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June 15, 2010 | Communiqué | Pittsburgh

A Publication of the Employee Benefits and Executive Compensation Practice Group of Thorp Reed & Armstrong, LLP.


This is the fifth installment in our series on the Affordable Care Act or “Reform Act.”  In our fourth communiqué (as updated to reflect recent interim regulations) we covered the Affordable Care Act’s requirement that group health care plans (“plan” or “plans”) cover adult children until age 26, and the recent IRS guidance (Notice 2010-38) indicating that such coverage would not be taxable to the employee even if the child is not the employee’s tax dependent.[2]  

There are other changes you must make to your plan(s) to comply with the Affordable Care Act effective for plan years beginning on or after September 23, 2010,[3] or for plans maintained on a calendar year basis, January 1, 2011.[4]  The following changes apply both to new plans as well as grandfathered plans.[5]

Pre-Existing Condition Exclusions Eliminated for Children Under Age 19

Under the Affordable Care Act, your plan will not be able to impose any pre-existing condition exclusion for children under age 19.[6]  This is not an entirely new concept.  Most group health care plans are already severely restricted by the Health Insurance Portability and Accountability Act (“HIPAA”) from excluding coverage for pre-existing conditions; and the HIPAA portability requirements extend to all covered individuals, not just children under age 19.  Nothing in the Affordable Care Act changes the current HIPAA requirements.  Therefore, this mandated change should not be a major factor for plans that are already subject to HIPAA. 

By way of background, HIPAA prohibits a plan from imposing a pre-existing condition exclusion for a period longer than 12-months.  Further, to the extent an individual enrolling in the plan was covered under another group health plan before joining a new employer and can provide a certificate of creditable coverage under his or her prior employer’s plan, coverage under the prior plan must be counted toward satisfying any pre-existing condition exclusion under the plan in which he or she is newly enrolled.  In response to HIPAA, many employers amended their plans or purchased insured products that did not contain any pre-existing condition exclusions. 

After the passage of the Affordable Care Act, a number of insurance companies tried to interpret this mandate contrary to the legislative intent. In response, Secretary of Health and Human Services Kathleen Sebelius (“Secretary”) issued a letter to insurers clarifying that under the Affordable Care Act’s mandate no child could be denied coverage due to a pre-existing condition.[7] 

Rescission of Coverage

The Affordable Care Act prohibits plans and health insurers, in both the group and individual market, from rescinding an individual’s coverage except in cases of intentional misrepresentation or fraud.  Again, this restriction applies for the first plan or contract year beginning on or after September 23, 2010.  Cancellation of coverage requires prior notice to the enrolled individual.  Special rules apply to network plans and there are exceptions to the guaranteed renewal requirements for individual coverage.

After seeing media reports that WellPoint routinely dropped coverage to women recently diagnosed with breast cancer, the Secretary wrote WellPoint on April 22, 2010 to address their actions.[8]  In her letter, the Secretary noted that such practices would soon be prohibited and requested WellPoint to reconsider its actions in anticipation of the change in the law.  In response to the Secretary’s actions, it has now been reported that WellPoint, as well as other insurance carriers, including United Healthcare, will also stop such coverage cancelations.

Lifetime Limitations/Annual Limitations

Effective the first plan year beginning on or after September 23, 2010, the Affordable Care Act prohibits plans from imposing lifetime dollar limitations on “essential health benefits.” “Restricted annual limits” can continue until 2014, on the dollar value of “essential health benefits” per covered individual.  What constitutes “restricted annual limits” will be determined by the Secretary.[9]  “Essential health benefits” will also be defined by the Secretary, but, by statute, such term includes ambulatory care, emergency care, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitation services and devices, laboratory services, preventative care (including wellness services) and pediatric services (including vision and dental care).[10] 

The modifications discussed above apply to all plans, even “grandfathered plans.”  New or non-grandfathered plans, on the other hand, are subject to some additional requirements, effective the first day of the plan year beginning on or after September 23, 2010 (or January 1, 2011 for calendar year programs). 

These additional changes include the following: 

  • Each plan must establish a formal claim and appeal process, with coverage to continue during the administrative process. 
  • Emergency services must be covered without requiring the covered individual to obtain prior approval and coverage for such services must be the same whether performed in-network or out of network. 
  • If a plan requires the designation of a primary care physician, covered individuals must be permitted to designate pediatricians and obstetricians/gynecologists as their primary care physician.
  • Plans must cover preventive care without any cost sharing. 
  • Insured group health plans are subject to new nondiscrimination rules.

Preparing for 2011 – Additional Affordable Care Act Provisions

If you maintain your group health plan on a calendar-year basis, then you have some additional planning issues for 2011: 

First, you will need to be able to track the value of health care coverage provided to your employees.  We anticipate that this will be based on your plan’s COBRA premium value.  The value of health care coverage provided to the employee must be reported on the W-2 issued for the 2011 tax year in January, 2012. 

Second, if you permit reimbursement for over-the-counter drugs through your medical flexible spending accounts or health reimbursement accounts, with the exception of insulin or unless prescribed by a doctor, over the counter drugs will no longer constitute qualified medical expenses. 

In our next communiqué, we will discuss what it means to be a grandfathered plan.  Future articles will discuss other plan mandates and/or limitations that will be effective after 2011, as well as the penalties for noncompliance.  As additional guidance is issued by HHS/IRS/DOL, our communiqués will be updated or new communiqués will be posted to the Thorp Reed & Armstrong, LLP on-line Library. 

In the meantime, if you, or any individual within your organization, would like to discuss the Affordable Care Act and its impact on your organization, please feel free to call any member of the Employee Benefits and Executive Compensation Practice Group:

Sarah Lockwood Church (412 394 7731), Paul Kasicky (412 394 2441), Kristen Belz Ornato (412 394 7749), or Kevin Wiggins (412 394 2401). 

This Thorp Reed & Armstrong, LLP Communiqué is prepared in summary form and is not to be construed as legal advice or opinion on any specific fact or circumstance. We do not assume any responsibility to revise the Communiqué if there are subsequent changes in the law.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

 June 2010

[1] The Patient Protection and Affordable Care Act (P.L. 111-149), or the PPACA, as amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), or the Reconciliation Act.  The PPACA and Reconciliation Act are now being referred to by the Administration and the U.S. Department of Health and Human Services as the Affordable Care Act. 

[2] Installment Four

[3] Six (6) months after P.L. 111-149 was signed, or March 23, 2010. 

[4] A later effective date may apply to a “collectively-bargained plan” (as such term is yet to be defined for purposes of the Affordable Care Act). 

[5] A “grandfathered plan” is, generally, any plan that was in effect on March 23, 2010.  We anticipate guidance in the near future on what modifications to a plan will take it out of grandfathered status. 

[6]  The Affordable Care Act imposes a ban on all pre-existing condition exclusions in 2014. 

[7] Letter to insurers  

[8]  Letter to WellPoint

[9] Annual limitations will be eliminated completely in 2014. 

[10] PPACA Section 1302