While the new law places responsibilities on individuals, it also presents challenges for employers with Massachusetts employees. Employers should begin to familiarize themselves with the law’s provisions and determine the steps they need to take to comply or face financial penalties.
In 2006, the Commonwealth of Massachusetts enacted comprehensive health care reform legislation known as the Act Providing Access to Affordable, Quality, Accountable Health Care (the Act). The Act is designed to ensure that every Massachusetts resident has adequate health coverage by requiring Massachusetts residents to obtain health coverage that satisfies minimum guidelines and by imposing various requirements on Massachusetts employers. Compliance with the Act will present administrative challenges—many provisions become effective July 1, 2007, and the state has not yet finalized its regulatory guidance. While some observers believe the Employee Retirement Income Security Act of 1974 (ERISA) pre-empts the Act, no employer or group of employers has yet filed an ERISA pre-emption challenge. This article summarizes some of the key features of the Act and addresses the compliance steps employers need to consider.
The Individual Mandate
The heart of the Act is the individual mandate, which, effective July 1, 2007, requires that every Massachusetts resident obtain and maintain health coverage that satisfies minimum creditable coverage requirements. Individuals can satisfy the mandate by obtaining coverage through their employers or a public instrumentality created by the Act named the Commonwealth Health Insurance Connector (the Connector). Individuals may purchase health insurance coverage through the Connector only if they are not eligible for coverage under their employer’s health plan. Individuals are exempt from the individual mandate if they object on religious grounds, if the individual has a hardship, or the Connector determines that affordable coverage is not available.
The Connector has issued preliminary guidance regarding the minimum creditable coverage requirements. Under these regulations, employer-sponsored health plans are deemed to satisfy the minimum creditable coverage requirements during 2007 and 2008. However, beginning in 2009, an employer-sponsored health plan will satisfy the minimum creditable coverage requirements only if it complies with specific Massachusetts requirements regarding covered benefits and cost-sharing. If a Massachusetts resident is covered by an employer-sponsored health plan that fails to satisfy the minimum creditable coverage requirements, the individual will need to acquire other health coverage that satisfies those requirements or face significant penalties.
The Massachusetts Department of Revenue will enforce the individual mandate. Individuals who fail to comply with the individual mandate in 2007 will lose their personal tax exemption. Those who fail to comply with the individual mandate in 2008 and beyond will incur a penalty equal to 50 percent of the minimum monthly premium for creditable coverage for each month of non-compliance.
The Act imposes three key requirements on employers: the fair-share contribution requirement, the free-rider surcharge/cafeteria plan requirement and the reporting requirements. In addition, the Act includes insurance reforms that may affect the way employers provide health insurance to their employees.
The Fair-Share Contribution Requirement
Under the Act, employers with 11 or more full-time employees are required to make a "fair and reasonable contribution" toward the cost of their employees’ health coverage. Employers who do not meet this requirement will be required to pay an annual amount (up to $295) for each of their full-time employees. An employer is deemed to make a fair and reasonable contribution if it maintains a group health plan and it satisfies either a minimum participation requirement or a minimum contribution requirement.
An employer satisfies the minimum participation requirement if it contributes any amount to its group health plan and at least 25 percent of its full-time Massachusetts employees participate in the plan. An employer satisfies the minimum contribution requirement if it offers to pay at least 33 percent toward the cost of health coverage for full-time Massachusetts employees after the first 90 days of employment. A full-time employee includes an employee who works at least 35 hours a week at a Massachusetts location. Independent contractors, seasonal employees and temporary employees are not taken into account for purposes of the fair-share contribution requirement. Employers that do not satisfy the fair-share contribution requirement must remit their $295 per employee payments to the Division of Unemployment Assistance, under rules which have not been issued as of the date of this publication.
The Free-Rider Surcharge/Cafeteria Plan Requirement
The Act’s free-rider surcharge requirement is aimed at employers who do not provide health insurance and whose employees use free care. The free-rider surcharge is effective July 1, 2007, and imposes a surcharge on employers with 11 or more full-time employees to recover a portion of state-funded health care costs provided by Massachusetts to the employer’s employees. An employer is subject to the surcharge if Massachusetts pays for care for any single employee (or their dependent) more than three times in a year, or for any combination of employees (and their dependents) more than five times in a year, and if the total amount of state-funded benefits exceeds $50,000. The surcharge amount will vary depending on employer size and the number of instances that its employees (and their dependents) receive care. The amount of the surcharge will be reduced by the percentage of employees for whom the employer provides health coverage.
Employers can avoid the free-rider surcharge if they adopt an Internal Revenue Code Section 125 cafeteria plan that conforms with rules established by the Connector. Under these rules, the cafeteria plan must, at a minimum, be a premium-only plan offering access to one or more medical care coverage options. Massachusetts regulators have clarified informally that this does not require an employer to offer a medical care coverage option to its employees, as long as the cafeteria plan permits Massachusetts residents who are eligible to purchase health insurance through the Connector to pay the premiums for such insurance on a pre-tax basis. Employees are only eligible to purchase health insurance coverage through the Connector if they are not eligible for coverage under their employer’s health plan.
