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This two-part article covers significant developments in late 2009 and 2010 in employee benefits, including executive compensation, health and welfare benefits, qualified plans, and employment taxes. Part I discusses employment taxes, including the Hiring Incentives to Restore Employment (HIRE) Act and medical resident FICA refund claims, and provides an overview of the health care reform legislation,1 which President Obama signed into law in March 2010, focusing on guidance released and provisions that require immediate employer-related changes. Part II, in the December issue, will cover updates and changes to the rules for qualified retirement plans.
The Affordable Care Act—Small Business Provisions
Small Business Health Care Tax Credit
Small businesses and tax-exempt organizations that provide health care coverage to their employees will be eligible for a special income tax credit for health insurance premiums they pay for their employees under the Patient Protection and Affordable Care Act (PPACA). 2 Eligible employers can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. The IRS has released a draft Form 8941, Credit for Small Employer Health Insurance Premiums, which employers will attach to their tax returns to claim the credit.
In order to be eligible for this credit, (1) the employer must have fewer than 25 full-time equivalent employees (FTEs) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay at least half of the insurance premiums for the employees at the single (employee-only) coverage rate. 3
The number of an employer’s FTEs is determined by dividing the total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080. The credit is specifically targeted to help small businesses that employ primarily low and moderate income workers. Generally, seasonal workers, family members, a sole proprietor, a partner in a partnership, a shareholder owning more than 2% of an S corporation, and any owner of more than 5% of other businesses are not considered employees for purposes of the credit. 4
The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer during the employer’s tax year to employees taken into account in determining FTEs by (2) the number of the employer’s FTEs for the year. 5
The maximum credit is 35% of premiums paid in 2010 by eligible small business employers and 25% of premiums paid by eligible employers that are tax-exempt organizations. 6 In 2014, this maximum credit increases to 50% of premiums paid by eligible small business employers and 35% of premiums paid by eligible employers that are tax-exempt organizations. The maximum credit goes to smaller employers—those with 10 or fewer FTEs—paying annual average wages of $25,000 or less.
Cafeteria Plan Nondiscrimination Safe Harbor for Small Employers
Beginning in 2011, small employers (generally those with 100 or fewer employees) will be allowed to adopt new simple cafeteria plans, which are conceptually similar to simple 401(k) plans and simple IRAs under current law. 7 In exchange for satisfying minimum participation and contribution requirements, these plans will be treated as meeting the nondiscrimination requirements that would otherwise apply to the cafeteria plan. By offering health care coverage through simple cafeteria plans, small employers, including owners and highly compensated employees, may obtain more benefits—potentially discriminatory benefits—without running afoul of the nondiscrimination requirements of classic cafeteria plans.
Small Employer Workplace Wellness Program
Grant money will be awarded to small employers who implement a “comprehensive workplace wellness program.” 8 The grant program will provide $200 million over a five-year period, beginning in 2011. Eligible employers are those that employ fewer than 100 employees with 25 hours or more per week and that did not provide a workplace wellness program as of March 23, 2010. To qualify as a comprehensive workplace wellness program, a wellness program must be available to all employees and include health awareness initiatives such as health education and health risk assessments, initiatives to change unhealthy behaviors, and mechanisms to encourage employee participation.
The Affordable Care Act—Immediate Changes
The sweeping changes made by the health care reform legislation will become effective over the course of several years. However, some of the employer-related changes will become effective as early as the first plan year that begins on or after September 23, 2010 (January 1, 2011, for calendar-year plans). These “first-up” changes will impose the following on group health plans:
- Expansion of dependent coverage;
- Prohibition on excluding children based on preexisting conditions;
- Coverage of preventive health services without cost-sharing requirements;
- Limitations on rescission practices; and
- Regulation of annual and lifetime limits on essential health benefits.
Each provision will be discussed in detail below.
While insurance policies that were in effect on the date of enactment (March 23, 2010) are generally grandfathered (for both the current term and any renewal terms), four of the five aforementioned insurance market reforms apply to grandfathered plans. 9 Thus, except for the preventive health services coverage requirement, these principal reforms are effective for all plans for plan years beginning on or after September 23, 2010. 10
Some programs established under the PPACA are already effective. For example, the reinsurance program for early retirees (by which participating employer plans are reimbursed a portion of the cost of providing health insurance coverage to early retirees) became effective on the date of enactment. 11 Employers who are accepted into this program can submit claims for their retirees, and these claims will be processed in the order in which they are received. 12 They will be reimbursed for costs incurred on or after June 1. 13 The program is set to expire on January 1, 2014 (or possibly earlier, when the $5 billion in federal funding is exhausted). 14
As discussed above, for tax years beginning in 2010, a special tax credit is available for small businesses and tax-exempt organizations that provide health insurance coverage to their employees.
