Health care reform legislation: The coming compliance tsunami
From a special issue of Ceridian Connection in November 2009.
by Jim O'Connell
Like the effects of a submarine earthquake not seen until its giant tidal wave crashes ashore, the Affordable Health Care for America Act, the single biggest piece of domestic policy legislation in 45 years, has the potential to drown our nation's employers in new and far-reaching HR, payroll and benefits compliance requirements.
To be sure, it's not possible to predict whether the final legislation that goes to President Obama for signature will mirror the House-passed bill. Two competing bills have been approved by U.S. Senate committees. The Senate Majority Leader, Harry Reid (D-NV), has just announced a merged composite bill -- the Patient Protection & Affordable Care Act -- to be considered soon on the Senate floor.
But if the final health care reform legislation that becomes law looks anything like what the U.S. House of Representatives approved, or even resembles U.S. Senator Reid's newly announced legislation, the new law could be the compliance equivalent of the Fair Labor Standards Act (FLSA), the Family & Medical Leave Act (FMLA) and COBRA all rolled into one.
Setting aside the policy pros and cons of particular legislative provisions, the Affordable Health Care for America Act and the new Patient Protection & Affordable Care Act both make the fundamental assumption that employers and their payroll, HR, benefits and compensation professionals will navigate each and every legislative stipulation, tax and reporting requirement and make it all happen in the real world of the workplace.
With the help of the American Payroll Association (Payroll Currently October 16, 2009, Inside Washington November 2009 and Payroll Currently November 13, 2009), Ceridian put both the House-passed and Senate-pending bills under a compliance microscope to analyze eight potential new requirements for employers.
40 Percent Excise Tax on High-value Health Plans
Medicare Payroll Tax Hike for High-income Earners
W-2 Reporting of the "Value" of Employee Health Benefits
Automatic Enrollment of Employees in Health Plans
COBRA Coverage Time Extension
Flexible Spending Account Limitations Under Cafeteria Plans
Employer "Play or Pay" Mandate
The "Tax Gap" -- Tightening 1099 Information Reporting
Legislative outlook
As the U.S. Senate prepares to vote on amendments to the Patient Protection & Affordable Care Act and then reconcile a Senate-passed bill with its House-passed counterpart, there are many uncertainties, but only one certainty about health care reform legislation.
The uncertainties relate to the particular provisions and what will survive in the final bill President Obama signs into law in December or January. Will there be a public option in the health insurance exchange? What will be the threshold for the 40 percent excise tax? How strict will be the employer mandate? How many additional people will gain access to health insurance? Will this legislation slow health care costs or accelerate them? How much will health care reform cost taxpayers? Will this bill add to the federal budget deficit? What about coverage for illegal immigrants? These and many other questions cannot be answered at this time.
But there is one certainty about health care reform legislation: it will represent a compliance tsunami for America's employers. The good news is that this is one tsunami for which we will have a couple of years to prepare.
Successfully handling the new compliance requirements that will no doubt come in the wake of this legislation will require leadership and partnership. Ceridian is preparing right now to lead the way in deciphering, understanding, explaining and implementing health care reform's new compliance requirements. Ceridian is also preparing to partner to listen to the voice of the customer in learning what will be required to make sure everyone is fully compliant and on time. Educating employees about health care reform will, of course, be critical to compliance success.
It's no exaggeration that health care reform legislation, if it becomes law in the form of the pending bills, could represent the single biggest compliance tidal wave ever. Now more than ever is the time to stay ahead of the curve of compliance change.
return to top
40 Percent Excise Tax on High-value Health Plans
The Senate Finance Committee reported legislation would raise some $200 billion over 10 years through a new 40 percent excise tax on so-called Cadillac health plans. As modified November 17 by Senate Majority Leader Harry Reid (D-NV), the tax would apply to the "excess aggregate value" of health plans above a threshold of $8,500 for individual and $23,000 for family coverage.
Aggregate value would include the cumulative annual cost of an employee's major medical premium, dental and vision insurance, FSAs, HRAs and HSAs.
