Budget Spending Deal Contains Changes That Impact Employer-Sponsored Group Health Plans
This client alert summarizes key health benefit changes on several fronts—legislative, regulatory, and in the courts. Legislatively, President Trump signed the Further Consolidated Appropriations Act, 2020 (the “Act”) on December 20, 2019 to avoid a shutdown of the federal government. The Act also contained a number of provisions impacting employer-sponsored group health and welfare plans that we anticipate will be welcome changes to employers.
On the regulatory side, the Departments of Health and Human Services, Labor, and Treasury (the “Departments”) recently issued a revised Summary of Benefits and Coverage (“SBC”) template that must be used by employer-sponsored group health plans starting with the first plan year that begins on or after January 1, 2021. Thankfully, the changes to the SBC template are fairly insignificant and only relate to the reduction of the individual mandate under the Affordable Care Act (the “ACA”) to $0.
Federal courts continue to hear ACA-related litigation. The Fifth Circuit Court of Appeals recently issued a decision in Texas v. U.S. In this case, the District Court for the Northern District of Texas determined that the individual mandate was no longer constitutional because Congress previously “zeroed” out the penalty for violating the mandate. Because the District Court also found that the individual mandate cannot be severed from the ACA, it determined that the entire ACA was unconstitutional. While the Fifth Circuit Court of Appeals agreed that the individual mandate was unconstitutional, it did not issue a decision on the constitutionality of the entire ACA. Instead, it remanded the case back to the District Court for additional analysis on whether the individual mandate could be severed from the ACA. The case has been further appealed to the United States Supreme Court.
Below are details regarding these developments.
The Further Consolidated Appropriations Act, 2020
The following changes will impact employer-sponsors of group health and welfare plans and individuals:
- Cadillac tax. The Cadillac tax—which is an excise tax on employers equal to 40% of the cost of employer-sponsored coverage that exceeds certain thresholds—was delayed several times by previous legislation. The Act officially repeals the Cadillac tax once and for all.
- Annual Fee on Health Insurance Providers. The annual health insurance providers fee—which is also known as the Health Insurance Tax or “HIT”—is generally imposed on insurers of fully insured plans. The Act repeals the HIT effective in 2021.
- PCORI Fee. The Patient Centered Outcome Research Institute (“PCORI”) fee was extended for 10 more years. Since many employers believed they had paid the last PCORI fee (or would pay the last PCORI fee on July 1, 2020), we suspect employers will not embrace this change. As extended, the PCORI fee will now apply to plan years ending before October 1, 2029.
- Parking Tax for Tax-Exempt Entities. Beginning in 2017, tax-exempt entities were subject to Unrelated Business Taxable Income on the tax-exempt entity’s costs for providing qualified transportation fringe benefits to its employees, which includes certain employee parking. The Act repealed this “parking tax” as though it never existed. The IRS indicated that it will issue additional guidance for tax-exempt entities that paid this tax to file a claim for refund.
- Medical Expense Deduction. In 2019 and 2020, individuals can continue to deduct unreimbursed medical expenses to the extent those expenses exceed 7.5% of the individual’s adjusted gross income. This threshold was scheduled to increase to 10% in 2019. The Act extended the 7.5% threshold through 2020.
- Tax Credit for Paid Family and Medical Leave. In 2020, employers remain eligible for a business tax credit for certain employer-paid family and medical leave. Before the Act, this tax credit was set to expire in 2019.
Summary of Benefits and Coverage Template Revisions
The Departments recently issued a revised template for the SBC. Most of the revisions to the new SBC template are minor (e.g., grammatical and stylistic in nature) to make the SBC more reader-friendly to users.
The only substantive change to the SBC template relates to the explanation of “minimum essential coverage” in the question “Does this plan provide Minimum Essential Coverage?” because the individual mandate penalty was reduced to $0 in 2019. As revised, this explanation is:
Minimum Essential Coverage generally includes plans, health insurance available through the Marketplace or other individual market policies, Medicare, Medicaid, CHIP, TRICARE, and certain other coverage. If you are eligible for certain types of Minimum Essential Coverage, you may not be eligible for the premium tax credit.
The revised SBC template must be used for group health plans for the first plan year that begins on or after January 1, 2021. Since the SBC must generally be distributed during a group health plan’s annual open enrollment period, this means that the revised SBC template may need to be used during annual open enrollment periods before January 1, 2021.
Texas v. U.S.
On December 18, 2019, the Fifth Circuit Court of Appeals issued an opinion in Texas v. U.S. This case centers on the constitutionality of the ACA.
The plaintiffs in Texas v. U.S. argued that once Congress reduced the penalty for the individual mandate to $0 the individual mandate was no longer a constitutional exercise of Congress’s taxing power. (In a previous Supreme Court decision, the Supreme Court held that the individual mandate penalty was a constitutional exercise of Congress’s taxing power.) The plaintiffs further argued that because the individual mandate is a fundamental provision of the ACA that it could not be “severed” from the ACA. Finally, the plaintiffs argued if the individual mandate is unconstitutional and cannot be severed from the ACA that the entire ACA must also be unconstitutional. The District Court agreed with the plaintiffs.
The defendants appealed the District Court’s decision to the Fifth Circuit. The Fifth Circuit agreed that the individual mandate was no longer constitutional after the penalty was reduced to $0. But the Fifth Circuit remanded the case back to the District Court for further analysis on whether the individual mandate can be severed from the rest of the ACA.
On January 3, 2020, the defendants petitioned the Supreme Court to hear the case, but the plaintiffs argued against a Supreme Court review until the District Court performs the additional severability analysis directed by the Fifth Circuit Court of Appeals. If the Supreme Court decides to hear this case, it could issue a decision in the summer of 2020 if it also agrees to expedite the case. If the Supreme Court decides to hear the case on a non-expedited basis, it would likely issue a decision in the summer of 2021. On the other hand, if this Supreme Court does not agree to hear the case, it would likely be years before it is finally resolved.
The Act also makes substantial changes to employer-sponsored retirement plans. For more information on these changes, please see our client alert here. If you have any additional questions about the changes made by the Act to employee benefit plans, please contact an attorney in the Employee Benefits and Executive Compensation practice group.