Canadian HR managers with responsibility for employee benefits in the United States need to be aware of major health-care changes in the U.S., coming into effect over the next eight years.
While employers aren’t currently required to provide health-care coverage, the U.S. is moving towards a system where larger employers will need to provide coverage with basic benefits to employees or risk having to pay a non-deductible penalty tax to the government.
Employers that provide very rich plans will also have to pay a penalty tax, which will help pay for health-care reform. Penalties will also be imposed on certain individuals who do not purchase health insurance.
Criticized features of U.S. coverage, such as pre-existing condition exclusions and benefit caps, will be eliminated for all group plans.
Fewer coverage requirements apply to plans in existence on March 23, 2010, that have not been materially changed (“grandfathered plans”). For example, grandfathered plans are exempt from rules such as the requirement to provide preventive care without employee cost-sharing and the requirement to provide non-discriminatory group insurance.
Certain changes will cause a plan covering active employees to lose its grandfathered status. These include changes in insurers, any reductions in annual benefit limits and certain increases in co-pays and deductibles, as well as elimination of benefits to diagnose and treat particular conditions.
Employers may voluntarily give up grandfathered status if they want greater flexibility, but they will then have to comply with more legal requirements.
Timeline for major changes
Here is a schedule of the major changes coming into effect for both insured and self-funded plans:
2010: A new subsidy program for employers became available as of June 1 that provides medical coverage to retirees not yet eligible for Medicare. The subsidy must be used to reduce plan costs such as co-payments. A new tax credit is also available to assist small employers in setting up health plans, but most Canadian employers will not qualify for this.
2011: All plans must implement a number of plan changes, primarily eliminating lifetime benefit caps and annual dollar limits on essential benefits and expanding dependant coverage to include single or married adult children up to age 26 and children with pre-existing conditions. Non-grandfathered, insured medical plans must satisfy non-discrimination requirements for the first time (these previously applied to self-insured plans). Calendar year plans have a Jan. 1 deadline.
2013: Caps beginning at US$2,500 per year limit pre-tax contributions to flexible spending accounts. The caps are on employee pre-tax contributions used to pay medical expenses not covered by insurance. Currently, there is no dollar limit on the amount of salary an employee can shelter from tax by contributing to this plan.
Employers can no longer deduct the federal subsidy received to cover a portion of the costs for qualified retiree (Medicare Part D) drug plans.
2014: Employer “pay or play” responsibility begins. Employers are still not required to provide medical coverage to employees, but employers with more than 50 full-time equivalent employees will be required to offer minimum essential coverage or risk paying a non-deductible tax. Individuals will also be required to obtain minimum essential coverage or pay an excise tax. State insurance exchanges (an agency or non-profit established by a state) will also provide qualifying coverage to employees and small employers. Employees with employer-provided coverage can use these if exchange coverage is more affordable.
If an employer with more than 50 employees (including employees of non-U.S. affiliates) does not provide coverage and at least one employee receives assistance and coverage through a state exchange, the monthly penalty is US$166.67 per full-time employee (the first 30 employees are exempt).
If that same employer offers coverage not deemed affordable (the employee’s costs exceed 9.5 per cent of household income), it risks a monthly penalty assessed at US$250 for each employee who is eligible for assistance and receives coverage through a state exchange.
Employers will also be required to provide vouchers equal to their contribution to certain employees who do not enrol in the plan based on their contribution and household income.
Employer plans must remove all annual dollar limits and pre-existing condition restrictions, and limit waiting periods to a maximum of 90 days.
2017: States can make coverage through exchanges available to large employers.
2018: A non-deductible, 40-per-cent excise tax on insurers and administrators of self-funded plans begins to be imposed on coverage over set thresholds in generous plans referred to as “Cadillac Plans.” The threshold is US$10,200 for employee coverage and US$27,500 for family coverage.
Carol Buckmann is a lawyer at the New York office of Osler, Hoskin & Harcourt where she advises about employee benefits and executive compensation. She can be reached at email@example.com. For more information, visit www.pensionsbenefitslaw.com.
Preparing for U.S. health-care reform
What should employers and HR managers be doing now?
• Analyze current coverage to see where it is not compliant.
• Study the new federal tax breaks.
• Know the changes that can end grandfathered plan status. A mistake about whether a plan is treated as grandfathered may result in major violations of the law.
• Consider consulting actuaries about projected future costs and the likelihood a plan will be a “Cadillac plan.”
• Monitor new releases from the Internal Revenue Service, Department of Labor and the Department of Health and Human Services interpreting the new requirements.