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Benefits and Executive Compensation

The Changing State of the ACA

2017
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Read all of our updates.

These alerts are part of a series of regular Davis Wright Tremaine updates in anticipation of major changes to the Affordable Care Act. Although it is too early to know with certainty what changes will be made and when, it is likely that the Trump Administration and Congress will prioritize changes to the Affordable Care Act starting in early 2017. This series will keep you up to date with those changes, whether they occur through specific regulatory action or comprehensive legislation.

Advisories:  

Update #1: ACA Reporting Deadlines Extended
01.18.17 – By Amy Hwang and Jeff Befiglio

This alert concerns the extension of the deadline for distributing and filing Forms 1094 and 1095.

If you were not already aware, the IRS announced in Notice 2016-70 that the deadline for employers to distribute ACA information reports to employees (Form 1095-C) has been extended from Jan. 31, 2017, to March 2, 2017. This extension does not affect the deadline by which employers must file the required information with the IRS, which remains March 31, 2017 (or Feb. 28, 2017 for employers filing with the IRS on paper). However that deadline can be extended automatically to May 1, 2017 by filing Form 8809.

Also, in a reversal of previous guidance, the IRS decided that the good faith transition relief will be extended for 2016 reporting. Employers who demonstrate that forms and reports were completed in good faith will not be subject to an IRS penalty for incomplete or incorrect information on the reporting forms. Like the good faith standard for 2015, this relief is available only for employers who file and distribute the required forms and reports by the applicable deadlines.


Update #2: Relief Extended For “Opt-Out” Payments for Health Coverage
01.23.17 – By Jeff Belfiglio and Dipa N. Sudra 

The IRS has extended the relief available to employers who offer an “opt-out” payment to employees who decline company medical coverage. This means that for 2017, such payments, whether conditional or unconditional, will not have to be counted as employee contributions for purposes of calculating the affordability of the employer plan, provided that the opt-out arrangement was adopted before December 16, 2015. Employers who made changes to their opt-out programs in anticipation of the new rules taking effect on Jan. 1 may want to revisit their plans.

Since Notice 2015-87, the IRS had been warning employers that certain opt-out payments would count as part of the employee’s cost of obtaining employer-provided coverage. In July 2016, it confirmed its position in proposed regulations. In the IRS’s view, an “unconditional” payment, which the employee could receive simply by opting out of the employer’s plan, was an employee cost. Its reasoning was that to obtain coverage, the employee had to forego the opt-out payment (and pay his share of premiums), so the opt-out payment was effectively a salary reduction paid by the employee. As a result of counting the opt-out payment, the employee’s share of costs might make the coverage “unaffordable” and expose the employer to penalties under the employer mandate. In contrast, a “conditional” opt-out, which required evidence of other group coverage for the employee and dependents in order to opt out of employer-provided coverage, would not count as an employee cost even if the employee took the coverage. The IRS called this an “eligible opt-out arrangement.” Regardless of the type of arrangement, employers who adopted an opt-out arrangement before Dec. 16, 2016, got interim relief. They were not required to take any opt-out payments into account until final regulations were effective, which was expected to be Jan. 1, 2017.

When the final regulations came out Dec. 19, 2016, however, they surprisingly said that the IRS was still examining the rules for opt-out payments, and extended the relief for plans adopted before Dec. 16, 2015 until further regulations were issued. (Of course, the entire employer mandate may be repealed by then.) In the meantime, some employers with unconditional opt-outs moved to conditional “eligible” arrangements, and may now want to re-examine if that is still desirable.


Update #3: First Executive Action on ACA Could Defeat Mandates
01.23.17 – By Jeff Belfiglio

On Inauguration Day, President Trump signed an Executive Order to begin dismantling the Affordable Care Act (ACA) or “Obamacare.” While the Order has little immediate effect, and may have been issued on “day one” mainly to fulfill campaign pledges, it opens the door to other regulatory actions that could dismantle parts of the ACA’s structure even without Congressional action to repeal the law.

The Order directs all federal agencies to ease the “burdens” of the ACA while awaiting repeal and possible replacement. Most importantly, it directs each federal agency “to the maximum extent permitted by law . . . [to] exercise all authority and discretion available to them to waive, defer, grant exceptions from, or delay” any provision that imposes a fiscal burden, penalty, or tax. This very broad directive opens the door to many potential actions that could shatter the structure of the ACA.