Other notable changes will soon be effective as well. For tax years beginning in 2011, nonprescription drugs will no longer be reimbursable by health FSAs, Archer MSAs, health reimbursement accounts (HRAs), or health savings accounts (HSAs). 15 Beginning in 2011, nonqualified distributions from HSAs and Archer MSAs will be subject to an excise tax of 20% (increased from 10% for HSAs and 15% for Archer MSAs). 16 Also beginning in 2011, employers will be obligated to report the cost of providing employer-sponsored health care on Form W-2. 17
Grandfathering Rules
Setting the parameters for group health plans that are seeking to avoid some of the mandates imposed by the PPACA, the Departments of Health and Human Services (HHS), Treasury, and Labor (DOL) have published guidance for identifying and maintaining “grandfathered” health plans. 18 The regulations are generally effective on June 14, 2010, although a transition period and good-faith compliance apply. Some highlights of the regulations:
Retiree-only and excepted benefit plans are excluded: The preamble provides an exercise in statutory construction as it relates the changes made by the PPACA to the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code, and the Public Health Service Act (PHSA). 19 It clarifies that the individual and group market reforms of the PPACA do not apply to very small plans (i.e., those with fewer than two participants who are current employees), retiree-only plans, or plans that provide only excepted benefits (e.g., dental-only plans, vision-only plans, most health care flexible spending arrangements). 20 HHS further states that it will exclude from its enforcement efforts non–federal government plans that are retiree-only plans or excepted benefits. 21 Along the same lines, HHS encourages states not to apply the market reforms to issuers of retiree-only plans or excepted benefits. 22
Grandfathered plan defined: Several general elements apply in determining whether a health plan is grandfathered, 23 including:
- Continuous coverage: The plan must have continuously covered someone (not necessarily the same person) since March 23, 2010, the date of enactment of the PPACA. This means that, even if all the individuals who were enrolled in the plan on March 23, 2010, cease to be covered, the plan could still qualify as grandfathered if it continuously covers someone.
- Determination made for each benefit package: The determination of whether the requirements are met is made separately for each benefit package under the plan.
- New policy, certificate, or contract of insurance: A plan will cease being grandfathered if it provides coverage under a new policy, certificate, or contract of insurance.
- Disclosure: To maintain grandfathered status, any plan materials provided to participants that describe the plan’s benefits (e.g., the summary plan description) must include a statement that the plan believes it is grandfathered. Model language is included in the regulation.
- Recordkeeping: The plan must maintain, for as long as it claims grandfathered status, records documenting the plan terms in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as grandfathered, and must make such records available on request.
- Enrollment after March 23, 2010: For an individual who is enrolled on March 23, 2010, that individual’s grandfathered health plan coverage includes coverage of the individual’s family members who enroll after March 23, 2010. A grandfathered plan is grandfathered for new employees (whether newly hired or newly enrolled) and their families enrolling in the plan after March 23, 2010, provided that anti-abuse rules are met.
- Anti-Abuse Rules: The plan will not remain grandfathered if the principal purpose of a merger, acquisition, or similar business restructuring is to cover individuals under a grandfathered plan. In addition, where employees are transferred from one grandfathered plan to another without a bona fide business reason, the plan terms will be compared, treating the transferee plan as if it were an amendment of the transferor plan in applying the regulation’s “limited change” provisions.
- Collectively bargained plans: Collectively bargained plans will remain grandfathered until the later of (1) the termination of the last of the agreements in effect on March 10, 2010, relating to the coverage, or (2) the date the plan would otherwise lose grandfathered status.
Maintaining grandfathered status: Changes to grandfathered plans are not prohibited, but they are constrained. 24 Grandfathered status is lost in the case of:
- Benefit elimination: The elimination of all or substantially all benefits to diagnose or treat a particular condition will cause the plan to lose grandfathered status. For example, if a plan provides benefits for a particular mental health condition—the treatment for which is a combination of counseling and prescription drugs—and subsequently eliminates benefits for counseling, the plan is treated as having eliminated all or substantially all benefits for that mental health condition and would cease to be a grandfathered plan with respect to the mental health care coverage.
- Increased cost sharing: The plan would cease to be grandfathered if it increased cost sharing beyond prescribed limits.
- Fixed percentage cost sharing: No increase is allowed in fixed-percentage cost sharing (e.g., a level of co-insurance set at 20% could not be increased).
- Fixed amount cost sharing for noncopayments. Fixed amount cost-sharing (other than for copayments) cannot increase more than medical inflation plus 15 percentage points (i.e., the “maximum percentage increase”).
- Fixed amount cost sharing for copayments: Fixed amount cost-sharing for copayments cannot increase more than the maximum percentage increase, or $5 increased by medical inflation, whichever is greater. Medical inflation is based on the medical care component of the Consumer Price Index for All Urban Consumers, unadjusted since March 2010.
