On Tuesday, March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act of 2010 (the "PPACA") into law. The PPACA, which is designed to overhaul the United States health care system, regulates all aspects and players in the health care arena, including individuals, employers and health insurers. The House and the Senate also have adopted amendments to the PPACA in the form of the Health Care and Education Affordability and Reconciliation Act of 2010 (the "Reconciliation Act"). The following provides a summary of the health care plan provisions included in the PPACA as currently adopted and as amended by the Reconciliation Act.

Improvements in Health Care

The PPACA amends the Public Health Service Act ("PHSA") to improve available health care coverage by preventing certain practices by group health plans, including self-insured plans, and insurers. Unless noted otherwise, these reforms will go into effect as of the first day of the plan year beginning six months after the date of enactment of the PPACA, which for calendar-year plans will be January 1, 2011. Under the PPACA notable amendments provide that group health plans and insurers:

• Lifetime and Annual Limits. Will not be permitted to impose lifetime limits on the dollar value of essential benefits for a participant or a beneficiary. As of January 1, 2014, group health plans and insurers also will not be permitted to impose an annual limit. In the meantime, annual limits may only be imposed on essential benefits, as determined by Health and Human Services ("HHS").
• No Rescissions. Will not be able to rescind a health care policy once an individual is covered, except for fraud on the part of the individual or intentional misrepresentation of a material fact. Any cancellation must be with prior written notice.
• Preventive Services. Will be required to cover certain preventive services that are recommended by the United States Preventive Services Task Force, including immunizations; preventive care for infants, children and adolescents; preventive screenings for women (including mammograms); and, will not be permitted to impose cost-sharing requirements on these benefits.
• Pre-existing Condition Exclusions. Will not be permitted to apply a pre-existing condition exclusion or limitation against a child who is under the age of 19.
• Dependent Coverage until Age 26. Will be required to provide coverage for unmarried dependents until age 26, unless the group health plan or insurance policy does not provide coverage for dependents.
• Summary of Benefits. Will be required to provide a summary of benefits and an explanation of coverage that complies with certain standards (to be developed over the 12 months following enactment) to participants no later than 24 months after the enactment of the PPACA. Group health plans and insurers must also provide at least 60-days notice of any modifications to policies. A fine is assessed for failure to provide the summary. The summary must (i) be no more than four pages in length and understandable by the average participant; (ii) provide uniform definitions of standard insurance and medical terms; (iii) include an explanation of exceptions to coverage, reductions, limitations, cost-sharing, renewability and the continuation of coverage, and examples; and, (iv) include a statement of whether it provides the "minimum essential coverage".
• Nondiscrimination. Will be required to comply with the nondiscrimination testing provisions that prevent discrimination in favor of highly compensated individuals and that previously only applied to self-insured plans.
• Quality Reporting. Will be required to submit an annual report to HHS and participants, which complies with reporting requirements developed by HHS within the two-year period after enactment of the PPACA. Penalties will apply for failure to submit the annual report. The report must discuss whether the benefits under, and structure of, the plan improve health outcomes, implement activities to prevent hospital readmissions, improve patient safety and reduce medical errors, and implement wellness and health-promotion activities.
• Appeals Process. Will be required to set up an internal and external appeals process, which will allow participants to review their files and present evidence and testimony in any appeal.
• Participant Protections. Will be required to permit participants to select a primary care provider or pediatrician from any participating provider; will not be allowed to require a referral for women to access obstetrical and gynecological care; and, will be required to cover emergency services without requiring prior authorization and regardless of whether the provider is a participating provider.
• Accounting for Costs. Will be required to submit reports regarding the amount of premiums spent on non-claim costs and provide rebates if the amount spent on non-claim costs exceeds a certain percentage of the total premium revenue. As of January 1, 2011, this annual rebate will be due if the ratio of the amount of premium revenue expended on reimbursement for clinical services and activities that improve health care to the total premium revenue is less than 85 percent (for large-group market) or 80 percent (for small-group market). Beginning in 2014, the ratio will be based on an average of premiums expended on costs and the total premium revenue for each of the previous three years.
• State and Federal Government Oversight. Effective immediately, the PPACA also empowers and requires the state and federal governments to oversee health care coverage provided by insurers. Specifically, the PPACA provides that with the assistance of grants made by HHS, states will establish offices of health insurance consumer assistance or health insurance ombudsmen. The PPACA also requires HHS, in conjunction with states, to establish a process of annual review, to begin with the 2010 plan year, of unreasonable increases in premiums. Insurers must submit justification for any unreasonable premium increases prior to implementation of such increases. Grants will be provided to states to assist them in monitoring trends in premium increases and to make recommendations as to whether certain insurers should be excluded from participation in the exchanges discussed below based on a pattern or practice of excessive or unjustified premium increases. Medical reimbursement data centers will be set up to collect information from insurers and develop fee schedules and database tools that fairly reflect market rates and geographic differences.

