Appeals Court Rejects “Individual Mandate” (from Lockton)

Appeals Court Rejects “Individual Mandate”
But Remainder of Healthcare Law Survives;
IRS Set to Clarify Key Aspects of Play-or-Pay Mandate

Executive Summary

  • A federal appeals court struck down the constitutionality of the healthcare reform law’s “individual mandate,” disagreeing with a contrary decision reached last month by another appeals court. The dispute between federal appeals courts all but guarantees a Supreme Court review.
  • Federal authorities issued additional guidance on the operation of the reform law’s insurance exchanges.  In the process they indicated they’ll make life easier for employers in at least three ways. The IRS has confirmed that the “affordability” of an employer’s offer of coverage to an employee will be based on employee-only coverage, and on the employee’s current W-2 wages. Also, the Service confirmed that the employer’s offer of coverage is not required to include the reform law’s “essential health benefits.”

Well, this gets curiouser and curiouser. Today, the second federal appeals court to consider the constitutionality of the healthcare reform law’s “individual mandate” became the first to strike the mandate down. Breaking from a decision last month by the 6th Circuit Court of Appeals, today’s 2-1 decision by the 11th Circuit to strike the mandate is particularly noteworthy in at least two respects.
First, although the mandate issue has significant political undertones that appeared to surface in the various decisions at the federal trial court level (Democrat-appointed judges upheld the law while Republican-appointed judges struck it down), the federal appellate court decisions reflect, at least to some degree, a separation of the legal issue from the political or social one. The two-judge majority that today found the mandate unconstitutional includes a judge appointed by Bill Clinton. Last month’s two-judge majority that upheld the law included a judge appointed by George W. Bush.
Second, while today’s decision finds the individual mandate unconstitutional, it reversed the trial court’s decision to throw out the entire healthcare reform law (see our February 1, 2011, Alert regarding the trial court’s opinion by clicking here). The appeals court concluded that the individual mandate may, in fact, be severed from the remainder of the law.
The constitutionality of the individual mandate is an issue that the Supreme Court was almost certainly going to take up anyway in the coming months, but today’s decision virtually guarantees it. The Supreme Court typically resolves significant disagreements between the federal appeals courts, and now there is a direct conflict between two separate appellate courts.
Happy Friday: IRS Makes “Play or Pay” Much Easier for Employers
The IRS today tipped its hand regarding its view of three key aspects of the employer “play or pay” mandate in 2014, and the news for employers is nearly all good.
“Affordability” Standard Applies to Employee-Only Coverage
First, an employer’s offer of coverage to an employee in 2014 and beyond will be considered “affordable” to the employee – thus shielding the employer from potential penalties – if the employer’s offer of employee-only coverage does not exceed 9.5 percent of the employee’s household income.
The healthcare reform statute was a bit vague on this point. The statute requires employers with at least 50 full-time equivalent employees to offer health insurance to full-time employees and their dependents, beginning in 2014. The law requires the employer to make its offer of coverage both “affordable” and “qualifying” or the employer risks penalties.
Under the statute, the coverage will be considered “affordable” if the employee doesn’t have to pay more than 9.5 percent of his or her household income for it. The law seems to say that the 9.5 percent limit applies to employee-only coverage (in other words, that the employer has no duty to subsidize dependent coverage). Legislative history clearly says this was Congressional intent.
So it came as a surprise when recent informal comments by the IRS suggested this might be an open issue in the halls of the Treasury Department. It was thus a relief today to find the IRS concluding that the employer’s offer of coverage will be considered “affordable” if the employee is not required to pay more than 9.5 percent of his or her household income for employee-only coverage, even if the employee must pay more than that for dependent coverage.
IRS Will Allow Employers to Determine “Affordability” by Considering Employees’ Current Wages
The second piece of great news is that the IRS intends to issue regulations that will allow employers to gauge the “affordability” of their offer of employee-only coverage by referring to employees’ current W-2 wages.
This will do a tremendous favor to the employer community because it would have been very difficult for an employer to get out in front of an “affordability” calculation, at least the way the healthcare reform law and its legislative history describe the mechanics of the calculation.