- Employer contributions: The employer contribution rate cannot decrease for any tier of coverage for any class of similarly situated individuals, in the case of a contribution rate based on cost of coverage, by more than five percentage points below the rate on March 23, 2010, and, in the case of a contribution rate based on a formula, by more than 5% based on the rate on March 23, 2010.
- Annual limits: If a plan imposed no overall annual or lifetime limit on March 23, 2010, it cannot impose an annual limit thereafter. If no overall annual limit was imposed but a lifetime limit was imposed on March 23, 2010, an overall annual limit cannot be imposed that is lower than the lifetime limit. If the plan imposed an overall annual limit on March 23, 2010, it cannot lower the annual limit.
Other than the constraints specified in the regulations, a grandfathered plan is permitted to make changes without losing its grandfathered status. As noted in the preamble, permitted changes include changes to increase or decrease premiums, to comply with state or federal statutes, to voluntarily comply with the PPACA, and to change third-party administrators. 25
Transition rule and good-faith compliance: For changes made after March 23, 2010, that are pursuant to legally binding contracts entered into before that date, a filing on or before that date with a state insurance department, or written amendments to a plan that were adopted on or before that date, a transition rule applies by which those changes are considered part of the plan as it was in effect on March 23, 2010. 26 The regulations also provide that good-faith compliance with the statute will determine whether changes made after March 23, 2010, but before June 14, 2010, that only modestly exceed the constraints in the regulation should be disregarded. 27 In addition, a grace period to revoke changes is provided by which changes adopted prior to June 14, 2010, that would have eliminated grandfathered status can be revoked to bring the plan within the limits for retaining grandfathered status effective as of the first day of the first policy year beginning on or after September 23, 2010.
Dependent Coverage Must Be Offered up to Age 26
If employers offer health plans to employees and cover employees’ children, the plan must extend coverage until the child reaches age 26, effective with the first plan or policy year that begins on or after September 23, 2010. 28 This includes children whose coverage ended, or who were denied coverage (or were not eligible for coverage), because previously the availability of dependent coverage of children under a plan ended before attainment of age 26. Notice of the opportunity to enroll (including the written notice) in the plan for children whose coverage ended or who were denied or were not eligible for coverage must be provided to employees not later than the first day of the first plan year beginning on or after September 23, 2010. 29 A plan or issuer must give an enrollment opportunity to an eligible child that continues for at least 30 days (including written notice of the opportunity to enroll), regardless of whether the plan or coverage offers an open enrollment period and regardless of when any open enrollment period might otherwise occur. 30
Plans are not required to cover employees’ grandchildren or the spouse of an employee’s child.
Whether an individual is a child of the employee depends on the legal relationship and has nothing to do with the classification as a dependent for income tax purposes. 31 In a separate provision, effective March 30, 2010, the rules excluding the value of health coverage and benefits from an employee’s income are modified to allow exclusion of the benefits provided to these individuals until the calendar year in which they turn 27. 32 Thus, employers may continue to provide coverage on a nontaxable basis through the end of the calendar year in which a child reaches age 26. This accommodates various enrollment periods that an individual might have for other coverage.
Cafeteria plans can offer employees the opportunity to revise salary reduction contributions for the amount of additional coverage provided under this mandate. The cafeteria plan must be amended by December 31, 2010, to provide for this.
Grandfathered plans that make available coverage for employees’ children are not required to cover an adult child who has not reached age 26 if the child is eligible to enroll in an employer-sponsored health plan other than a group health plan of the parent. 33 However, if the child is eligible for coverage under both parents’ plans, neither plan can exclude the child based on eligibility under the other plan. 34
Preexisting Condition Exclusions Are Prohibited
Group health plans (both insured and self-insured, and grandfathered and nongrandfathered) are prohibited from imposing any preexisting condition exclusions effective with the plan year beginning on or after January 1, 2014. 35 However, for enrollees under age 19, this prohibition is effective with the plan year beginning on or after September 23, 2010. 36
A “preexisting condition exclusion” is generally defined as a limitation or exclusion of benefits relating to a condition based on the fact that the condition was present before the date of enrollment for coverage, regardless of whether any medical advice or treatment was received before that date. 37 An exclusion of benefits for a condition is not a preexisting condition exclusion, however, if the exclusion is not based on a preexisting condition. These underlying definitions derive from the Health Insurance Portability and Accountability Act (HIPAA) and remain essentially unchanged.
As required by the PPACA, on July 30, 2010, HHS issued interim final regulations to establish a temporary high-risk health insurance pool program that will provide coverage to individuals with preexisting conditions. 38 This program will remain in effect until January 1, 2014, when the health insurance exchanges will go into effect. The new regulations address eligibility, enrollment, benefits, premiums, funding, and program oversight, which will be administered on a state-by-state basis.