Actions to Expand Coverage and Make It More Affordable

The PPACA also includes provisions effective upon enactment of the PPACA that are aimed at increasing the number of individuals who have health plan coverage and making coverage more affordable.

• High-Risk Pool. Within 90 days of enactment of the PPACA, HHS will create a temporary high-risk health insurance pool program, which will exist through 2014. Coverage will be provided through this risk pool to individuals who have not been covered during the six-month period prior to applying to the risk pool and who have a pre-existing condition.
• Reinsurance for Early Retirees. Establishes a temporary reinsurance program to provide reimbursement to participating employment-based plans for a portion of the cost of providing coverage to early retirees through 2014.
• Information to Identify Affordable Coverage Options. Provides that an internet site will be set up by July 1, 2010, to provide information on health insurance coverage, Medicaid coverage and Medicare coverage, and the state high-risk pools.
• Administrative Simplification. Amends the Health Insurance Portability and Accountability Act ("HIPAA") and the Social Security Act with respect to standards and operating rules for financial and administrative transactions. HHS will adopt certain standards and operating rules by no later than July 1, 2012, that will be effective no later than January 1, 2014.

Health Insurance Market Reforms

The PPACA also includes reforms to the general health insurance market. These reforms generally go into effect for years beginning on or after January 1, 2014, and require that insurers and group health plans:

• No Pre-Existing Condition Exclusions. May not impose pre-existing condition exclusions.
• Fair Insurance Premiums. Must provide insurance premiums in an individual or small- group market that vary only with respect to whether the coverage is for an individual or more than one individual, rating area, age and tobacco use. This also applies to a group health plan or insurer that provides coverage in a large-group market.
• Availability of Coverage. In an individual or group market, must accept every employer and individual that applies for coverage, subject to the insurer's restrictions on open-enrollment periods.
• Renewability of Coverage. Must renew or continue coverage at the option of the plan sponsor or individual.
• No Discrimination Based on Health Status. May not establish rules for eligibility of any individual to enroll based on any of the following factors related to the individual or a dependant of the individual: health status; medical condition (physical or mental illness); claims experience; receipt of health care; medical history; genetic information; evidence of insurability; or, disability.
• No Discrimination against Providers. May not discriminate with respect to participation against any healthcare providers, but insurers are not required to contract with all willing health care providers.
• No Excessive Waiting Periods. May not apply waiting periods of more than 90 days to group health plans.
• Coverage for Participants in Clinical Trials. May not deny an individual participation in an approved clinical trial in which the individual is eligible to participate; may not deny, limit or impose additional conditions on coverage of routine patient costs for items and services furnished in connection with participation in a clinical trial; and, may not discriminate against an individual on the basis of participation in the trial.
• Wellness Programs. Must satisfy HIPAA's current rules regarding wellness programs, with an increase in the limit applicable to wellness incentives from 20 percent to 30 percent.
• Comprehensive Health Insurance Coverage. In the individual and small-group markets, must cover the "essential health benefits package." Group health plans must ensure that cost sharing does not exceed certain limits. If an insurer offers coverage at the bronze, silver, gold or platinum level, the insurer must also offer coverage in that level as a plan in which only enrollees are under 21.
• Annual Limits on Cost Sharing. Must place an annual limit on cost sharing incurred under a plan, which may not exceed the limits set forth in Section 223(c)(2)(A)(ii) of the Internal Revenue Code of 1986, as amended (the "Code"). For 2015 and later, the dollar amount limitation for self-only coverage is increased in accordance with a prescribed formula.
• Annual Limits on Deductibles. Must place an annual limit on deductibles for employer-sponsored plans. For plans in the small-group market, the deductible may not exceed $2,000 for individual coverage and $4,000 for any other plan. The annual limit on deductibles may be increased by the maximum amount of reimbursement which is reasonably available to participant under a flexible spending arrangement. For plan years beginning in 2014, the annual limit on deductibles is increased in accordance with a prescribed formula.