For example, the Department of Health and Human Services can grant “hardship” exemptions from the individual mandate. President Obama used it in 2014 so that individuals whose policies were cancelled by their insurers because they did not comply with the ACA would not be penalized while they sought a replacement policy. Will HHS now grant wholesale exemptions from the individual mandate on the grounds that all the insurance available in the Exchange markets is “too expensive”? That would in effect erase the individual mandate and discourage the “young and healthy” from remaining in the market. Likewise, the IRS previously deferred the employer mandate penalty for employers in the 50 to 100 employee range. It could conceivably come up with a broader exemption to let some employers dismantle their coverage.

We will continue to issue updates as specific regulatory actions are taken under this Order.


Update #4: Proposed ACA Rules to Stabilize Exchange Markets
02.16.17 – By Robin Andrews and Jeff Belfiglio

Insurers have been pressuring the Trump Administration to relieve some of the uncertainty from the pending ACA “repeal/replace” debate in time for them to decide whether to participate in the individual health insurance Exchange markets next year. On Feb. 15, federal regulators issued proposed measures intended to stabilize marketplaces while lawmakers are still deciding the long-term future of the ACA. The rules changes, if adopted, will shorten the open enrollment period, decrease benefits, and give states more oversight. The proposed changes also address concerns from insurers that too many consumers are ignoring the individual mandate, unlawfully using special enrollment periods when they become sick, and dropping coverage shortly afterwards.

Here are key provisions in the proposed rule:

  • For plan years starting Jan. 1, 2018, and onward, there would be a shorter open enrollment period, running from Nov. 1 to Dec. 15, instead of Nov. 1 to Jan. 31. Regulators assert that this six-week period would align better with many open enrollment periods for employer-based coverage, as well as with the open enrollment period for Medicare. This accelerates a change originally scheduled to take place in 2019.
  • Consumers seeking to use any of the categories of special enrollment periods (for example, loss of employer-provided coverage or a qualifying event such as marriage) would be required to verify their eligibility with HHS at the time of enrollment. This change was a top priority for insurers to protect against abuses and adverse selection, but is only mandatory for federally run Exchanges.
  • Insurers would be authorized to collect unpaid premiums from consumers whose policies were terminated due to failure to pay premiums before having to reenroll them in the coming year’s plan.
  • Marketplace insurers would have more flexibility to provide fewer benefits than currently prescribed by law, up to a margin of 4%.
  • Federal regulators would defer to states to assess whether ACA policies have adequate provider networks.

The proposed rule did not include a rumored change to allow insurers to charge higher premiums for older enrollees. Even if the proposed changes are adopted—and they seem to be on a fast track to be finalized in March—it remains to be seen whether insurers will remain in a market whose existence beyond 2017 is still uncertain.


Update #5: It’s Here! House Republicans Propose ACA Replacement – Key Provisions for Employers
03.07.17 – By Dipa N. Sudra

The House Ways and Means and Energy and Commerce Committees have issued draft legislation, the American Health Care Act, to begin the process of repealing and replacing the Affordable Care Act. Both Committees will hold markups on March 8. In the meantime, here are key provisions for employers in the draft bill.

  • The employer mandate would be effectively repealed retroactively (the penalty is reduced to zero).
  • The Cadillac tax would be further delayed until tax years beginning on or after January 1, 2025.
  • Over-the-counter medications could be reimbursed by tax advantaged savings vehicles (HSAs, HRAs and health FSAs) beginning in 2018.
  • The $2,500 (as indexed) limit on contributions to health FSAs would be repealed effective for plan years beginning on or after January 1, 2018.
  • For HSAs, beginning in 2018:
    • The basic contribution limit for HSAs would be increased to at least $6,550 (self-only)/$13,100 (family).
    • Both spouses could make catch-up contributions to one HSA.
    • If an HSA is established during the 60-day period beginning on the date high deductible health plan coverage begins, the HSA would be backdated to that date to determine if expenses are qualified.
    • Distributions from HSAs that are not used for qualified medical expenses are includible in income and subject to an additional tax. The bill would lower the tax rate on distribution penalties after December 31, 2017.
  • The business-expense deduction for retiree prescription drug costs would be reinstated without reduction for any federal subsidy for plan years beginning on or after January 1, 2018.
  • The fact sheet reports that dependents could continue on their parents’ plan until they are age 26.
  • The bill includes an age-weighted tax credit ranging between $2,000 and $4,000 (capped at $14,000 for a family), for the purchase of state-approved, major medical health insurance and unsubsidized COBRA coverage. The credits would be available in full to those making $75,000 per year ($150,000 for joint filers), phasing out by $100 for every additional $1,000 in income. However, to be eligible an individual must not have access to government health insurance programs or an offer from any employer. In addition, amounts contributed to a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) would reduce the subsidy.
  • The individual mandate would be effectively repealed (the penalty is reduced to zero) retroactively. The replacement would be a “continuous coverage” requirement beginning in 2019 under which an individual who goes longer than 63 days without continuous health coverage will be assessed a flat 30% late enrollment surcharge on top of the base premium for 12 months.