For example, “household income” is basically household adjusted gross income, essentially taxable wages minus things like alimony payments, HSA contributions, student loan interest payments, etc. The employer would not have any true idea of an employee’s “household income,” so its attempt to limit employee contributions for employee-only coverage to 9.5 percent of the employee’s household income would have been a bit of a shot in the dark. The employer could have come close, by limiting employee contributions to no more than 9.5 percent of an employee’s current wages, but it would not have been an absolute safe harbor. Now, apparently, it will be.1
The regulations contemplated by the IRS give a nod to complaints from the employer community that it needed a more defined and workable standard for gauging the affordability of an employer’s health insurance offering to employees. To weave guidance like this into the reform law’s regulatory fabric will require the IRS to exercise considerable discretion, and the effort reflects the IRS’s willingness to listen to group plan sponsors on this issue.
“Qualifying” Coverage Does Not Mean the Employer Must Offer Exchange-Quality Coverage
Today’s guidance also portends additional good news regarding the healthcare reform law’s requirement that employers not only make health coverage “affordable” to full-time employees, but that the coverage also be “qualifying.”
It has been rather clear from the start that for an employer’s offer of coverage to be considered “qualifying,” the coverage must be designed to pay 60 percent of the healthcare charges covered by the plan. It has also been clear that this is a different, apparently softer, standard than the minimum 60 percent “bronze” level of coverage the health insurance exchanges must offer, because exchange-based coverage is required to offer all “essential health benefits” described in the reform law. Employer-based coverage is not.
The IRS said today that future regulations will spell out precisely how robust an employer’s plan must be in order to be considered “qualifying” coverage, and that in crafting these regulations federal authorities will try to balance the interests of the employer community (with the objective of preserving the existing system of employer-sponsored coverage), but without allowing employers to skirt their responsibilities under the law (as regulators may see those responsibilities). So in this regard we will have to wait and see, but today’s guidance at least confirms what we were fairly certain we already knew about “qualifying” coverage.
Additional Guidance on Insurance Exchanges, Premium Subsidies
Today’s releases also include guidance on the operation of the individual and small business insurance exchanges that the healthcare reform law expects to be operating by 2014. The guidance in part deals with how individuals may enroll in coverage and receive tax credits to help them purchase coverage, if their household income is within certain parameters and they meet other requirements.
We are analyzing the regulations and will issue additional information on them in the days ahead.
Ed Fensholt, JD
Health Reform Advisory Practice
1 The healthcare reform law’s legislative history suggests the insurance exchanges would determine the “affordability” of an employee’s employer-based coverage by comparing the required employee contribution to the employee’s adjusted gross income from his tax return for the second year preceding the year of his application for exchange-based health insurance (i.e., an employee applying for exchange-based coverage in 2014 would have his “household income” determined on the basis of his federal income tax filing for 2012).  So today’s guidance goes a long way in shielding employers from the vagaries of this calculation.
Not Legal Advice:  Nothing in this Alert should be construed as legal advice.  Lockton may not be considered your legal counsel and communications with Lockton’s Compliance Services group are not privileged under the attorney-client privilege.

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About thebenefitblog

Eric is a Producer at Lockton Insurance Brokers, Inc., the world’s largest privately held commercial broker. Eric has over 23 years of experience in the insurance industry and has spent the last 11 years with Lockton. Eric specializes in Health & Welfare Benefits, Retirement Planning, and Executive Benefits. Eric's clients utilize his expertise in the areas of Plan Due Diligence, Transaction Structure, Fiduciary Oversight, Investment Design, Compliance and Vendor negotiation to improve the operational & financial outcome for each client. The Benefit Blog is a place to share that expertise and industry news.
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1 Response to Appeals Court Rejects “Individual Mandate” (from Lockton)

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