Preservation of Right To Maintain Existing Coverage

Despite the changes discussed above, the PPACA is not intended to impact an individual's current coverage. Accordingly, the PPACA provides that it will not require an individual to terminate coverage under a group health plan or health insurance coverage in which he or she is enrolled on the date of enactment. In addition, plans that exist when the PPACA becomes effective are grandfathered and excused from complying with many of the health care improvement and market reform provisions of the PPACA, including the prohibition on lifetime or annual limits, rescission of benefits provisions, preventive service requirements, dependent coverage provisions, nondiscrimination rules, certain reporting requirements, excessive waiting periods, and preexisting condition exclusions.

Health Care Exchanges

To assist individuals who do not have health plan coverage, within one year after the date of enactment of the PPACA, the Secretary shall make planning and establishment grants to establish American Health Benefit Exchanges (the "Exchanges"). By January 1, 2014, each state is required to establish an Exchange in the form of a governmental agency or nonprofit entity established for the purposes of facilitating the purchase of Qualified Health Plans, as defined below, by qualified individuals and employers, and to provide for the establishment of a Small Business Health Options Program. As permitted by the states involved and HHS, Exchanges may be able to operate in one or more states or have subsidiary Exchanges in specific geographic areas if certain requirements are satisfied. Exchanges will be required to perform various administrative tasks, including:

• certifying health plans as "Qualified Health Plans" and establishing a rating system;
• providing standardized information and assistance; and
• reporting to the federal government (and applicable employers) certain information, including information regarding individuals who are exempt from the individual mandate discussed below; employed individuals who are eligible for premium tax credits; and, employers that do not provide minimum coverage.

For purposes of the provisions discussed above, the PPACA defines a "Qualified Health Plan" as a plan that (a) is certified by the Exchange through which it is offered; (b) provides "Essential Health Benefits," as defined by the PPACA; and, (c) is offered by a health insurance issuer that satisfies various requirements, including the requirement that it agrees to offer at least one plan on the silver level and one on the gold level, and to charge the same premium rate for each Qualified Health Plan without regard to whether it is offered on an Exchange, individually or through an agent. The PPACA also allows states to enact laws prohibiting Qualified Health Plans from covering abortion coverage.

Under the PPACA, Exchanges will be subject to certain funding limitations. While HHS shall provide grants to facilitate the establishment of the Exchanges, states shall ensure that Exchanges are self sustaining by January 1, 2015. To accomplish this, Exchanges may charge assessments or user fees to participating health insurance issuers or otherwise generate funding to support their operation. Furthermore, Exchanges are prohibited from wasteful spending, which includes paying excessive executive compensation.

The PPACA preserves the choices available to qualified individuals in connection with plans available under an Exchange. A qualified individual may enroll in any Qualified Health Plan available to such individual and for which the individual is eligible, but cannot be compelled to enroll in any plan offered under an Exchange. "Qualified Individuals" with respect to an Exchange means an individual who is an un-incarcerated, lawful resident of the United States seeking to enroll in a Qualified Health Plan under an Exchange and who resides in the state of the Exchange. Exchanges also will allow small employers (qualified employers with less than 100 employees) to offer a choice of Qualified Health Plans at one level of coverage through the Exchange. States may allow large employers to qualify beginning in 2017. Finally, insurers are required to pool the risk of enrollees in all plans (except grandfathered plans) in each market, regardless of whether plans are offered through Exchanges.

Employers will be required to provide notice to employees regarding coverage available through an Exchange. Employers will not be allowed to permit employees to purchase coverage through an Exchange on a pre-tax basis under a cafeteria plan, except in the case of qualified employers (i.e., small employers, and, after 2017, large employers in electing states) offering a choice of plans to their employees through the Exchange.

