July 9, 2012 by Mark L. Stember with Martha L. Sewell
Upon enactment of the Patient Protection and Affordable Care Act (ACA) back in March 2010, employers grappled with difficult questions and issues. But, even as employers responded to volumes of implementing regulations issued by the federal agencies, legal challenges questioned whether employers would be forced to comply with the ACA at all.
These cases – which asserted that the ACA exceeded Congress’s constitutional authority – wound their way through the legal system with inconsistent results. Two circuits upheld the ACA, one struck it down, and a fourth did not reach the merits. The Supreme Court quickly stepped in and, on June 28, 2012, issued its much-anticipated decision in which Chief Justice Roberts led a majority generally upholding the ACA.
With this issue resolved, employers are now faced with the challenge of complying with the many ACA provisions that take effect in the next two years.
National Federation of Independent Business et. al. v. Sebelius
Lawsuits challenged that Congress acted outside of its constitutional powers with respect to two provisions of the ACA – (1) the “Individual Mandate,” which imposes a penalty for most individuals who fail to maintain health coverage and (2) an expansion of state Medicaid programs. Although neither provision directly affected employers, the entire legislation was at risk if the Court found that one or more provisions were unconstitutional and could not be severed.
The majority held that the Individual Mandate was not within the scope of Congress’s authority under the Commerce Clause – rejecting the federal government’s principal argument – because Congress’s power to regulate commerce did not include the power to compel commerce by forcing individuals to obtain health insurance.
Surprisingly, however, the Chief Justice sided with the Court’s liberal members in holding that the Individual Mandate was nevertheless authorized by Congress’s taxing power because individuals can fully comply with the Individual Mandate by paying the required excise tax.
By upholding the Individual Mandate, the rest of the ACA (except for the Medicaid issue discussed below) remains in effect. The Supreme Court deftly sidestepped the thorny questions of how to severe the Individual Mandate from the rest of the ACA (e.g., if the Individual Mandate was ruled unconstitutional).
The ACA expanded Medicaid by requiring states to extend coverage to virtually anyone with incomes less than 133% of the federal poverty level. The federal government would fund 100% of this expansion through 2016, but then funding would decline gradually to a 90% minimum in later years. States would not be required to implement the ACA’s Medicaid expansion, but if they refused they would lose all federal Medicaid funding.
The Chief Justice’s majority opinion recognized that Congress may provide incentives for states to follow its policies by attaching strings to its funds but found that subjecting existing Medicaid funding to the conditions of the Medicaid expansion crossed the line into compulsion in a way that violated the principles of federalism. Accordingly, the Court found that if states failed to implement the ACA’s expansion of Medicaid, they would only lose the additional Medicaid funding provided by the ACA.
Future of the ACA
Congressional Republicans immediately responded to the Supreme Court’s decision with vows to repeal the ACA. But with a Democratic-controlled Senate, as well as President Obama’s veto power, any repeal effort would be largely symbolic.
Anything less than a “clean sweep” by Republicans in the November elections means that the ACA will remain at least in some form. In order to make changes to the ACA, Republicans would need a filibuster-proof majority in the Senate, a substantial majority in the House and a Republican president. However, a Republican president (with a Democratic Congress) would be able to delay or slow ACA implementation.
Next Steps for Employers
The immediate effect of the Supreme Court’s decision is that employers must re-focus their efforts on ACA compliance. For some employers, the most urgent decision is whether to remain a “grandfathered” health plan for 2013. Grandfathered health plans are exempt from many ACA requirements (e.g., preventive care), but this exemption comes at a cost – the employer is limited in the extent to which it can shift increased health care costs to employees.
In addition, there are a number of new provisions that take effect in 2013, including:
- Non-grandfathered health plans must provide expanded coverage for preventive care services for women, including coverage for contraceptives.
- Employers must pay the temporary per participant fees, which will help fund research.
- Employers must report the aggregate cost of employer-sponsored health coverage on the Form W-2 issued for 2012.
- Beginning with the open enrollment period this fall, employers must provide a Summary of Benefits and Coverage to employees.
- Beginning March 1, 2013, employers must notify employees regarding the availability of health insurance exchanges.
2014 Affordable Care Act Provisions
Even without the political questions that surround the future of the ACA, employers still face uncertainty over implementation of key ACA provisions. Critical pieces of the legislation, including the health insurance exchanges and the employer penalty provisions, are scheduled to go into effect January 1, 2014. Yet, the federal agencies have not issued final guidance addressing fundamental aspects of the employer penalty, including the rules for determining who is a “full-time employee” and whether coverage provides minimum value or is affordable. Without this guidance employers cannot begin to evaluate and implement plan design changes that will be needed.
Adjustments may be needed as early as the first quarter of 2013. If guidance is not issued by the end of 2012, meeting the January 1, 2014 effective date would be extremely difficult. Given the uncertainty of this timing, employers should pay close attention to regulatory developments and the possibility of administrative delays in the next six months.
About the Authors
Mark Stember, partner at Kilpatrick Townsend, concentrates his practice on counseling clients on the tax and related aspects of health and welfare benefits, flexible compensation, fringe benefits, executive compensation, and qualified retirement plans. Mr. Stember has counseled both private and public clients regarding health and welfare plans, cafeteria plans, fringe benefit plans, such as adoption assistance and tuition reimbursement, nonqualified deferred compensation plans, executive split dollar life insurance plans and section 401(k) and pension plans.
Martha Sewell, partner at Kilpatrick Townsend, practices in the area of employee benefits, where she focuses on employee health and welfare benefit plans. She counsels clients on compliance with the numerous and often complex rules applicable to health and welfare plans, cafeteria plans and fringe benefit plans, including ERISA, HIPAA and the tax code.