While the tax would be imposed on insurers (for fully insured plans) or employers (for self-insured plans), it would be the responsibility of employers to calculate the total "excess health benefit subject to the tax," i.e., the excess aggregate value, then determine the "applicable share" of the excess benefit for each coverage provider and then "notify each provider and the IRS" of their pro rata shares of the excess and the tax due.
As if this requirement were not onerous enough, APA points out that the Senate Finance Committee bill would subject employers to a special penalty if the employer reported an amount to an insurer or plan administrator, or to the IRS, that was less than required. In that instance, the penalty assessed would be equal to the amount of excise tax owed plus interest!
return to top
W-2 Reporting of the "Value" of Employee Health Benefits
Related to the calculation of "excess aggregate value" for the 40 percent excise tax, employers would also be required under the Senate Finance Committee legislation to report the value of employer-provided health coverage, including major medical premiums, dental and vision coverage and employer and employee HSA contributions on an employee's W-2, but exclude employee FSA contributions.
The committee-reported bill explicitly states that in determining the value of employee health benefits for purposes of W-2 reporting, employers would be required to use the same calculation they currently use in determining the employer-provided portion of premiums for the employee under the rules for COBRA continuation coverage, including the special rule for self-insured plans.
While it appears the W-2 reporting requirement would be for information purposes only, and not tax withholding, its link to the excise tax calculation and reporting requirement makes it an especially burdensome requirement for employers.
Moreover, and perhaps as an indication that committee senators did not appreciate the compliance burden they would impose on employers, the September 2009-reported bill would require W-2 reporting to begin in January 2010! Obviously, Congress will need to push that start date back to 2011 W-2 forms.
return to top
Automatic Enrollment of Employees in Health Plans
Perhaps impressed with the success of 401(k) plan auto-enrollment under the 2006 Pension Protection Act, Congress seems intent on requiring employers to auto-enroll employees in employer health plans. Under the bills passed by the Senate Finance Committee and House, and beginning in 2013, employers would auto-enroll employees in one of their health plans (the lowest-premium plan in the House bill) and employees would have 30 days to opt out.
Employers would, of course, also be required to provide comprehensive notice to automatically enrolled employees advising them of their opt-out rights and obligations under the plan.
return to top
COBRA Coverage Time Extension
The House-passed bill contained an unusual provision that did not relate directly to health care reform as typically defined: the bill would extend COBRA continuation rights from the current law 18 months to the time when a COBRA continuant becomes eligible for coverage under another employer plan, enrolled in Medicare or when the health insurance exchange is up and running in 2013.
At the risk of putting too fine a point on this provision, this means a terminated employee could conceivably remain on COBRA for three years-i.e., until 2013 or longer if the exchange is not fully operational by then.
return to top
Flexible Spending Account Limitations Under Cafeteria Plans
As payroll professionals know, Dependent Care FSAs are subject to an annual statutory cap of $5,000, while no statutory limit presently applies to Health FSAs. Health care reform legislation will almost certainly change that longstanding distinction.
Both the Senate Finance Committee-reported bill and the House-passed legislation would establish a first-time statutory cap of $2,500 on employee FSA contributions. The effective date for this limit is taxable years beginning after December 31, 2012.
While focus in this report is on compliance requirements, it's worth noting that the pending legislative cap on FSA contributions does not include indexation to adjust for medical cost inflation. Therefore, the purchasing power of the $2,500 FSA cap would decrease in value over time as prices for out-of-pocket medicine continue to skyrocket.
Another FSA limitation included in health care reform legislation targets over-the-counter (OTC) medicines such as antiallergy medications, acetaminophen and other nonprescription medicine. In 2003, the IRS ruled that FSA dollars could be used to purchase over-the-counter medicine since drugs such as Claritin were coming off prescription and would be less costly for consumers.