Finally, to replace the deleted public option, the U.S. Office of Personnel Management will contract with insurance companies to offer at least two multi-State Qualified Health Plans through each state's Exchange. At least one of the insurers has to be a non-profit insurance company. In addition, the plans have to meet the same requirements as plans offered to federal employees with regard to the medical-loss ratio, profit margins, premiums, and other terms and conditions of coverage as are in the interest of enrollees in such plans, as well as other specified requirements.

CO-OPs

The PPACA also permits the establishment of Consumer Operated and Oriented Plans (the "CO-OPs") to provide Qualifed Health Plans. The CO-OPs will be member-run, non-profit health insurance issuers that will offer Qualified Health Plans in the individual and small-group markets in the states in which issuers are licensed to offer such plans. Under the PPACA, "Qualified Nonprofit Health Insurance Issuers" will be entities:

• organized under state law as nonprofits;
• whose activities substantially consist of issuance of Qualified Health Plans in the individual and small-group market;
• that did not exist as a health insurance issuer or related entity on July 16, 2009; and
• that adhere to governance requirements that (i) require the entity to be subject to a majority vote of its members; (ii) follow strict ethics and conflict of interest rules to protect against insurance industry involvement and interference; (iii) operate with a strong consumer focus; (iv) use profits to lower premium or improve benefits; and, (v) comply with state laws.

Qualified Health Plans offered under the CO-OP program will to be subject to all federal and state laws that apply to private health insurers.

Alternative Programs

The PPACA also allows states to establish additional plans outside of the Exchange. Under the PPACA, states may contract, through a competitive process that includes negotiation of premiums, cost sharing, and benefits, with standard health plans, and provide these plans to individuals who are not eligible for Medicaid or other affordable coverage and have income below 200 percent of the Federal Poverty Level ("FPL") or have income below 133 percent of the FPL in the case of an alien who is lawfully present in United States. The PPACA requires HHS to certify that participating individuals do not have to pay more in premiums and cost sharing than they would have paid under Qualified Health Plans, and that the plans cover essential health benefits. HHS will be required to transfer 95 percent of the tax credits and cost-sharing reductions that would have been provided to individuals enrolled in standard health plans if they were enrolled in Qualified Health Plans to states that provide these alternative programs.

Assistance for Insurers, Individuals and Small Businesses

To assist with the establishment and enrollment of individuals in Qualified Health Plans provided by an Exchange or an alternate program provided by a state, the PPACA provides assistance for insurers who cover high-risk individuals, for individuals who cannot afford coverage and for small businesses.