…and the key omissions:

  • The cap on the tax exemption for employer-sponsored health care plans has been dropped. Leaked draft legislation included a cap at the 90th percentile of current premiums, but was subject to much criticism.
  • Employers may be rejoicing at the prospect of the demise of 1095 reporting, but that may be premature. Any ACA replacement is likely to include employer reporting of coverage so that the IRS knows who has coverage. The bill indicates reporting will be required for tax credits starting in 2020.

We will issue more guidance and updates as we receive more information.


Update #6: ACA Lives On – Employers Should Stay Their Course
03.24.17 – By Dipa N. Sudra

Republicans have announced that their ACA replacement bill, known as the American Health Care Act (see our previous advisory), has been pulled from a vote, after determining they may not have enough votes to pass the bill.  It is unclear whether or when  a replacement bill will be issued. 

Employers should continue to comply with the ACA, as its provisions (including the employer mandate and associated reporting) remain the law for the foreseeable future. Contact your DWT attorney for more information on ACA compliance.


Update #7: ACA Market Stabilization Rules Finalized; Cost-Sharing Next Hurdle
04.20.17 – By Jeff Belfiglio

The Trump Administration has issued final market stabilization rules designed to keep insurers in the individual health insurance Marketplaces. The rules are virtually the same as the proposed rules described in our Update #4. Perhaps the most noticeable change resulting from the rules’ implementation will be that the enrollment period for 2018 will be shortened to November 1-December 15, 2017. (States that run their own exchanges, like Washington, California, and New York, can supplement the enrollment period.)

The agencies that collaborated on the rules expressed the hope that the rules will “help stabilize premiums over time, increase issuer participation, and ultimately provide consumers with more coverage options ... thereby attracting more young and healthy enrollees into plans.” After the proposed rules were published, the effort to “repeal and replace” the ACA seemingly has reached impasse, making the long-term viability of the Marketplaces even more important. Insurers are now looking for assurances that the Trump Administration will continue to pay cost-sharing subsidies while litigation over them continues. Discontinuance of the subsidies alone would cause an average estimated 19 percent increase in premiums, according to the Kaiser Family Foundation. 


Update #8: American Health Care Act Passed by House May Revive Annual and Lifetime Limits in Self-Insured Employer Plans
05.11.17 – By Amy Hwang and Jeff Belfiglio

On May 4, the House Republicans narrowly passed the American Health Care Act (AHCA). Except for effective dates, the provisions impacting employers were generally unchanged (see our previous advisory). One major change to the original bill is that individual states would be permitted to apply for a waiver from several existing ACA regulations. A state waiver could allow coverage to be offered without all of the currently required “essential health benefits.” While this was mainly intended to offer flexibility in the state insurance market, it may indirectly allow self-insured employers to impose annual and lifetime benefit limits.

The ACA only allows annual and lifetime limits in group health plans for benefits that are not “essential health benefits.” Under current regulations, self-insured employer plans can use any state’s benchmark essential health benefits package for this purpose, regardless of where the employer is located, but those state standards do not vary significantly. The AHCA opens up the possibility that some states could obtain waivers that significantly reduce the scope of “essential health benefits,” starting in 2020. If this provision is enacted into law, this could provide self-insured employers throughout the country an opportunity to redesign their plans, by adopting a particular state’s narrow benchmark package, and re-imposing limits on any benefit that state does not deem essential.

The bill now moves to the Senate for consideration, where it is expected to undergo significant change. A working group led by Senate Majority leader Mitch McConnell (R-KY) has already been formed.

In the meantime, employers should continue to comply with the ACA, as its provisions (including the employer mandate and associated reporting) remain the law for now. Contact your DWT attorney for more information on ACA compliance.