Now it appears that Congress will turn back the clock and reinstate a prescription requirement for FSA-eligible expenses. The new law could conform the definition of FSA-eligible expenses to that used for medical expense itemized tax deductions. Coupled with the non-indexed FSA cap, a new limit on expenses eligible for FSA funds will represent another new compliance burden for employers -- and make it even more difficult for employers to communicate the benefits of FSAs to their employees.
return to top
Employer "Play or Pay" Mandate
To a greater or lesser extent, all pending health care reform proposals would require most employers not only to offer a minimum health benefits "package" to employees, but to "contribute" a certain percentage of the cost -- backed up by stiff penalties for failure to comply.
In the House-passed legislation, for example, employers would be required to pay 72.5 percent of the premium for individual coverage and 65 percent of the family premium for an "essential benefits package."
The new Senate bill, on the other hand, while not prescribing a specific benefits package nevertheless would require employers to provide "first dollar" coverage for preventive services and prohibit annual or lifetime coverage limits.
Under the House-passed bill employers who fail to "Play," i.e., who do not offer coverage or whose coverage fails to meet the new minimum benefit and contribution standards, would be required starting in January 2013 to "Pay" a whopping 8 percent payroll tax to the federal government. While it remains unclear what wage amounts would be subject to the new payroll tax, it appears that the definition of total wages would be that used for FICA tax calculations.
The Senate Finance Committee-reported legislation and the new bill announced recently by Senator Harry Reid take a more moderate stance to employer penalties, requiring employers to pay a "Free Rider" fee of $750 per employee to help finance tax credit subsidies for employees who purchase coverage through the health insurance exchange.
Of all the compliance requirements employers are likely to confront if health care reform legislation becomes law, the employer "Play or Pay" mandate could be the most onerous -- particularly as it will tend to hit the smallest employers the hardest.
Apart from the employer "play or pay" mandate, health care reform legislation is likely to require all employers to offer health insurance that meets some federal standard for "minimum essential coverage," perhaps 60 percent of the actuarial value or total cost of the coverage. Most observers believe the 60 percent standard would protect consumer-directed health plans with health savings accounts.
return to top
The "Tax Gap" -- Tightening 1099 Information Reporting
Under present law, all "payers" of payments aggregating $600 or more to a single payee, including for income or compensation but not for payment for goods, are required to file an information return. The payer is required to provide the recipient with an annual statement showing the aggregate payments made and contact information for the payer.
Payers are subject to strict penalties for failure to comply with this requirement, including penalties for failure to file the information return and failure to provide the payee statement.
Fortunately, payments to corporations, exempt organizations, governmental entities and retirement plans have long been exempted from the reporting requirement. Health care reform legislation would change that exemption.
Under both the Senate Finance Committee-approved bill and the new bill developed by Senator Reid, the regulatory exemption for corporate information reporting of payments to corporations would be eliminated.
Starting in 2012, and in an effort to close a part of the so-called tax gap of taxes due but unpaid, "the class of payments with respect to which reporting would be required would include gross proceeds for both property and services," according to the September 22, 2009 Chairman's Mark of the bill before the Senate Finance Committee This would represent a big change from current 1099 reporting and pose dramatic new coordination challenges for payroll departments and accounts payable offices.
return to top
This feature represents the personal opinions and interpretations of the author for the benefit of Ceridian clients and associates. It is not intended as, nor should it be interpreted as, legal advice in connection with proposed health care reform legislation.
With more than 30 years of experience in federal legislative and regulatory affairs, Jim O'Connell focuses on HR and payroll policy issues, keeping customers informed about fast-changing and complex compliance regulations and workforce trends. O'Connell is a frequent participant in national and chapter HR and payroll industry meetings. He is an adjunct professor at Georgetown University in Washington, D.C., and specializes in international business-government relations. O'Connell has been with Ceridian since 1982. Before joining Ceridian, he served in the U.S. Senate as chief legislative assistant to New York Senator Jacob K. Javits and later with Connecticut Senator Lowell P. Weicker. O'Connell holds a Ph.D. in economics from New York's Fordham University.