• Reinsurance and Risk Corridors. Requires States by 2014 to establish a nonprofit reinsurance entity that collects payments from insurers and makes payments to insurers in the individual market that cover high-risk individuals. Under the PPACA, HHS will establish federal standards for the determination of high-risk individuals, a formula for payment amounts, and the contributions required of insurers, which must total $25 billion over 2014, 2015 and 2016. HHS will also be required to establish risk corridors for Qualified Health Plans. If a plan's costs (other than administrative costs) exceed 103 percent of total premiums of plans in the risk corridor, HHS will make payments to the plan to defray the excess. If a plan's costs (other than administrative costs) are less than 97 percent of total premiums of plans in the risk corridor, the plan makes payments to HHS. Finally, states will be required to assess charges on group health plans with enrollees of lower than average risk, and to provide payments to health plans with enrollees of higher than average risk.
• Premium Assistance. To assist certain low-income individuals who may not be able to afford the cost of purchasing health care coverage from an Exchange, the PPACA adds a new Code Section 36B. Section 36B provides a premium assistance credit, in the form of a refundable tax credit based on income, for taxpayers enrolled in private health insurance through an Exchange. The premium assistance credit is calculated on a sliding scale starting at 2 percent of income for taxpayers with household income at or above 100 percent of the FPL and phasing out at 9.5 percent of income for those at 400 percent of the FPL. The reference premium to determine the premium assistance amount is tied to the second lowest cost silver plan available in the individual market in the rating area in which the taxpayer resides. An employee who is offered health plan coverage by an employer under which the employee's required contribution exceeds 9.5 percent of his or her household income, or the plan's share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, is eligible for the premium assistance credit.
• Reduced Cost Sharing for Individuals Enrolling in Qualified Health Plans. Even when individuals have health plan coverage, they may not be able to afford the deductibles and copayments (i.e., the cost-sharing requirements) required to obtain health care through an Exchange. A reduction in cost sharing will be achieved by reducing the standard out-of-pocket maximum limits to: (i) one-third of the limit for individuals with household income between 100 percent and 200 percent of the FPL; (ii) one half of the limit for individuals with household income between 201 percent and 300 percent of the FPL; and, (iii) two-thirds of the limit for individuals with household income between 301 percent and 400 percent of the FPL. The cost-sharing subsidy must buy out any difference in the cost sharing by bringing the actuarial value of the plan to: (i) not more than 94 percent for individuals with household income between 100 percent and 150 percent of the FPL; (ii) not more than 87 percent for individuals with household income between 151 percent and 200 percent of the FPL; (iii) not more than 73 percent for individuals with household income between 201 percent and 250 percent of the FPL; and, (iv) not more than 70 percent for individuals with household income between 251 percent and 400 percent of the FPL. In addition to adjusting actuarial values, the plan's share of the total allowed cost of benefits provided under the plan must be: (i) 94 percent for individuals with household income between 100 percent and 150 percent of the FPL; (ii) 87 percent for individuals with household income between 151 percent and 200 percent of the FPL; and, (iii) 73 percent for individuals with household income between 201 percent and 250 percent.
• Small Employer Tax Credit. Section 45A is added to the Code to provide a sliding scale tax credit to small employers that purchase health insurance for their employees. A small employer is an employer with fewer than 25 employees with average wages of less than $50,000. These employers are eligible for a tax credit of up to 35 percent of the employer's contribution toward an employee's health insurance premium, if the employer contributes at least 50 percent of the total premium cost or 50 percent of a benchmark premium. In the year 2014 and beyond, eligible employers that purchase coverage through an Exchange can receive a tax credit for two years of up to 50 percent of the employer's contribution towards an employee's health insurance premium, if the employer contributes at least 50 percent of the total premium cost. Full credit is available for small employers with 10 or fewer employees with average wages of less than $25,000.
  HHS will establish a program for determining whether individuals are eligible for premium tax credits, reduced cost sharing, or exemptions from the individual responsibility requirements discussed below.

Individual Coverage Mandates

Beginning January 1, 2014, individuals will be required maintain minimum essential coverage or pay a penalty to the federal government. Through the addition of Code Section 5000A, the PPACA will effectively require individuals who do not fall into one of numerous exceptions to maintain health care coverage or face penalties. The penalty will be determined based on a formula, that will require an individual to pay for each month in which he or she does not have minimum essential coverage 1/12th of the lesser of (i) the average cost of a bronze-level Exchange plan or (ii) an amount determined based on household income, certain flat dollar amounts and the number of applicable individuals who do not have coverage. Individuals will also be required to ensure that their dependents have coverage or face additional penalties.

Certain individuals, however, will be exempt from satisfying the PPACA's individual coverage mandate. Specifically, the PPACA provides an exception for individuals:

• who satisfy the requirements of certain religious conscience exemptions;
• are not lawfully in the United States, incarcerated or a member of an Indian tribe;
• where required health care coverage premiums exceed 8 percent of such individual's household income for the taxable year;
• whose household income for any month during a calendar year is less than 100 percent of the FPL;
• who fail to maintain minimum essential coverage for a period of less than three months; or
• who experience certain hardships as defined by HHS.

For purposes of this individual mandate, minimum essential coverage will include coverage provided by: Medicare; Medicaid; CHIP; the TRICARE for Life program and the veteran's health care program; an eligible employer-sponsored plan; an individual health plan; a grandfathered health plan; or other health care coverage recognized by HHS and the Treasury. Minimum essential coverage, however, will not include health insurance coverage or group health plan coverage that provides limited benefits, such as a plan that provides benefits only in the event of an accident or disability; supplemental liability insurance; workers' compensation insurance; on-site clinics; limited scope dental or vision benefits; or benefits for long-term care, nursing home care, home health care or community based care.