Update #9: New Executive Orders and Actions Could Reshape ACA in Absence of Legislation
10.24.17 – By Jeff Belfiglio

After months of Congressional attempts to “repeal and replace” the ACA ended in failure, President Trump has issued an Executive Order and taken other actions that could significantly reshape the health care market. We are resuming our series on the changing state of the ACA to cover these developments. This issue covers a part of the Executive Order that could be implemented very quickly, allowing employers to use HRAs to reimburse employers for their individual insurance premiums.

Since our last update, the Senate failed in several attempts to pass either the House bill or any others to repeal and replace the ACA. On October 12, a frustrated President Trump issued an Executive Order designed to do as much as could be accomplished without legislation. Most of the Executive Order concerns changing the rules for Association Health Plans, and will be covered in a future Update. But one section directs the IRS, DOL, and HHS to act within 120 days to prepare regulations or revise guidance to increase the usability of HRAs “and to allow HRAs to be used in conjunction with non-group coverage.”

As we previously reported here, “Premium Reimbursement Arrangements” are a long-standing practice under which (usually small) employers would reimburse their employees, on a tax-free basis, for premiums that the employee paid for individual health insurance. (HRAs could also be used for this purpose, and might cover other medical expenses too.) The tax status of such arrangements is well-established, but under the ACA the IRS took the position in Notice 2013-54 that such arrangements would violate certain provisions of the ACA and subject the employers to hefty penalties. The IRS and later legislation provided penalty relief, but still expected all such arrangements to be abandoned by the end of 2016.

The Executive Order clearly aims to revive the use of HRAs in such arrangements. Because the IRS position disallowing their use under the ACA was taken in IRS Notices, FAQs, and other informal guidance, its position could be reversed relatively quickly and without the public comment period required by formal rulemaking. However it is unlikely that it will be in place in time for the Exchange open enrollment period that starts November 1, so it may not have much immediate impact on new enrollees in the individual market. We will report on the new guidance that emerges. Some commentators have speculated that an influx of HRA-funded employees could help the individual insurance market, while others have pointed out that employers may hesitate to send their employees to an individual market that is currently in turmoil. It is also unclear how the availability of reimbursement from an HRA would affect an individual who would otherwise be eligible for a subsidy in the individual market.

Interestingly, the Executive Order and accompanying publicity did not mention the fact that such HRAs are already available under limited circumstances in the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) program enacted late in 2016. Read our previous advisory on this here. The QSEHRA program required prompt action to adopt it in time for 2017, so got off to a slow start. The Executive Order is intended to expand the use of HRAs beyond the QSEHRA program, although QSEHRAs will continue to remain available even if the broader use of HRAs is delayed or challenged.


Update #10: Trump Administration Halts Funding of Cost Sharing Reduction Payments to Insurers
10.31.17 – By Amy Hwang and Stuart Harris

Earlier in October, the Trump Administration announced it would immediately terminate payments to insurers to offset the costs of ACA-mandated discounts on co-payments and deductibles for low-income consumers. A number of states and the District of Columbia sued to force the administration to continue these payments. On October 25, the plaintiffs’ request for a preliminary injunction was denied, which means that the payments will likely not resume absent Congressional action. However, states have allowed insurers to increase premiums for 2018 to reflect the greater cost of coverage without the government’s cost-sharing payments. As a result, the impact of this executive action on the Exchange market during the next open enrollment period (starting on November 1) will be to raise rates on some plans, but that may be mitigated by increased premium tax credits. The move may also leave insurers reluctant to participate in the Exchanges after 2018 without resumption of these cost-sharing reduction payments.

One component of the ACA requires insurers to provide reduced out-of-pocket limits, deductibles, and other cost-sharing for low-income individuals. Although the ACA requires the federal government to compensate insurance companies for these reductions, the ACA does not expressly appropriate funds for these reimbursements. Back in 2013 the Obama administration decided it had the authority to make such payments, which became known as cost-sharing reduction payments, or CSRs. The House of Representatives responded with a lawsuit. A federal judge ruled against the administration, but stayed the order pending appeal by the Obama Administration, and so the CSRs continued.

As described in a prior advisory earlier this month President Trump issued an Executive Order to make certain changes to the ACA, including allowing for the expanded use of HRAs and loosening restrictions on Association Health Plans. Shortly thereafter, on October 12, the White House announced that it would immediately stop CSRs absent Congressional appropriation of funds for the payments. In response, eighteen states and the District of Columbia sued the Trump Administration, asserting that this sudden change would throw the individual insurance market into disarray ahead of the open Exchange enrollment period starting on November 1.

