PIHRA – LEGISLATIVE AFFAIRS COMMITTEE: UPDATE December 2010 PIHRA’s Legislative Affairs Committee has prepared a summary of some laws, bills, and regulations that may be of particular interest to you as the year draws to a close. Health Care Reform The Patient Protection and Affordable Care Act (the federal health care reform law) is an extensive law that will require all employers that offer group health plans to make changes to their benefit plans. The effective dates for many of the law’s provisions turn on when the employer’s plan year begins; portions of the law are already in effect for many employers, while other employers will have to begin compliance within the next 9 months. The summaries below highlight some of the key compliance obligations contained in the law that either are in effect or will take effect soon. New W-2 Reporting Requirement: Delayed Effective Date In addition to mandating changes to the benefits offered through group health plans, the health care reform law also requires employers, for tax years beginning after December 31, 2010, to disclose in employees’ Form W-2 the aggregate cost of employer-sponsored health coverage. Aggregate cost will be determined using rules similar to the COBRA applicable premium rules, and includes employer and employee contributions for medical, dental, and vision coverage. Recently, the IRS issued guidance (IRS Notice 2010-69) delaying the effective date of this new reporting requirement. For 2011, reporting will be voluntary, not mandatory. This delay will give employers more time to make any necessary changes to their payroll systems and procedures in preparation for compliance with the new reporting requirement. A revised Form W-2 for 2011 has been released in draft form and is available for viewing on the IRS website. The cost of employer-sponsored health coverage will be reported in box 12. The IRS expects to issue more guidance on this reporting requirement before the end of 2010. Grandfathered Health Plans Under the health care reform law, a number of plan design changes will go into effect for each plan as of the first day of the first plan year for that plan on or after September 23, 2010. If a plan has a calendar year plan year, the changes go into effect as of January 1, 2011. (There is a different effective date for fully insured plans maintained pursuant to a collective bargaining agreement.) Some of the changes apply to all group health plans; other changes only apply to "non-grandfathered" plans. 2

The federal health care reform law exempts "grandfathered" health plans from some of the compliance obligations that apply to non-grandfathered plans. A grandfathered health plan is, in summary, a plan that was in existence on March 23, 2010, with at least one participant. In order for the plan to maintain grandfather status, it must not make one or more of six changes described in the regulations. Specifically, compared to the plan’s provisions in effect on March 23, 2010, grandfathered plans cannot make the following changes:

• Benefits: Cannot significantly cut or reduce benefits. For example, if the plan covers care for people with diseases such as diabetes, cystic fibrosis, or HIV/AIDS, the plan cannot eliminate coverage for those diseases.

• Co-insurance: Cannot raise co-insurance charges. For example, it increases the share of a hospital bill from 20% to 25%.

• Co-payments: Cannot significantly raise co-payment charges. For example, it raises its copayment from $30 to $50 over the next 2 years. (The regulations include a formula for determining whether a proposed increase exceeds the allowed limits.)

• Deductibles: Cannot significantly raise deductibles or other fixed amount cost-sharing requirements. For example, it raises a $1,000 deductible by $500 over the next 2 years. (The regulations include a formula for determining whether a proposed increase exceeds the allowed limits.)

• Employer Contributions: Cannot significantly lower employer contributions by more than 5 percent. For example, it increases its workers’ share of the premium from 15% to 25%.

• Annual Limits: Cannot add or tighten an annual limit on what the plan pays. Some plans cap the amount that they will pay for covered services each year. If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010. Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees).

Plan Design Changes Applicable to All Plans As of the first day of the first plan year on or after September 23, 2010, all plans—grandfathered or non-grandfathered, self-funded or fully insured—will have to make the following plan design changes:

• Dependent Coverage: If the plan covers dependents, dependent children of the employee will be eligible for coverage under the plan up to the age of 26. o There is a slightly different rule for grandfathered plans. Although grandfathered plans must still cover adult dependents, they do not have to do so if the adult dependent is eligible for other eligible employer-sponsored coverage.