Lifetime and Annual Limits Are Prohibited
The PPACA generally prohibits group health plans (both insured and self-insured, and grandfathered and nongrandfathered) from imposing overall lifetime limits on the dollar value of benefits effective with the plan year beginning on or after September 23, 2010. 39 However, for annual limits, until 2014 plans may impose a three-year phase-in “restricted annual limit” for “essential health benefits” that must equal or exceed the designated minimum limit for that year: 40
- Beginning on or after September 23, 2010, but before September 23, 2011: $750,000.
- Beginning on or after September 23, 2011, but before September 23, 2012: $1.25 million.
- Beginning on or after September 23, 2012, but before January 1, 2014: $2 million.
Beginning on and after January 1, 2014, annual limits are prohibited. 41 These limits apply on an individual basis (i.e., an overall annual limit on family benefits cannot operate to deny a covered individual the minimum annual benefit for that year). 42 In applying the limit, only claims for essential health benefits may be taken into account. 43
The purpose of this three-year phase-in is to mitigate the potential for premium increases while enabling plan enrollees to have access to essential health benefits. The regulations permit HHS to establish a program by which the restricted annual limits can be waived or lowered for group health plans where premium increases will be an issue. 44
Essential health benefits: What constitutes essential health benefits is yet to be determined. 45 The PPACA states that such benefits will include at least the following general categories (and the items and services covered within them):
- Ambulatory patient services;
- Emergency services;
- Hospitalization;
- Maternity and newborn care;
- Mental health and substance use disorder services, including behavioral health treatment;
- Prescription drugs;
- Rehabilitative and habilitative services and devices;
- Laboratory services;
- Preventive and wellness services and chronic disease management; and
- Pediatric services, including oral and vision care.
The preamble provides that until guidance is issued, the Departments of Health and Human Services, Labor, and Treasury will take into account a plan’s good-faith compliance with a reasonable interpretation of the term “essential health benefits” in enforcing these provisions of the PPACA. 46
Notwithstanding these restrictions, a plan is permitted to exclude all benefits for a specific condition, and such an exclusion will not be considered an annual or lifetime limit. 47
Notice to affected enrollees: For enrollees who reached a lifetime limit but are still eligible for coverage as of the first day of the first plan year beginning on or after September 23, 2010, the plan must provide notice that the lifetime limit no longer applies. 48 The plan must also provide special enrollment opportunities if the individual is no longer enrolled. The plan must provide the notice and enrollment opportunity no later than the first day of that plan year. 49
Excepted group health plans: The restrictions on annual and lifetime limits do not apply to health flexible spending arrangements, medical savings accounts, HSAs, HRAs that are integrated with a group health plan that otherwise complies, or standalone HRAs for retirees. 50 The agencies are seeking comments on applying these restrictions to other standalone HRAs.
Rescission allowed only for fraud or intentional misrepresentation: The PPACA prohibits group health plans (both insured and self-insured, and grandfathered and nongrandfathered) from rescinding coverage under the plan except in the case of fraud or the intentional misrepresentation of a material fact, effective for plan years beginning after September 23, 2010. 51
Rescission is the retroactive cancellation or discontinuation of coverage other than for nonpayment of premiums. 52 The new federal standard for rescinding health coverage applies to the coverage of a single individual, an individual in a family, or an entire group (e.g., an employment-based group). 53 Moreover, it applies to representations made by the individual or by a person seeking coverage on behalf of the individual. 54 Therefore, the new standard would apply to the attempted rescission of an entire employment-based group’s coverage where an employer representative allegedly made intentional misrepresentations about the prior year’s claims experience.
This sets a minimum federal standard for the rescission of coverage under a group health plan, although more protective state laws will still apply. 55 The preamble notes that this new standard may be higher than what previously applied under state or federal common law. 56 Prior law, for example, may have permitted rescission for the simple misrepresentation of a material fact, even where the misrepresentation was not intentional.
Patient protections: The PPACA requires certain patient protections to be offered under group health plans (insured and self-insured) effective with the first plan year beginning after September 23, 2010. 57 As discussed previously, these requirements do not apply to grandfathered plans.
Choice of health care professional: Plans that provide coverage though a network of providers must provide enrollees with certain rights regarding the selection of a primary care provider, the selection of a child’s pediatrician, and access to an obstetric or gynecological provider (OB-GYN). 58 More specifically:
- Primary care provider: If the plan requires the designation of a primary care provider (PCP), it must permit the enrollees to designate any participating PCP who is available to accept them.
- Pediatrician: If the plan requires the designation of a participating PCP for a child by an enrollee, it must permit the enrollee to designate a physician who specializes in pediatrics as the child’s PCP if the physician participates in the network and is available to accept the child.
