By: Katie Kelley
Apart from the latest debates on political opinions over health care changes, it’s important to know what necessary steps are required to get HR and their employees on the right track for 2013.
The Patient Protection and Affordable Care Act outlines changes set to kick in over several years. Benefits managers and human resource advisors are nearing the implementation of the 2013 provisions, and while these changes might not be as newsworthy as the 2014 provisions that are dominating headlines, they do hold credence to employees and their health plans.
According to Troy Filipek, a principal and consulting actuary for Milliman, the best way to prepare for compliance next year is to employ contingency planning as well as develop open lines of communication with employees.
Filipek says employers need to be proactive for 2013 while thinking ahead for 2014.
“There are a lot of changes that are occurring, and there are things employers can benefit from just by considering these options. Talk to your advisors and obviously if you do decide to make a change, talk to your employees or your retirees because with anything you make changes to, it’s important that your people are well advised on it, why you’re doing it and how it’s going to impact them.”
Sharon Cohen, a principal at Buck Consultants and an expert in pretax benefits and health care, shared a similar viewpoint, but also noted that it’s imperative for employers and benefits managers continue with what’s required by law right now—despite any changes that may still occur. “The provisions will start taking effect and the government is moving forward. I wouldn’t count on this all going away before I would take action.”
Medicare subsidy taxation
The major PPACA provision impacting Medicare Part D closes the ‘donut hole’ or gap between coverage limits and out-of-pocket spending on the cost of prescription care, but the law also changes the retiree drug subsidy program.
Now, Filipek explains, the money that employers receive from the government for these subsidies is subject to taxation.“The big change for 2013 with the RDS program is that in the past, from 2006 forward, the allowance that these employers receive from the government for the subsidies used to be non-taxable income,” Filipek says. “That has changed since the enactment of the [PPACA].”
“It’s a pretty big change,” he says. “A lot of employers have already felt the impact of it because once the law passed, based on the accounting standards, you had to recognize the future impact of that in your financial statements.”
Options include continuing coverage and working with the newly taxed subsidies or dropping coverage and allowing retirees to enroll in individual part D plans. Additionally, Filipek says, employers can maintain group coverage and work with a pharmaceutical benefit manager or health plan in the Part D program to develop a custom benefits package through a Part D Employer Group Waiver Plan plus secondary wrap plan design, which are plan options gaining traction in the marketplace.
Regardless of what decision is made, it’s imperative that both brokers and HR professionals “make sure it’s seamless for the retiree and easy for them to understand,” Filipek says.
“It’s important to communicate with the retirees because these are not people who are coming into the workplace every day where it’s easier to communicate with them. You have to find ways for outreach to them and their spouses.”
The RDS program is designed for employers to continue offering prescription drug coverage to retirees since Part D went into effect six years ago. The government provides a subsidy to employers who maintained a benefit rather than dropping coverage and having their retirees sign up for Medicare Part D individually.
“That program has been what a lot of employers have done since 2006 when Part D started. They had to make a decision to continue offering pharmacy coverage or end their coverage and have retirees sign up for Part D,” Filipek says. “Most opted to continue coverage and get the Retiree Drug Subsidy but that is starting to change with some of the PPACA provisions taking effect.”
HR advisors will need to prepare and communicate newly implemented salary reduction contributions regarding flexible spending accounts that go into effect next year, which impose a cap of $2,500 on these accounts.
“Any employer that has a calendar year beginning Jan. 1, will have to have implemented that provision,” Cohen says. “The salary reduction dollars are capped at $2,500 though, right now, with open enrollment periods typically starting in October and in November—that is a communication that employers who previously had a higher maximum on their FSAs now need to communicate to their employees.”
It’s important to note that only a small percentage of individuals who have FSAs made available to them actually use them. Regardless, employers must inform employees of the change and how it could affect their health coverage long term.
“This is a change that now needs to be communicated to employees,” Cohen says.
But there will be a grace period on contributions that go unused and HR directors will have the opportunity to amend plans through the end of 2014, the limit will be necessary beginning Jan. 1.
“For benefits managers, it would have been last year or the beginning of this year that they would have needed to make design changes to accommodate this,” Cohen says. For those who run on a different plan year other than January, the design considerations must be determined now in order to offer concrete options for open enrollments, she says.