• Lifetime Limits: The plan cannot have lifetime limits on "essential health benefits."

• Annual Limits: For plan years prior to 1/1/14, only "restricted annual limits" are allowed on "essential health benefits." The restricted annual limits are being phased in and then will be eliminated for plan years beginning on or after January 1, 2014.

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• Pre-existing Conditions: No pre-existing condition exclusions will be allowed or children under 19, for plan years beginning on or after September 23, 2010 (and for all participants by January 1, 2014).

• Rescission: The plan will not be able to rescind coverage except for fraud or intentional misrepresentation of a material term, and with 30 days prior notice.

Plan Design Changes Applicable to Non-grandfathered Plans Effective as of the first day of the first plan year on or after September 23, 2010, a plan that is not grandfathered will have to make the following additional plan design changes:

• Preventive Services: Non-grandfathered plans must cover preventive care without cost sharing (including copayments and deductibles). The regulators have prepared a list of what qualifies as a preventive service for this purpose; see .healthcare.gov.

• Nondiscrimination Testing: For the first time, fully insured plans will be subject to nondiscrimination testing similar to the rules applicable to self-funded plans.

• Claims Appeals: New claims appeal rules will apply. These new rules include new requirements for internal reviews and appeals, as well as setting up a mandatory external review process. Model notices, with updated requirements, have been provided.

• Physician Designation: Participants must be able to designate any participating primary care provider available to accept the individual.

• Pediatrician Designation: A participant must be able to designate a pediatrician as his/her child’s primary care provider if such provider participates in the network.

• OB-GYN: The plan cannot require pre-authorization or referral for coverage or care provided by an OB-GYN.

• Emergency Services: If the plan covers services provided in a hospital emergency room, the plan shall not require pre-authorization, shall provide coverage even if the health care provider is not in network, and shall have the same cost sharing requirements for in-network and out-of-network.

Notices and New Enrollment Opportunities

The health care reform law includes new notice and disclosure requirements, including two notices that describe new enrollment opportunities. Model notices have been provided: .dol.gov/ebsa/healthreform. A summary of each of these requirements follows:

• Notice of Grandfather Status: If a plan is grandfathered, notice of that fact must be included in plan materials describing benefits. The notice must include contact information in the event participants have questions or complaints. This notice applies to grandfathered plans only. (To maintain grandfather status, plans must also maintain records documenting the terms of the plan on March 23, 2010, and any other documents necessary to verify the plan’s status as a grandfathered plan.)

• Patient Protection Model Disclosure. The Patient Protection Model Disclosure describes the right of participants to designate a primary care provider or pediatrician, and explains that pre-authorization is not required for treatment by an OB-GYN. This notice must be provided

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whenever the plan provides a participant with a summary plan description or other similar description of benefits under the plan. This notice must be provided no later than the first day of the first plan year beginning on or after September 23, 2010. This notice applies to non-grandfathered plans only.

• Model Language for Notice of Opportunity to Enroll in Connection with Extension of Dependent Coverage to Age 26. The regulations require a plan to give adult dependents an opportunity to enroll that continues for at least 30 days (including written notice of the opportunity to enroll). This enrollment opportunity (including the written notice) must be provided not later than the first day of the first plan year beginning on or after September 23, 2010. The notice may be included with enrollment materials, provided the statement is prominent. Enrollment must be effective as of the first day of the first plan year beginning on or after September 23, 2010 (so, if the notice does not go out 30 days in advance of the first day of the plan year, enrollment must be retroactive). This notice applies to all plans (grandfathered and non-grandfathered).

• Model Language Notice Lifetime No Longer Applies and Enrollment Opportunity. This notice and new enrollment opportunity must be provided beginning not later than the first day of the first plan year beginning on or after September 23, 2010. For individuals who enroll under this opportunity, coverage must take effect not later than the first day of the first plan year beginning on or after September 23, 2010. The opportunity to enroll must continue for at least 30 days (including written notice of the opportunity to enroll). The notice may be included with enrollment materials, provided the statement is prominent. This notice applies to all plans (grandfathered and non-grandfathered).