- OB-GYN: If the plan provides obstetric or gynecological care and requires the designation of an in-network PCP, it cannot require a referral for a female enrollee who seeks in-network care from an OB-GYN. The plan must treat the ordering of related obstetric or gynecological items and services by the OB-GYN as the authorization of the PCP. Plans are not precluded, however, from requiring the OB-GYN to notify the PCP of treatment decisions or to comply with plan requirements regarding referrals, prior authorization, and provision of services under an approved treatment plan.
The plan must provide enrollees with notice of these rights whenever they are given a summary plan description or similar description of the plan’s benefits. Model language is included in the regulations.
Emergency services: Plans that provide any benefits for emergency services in the emergency room of a hospital must provide for the following: 59
- No preauthorization can be required of either the individual or the service provider for the emergency services.
- Coverage must be provided without regard to whether the provider is in-network.
- If the emergency services are provided out-of-network, the plan:
- Cannot impose administrative requirements or limitations on coverage that are more restrictive than for in-network services.
- Must provide coverage without regard to any other term or condition of coverage under the plan other than the exclusion or coordination of benefits, an affiliation or waiting period, and applicable cost sharing.
- Must satisfy the cost-sharing requirements of the regulation, under which copayments and coinsurance imposed for out-of-network emergency services cannot exceed those imposed in-network. The out-of-network provider may balance bill the patient for the difference (i.e., the difference between its charges and the amount it receives from the plan and the patient in the form of copays and coinsurance). The plan must pay a reasonable amount for the out-of-network emergency services, which the regulations define as the greatest of the:
1. In-network rate: The amount negotiated with in-network providers for the emergency services;
2. Out-of-network rate: The amount calculated for the emergency services using the same method the plan generally uses to determine payment for out-of-network services (e.g., usual, customary, and reasonable charges) but substituting the in-network cost-sharing provisions for the out-of network ones; or
3. Medicare rate: The amount Medicare would pay for the services.
A plan may impose deductibles or out-of-pocket maximums on out-of-network emergency services only if they apply generally to out-of-network benefits.
Preventive Service Coverage Mandate
Nongrandfathered health plans must provide coverage for, and may not impose any cost-sharing requirements with respect to, certain preventive care services effective with the first plan year beginning on or after September 23, 2010. 60
The preventive services that must be covered, and may not be subject to any cost-sharing requirements (including copayments, coinsurance, or deductibles)—i.e., “mandated preventive services” 61—are those defined by:
- Evidence-based items or services that have in effect an A or B rating in the current recommendations of the U.S. Preventive Services Task Force with respect to the individual involved.
- Immunizations for routine use in children, adolescents, and adults that have in effect a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention with respect to the individual involved. A recommendation is in effect after the director of the CDC has adopted it and is considered to be for routine use if listed on the CDC’s immunization schedules.
- Evidence-informed preventive care and screenings for infants, children, adolescents, and women provided for in comprehensive guidelines supported by the Health Resources and Services Administration (HRSA).
The relevant recommendations or guidelines sometimes do not specify how frequently a plan should provide a preventive service or the specific screening method that should be used. The regulations clarify that plans may use “reasonable medical management techniques to determine the frequency, method, treatment, or setting” for any mandated preventive service “to the extent not specified in the recommendation or guideline.” 62
The various recommendations and guidelines at the core of this mandate will change over time. To remain in compliance, group health plans periodically will need to make adjustments such as adding coverage for certain preventive services or eliminating certain cost-sharing requirements for others.
To help group health plan sponsors identify the specific preventive services subject to the mandate, the preamble to the regulations references a website ( www.healthcare.gov/center/regulations/prevention.html) that links to all the relevant recommendations and guidelines. 63 The regulations clarify that plans will not have to comply with any updates to the relevant recommendations and guidelines until the first day of the plan year beginning one year after the date the updated recommendation or guideline is issued. 64 Group health plans do not have to continue covering or observe the cost-sharing ban on preventive services that are no longer required by these recommendations or guidelines. 65
Doctors and other health care practitioners often provide preventive services during routine office visits, and a series of rules and examples explains how group health plans can apply to an office visit copayment without running afoul of the rule that no copayment can apply to preventive services. In general, a plan may impose a cost-sharing requirement for the office visit if the mandated preventive service is billed separately or is tracked separately as individual encounter data. 66 However, if the mandated preventive service is not tracked or billed separately, the cost sharing may not be applied to the office visit unless the preventive service is not the primary purpose of the office visit. Plans are not required to cover any preventive services delivered outside of the plan’s provider network, and they can impose cost-sharing for any coverage provided for out-of-network preventive services, including mandated preventive services. 67
New Internal and External Claims Procedures for Group Health Plans
Effective for plan years beginning on and after September 23, 2010, nongrandfathered group health plans and group health issuers need to provide enhanced internal claims review procedures, and claimants with adverse internal decisions will be entitled to an external review by an independent review organization under either a state or a federal process. 68
Internal review process—ERISA claims procedures amplified: The new standard amplifies existing ERISA claims procedures under DOL Regulation Section 2560.503-1. Plans are required to comply with the current ERISA procedures, modified with regard to: 69
- Adverse benefit determinations: A rescission of coverage is now included as an adverse benefit determination.
