Plan Types

As is currently the case, health insurance will be available on an individual, small group, or large group basis. An individual plan is just as it sounds — a plan purchased by an individual to cover themselves, and/or other members of their family.

A small group plan refers to an employer-sponsored health insurance plan for companies with from 2 – 50 employees. As of 1/1/2014, this definition will technically change to 2-49, with 50 being the point at which large group is defined.

A large group plan is an employer-sponsored health insurance for companies with (post 1/1/2014) at least 50 employees. There is no upper limit on number of employees.

Health insurance plans can be fully funded (the insurance company accounts for all risk except for that assigned to the insured in the contract) or self-funded (the employer in an employer-sponsored plan assumes some of the medical financial risk directly in exchange for a lower premium). All of PPACA’s provisions apply to fully funded plans. Some, but not all, of PPACA’s provisions apply to self-funded plans.

All group plans must offer, but are not required to pay for, dependent coverage to an employee’s children. Notably, spousal coverage does not have to be offered in such plans.

In 2016, the definition for a small group will expand to 100 employees, however, the penalties/taxes that apply to large group will still apply at the 50 or greater employee mark.

Grandfathering

Grandfathered health plans refer to plans that were in place prior to 3/23/2010. PPACA did not require that those plans remain in place after enactment of the legislation, or require that they be replaced. In practical fact however, a number of insurance carriers have eliminated their “grandfathered” plans, and have retired such plans, requiring that insureds replace their coverage with new, non-grandfathered plan coverage.

[ed. note:: apparently, many insurers are going to auto-renew existing individual plans through 12/31/2014. This will allow these plans to stay intact until then, but will have to be replaced with a PPACA QHP at that point. Insureds will be able to change to a PPACA QHP earlier than their renewal however. Small group plans may be able to apply for an early renewal, and receive the same consideration.]

A plan that was in place prior to 3/23/2010 can only be considered “grandfathered” going forward if, upon renewal, changes in the plan design were fairly insignificant. For example, if an individual, trying to keep their premiums low, replaced a $2000 deductible plan with a $3000 deductible plan, the new plan would be considered non-grandfathered. Similarly, in a group setting, if an employer plan design or the employer’s contribution was changed to place a significantly greater financial burden on the employee, the new plan was no longer classified as grandfathered.

In a very general sense, the benchmark for deeming a plan to be non-grandfathered is if the burden in costs on the employee increase 5% or more, not taking into account plan trend (cost increases due to the upward trend of medical costs).

Mandates

From a technical, legal perspective, PPACA does not contain mandates. The decision by the Supreme Court in June 2012 made that clear. However, whether your perspective is individual or group, this may well be a difference without distinction since the law places penalties/taxes upon individuals and large group employers for not providing minimum essential health benefits. So, to be less confusing, we refer to these requirements as “mandates” in the rest of this paper.

Individual “Mandate”

As indicated previously, the Supreme Court judged that the Constitution does not permit the Congress to mandate the purchase by an individual of a commercial product. However, the court decision also determined that Congress could impose a tax upon an individual for not behaving in a specific manner. Therefore the penalty set forth in PPACA has become a tax, and the term “individual mandate” is for all intents and purposes a requirement. To simplify, we will therefore refer to this as a “mandate” throughout this paper.

For PPACA’s purposes, an individual is a US citizen or legal resident, with certain exceptions::

  1. people with religious objections;
  2. American Indians with coverage through the Indian Health Service;
  3. undocumented immigrants;
  4. those without coverage for less than three months;
  5. those serving prison sentences;
  6. those for whom the lowest-cost plan option exceeds 8% of annual income; and
  7. those with incomes below the tax filing threshold

There are two key elements regarding this mandate:: first, the individual must have health care coverage, and that coverage must adhere to stipulated essential health care benefits. If an individual does not have the minimum essential coverage (defined as the 60% actuarial value or bronze plan, defined more fully in a few paragraphs), that individual will be subject to a penalty/tax (the following is derived from the NFIB website)::

Taxes (read: penalties) begin in 2014 and rise in years following. In each year, the tax consists of the higher of a dollar amount or a percentage of household income. Following is the schedule of taxes:

  • 2014: The higher of $95 per person (up to 3 people, or $285) OR 1.0% of taxable income.
  • 2015: The higher of $325 per person (up to 3 people, or $975) OR 2.0% of taxable income.
  • 2016: The higher of $695 per person (up to 3 people, or $2,085) OR 2.5% of taxable income.
  • After 2016: The same as 2016, but adjusted annually for cost-of-living increases.

(Note: line-to-line changes in variables are in red, underlined type)

  1. 2014; family of 2; taxable income=$26,000;
tax=$260
because $260 (=$26,000×1%) is higher than $190 (=$95×2).
  2. 2014; family of 3; taxable income=$26,000;
tax=$285
because $285 (=$95×3) is higher than $260 (=$26,000×1%).
  3. 2016; family of 3; taxable income=$26,000;
tax=$2,085
because $2,085 (=$695×3) is higher than $650 (=$26,000×2.5%).
  4. 2016; family of 3; taxable income=$85,000;
tax=$2,125
because $2,125 (=$85,000×2.5%) is higher than $2,085 (=$695×3).
  5. 2016; family of 8; taxable income=$85,000;
tax=$2,125
because $2,125 (=$85,000×2.5%) is higher than $2,085 (=$695×3).
  6. 2016; family of 8; taxable income=$300,000;
tax=$7,500
because $7,500 (=$300,000×2.5%) is higher than $2,085 (=$695×3).

Subsidies are discussed in a later section, but it should be noted here that an individual who applies for individual coverage in an exchange, but who has qualifying coverage offered through their employer (offering minimum essential benefits and employee cost is less than 9.5% of W2 income), is not eligible for a subsidy.

Employer Mandate

Employer sponsored plans fall into two categories starting 1/1/2014:: Large group (50 or more employees) and small group (49 or fewer employees).

Small group employers are not subject to any sort of penalty for not offering coverage to employees, not offering coverage that contains minimum essential benefits, or not offering coverage contributions that meet affordability standards. [ed. note** as has been the case for years, a small employer’s decision to offer coverage and/or other benefits is based on the employer’s need to attract and retain the type and quality of employee that is needed for the business.]

Again, while PPACA does not contain a specific large employer mandate, it imposes penalties/taxes if the large group employer does not offer coverage that meets the essential minimum coverage or affordability requirements. The penalties will be described below in the section on affordability.

Large groups (50 or more) will pay a penalty if they do not offer any coverage, the coverage offered is not affordable, or if any employee of a company that offers coverage qualifies for a subsidy in a public exchange. The specific penalties for this are defined below.

[ed. note:: Originally employers with more than 200 employees were supposed to auto-enroll new employees on their sponsored plans beginning in 2014, but that requirement has been postponed.]

The offer of a plan from an employer, large or small, need only be made to an employee and their child dependents. For purposes of PPACA, HHS has issued a policy that the spouse of an employee need not be offered coverage under the employer sponsored plan. There is no requirement that an employer contribute to the premium payment of an employee or covered dependent. Contribution and participation rules are generally set at the State and carrier level.

In Part 4:: Penalties and Subsidies

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