Employer Mandates

Effective January 1, 2014, the PPACA also imposes new requirements on employers, including those who do not currently provide health care coverage. Specifically, large employers, which for purposes of the PPACA means any employer with more than 50 full-time equivalent employees in its controlled group ("Large Employer"), will be subject to monthly assessments if the employer's group health plans do not satisfy certain requirements. Through the addition of Section 4980H to the Internal Revenue Code Large Employers that:

• Do not offer employees and their dependents a plan providing minimum essential coverage, but who have at least one employee who has enrolled in a Qualified Health Plan and are receiving premium assistance credits or cost-sharing reductions, will be required to pay an annual fee. This annual fee will be equal to the product of $2,000, as indexed for inflation, and the number of employees over thirty employed by the Large Employer.
• Provide a group health plan that qualifies as minimum essential coverage, but who have employees qualify for a premium assistance credit or cost-sharing reduction, will be required to pay a fee equal to the lesser of (i) $3,000 for each employee or (ii) $2000 for each full-time equivalent employee in excess of 30 employees.

The PPACA includes certain exceptions with regard to these requirements, including an exception for employers that do not have more than 50 employees for more than 120 days during the calendar year.

In addition, employers with 200 or more full-time equivalent employees that provide a group health plan will be required to automatically enroll all new employees and continue the enrollment of current employees in a health benefit plan offered by the employer. Employers will be required to notify employees about this automatic enrollment program and to provide employees with the ability to opt out of the employer's coverage.

Employer Free-Choice Vouchers

Effective as of January 1, 2014, the PPACA also requires employers that offer minimum essential coverage to their employees to offer certain employees the option of either enrolling in the employer's plan or receiving a tax-free voucher from the employer. An employee would be eligible for a tax-free voucher if:

• the employee's premium share for the employer plan is between 8 percent and 9.8 percent of the employee's household income, and
• the employee's household income did not exceed 400 percent of the FPL.

The 8 percent and 9.8 percent levels would be indexed after 2014 to reflect the rate of premium growth over the rate of income growth. The voucher provided by the employer will equal the employer's largest cost-sharing contribution under its health plan and would be further adjusted for age and based on the amount the employer would pay for employee self-only coverage or family coverage, as applicable. Employees will be able to use the vouchers to obtain coverage through an Exchange and would be permitted to keep the amount of the voucher in excess of the cost of Exchange-based coverage the employee obtains. An employee will not be taxed on the portion of a voucher used to pay premiums in an Exchange, but will be taxed on any excess the employee retains.

Reporting Requirements

Effective as of January 1, 2014, employers and health insurance companies that provide minimum essential coverage to individuals will be subject to new reporting requirements. While the exact form that employers and health insurance issuers will use for satisfying these reporting requirements and the filing deadline will be developed by the Treasury, under the PPACA, reports filed by insurers and employers will be required to include: 

• Information identifying the individuals covered under the policy or plan.
• For insurers, the date the individuals received minimum essential coverage during the calendar year and information regarding whether the coverage is provided through an Exchange or an employer's group health plan. 
• For Large Employers, a certification as to whether the coverage provided is minimum essential coverage; and, if the answer is yes, the length of any applicable waiting period; the months during which the coverage was available; the monthly premium for the lowest-cost option in each enrollment category provided under the plan, as well as the number of employees covered by the plan for each month during the calendar year.

However, Large Employers that provide insured group health plans will be able to satisfy these reporting requirements by entering into an agreement with their insurer under which the insurer will include the information the employer is required to report in the insurer's report.

Insurers and Large Employers will also be required to provide a statement to policyholders and employees. The statement will inform policyholders or employees that a report regarding their health insurance coverage will be filed with the IRS and will include the information required to be filed in the report. Statements to policyholders and employees will be due on or before January 31 of the year following the calendar year in which the report described above is due. Employers that fail to satisfy these reporting requirements will be subject to penalties.

Tax Provisions

The PPACA also includes numerous changes to the Code that will impact the taxation of health benefits, including a tax on high-cost, employer-sponsored health coverage, otherwise known as Cadillac Plans. These provisions will require employers to modify their currently existing programs.

