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Obamacare: The Big Picture

November 7, 2013

We are approaching January 1, 2014, a critical date for the health care reform law that has come to be known as Obamacare, and we think this is a good time to give our clients and friends who offer employer-based health care a broad perspective on where things stand.

WHAT CHANGES FOR EMPLOYERS WILL HAVE OCCURRED BY 2014?

As we have said consistently, the changes that were required to be made to employer health plans both before 2014 and effective in 2014 were minimal.   Employer plans have already been required to eliminate most dollar caps, offer coverage to children under age 26, and change some of their appeal procedures.

One change that is not new but has been in the news a lot is the requirement that employer plans cover certain preventive procedures, determined by the government, without a deductible or copay.  When contraceptive expenses were added to this list, a number of employers protested, claiming it infringed their constitutional religious freedom.  This issue has been making its way through the courts, with conflicting results, and is likely to be decided by the Supreme Court.

In 2014, for the first time, all restrictions based on pre-existing conditions must be removed from employer health plans.  This undoubtedly already is reflected, or will be reflected, in your 2014 enrollment materials.

Although some sponsors of collectively bargained plans have begun considering plan changes to avoid the “Cadillac tax”, effective in 2018, overall Obamacare has required little change to the benefits provided by employer plans by 2014.

WHAT ABOUT THE INDIVIDUAL MANDATE?

Much of the current media attention is devoted to the requirement that, effective in 2014, most Americans must be covered by health insurance - either through employer coverage of any kind, a government program such as Medicare or Medicaid, or an individual policy, generally obtained from a health care exchange - or pay a penalty.  This is known as the “individual mandate.”  The flaws in the health care exchange websites have been widely publicized.  So has the fact that some existing individual health insurance products must be eliminated in 2014 because they do not meet certain minimum standards.  You should understand that these minimum standards - referred to as “Essential Health Benefits” - do NOT apply to employer-provided health plans.

WHAT ABOUT THE EMPLOYER MANDATE?

You may recall that an additional burden was supposed to be imposed on employers in 2014 - the so called “employer mandate.”  Most of you probably know that this burden was postponed by the government until 2015.  Here are more of the details that led to the postponement:

One important feature of the exchanges is that they will award subsidies to individuals who apply for coverage if their household income is below a certain level.  Under the law, these subsidies do not apply to individuals who are offered employer coverage unless the employer coverage either does not provide “minimum value” or is not “affordable.”   This rule requires the exchanges to know whether an employer offers coverage, and if so whether the coverage has minimum value and is affordable.  That in turn required a reporting obligation on employers.

Coordinated with this rule is the so-called “employer mandate.”  This is the imposition of a penalty on employers of over a certain size (”applicable employers”) if they do not offer coverage, or if they offer coverage that does not have minimum value or is not affordable.  The employer mandate rules, as set forth in proposed regulations, required very complicated questions to be answered such as who is an applicable employer, which employees had to be covered, and how were minimum coverage and affordability to be determined.   It would have been a challenge for employers to understand these issues, digest the rules and implement decisions by the statutory effective date of January 1, 2014.

The government recognized this challenge and postponed the effective date by one year to January 1, 2015.  It remains to be seen whether any of the rules will be modified or simplified, but employers will have plenty of time to plan for 2015.  For 2014, the employer has no mandate, no obligations and no penalties to pay.  Whether an employee is entitled to a subsidy or not will be determined without employer input.

WHAT IS THE BIG PICTURE?

The challenge of providing employer-sponsored coverage that fits within an employer’s budget existed before Obamacare, and continues to exist.  Innovations that were in play before Obamacare - wellness programs, high deductible plans with health savings accounts (HSAs) or health reimbursement accounts (HRAs), and limits or restrictions on spouse coverage - continue to evolve.  Some new ideas, such as employer-sponsored “exchanges” that put more of the burden of choice and financing on employees - have been getting some publicity.  It is unlikely that Obamacare will have a material impact in the short run on this continuing challenge facing employers, but we expect that innovations in the private sector will continue to evolve.

One important fact to keep in mind is that that employer-provided coverage - whether paid for by the employer or by the employee through payroll deduction - uses pre-tax dollars, while individually purchased coverage does not.   For example, if an employee receives employer-provided coverage that costs $10,000 per year, all of which is paid by the employee via salary reduction, the real cost of that coverage may be as little as $6,000 or $7,000 in after-tax dollars, depending on the employee’s tax bracket.  But coverage on the exchange that costs the employee $10,000 has a real cost of $10,000 in after-tax dollars (unless an employee who itemizes on Schedule A of Form 1040 can deduct the premium costs as a deductible expense for calculating taxable income).  The difference - $3 or $4 thousand - is a longstanding government subsidy provided through the tax laws unrelated to Obamacare.  So the continued existence of employer-provided coverage is likely to continue to be important to allow employees to get this tax law subsidy even if an increasing share of the cost is to be borne by the employee.

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