by Jim O'Connell
| When the U.S. House of Representatives passed health care reform legislation on November 7 by the slim margin of 220-215, headlines proclaimed blockbuster issues -- 30 million more insured, higher taxes, employer mandates, Medicare cuts, insurance company regulations, individual mandates, Medicaid expansion and a public option in the health insurance exchange. What the headlines did not mention was that this landmark legislation also represents a 2,000-page compliance tsunami for employers -- small, medium and large. | SPACE | tsunami (tsoo-na-me): A very large ocean wave caused by underwater earthquake or volcanic eruption. American Heritage Dictionary of the English Language 2009. |
Like the effects of a submarine earthquake not seen until its giant tidal wave crashes ashore, the Affordable Health Care for America Act, the single biggest piece of domestic policy legislation in 45 years, has the potential to drown our nation's employers in new and far-reaching HR, payroll and benefits compliance requirements.
To be sure, it's not possible to predict whether the final legislation that goes to President Obama for signature will mirror the House-passed bill. Two competing bills have been approved by U.S. Senate committees. The Senate Majority Leader, Harry Reid (D-NV), has just announced a merged composite bill -- the Patient Protection & Affordable Care Act -- to be considered soon on the Senate floor.
But if the final health care reform legislation that becomes law looks anything like what the U.S. House of Representatives approved, or even resembles U.S. Senator Reid's newly announced legislation, the new law could be the compliance equivalent of the Fair Labor Standards Act (FLSA), the Family & Medical Leave Act (FMLA) and COBRA all rolled into one.
Setting aside the policy pros and cons of particular legislative provisions, the Affordable Health Care for America Act and the new Patient Protection & Affordable Care Act both make the fundamental assumption that employers and their payroll, HR, benefits and compensation professionals will navigate each and every legislative stipulation, tax and reporting requirement and make it all happen in the real world of the workplace.
With the help of the American Payroll Association (Payroll Currently October 16, 2009, Inside Washington November 2009 and Payroll Currently November 13, 2009), Ceridian put both the House-passed and Senate-pending bills under a compliance microscope to analyze eight potential new requirements for employers.
Eight Potential Employer Compliance Issues Posed by Health Care Reform
40 Percent Excise Tax on High-value Health Plans
Medicare Payroll Tax Hike for High-income Earners
W-2 Reporting of the "Value" of Employee Health Benefits
Automatic Enrollment of Employees in Health Plans
COBRA Coverage Time Extension
Flexible Spending Account Limitations Under Cafeteria Plans
Employer "Play or Pay" Mandate
The "Tax Gap" -- Tightening 1099 Information Reporting
Legislative outlook
As the U.S. Senate prepares to vote on amendments to the Patient Protection & Affordable Care Act and then reconcile a Senate-passed bill with its House-passed counterpart, there are many uncertainties, but only one certainty about health care reform legislation.
The uncertainties relate to the particular provisions and what will survive in the final bill President Obama signs into law in December or January. Will there be a public option in the health insurance exchange? What will be the threshold for the 40 percent excise tax? How strict will be the employer mandate? How many additional people will gain access to health insurance? Will this legislation slow health care costs or accelerate them? How much will health care reform cost taxpayers? Will this bill add to the federal budget deficit? What about coverage for illegal immigrants? These and many other questions cannot be answered at this time.
But there is one certainty about health care reform legislation: it will represent a compliance tsunami for America's employers. The good news is that this is one tsunami for which we will have a couple of years to prepare.
Successfully handling the new compliance requirements that will no doubt come in the wake of this legislation will require leadership and partnership. Ceridian is preparing right now to lead the way in deciphering, understanding, explaining and implementing health care reform's new compliance requirements. Ceridian is also preparing to partner to listen to the voice of the customer in learning what will be required to make sure everyone is fully compliant and on time. Educating employees about health care reform will, of course, be critical to compliance success.
It's no exaggeration that health care reform legislation, if it becomes law in the form of the pending bills, could represent the single biggest compliance tidal wave ever. Now more than ever is the time to stay ahead of the curve of compliance change.
return to top
40 Percent Excise Tax on High-value Health Plans
The Senate Finance Committee reported legislation would raise some $200 billion over 10 years through a new 40 percent excise tax on so-called Cadillac health plans. As modified November 17 by Senate Majority Leader Harry Reid (D-NV), the tax would apply to the "excess aggregate value" of health plans above a threshold of $8,500 for individual and $23,000 for family coverage.
