Recognizing that the key provisions of the Affordable Care Act do not take effect until 2014, Congress included a number of short-term incentives for the expansion of health coverage during the intervening period.
Three of these programs are as follows:
- “Reinsurance” for certain claims incurred by early retirees under an employer-sponsored plan;
- A tax credit for small employers with a low-paid workforce who pay a significant portion of their employees’ health insurance premiums; and
- State-wide “high-risk pools” for individuals who are unable to obtain health coverage due to a preexisting condition.
EARLY RETIREE REINSURANCE PROGRAM
According to the Obama Administration, the percentage of large employers offering health coverage to early retirees (i.e., those between age 55 and Medicare eligibility) has declined precipitously in recent years, from 66% in 1988 to 31% in 2008. As a way of stemming that slide, the Affordable Care Act allocates $5 billion to a program under which the federal government will reimburse employer health plans (whether insured or self-funded) for certain claims incurred by early retirees or their covered dependents. During 2010, this program will reimburse 80% of an individual’s claims of more than $15,000 and less than $90,000. These two dollar amounts will be adjusted for inflation in later years.
To be eligible to participate in this reinsurance program, a health plan must submit an application to the Department of Health and Human Services (“HHS”) demonstrating that the plan has implemented “programs and procedures to generate cost-savings with respect to participants with chronic and high-cost conditions.” As an example of such a cost-savings program, recent HHS regulations mention a diabetes management program that includes monitoring and behavioral counseling to prevent complications and hospitalizations. Those regulations define a “high-cost condition” as one that is likely to result in claims of $15,000 or more during a plan year by any one participant.
Any reimbursements received under this program must be used by the plan to “lower costs for the plan.” For example, these funds might be used to reduce retiree premiums, copayments, deductibles, coinsurance, or other out-of-pocket costs. Apparently, they could also be used to reduce any employer premiums for the retiree coverage. However, they could not be used as general revenues of the plan sponsor. HHS is required to audit this program on an annual basis to ensure the appropriate use of all reimbursements. These reimbursements will not be taxable to the plan sponsor.
This program is slated to end on January 1, 2014 — or sooner, if the $5 billion appropriation is exhausted before then. Applications to participate in the program will be available by the end of June. Because reimbursements will be made to qualifying plans on a first-come, first-served basis, any sponsor interested in participating in this program should plan to apply early.
SMALL-EMPLOYER TAX CREDIT
Beginning in 2010, small employers (those with fewer than 25 full-time employees, including full-time equivalents [“FTEs”] with a relatively low-paid workforce (an average annual wage of less than $50,000) may qualify for a federal tax credit equal to a portion of the amounts the employer pays for its employees’ health insurance. To receive the full credit, an employer must have 10 or fewer FTEs and an average annual wage of less than $25,000. The credit is phased out for employers with 10 to 25 employees or average annual wages of $25,000 to $50,000.
This tax credit is equal to a percentage of the total health insurance premiums paid by the employer. For 2010 through 2013, taxable employers may receive a credit of up to 35% of these premiums, while tax-exempt employers may receive a credit of up to 25%. Taxable employers will claim this amount as a general business credit, thereby allowing it to be carried back one year and forward for up to 20 years. The credit also applies to liability under the alternative minimum tax. Tax-exempt employers will claim the credit as an offset against their payroll tax liability. For such employers, the credit is limited to this annual amount.
Beginning in 2014, the program will be slightly modified. The maximum credit percentage will increase to 50% for taxable employers and 35% for tax-exempt employers. However, the credit will then apply only to coverage purchased through one of the state-wide exchanges that are to be established under the Act. Moreover, the credit will then be available to an employer for only two consecutive years.
In order to qualify for this credit, an employer must pay at least 50% of the total insurance premiums charged to its employees. For 2010, the employer must simply pay the same dollar amount for each employee, regardless of whether an employee elects single or family coverage. Beginning in 2011, however, the employer must pay a uniform percentage of each employee’s actual premium, even if an employee’s premium is higher due to his or her election of family coverage.
A complicating factor stems from the fact that the credit is actually calculated on the basis of the lesser of (1) the employer’s actual premiums paid on behalf of its employees, or (2) the amount that the employer would have paid (based on the same uniform percentage of the premium) if its employees had enrolled in a plan under which the premiums were equal to the average premiums charged in the small group market in the state where the insurance is purchased. In its recent Revenue Ruling 2010-13, the IRS has listed the dollar amounts of these “benchmark” employee and family premiums to be used during 2010. HHS will redetermine these state-wide benchmarks on an annual basis, and may also establish higher benchmarks for certain areas within a state.
In determining whether an employer meets the 25 FTE and $50,000 average wage thresholds, an employer may disregard any self-employed individuals, any 2% S-corporation shareholders, and any 5% owners of other entities. The number of FTEs is then determined by dividing the total number of hours worked by all employees by 2080. The applicable wage definition is the one used for FICA contribution purposes, but disregarding the annual FICA wage cap.
Any small employer that would qualify for this tax credit — or that would qualify by making only minor adjustments to the premium amounts it currently pays on behalf of its employees — should investigate the credit’s availability. Claiming the credit may significantly ease the cost of maintaining the employee health plan. Moreover, although an employer may not deduct any premium payments that give rise to the credit, any additional employer premiums will still be deductible.
HIGH-RISK POOLS FOR LONG-TERM UNINSURED
One of the programs included in the Affordable Care Act was proposed by congressional Republicans. It is designed to encourage states to establish temporary pools to provide health coverage to individuals who are otherwise unable to obtain such coverage due to a preexisting condition. To qualify for coverage through one of these “high-risk pools,” an individual must be lawfully in the United States, have a preexisting condition (as determined under guidance to be issued by HHS), and not have been covered under creditable coverage (as defined for HIPAA purposes) during the six months prior to applying.
This program is to be available starting on July 1, 2010. It will end on January 1, 2014, when coverage with no preexisting condition exclusions should be available through the exchanges. The Act appropriated $5 billion to support these high-risk pools, which are to be funded entirely by the federal government.
Each state may either establish its own high-risk pool or allow HHS to establish and maintain such a pool for its residents. As of May 3, thirty states had announced that they would maintain their own pools and 17 had elected to allow HHS to do so. The remaining four states were still considering their options.
Although employers will have no direct involvement with these high-risk pools, they should be aware of a provision in the Act that requires an insurer or self-funded plan to reimburse a pool if the insurer or plan sponsor is found to have encouraged an individual to disenroll from existing coverage in order to obtain coverage through a pool.