an employer could elect to use a “look-back period” of 3 to 12 months to determine whether each employee had worked an average of 30 or more hours per week (or 130 or more hours per month). If an employee is found to be full-time under this standard, the employer could continue to treat that employee as full-time for a “stability period” of at least 6 months (but no less than the duration of the look-back period). Similarly, an employee who is found not to be full-time under the look-back approach would not be considered full-time for the duration of the stability period.
Notice 2011-36 also asks for comments on an unrelated ACA provision. This is the requirement (also effective in 2014) that employer health plans limit any eligibility waiting period to 90 days or less. The Notice lists a number of questions that have already been posed to the IRS concerning this requirement. Comments are requested on the proper responses to those questions, as well as other issues associated with this limitation on waiting periods.
Employers that are likely to be affected by these “shared responsibility” or 90-day waiting period provisions of the ACA may wish to submit comments to the IRS. The Notice describes three different methods for doing so. The comments are due by June 17, 2011.