Aggregate value would include the cumulative annual cost of an employee's major medical premium, dental and vision insurance, FSAs, HRAs and HSAs.
While the tax would be imposed on insurers (for fully insured plans) or employers (for self-insured plans), it would be the responsibility of employers to calculate the total "excess health benefit subject to the tax," i.e., the excess aggregate value, then determine the "applicable share" of the excess benefit for each coverage provider and then "notify each provider and the IRS" of their pro rata shares of the excess and the tax due.
As if this requirement were not onerous enough, APA points out that the Senate Finance Committee bill would subject employers to a special penalty if the employer reported an amount to an insurer or plan administrator, or to the IRS, that was less than required. In that instance, the penalty assessed would be equal to the amount of excise tax owed plus interest!
return to top
W-2 Reporting of the "Value" of Employee Health Benefits
Related to the calculation of "excess aggregate value" for the 40 percent excise tax, employers would also be required under the Senate Finance Committee legislation to report the value of employer-provided health coverage, including major medical premiums, dental and vision coverage and employer and employee HSA contributions on an employee's W-2, but exclude employee FSA contributions.
The committee-reported bill explicitly states that in determining the value of employee health benefits for purposes of W-2 reporting, employers would be required to use the same calculation they currently use in determining the employer-provided portion of premiums for the employee under the rules for COBRA continuation coverage, including the special rule for self-insured plans.
While it appears the W-2 reporting requirement would be for information purposes only, and not tax withholding, its link to the excise tax calculation and reporting requirement makes it an especially burdensome requirement for employers.
Moreover, and perhaps as an indication that committee senators did not appreciate the compliance burden they would impose on employers, the September 2009-reported bill would require W-2 reporting to begin in January 2010! Obviously, Congress will need to push that start date back to 2011 W-2 forms.
return to top
Automatic Enrollment of Employees in Health Plans
Perhaps impressed with the success of 401(k) plan auto-enrollment under the 2006 Pension Protection Act, Congress seems intent on requiring employers to auto-enroll employees in employer health plans. Under the bills passed by the Senate Finance Committee and House, and beginning in 2013, employers would auto-enroll employees in one of their health plans (the lowest-premium plan in the House bill) and employees would have 30 days to opt out.
Employers would, of course, also be required to provide comprehensive notice to automatically enrolled employees advising them of their opt-out rights and obligations under the plan.
return to top
COBRA Coverage Time Extension
The House-passed bill contained an unusual provision that did not relate directly to health care reform as typically defined: the bill would extend COBRA continuation rights from the current law 18 months to the time when a COBRA continuant becomes eligible for coverage under another employer plan, enrolled in Medicare or when the health insurance exchange is up and running in 2013.
At the risk of putting too fine a point on this provision, this means a terminated employee could conceivably remain on COBRA for three years-i.e., until 2013 or longer if the exchange is not fully operational by then.
return to top
Flexible Spending Account Limitations Under Cafeteria Plans
As payroll professionals know, Dependent Care FSAs are subject to an annual statutory cap of $5,000, while no statutory limit presently applies to Health FSAs. Health care reform legislation will almost certainly change that longstanding distinction.
Both the Senate Finance Committee-reported bill and the House-passed legislation would establish a first-time statutory cap of $2,500 on employee FSA contributions. The effective date for this limit is taxable years beginning after December 31, 2012.
While focus in this report is on compliance requirements, it's worth noting that the pending legislative cap on FSA contributions does not include indexation to adjust for medical cost inflation. Therefore, the purchasing power of the $2,500 FSA cap would decrease in value over time as prices for out-of-pocket medicine continue to skyrocket.
Another FSA limitation included in health care reform legislation targets over-the-counter (OTC) medicines such as antiallergy medications, acetaminophen and other nonprescription medicine. In 2003, the IRS ruled that FSA dollars could be used to purchase over-the-counter medicine since drugs such as Claritin were coming off prescription and would be less costly for consumers.