- Expedited notice for urgent care: In the case of urgent care claims, a notice of benefit determination must be made within 24 instead of 72 hours.
- Full and fair review: Where new or additional evidence is considered—or a new or additional rationale is the basis for a decision—it must be provided to the claimant as soon as possible, free of charge, and sufficiently in advance of the final internal adverse benefit determination to give the claimant an opportunity to respond.
- Notice: New requirements are imposed on notices of adverse benefit determinations, including the required inclusion of the denial code and its meaning (if applicable), a discussion of the decision, and the contact information for any health insurance consumer assistance ombudsman established under the PHSA to assist individuals with the claims review process. A plan must give the notice in a “culturally and linguistically appropriate” manner. For plans covering at least 100 participants, this means the notices must be provided on request in a non-English language in which 10% (or, if less, 500) of the participants are literate, and customer assistance help that is provided must also be available in that language.
- Exhaustion of remedy: The internal claims review process is deemed exhausted, and the claimant can proceed to the external claims review, if the plan or issuer fails to strictly adhere to the enhanced requirements.
The new rule explicitly requires a plan or issuer to provide continued coverage pending the outcome of the appeal. 70 As under the current regulations, a plan must provide advance notice and an opportunity for an advance review before it can reduce or terminate benefits for an ongoing course of treatment. 71
State standards for external review—NAIC model act and some transition: If a health insurance issuer is bound by a state external review process that includes the consumer protections of the National Association of Insurance Commissioners (NAIC) Uniform Model Act, the issuer is bound to comply with that state process. 72 Similarly, if a self-insured plan is bound by a state external review process meeting the NAIC requirements (i.e., where ERISA does not preempt that process), the plan is required to comply with it. Otherwise, the plan or issuer is required to comply with the federal review process. 73 The federal external review standards are yet to be released, but the new rule states that they will be similar to the NAIC Uniform Model Act. 74
Among other requirements, a state external review process must include at least:
- Certain adverse benefit determinations: The state process must allow for review of adverse benefit determinations based on requirements for medical necessity, appropriateness, health care setting, level of care, and effectiveness of a covered benefit.
- Expedited review: Exhaustion of the internal claims review cannot be required if the claimant applies for expedited external review at the same time as expedited internal review.
- Plan bears cost: The plan or issuer must bear the cost of the independent review organization (IRO) that conducts the review.
- Four-month period to appeal: Claimants must be given at least four months after receipt of the internal adverse benefit determination to request an external review.
- Independent review organization: The IRO must be assigned at random, be nationally accredited, and have no conflict of interest that will influence its decision.
- Binding decision: The decision must be binding on the claimant and the plan (or issuer).
- Maximum decision-making period: The decision must be issued no more than 45 days after the IRO receives the request for review, and no more than 72 hours in the case of expedited review. 75
A transition period is provided until the plan year beginning on or after July 1, 2011, by which existing state external review processes will be deemed to comply with the minimum requirements. 76 Thus, for plan years beginning before July 1, 2011, where a plan or issuer is bound to use a state’s external review process, the process will be deemed to satisfy the minimum standards of the regulation. Where the state has no external claims review, the federal process will apply. 77 For plan years beginning on or after July 1, 2011, unless HHS certifies that the state external review process meets the required standards, plans and issuers will be bound to use the federal external review process. 78
HIRE Act: Payroll Tax Exemption and Retention Credit
On March 18, 2010, President Obama signed into law the HIRE Act 79 to promote job creation and sustained employment. It provides employers with incentives for hiring and retaining workers, including a payroll tax exemption for employers who hire displaced workers and a current-year general business credit for employers who retain those workers.
- Employers can save the 6.2% employer portion of the Social Security tax on wages paid during the period March 19, 2010–December 31, 2010, to employees hired after February 3, 2010, as long as the employer does not hire the individual to replace another employee, other than one who voluntarily quit or was fired for cause. 80
- Employers will also get a nonrefundable tax credit of up to $1000 on their 2011 income tax returns if they retain such employees for 52 consecutive weeks without large decreases in pay. Employers may carry the credit forward. 81
Taxable businesses and tax-exempt organizations qualify for the payroll tax exemption and the credit. Public colleges and universities also qualify, although federal, state, or local government employers generally do not. 82
Newly hired employees, in this context, are individuals beginning employment after February 3, 2010, and before January 1, 2011, who were either unemployed or have been employed for less than 40 hours during the 60-day period ending on the date employment begins. There is no prohibition on applying the tax holiday or credit to individuals who have just recently started work in the United States, assuming they meet the 40-hour rule. 83
To be eligible for the payroll tax exemption and the credit, employers will need to get a Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, or similar signed affidavit, from any newly hired employee certifying that they were not employed for more than 40 hours during the 60 days prior to beginning employment. 84 Employers should not file Form W-11 with the IRS; instead they should retain it with their other payroll and income tax records.