On October 25, a California federal judge denied the request to issue a preliminary injunction against the Administration. Among the factors cited in the decision is that many states had already priced premiums, particularly for silver-level plans, for 2018 based on the assumption that the CSRs would not continue. In those states, although the cost of silver plans will increase, premium tax credits will also be increased to account for the increased premium costs, such that individuals who receive premium tax credits will not be affected. In some cases, other types of plans may become even more affordable as a result of the increased premium tax credits, and individuals may be able to purchase better coverage for the same or less cost. On the other hand, people who do not qualify for premium tax credits would likely pay more for Exchange coverage, particularly if they choose a silver plan.

Congressional action will likely be necessary in order to restore stability to the individual insurance market after 2018. Insurers will be hesitant to agree to participate in the Exchanges without the make-whole CSRs, and increased premiums will discourage individuals from purchasing insurance, even if low-income individuals may not be adversely impacted after factoring in premium tax credits. Senators Lamar Alexander and Patty Murray have reached agreement on a bipartisan bill to appropriate the CSRs and make other ACA changes. Even with 12 Republican co-sponsors, however, it may not even get a vote until President Trump signals that he will sign it. For now, the wild ride known as the ACA continues.


 

Update #11: Individual Mandate Eliminated by New Tax Law: Effect on Employers and Individual Market

01.09.18 – By Jeff Belfiglio

The new Tax Cuts and Jobs Act eliminates the ACA’s individual mandate to maintain minimum essential coverage, and the penalty for failure to do so, effective in 2019. While President Trump tweeted that this “effectively repealed” the entire ACA, its impact may be much more limited.

Effect on Employers. Employees free of the individual mandate could decline coverage under an employer’s plan after 2018. However, that option may not be available because most employer plans currently require proof of other coverage before allowing an employee to waive coverage. Allowing (presumably healthy) employees to drop coverage would likely cause employer premium costs to increase. Eliminating the individual mandate could also indirectly affect compliance with the employer mandate. Penalties under the employer mandate are triggered by employees that purchase subsidized coverage in the individual market. If fewer employees enroll in the individual market, then an employer that does not offer affordable coverage is marginally less likely to have an employee who will receive subsidies and trigger an employer penalty. An employer willing to violate the employer mandate because of the reduced risk of penalties would presumably wait until 2019 to reduce its coverage.

Effect of Repeal on Individual Market. Repeal of the unpopular individual mandate  is expected to further weaken the individual health insurance market, which was already under siege. See our Update #10 here. The repeal is projected by the CBO to save hundreds of millions of tax dollars by reducing subsidies and Medicaid costs due to large numbers of individuals going without insurance. On the other hand, repeal of the ACA’s “stick” is only part of the equation; as long as premium subsidies remain in place, millions will still find Exchange coverage attractive, even if the lack of a mandate causes premium increases. Some states are reportedly looking at adopting their own individual mandates, like Massachusetts has. In any case, the greatest increase in coverage under the ACA has been from expanded Medicaid coverage, now adopted by 32 states. Maine adopted expanded Medicaid coverage by voter initiative and other states like Idaho may do the same in 2018.

Update #12: Distribution Deadline for Employer Form 1095-C for 2017 Extended

01.10.18 – By Jeff Belfiglio

As it did last year, the IRS has again extended the date that employer Form 1095-C reports need to be distributed to employees. For 2017 reports, the deadline is now March 2, 2018, but the deadline for filing the reports with the IRS is still February 28, 2018 (not e-filing) or April 2, 2018 (e-filing).

The new Tax Cuts and Jobs Act (TCJA) that eliminates the individual mandate effective 2019 did not eliminate the employer mandate and reporting requirements. But employers got partial relief from the distribution deadline for employer Form 1095-C. The IRS extended the due date to provide Form 1095-C (or 1095-B for an insured plan) to employees from January 31 until March 2, 2018. Review the Notice 2018-06 here. This is similar to the extension granted last year. See Update #1 of our ACA advisory series here.

The IRS did not extend the date for filing the returns with the IRS, which remains February 28, 2018 if not filing electronically, or April 2, 2018 if filing electronically. That deadline can automatically be extended 30 days by filing Form 8809.

Lastly, the IRS extended the “good faith” transition relief from penalties for an employer’s failure to provide complete or correct returns. So, as in 2017, employers who provide the returns to employees and file them on time, even if they are not perfect, can claim the transition relief from penalties.

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