Now it appears that Congress will turn back the clock and reinstate a prescription requirement for FSA-eligible expenses. The new law could conform the definition of FSA-eligible expenses to that used for medical expense itemized tax deductions. Coupled with the non-indexed FSA cap, a new limit on expenses eligible for FSA funds will represent another new compliance burden for employers -- and make it even more difficult for employers to communicate the benefits of FSAs to their employees.
return to top
Employer "Play or Pay" Mandate
To a greater or lesser extent, all pending health care reform proposals would require most employers not only to offer a minimum health benefits "package" to employees, but to "contribute" a certain percentage of the cost -- backed up by stiff penalties for failure to comply.
In the House-passed legislation, for example, employers would be required to pay 72.5 percent of the premium for individual coverage and 65 percent of the family premium for an "essential benefits package."
The new Senate bill, on the other hand, while not prescribing a specific benefits package nevertheless would require employers to provide "first dollar" coverage for preventive services and prohibit annual or lifetime coverage limits.
Under the House-passed bill employers who fail to "Play," i.e., who do not offer coverage or whose coverage fails to meet the new minimum benefit and contribution standards, would be required starting in January 2013 to "Pay" a whopping 8 percent payroll tax to the federal government. While it remains unclear what wage amounts would be subject to the new payroll tax, it appears that the definition of total wages would be that used for FICA tax calculations.
The Senate Finance Committee-reported legislation and the new bill announced recently by Senator Harry Reid take a more moderate stance to employer penalties, requiring employers to pay a "Free Rider" fee of $750 per employee to help finance tax credit subsidies for employees who purchase coverage through the health insurance exchange.
Of all the compliance requirements employers are likely to confront if health care reform legislation becomes law, the employer "Play or Pay" mandate could be the most onerous -- particularly as it will tend to hit the smallest employers the hardest.
Apart from the employer "play or pay" mandate, health care reform legislation is likely to require all employers to offer health insurance that meets some federal standard for "minimum essential coverage," perhaps 60 percent of the actuarial value or total cost of the coverage. Most observers believe the 60 percent standard would protect consumer-directed health plans with health savings accounts.
return to top
The "Tax Gap" -- Tightening 1099 Information Reporting
Under present law, all "payers" of payments aggregating $600 or more to a single payee, including for income or compensation but not for payment for goods, are required to file an information return. The payer is required to provide the recipient with an annual statement showing the aggregate payments made and contact information for the payer.
Payers are subject to strict penalties for failure to comply with this requirement, including penalties for failure to file the information return and failure to provide the payee statement.
Fortunately, payments to corporations, exempt organizations, governmental entities and retirement plans have long been exempted from the reporting requirement. Health care reform legislation would change that exemption.
Under both the Senate Finance Committee-approved bill and the new bill developed by Senator Reid, the regulatory exemption for corporate information reporting of payments to corporations would be eliminated.
Starting in 2012, and in an effort to close a part of the so-called tax gap of taxes due but unpaid, "the class of payments with respect to which reporting would be required would include gross proceeds for both property and services," according to the September 22, 2009 Chairman's Mark of the bill before the Senate Finance Committee This would represent a big change from current 1099 reporting and pose dramatic new coordination challenges for payroll departments and accounts payable offices.
return to top
This feature represents the personal opinions and interpretations of the author for the benefit of Ceridian clients and associates. It is not intended as, nor should it be interpreted as, legal advice in connection with proposed health care reform legislation.
With more than 30 years of experience in federal legislative and regulatory affairs, Jim O'Connell focuses on HR and payroll policy issues, keeping customers informed about fast-changing and complex compliance regulations and workforce trends. O'Connell is a frequent participant in national and chapter HR and payroll industry meetings. He is an adjunct professor at Georgetown University in Washington, D.C., and specializes in international business-government relations. O'Connell has been with Ceridian since 1982. Before joining Ceridian, he served in the U.S. Senate as chief legislative assistant to New York Senator Jacob K. Javits and later with Connecticut Senator Lowell P. Weicker. O'Connell holds a Ph.D. in economics from New York's Fordham University.
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