Cafeteria Plans Adult Dependents: The health care reform law also amended the Internal Revenue Code to allow employees/parents to exclude the value of the coverage provided to adult children from their gross incomes, even if the adult child does not qualify as a dependent under the Internal Revenue Code (section 152). Consistent with this change, employers may want to amend their cafeteria plans so that employees can make an election to pay their dependent premiums on a pre-tax basis. Employers might also want to amend their cafeteria plan to include a provision that would allow employees to change their cafeteria plan elections mid-year when an adult dependent is added to the coverage. The IRS is allowing employers to make such an amendment to a cafeteria plan retroactive (normally, only prospective amendments can be made), so that employees are able to make mid-year election changes in 2010 when they add adult dependents. To accomplish this for 2010, however, the cafeteria plan must be amended on or before December 31, 2010. (IRS Notice 2010-38.)

Note: The California legislature did not amend the state’s Revenue and Taxation Code to conform to the health care reform law’s provisions on the tax treatment of coverage for adult dependents. As a result, the tax treatment for coverage provided to adult dependents will be different for federal and state income tax purposes. Employers and employees should consult their tax advisor on the impact of this situation. 5

Over-the-Counter Medications: For tax years beginning on or after December 31, 2010, the rules on reimbursements for over-the-counter medicine and drugs are changing. Over-the-counter medications (unless the drug is prescribed or insulin) purchased in 2011 will no longer be reimbursable through a health FSA, HRA, or HSA. All purchases, to be reimbursable, must be made by December 31, 2010. (IRS Notice 2010-59.) As a result of this change in the law, for plans that currently reimburse over-the-counter medication purchases, employers will need to amend their cafeteria plan by December 31, 2010. Nursing Mothers On July 15th, the Wage and Hour Division of the Department of Labor posted a new fact sheet that provides general information on the break time requirement for nursing mothers in the health care reform law, which took effect when the bill was signed into law on March 23, 2010. This section of the health care reform law applies to employers who are subject to the Fair Labor Standards Act (FLSA). Under this provisions, employers must provide a "reasonable break time for an employee to express breast milk for her nursing child for 1 year after the child’s birth each time such employee has need to express the milk." In addition, the employer must provide a "place, other than a bathroom, that is shielded from view and free from intrusion from coworkers and the public, which may be used by an employee to express breast milk." There are two limitations included in the law. First, an "employer shall not be required to compensate an employee receiving reasonable break time . . . for any work time spent for such purpose." Second, an "employer that employs less than 50 employees shall not be subject to the requirements of this subsection, if such requirements would impose an undue hardship by causing the employer significant difficulty or expense when considered in relation to the size, financial resources, nature, or structure of the employer’s business." If state law provides greater protection to nursing mothers, the state standard shall be met. (See California Labor Code sections 1030-1033 and Civil Code section 43.3.) Expanded Form 1099 Reporting in 2012 Anyone engaged in a trade or business that makes payments to a corporation after December 31, 2011, for services or property over $600, must complete and file an information return (Form 1099). This is an expansion of the existing reporting obligations. Efforts have been made in Congress to repeal this provision in the health care reform law, but they have not yet been successful. Employee Educational Assistance Act of 2010

Section 127 of the Internal Revenue Code allows an employee to exclude from income up to $5,250 a year in employer-provided tuition assistance. This provision would have expired by the end of the year, but last week it was extended for two years by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). 6

Paycheck Fairness Act The Paycheck Fairness Act (S. 3772) failed to pass the Senate by 2 votes on November 17th. The Act would require employers to base employee pay differentials only on education, training, or experience. In claims of discrimination, the legislation would require the employer to demonstrate that the pay differential is not discriminatory on the basis of sex, but rather is "job-related" to the position in question, and consistent with business necessity. Employment Nondiscrimination Act The Employment Nondiscrimination Act (ENDA) (S. 1584 and H.R. 3017) would create a new protected class for sexual orientation and gender identity. Under the bill, among other prohibitions, prohibits employment discrimination by an employer because of an individual’s actual or perceived sexual orientation or gender identity. The bill also applies to employment agencies and labor organizations. H.R. 3017 also prohibits preferential treatment or quotas, and allows only disparate treatment claims. The bill has been heard, but it has not passed. Children’s Health Insurance Program (CHIP)