The employer claims the payroll tax exemption on quarterly payroll tax returns beginning with the second quarter of 2010. For newly hired employees who were paid wages between March 19, 2010, and March 31, 2010 (during the first quarter), the credit may be claimed only on the second quarter return.
Employers who retain new hires qualified for the payroll tax exemption for at least 52 consecutive weeks and whose wages for the last 26 weeks equal at least 80% of the wages for the first 26 weeks may claim a general business credit. The amount of the credit is the lesser of $1,000 or 6.2% of wages paid by the employer to the retained worker during the 52 consecutive week period. The employer cannot carry this new hire retention credit back to a tax year that begins before March 18, 2010, and also cannot use it to offset the business alternative minimum tax.
Employers who claim the retention credit are still eligible for the work opportunity tax credit (WOTC) on the same employee. However, employers can only claim either the payroll tax exemption or the WOTC for an employee. 85 If an employer applied the payroll tax exemption for one or more prior quarters and wants to claim the WOTC, the employer can elect out of the exemption by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for each affected prior quarter.
IRS Accepts Pre-2005 FICA Student Tax Exception
On March 2, 2010, the IRS announced that it will accept the position that medical residents are excepted from FICA taxes based on the student exception for tax periods ending before April 1, 2005, the date new FICA regulations went into effect. 86
The IRS noted that institutions would only be covered under a FICA refund claim they filed themselves, while medical residents could be covered under either a claim they filed themselves or a claim filed by the institution that employed them. The IRS instructed residents who did not timely file a FICA refund claim to contact their employer to determine if the employer had filed a claim. Since the deadline for filing refund claims for periods ending before April 1, 2005, has generally expired, in most cases no further claims can be filed. However, many taxpayers filed protective claims and will now be perfecting them.
Supreme Court to Review Validity of FICA Regulations
In June 2010, the Supreme Court granted certiorari in the Mayo Foundation case. 87 The Mayo Foundation had sued the IRS, challenging the validity of revised FICA regulations that became effective in 2005. These revised regulations exclude medical residents and other full-time employees from the “student” FICA tax exception. The district court declared the new regulations invalid on the grounds that they clashed with the “plain meaning” of the underlying FICA statute. 88 The IRS appealed, and the Eighth Circuit appeals court reversed the lower court decision, holding that the amended 2005 FICA regulations are valid. 89 The Eighth Circuit noted that other interpretations of the statute were possible, but the IRS’s interpretation did not conflict with the plain language of the statute and was consistent with the origin and purpose of the exception as initially enacted by Congress.
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Footnotes
1 The Patient Protection and Affordable Care Act, P.L. 111-148 (PPACA), and the Health Care and Education Reconciliation Act of 2010, P.L. 111-152, signed into law by the president on March 23 and 30, 2010, respectively. In this article, these two statutes will be collectively referred to as the PPACA.
2 Sec. 45R.
3 Sec. 45R(d). Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.
4 Sec. 45R(e)(1)(A).
5 Sec. 45R(d)(3).
6 Secs. 45R(b) and (g)(2); Notice 2010-44, 2010-22 I.R.B. 717; Rev. Rul. 2010-13, 2010-21 I.R.B. 691. Tax-exempt employers will take the credit against payroll taxes paid (Sec. 45R(f)). They will claim it on a revised version of Form 990-T, Exempt Organization Business Income Tax Return, which will be revised for the 2011 filing season to enable eligible tax-exempt organizations to claim the credit.
7 Sec. 125(j), added by PPACA §9022.
8 PPACA §10408.
9 Id., §1251.
10 Id., §1004.
11 Id., §§1102 and 1105.
12 U.S. Department of Health and Human Services, “The Affordable Care Act’s Early Retiree Reinsurance Program Answers to Frequently Asked Questions” (June 29, 2010), www.hhs.gov/ociio/Documents/application_faq.html. In these posted Q&As about the program’s application and claim process, HHS explains that while applications will be accepted and processed on a first-come, first-served basis, the application process is separate from the claims process. Payments are made based on when claims are submitted, not when the employers’ applications for the program were submitted.
13 75 Fed. Reg. 24450 (May 5, 2010).
14 Substantive guidelines, including the official application submission instructions, are available at www.hhs.gov/ociio/regulations/errp/index.html.