W-2 insurance reporting
The PPACA requires that beginning in 2013, W-2 reporting will need to list employer-sponsored health coverage for the calendar year of 2012. Although this is not a 2013 provision, employees will notice the changes beginning in January of next year, and it’s necessary for HR to convey this to individuals.
“Employees have concern that their tax-free health coverage will be taxable, which will not be the case,” Cohen says. “The communications challenge for employers is to now let employees know that this is just information reporting and is not going to be taxed.”
This provision affects employers of larger companies with 250 or more employees, but those who receive life insurance as a retiree are also required to report their expenses as well.
SBC notification and exchanges
Beginning Sept. 23, during open enrollment periods, and continuing through next year, employers were required to offer employees a four-page summary benefits coverage of the packages made available to an employee for a company’s group health plan.
“[This is] a four page document that tells individuals what benefits are offered under the plan, how much they cost and it has to be in a uniform format that the government has put out,” Cohen says. “The idea is that it makes it easier for individuals who are purchasing coverage to compare the different coverages.”
In order to become compliant with this, it’s important for employers and HR to work with their benefits managers and access the guidance that has been introduced by government agencies including the Internal Revenue Service the Department of Labor, and the U.S. Department of Health and Human Services.
“They have provided templates and instructions,” Cohen says. “This requirement is for health plans large or small.” Cohen also notes this will be the same format of the state insurance exchanges, when they are up and running in 2014.
The state insurance exchanges also require contingency planning for the following year of 2014, when they are established within each state. Beginning next year it’ll be necessary to offer employees notice of these state insurance exchanges, by March 1, in compliance with the DOL guidance that takes precedent in this notification.
“States are still considering if they will adopt the exchange or if the federal government will run the exchange for them,” she says. “They will very soon have to put out some guidance, but right now we don’t have specifics around the exchanges.”
Cohen notes there’s no preparation necessary on behalf of HR or brokers for this provision; it’s simply wait-and-see.
Medicare wage expense
The Federal Insurance Contribution Act Medicare tax rate will increase among individuals with earnings greater than $200,000 and $250,000 for couples filing joint returns. This provision was set in place as a revenue-raising activity. It’s dependent on the employer to collect the tax of 0.9 percent, but this “will not increase the employer’s share of Medicare tax,” according to Sam Hoffman, a partner at Foley and Lardner, who specializes in health care.
“What employers really have to focus on is to set up the payroll system to increase the tax for employees who meet these limits,” Hoffman says. “Most people have thought it through.”
Hoffman doesn’t believe there’s a great need for strong communications campaigns because the 0.9 percent increase will be noted on pay stubs for individuals affected by this. However, employers should have prepared their payroll systems if they haven’t done so already to ensure this provision is met beginning next year. HR also should prepare themselves for questions that could arise in this arena.
“It is the responsibility of the employer to increase the withholdings of individuals earning more than $200,000 a year,” Cohen says. “Typically, the employer’s payroll system will need to be programed for that increase. It’s not so much the responsibility of HR as it is payroll, but there is a communications issue.”
For preparation purposes, Cohen echoes a strong necessity for both HR and brokers to be completing preparation as soon as possible.
“Most of these things, if they haven’t been implemented, they should be hurrying now,” she says.
Tax deduction limits
The income-tax deductions for health expenses sit at 7.5 percent of the adjusted gross income, but as of next year this will be raised to 10 percent of the AGI. Although, during a four year period of 2013 to 2016, those turning 65 (and their spouses) won’t be subject to this provision.
While this scarcely affects employers and HR, it will largely affect individuals and their taxes, which can require benefits managers to step in and work with individuals on a better understanding of this provision.
“This is more for individuals who file on an individual basis,” Cohen says. “It doesn’t normally affect an employer’s group health plan.”
Hoffman also paralleled a related sentiment that if you’re an employee under a group health plan, this is irrelevant, however, “if you buy your own health insurance then you’ll need to notate the cost to yourself and how to itemize those deductions.”
Substantial adjustments have been taken in the form of reflections of these soon-to-be taxed subsidies. “Starting in 2013, it will be a practical effect that these moneys are going to be taxed,” Filipek says.
He notes that a lot of brokers, advisors and even employers are currently in the process of reevaluating their options for offering retirees prescription drug coverage. As far as what steps are necessary to take in order to be prepared for the coming year’s changes, Filipek feels it’s important for employers and their advisors to simply understand that there are a variety of choices available.