The regulations also prohibit a cafeteria plan from imposing a waiting period that exceeds two months and require a cafeteria plan to offer participation rights during applicable election periods without regard to whether an eligible employee previously waived coverage. Employers, however, are allowed to exclude several classes of employees from participation in the cafeteria plan. These include:
Employees under age 18
Part-time employees (those who work on average fewer than 64 hours per month)
Employees who are considered wait staff, service employees or bartenders with average earnings less than $400 per month
Student employees employed as interns
Employees covered by a multi-employer health plan to which the employer contributes
Seasonal employees with either J-1 or H2B visas who have travel health insurance
Employers are required to file a copy of their cafeteria plan(s) with the Connector, although no specific guidance regarding this filing requirement has been specified as of the date of this publication.
The Reporting Requirements
Effective July 1, 2007, employers with 11 or more employees are required to submit a Health Insurance Responsibility Disclosure (HIRD) form designed to help Massachusetts gather information so that it can enforce the provisions of the Act. The employer HIRD form has not been finalized yet, but it is expected that employers will be required to disclose information such as the number of full-time employees, the number of part-time employees, whether the employer offers subsidized health coverage to full- and/or part-time employees, and whether the employer offers a Section 125 cafeteria plan. It is expected that employers will be required to file the employer HIRD form by November 15 of each year, based on information as of September 30 of that year, with penalties for failure to file ranging from $1,000 to $5,000. It is unclear whether employers will be required to provide information to the state indicating whether an employer-sponsored health plan satisfies the minimum creditable coverage requirements.
Employers will also be required to collect employee HIRD forms from employees who decline employer-sponsored health coverage or participation in the employer’s cafeteria plan. Employers must retain the employee HIRD forms for a period of three years. The employee HIRD forms have also not yet been finalized.
The Insurance Reforms
The Act includes insurance reforms that directly affect health insurance carriers and HMOs and indirectly affect employers that offer insured health plan options. One insurance reform requires carriers to make health insurance coverage available for persons through the earlier of their 26th birthday or the two-year anniversary of the loss of their federal tax dependent status. Another insurance reform prohibits carriers from offering health insurance coverage to employers that provide more generous premium contributions for highly paid employees than for other employees.
Implications for Employers
The impact of the Massachusetts health care reforms will vary. Employers that provide comprehensive health coverage to their full-time employees are likely to satisfy the fair-share contribution requirement in the short-term, but there is no guarantee that the fair-share requirement will remain static. Recent reports suggest that the Act is underfinanced, and pressures may mount to increase employer involvement.
Employers that currently offer cafeteria plans will need to modify their plans for Massachusetts employees, especially for employees who may not currently be eligible for employer-sponsored health plan coverage (such as part-time or seasonal employees). Employers will also need to consider whether to permit mid-year cafeteria plan election changes to allow employees who previously declined coverage to enroll in employer-sponsored coverage effective as of July 1, 2007. For employees who are eligible to purchase Connector-arranged health insurance coverage, employers with cafeteria plans will need to adopt administrative and payroll practices necessary to ensure that pre-tax contributions for these employees are transmitted to the Connector or its designee on a timely basis.
The individual mandate is not likely to affect employer-sponsored health plans in the short-term. However, the individual mandate may have considerable impact in the future, depending on how the state develops the minimum creditable coverage requirements. Beginning in 2009, employers will face significant pressure to conform their health plan designs to the state’s minimum creditable coverage requirements.
In the near term, the following action items should be considered:
Employers interested in avoiding the fair-share contribution requirement should determine whether their health plans satisfy the minimum participation or minimum contribution safe harbors.
Employers interested in avoiding the free-rider surcharge should determine what actions are necessary to comply with the cafeteria plan requirement. For example, an employer might consider amending an existing cafeteria plan, or adopting a new cafeteria plan that covers Massachusetts employees not currently eligible to participate in an existing cafeteria plan. The Connector has developed model cafeteria plan documents to facilitate compliance.
Employers should evaluate necessary administrative steps including: how to comply with the employer and employee HIRD reporting requirements (once the HIRD form is finalized and further guidance is provided); how to identify Massachusetts employees eligible to purchase Connector-arranged health insurance coverage, and how to forward pre-tax deductions for those employees to the Connector; how to respond to questions from Massachusetts employees regarding the Act; how to monitor future Massachusetts regulatory guidance; and whether changes applicable to Massachusetts employees (i.e., age of eligible dependent) should also be applied on a company wide basis or limited only to Massachusetts.
The Act presents many challenges for Massachusetts employers, particularly because the state has not finalized its regulatory guidance and because the Act may be subject to an ERISA pre-emption challenge, which, if successful, could overrule many of the Act’s requirements. Nevertheless, because there has been no indication that the July 1, 2007 effective date for many of the Act’s provisions will be extended, employers should begin to familiarize themselves with these provisions and determine the steps they need to take to comply.