15 Secs. 106(f), 220(d)(2)(A), and 223(d)(2)(A), as amended by PPACA §9003.
16 Secs. 220(f)(4)(A) and 223(f)(4)(A), as amended by PPACA §9004.
17 Sec. 6051(a)(14), as amended by PPACA §9002.
18 T.D. 9489.
19 T.D. 9489, preamble §I.
20 Id.
21 Id.
22 Id.
23 Temp. Regs. Secs. 54.9815-1251T(a), (c), and (f).
24 Temp. Regs. Sec. 54.9815-1251T(g)(1).
25 T.D. 9489, preamble §II.F, 75 Fed. Reg. at 34544.
26 Temp. Regs. Sec. 54.9815-1251T(g)(2).
27 T.D. 9489, preamble §II.F, 75 Fed. Reg. at 34544.
28 PHSA §2714, as amended by Section 1001 of the PPACA.
29 Temp. Regs. Sec. 54.9815-2714T(a).
30 T.D. 9482, preamble §II.A, 75 Fed. Reg. at 27125.
31 Sec. 105(b); Temp. Regs. Sec. 54.9815-2714T(c).
32 Notice 2010-38, 2010-20 I.R.B. 682.
33 Temp. Regs. Sec. 54.9815-2714T(g).
34 Id.
35 PHSA §2704, as amended by PPACA §1201.
36 Temp. Regs. Sec. 54.9815-1251T(e)(1).
37 Temp. Regs. Sec. 54.9801-3(a).
38 75 Fed. Reg. 45014 (July 30, 2010).
39 PHSA §2711, as added by PPACA §1001.
40 Temp. Regs. Sec. 54.9815-2711T(d)(1)(2).
41 PHSA §2711.
42 Temp. Regs. Sec. 54.9815-2711T(b).
43 Id.
44 Temp. Regs. Sec. 54.9815-2711T(d)(3).
45 T.D. 9491, preamble §II.B, 75 Fed. Reg. at 37191.
46 Id.
47 Id.
48 Temp. Regs. Sec. 54.9815-2711T(e)(2).
49 Id.
50 T.D. 9491, preamble §II.B, 75 Fed. Reg. at 37190.
51 PHSA §2712, as amended by PPACA §1001.
52 Temp. Regs. Sec. 54.9815-2712T(a).
53 Id.
54 Id.
55 Temp. Regs. Sec. 54.9815-2712T(c).
56 T.D. 9491, preamble §II.C, 75 Fed. Reg. at 37192.
57 PHSA §2719A, as added by PPACA §10101.
58 Temp. Regs. Sec. 54.9815-2719AT(a).
59 Temp. Regs. Sec. 54.9815-2719AT(b).
60 PHSA §2713, as amended by PPACA §1001.
61 Temp. Regs. Sec. 54.9815-2713T(a).
62 Temp. Regs. Sec. 54.9815-2713T(a)(4).
63 T.D. 9493.
64 Temp. Regs. Sec. 54.9815-2713T(b)(1).
65 Temp. Regs. Sec. 54.9815-2713T(b)(2).
66 Temp. Regs. Sec. 54.9815-2713T(a)(2).
67 Temp. Regs. Sec. 54.9815-2713T(a)(3).
68 PHSA §2719, as added by PPACA §1001.
69 Temp. Regs. Sec. 54.9815-2719T(b).
70 Temp. Regs. Sec. 54.9815-2719T(b)(2)(iii).
71 Id.
72 Temp. Regs. Sec. 54.9815-2719T(c).
73 Id.
74 Temp. Regs. Sec. 54.9815-2719T(d). More information on the new requirements is available at www.dol.gov/ebsa/healthreform, including a fact sheet, news release, and the NAIC Uniform Model Act.
75 Temp. Regs. Sec. 54.9815-2719T(c)(2).
76 Temp. Regs. Sec. 54.9815-2719T(c)(3)(i).
77 Id.
78 Temp. Regs. Sec. 54.9815-2719T(c)(3)(ii).
79 Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147.
80 Sec. 3111(d).
81 Sec. 38(b).
82 Sec. 3111(d)(2).
83 Sec. 3111(d)(3).
84 IR-2010-64 (5/18/10).
85 Sec. 51(c)(5).
86 IR-2010-25 (3/2/10).
87 Mayo Found., S. Ct. Dkt. No. 09-837 (cert. granted 6/1/10). Oral argument before the Supreme Court is scheduled for November 8.
88 Mayo Found. for Med. Educ. and Research, 503 F. Supp. 2d 1164 (D. Minn. 2007).
89 Mayo Found. for Med. Educ. and Research, 568 F.3d 675 (8th Cir. 2009), rev’g and remanding 503 F. Supp. 2d 1164 (D. Minn. 2007).
EditorNotes
Deborah Walker is a tax partner and Hyuck Oh is a senior at Deloitte Tax LLP in Washington, DC. For more information about this article, contact Ms. Walker at debwalker@deloitte.com.
