SESCO UPDATE- Health Care Reform Law

July 10, 2012

As well reported, on June 28, 2012, the Supreme Court of the United States ruled that the 2010 health care reform law is constitutional. In a 5 to 4 decision, Chief Justice John Roberts wrote that the law is constitutional as an exercise of Congress' power to tax.

To assist clients manage the new law, SESCO has developed a task force headed by Jamie Hasty and Phil Richards. Unfortunately, the initial findings by this task force and other professional firms are that there is more confusion than ever. As one law maker said, "we must pass the bill to find out what's in it." And this is the case. Many experts are finding that provisions of the law are extremely complicated and conflicting. Thus implementation and compliance will be very difficult. Additionally several governors are standing firm stating they will not implement state exchanges or expand Medicare.

So what does all this law mean to employers now?

Employers sponsoring group health plans must focus on ensuring compliance with the summary of benefits and coverage. This requires distribution of summaries of benefits and coverage during upcoming open enrollments. (The summaries must be distributed no later than the first day of the first open enrollment period beginning on or after September 23, 2012.) Also, employers with 250 or more employees must prepare to issue Form W-2s for 2012 (to be distributed in January 2013) that include the cost of group health coverage. SESCO will be available to assist with complying with these summaries.

In addition to the new challenges in understanding and complying with the law, there are over 20 new taxes in the law to include:

Health Savings Account (HSA) — Tax Hike On Withdrawals — Increases additional tax on non-medical early withdrawals from an HSA from 10 percent to 20 percent.

Cap On Flexible Spending Accounts — Imposes a cap on flexible spending accounts of $2,500 beginning in 2013 (now unlimited); amount of cap will be indexed to inflation after 2013.

Hike In Medicare Tax for High-Income Taxpayers
— beginning in 2013, taxpayers with earned income in excess of $200,000 or $250,000 (filing jointly) will pay an additional 0.9% Medicare tax on the income above the threshold.

Increase in Deduction Floor for Medical Expenses — beginning in 2013, the Act raises the threshold for deducting unreimbursed medical expenses from 7.5% to 10% of adjusted gross income.

Excise Tax on Hospitals — $50,000 per hospital that fails to meet new rules set by the HHS.

"Black Liquor" Tax Hike — a tax increase on a type of biofuel.

Tax On Drug Companies — $2.3 billion annual tax on the industry imposed relative to the company's share of sales each year.

Tax On Medical Device Manufacturers
— new 2.3% excise tax; exempts items retailing for less than $100

Tax on Health Insurers — annual tax on the industry imposed relative to health insurance premiums collected each year

Blue Cross/Blue Shield Tax Hike
— special tax deduction in current law for BC/BS companies will only be allowed if 85% or more of premium revenues are spent on clinical services.

Tax on Indoor Tanning Services — 10% excise tax

"Medicine Cabinet Tax"
- individuals no longer able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin)

Surtax On Investment Income
— creates a new 3.8% surtax on investment income earned by households making at least $250,000 ($200,000 single)

Eliminates Tax Deduction for Employer-Provided Retirement Drug Coverage in Coordination with Medicare Part D

Annual Compensation Limit for Health Insurance Executives — $500,000

Individual Mandate Excise Tax
— penalty for anyone not buying "qualifying" health insurance

Employer Mandate Tax — applies to employers with 50 or more employees; penalties levied if employer does not offer health insurance or does not offer insurance meeting the government's requirements

Excise Tax on Comprehensive Health Insurance Plans
— starting in 2018, new 40% excise tax on "Cadillac" health insurance plans ($10,200 single/$27,500 family). Includes all employer and employee amounts paid for medical, including pre-tax premiums; but does not include dental or vision coverage.

What some experts expect, in terms of how employers may respond to the changes in health care regulations:

-Employers may immediately share more cost with employees as health insurance costs are projected to increase 15% to 40%. 100% employer-paid health plans will be a thing of the past. More employers will implement a cost sharing of up to 50% for employees and require employees to pay 100% of family/dependent coverage as employers cannot afford the expected sharp increases.

-Discontinue benefit plans all together and push employees onto the exchanges where offered

-Move to part time work forces (less than 30 hours)

-Freeze hiring

-Use more independent contractors

-Freeze compensation

-Outsource/offshore

SESCO will continue to monitor developments in health care reform to include compliance as well as recommendations for employers on best practices for their firms. In the mean time, SESCO has recently updated "An Employer's Guide to Healthcare Reform" providing a detailed overview of what is required by the law, including a timeline indicating when different provisions are to be implemented. This white paper is available for $15.00 ($10.00 for retainer clients) and may be ordered by phone at 423-764-4127, by clicking HERE from our Online Publications store, or by email at sesco@sescomgt.com.