• Excise Tax on High-Cost, Employer-Sponsored Health Coverage. Effective for tax years beginning after December 31, 2017, group health plans may be subject to a 40 percent excise tax on the amount by which the health plan's annual cost for coverage exceeds $10,200 for single-only coverage, and $27,500 for other than single-only coverage. These annual threshold limits are increased by $1,650 for single-only coverage and $3,450 for other than single-only coverage for plans that cover employees engaged in certain high-risk professions and for retirees over age 55 but under age 65. These limits will be subject to cost-of-living adjustments.
  
  The excise tax may be imposed on insured and self-insured group health plans. Stand-alone dental and vision plans, long term care plans, Health FSAs and HSAs are not subject to the excise tax provisions. Failure to properly calculate an excess benefit which results in an underpayment of the excise tax may result in a penalty imposed on the employer equal to the amount of the excess plus interest.
• Inclusion of Cost of Employer-Sponsored Health Coverage on W-2. For tax years beginning after December 31, 2010, the PPACA requires employers to report on each employee's W-2 the aggregate cost of employer-sponsored health coverage. Contributions to Archer MSAs, HSAs or Health FSAs are not required to be reported under this provision, as they currently have their own W-2 reporting requirements.
• Distributions for Medicine Qualified Only if for Prescribed Drug or Insulin. Effective for tax years beginning after December 31, 2010, only insulin and physician-prescribed medicines are eligible for reimbursement under a Health FSA or paid as an eligible medical expense under HSAs or Archer MSAs. This effectively excludes from eligible medical expenses most over-the-counter medicines.
• Increase in Additional Tax on Distributions from HSAs and Archer MSAs Not Used for Qualified Medical Expenses. The tax rate on withdrawals from HSAs and Archer MSAs that are not used for qualified medical expenses increases to 20 percent. Such increased rates are effective for distributions made after December 31, 2010.
• Limitation on Health Flexible Spending Arrangements under Cafeteria Plans. Effective for tax years beginning after December 31, 2012, Health FSA benefits will be limited to $2,500 per year per participant.
• Expansion of Information Reporting Requirements. Effective for payments made after December 31, 2011, businesses that pay in excess of $600 annually to a corporate provider of property and/or services must file an information return with the provider and the IRS. Businesses are currently required to make such reports for non-corporate providers.
• Elimination of Deduction for Expenses Allocable to Medicare Part D Subsidy. For tax years beginning after December 31, 2012, the deduction for expenses allocable to the employer Medicare Part D subsidy are eliminated.
• Modification of Itemized Deduction for Medical Expenses. Effective for tax years beginning after December 31, 2012, the adjusted gross income threshold for itemized medical deductions will be increased to 10 percent (currently 7.5 percent). This increase is delayed until tax years after December 31, 2016, for individuals over the age of 65.
• Additional Hospital Insurance Tax on High-Income Taxpayers. Effective for tax years beginning after December 31, 2012, the Medicare Hospital Insurance tax (HI) is expanded for high-income individuals. A tax equal to 0.9 percent will be imposed on remuneration received after December 2012 which exceeds $250,000 in the case of a joint return, and $200,000 in all other cases.
• Unearned Income Medicare Contributions. For tax years beginning after December 31, 2012, there is imposed new Medicare Hospital Insurance (HI) tax on unearned income of high-income taxpayers. An additional tax equal to 3.8 percent will be imposed on net investment income for the year in excess of the threshold amount of $250,000 in the case of a taxpayer filing a joint return, or $200,000 in all other cases. For this purpose, net investment income includes interest, dividends, annuities, royalties, rents, gross income from a trade or business involving passive activities, and net gains attributable to the disposition of property (other than property held for a trade or business). Distributions from tax qualified 401(a), 403(a), 403(b), 408, 408A or 457(b) plans are not treated as net investment income.
• Establishment of Simple Cafeteria Plans for Small Businesses. Beginning January 1, 2011, a small employer (those with fewer than 100 employees) may establish a "simple cafeteria plan" for its employees. Simple cafeteria plans are subject to less stringent participation and eligibility requirements which normally apply to cafeteria plans. Certain mandatory minimum contribution and eligibility requirements will apply.

The impact of the PPACA on health plans is significant, and we encourage all of the players to begin working now to understand, and prepare for, the changes.

Client Alert 2010-067