An updated CHIP model notice is now available: ://www.dol.gov/ebsa/chipmodelnotice.doc Genetic Information Nondiscrimination Act On March 2, 2009, the EEOC issued proposed regulations that would implement the sections of the Genetic Information Nondiscrimination Act (GINA) applicable to employers (as well as an employing office, employment agency, labor organization, or joint labor-management committee). On November 9, the EEOC issued its final rule. The final rule is effective January 10, 2011. Under GINA, an employer (or other covered entity) may not request (which includes conducting an Internet search), require, or purchase genetic information of an individual or family member of the individual, unless the employer is authorized to do so by a specific exception contained in the regulations. "Genetic information" is defined broadly. Among other things, it is defined to include information about an individual’s genetic tests, the genetic tests of that individual’s family members, and the manifestation of disease or disorder in family members of the individual (family medical history).

The exceptions include (1) where an employer inadvertently requests or requires genetic information of an individual or the individual’s family member; (2) where an employer offers health or genetic services, including as part of a voluntary wellness program; (3) where an employer requests family medical history to comply with FMLA or s state leave law (and only when authorized by that leave law); (4) where an employer acquires genetic information from documents that are commercially and publicly available; (5) where the employer acquires genetic information for use in the genetic monitoring 7

of the biological effects of toxic substances in the workplace; and (6) where an employer conducts DNA analysis for law enforcement purposes as a forensic laboratory or for purposes of human remains identification and requests or requires genetic information of its employees, apprentices, or trainees, but only to the extent that the genetic information is used for analysis of DNA identification markers for quality control to detect sample contamination and is maintained and disclosed in a manner consistent with such use. The exception for inadvertent requests applies to situations, among others, where the employer requests medical information or documentation relating to requests for reasonable accommodation or employee leaves. If an employer acquires genetic information in response to a lawful request for medical information, the acquisition of genetic information will generally be considered inadvertent unless the covered entity directs the individual or health care provider from whom it requested medical information (in writing or verbally) not to provide genetic information. The regulations provide model language for this purpose. With respect to wellness programs, providing genetic information (including family medical history) must be voluntary. To be voluntary, the employer cannot require the individual to provide genetic information nor penalize those who choose not to provide it. In addition, the individual must provide prior knowing, voluntary, and written authorization (the regulations describe the content of the authorization). (A wellness program must comply not only with these rules, but also with, among others, the HIPAA nondiscrimination rules and the ADA.) Under the regulations, if the employer possesses genetic information in writing, that information must be maintained separately from other personnel information and the employer must treat the information as a confidential medical record. The information may be held in the same file as the employer holds medical information relating to the ADA. Other provisions in these extensive regulations are not summarized here. The prohibition on the acquisition of genetic information, including family medical history, also applies to medical examinations related to employment. An employer must tell health care providers not to collect genetic information, including family medical history, as part of a medical examination intended to determine the ability to perform a job, and must take additional "reasonable measures" within its control if it learns that genetic information is being requested or required. The reasonable measures will vary depending on facts and circumstances, and may include no longer using the services of a health care professional who continues to request or require genetic information during medical examinations after being informed not to do so. A separate set of proposed regulations was issued by IRS/DOL/HHS in October 2009. These regulations govern those sections of GINA that apply to group health plans and insurers. 8

San Francisco Minimum Wage: Effective January 1, 2011, the minimum wage in San Francisco is increasing to $9.92 per hour (it was $9.79 in 2010). According to the City, "All employers, regardless of where they are located, must pay their employees who perform work in San Francisco the San Francisco minimum wage." Health Care Security Ordinance: Effective January 9, 2008, the Health Care Security Ordinance (HCSO) requires "covered employers" to spend a minimum amount of money each quarter on their health care for their "covered employees." The 2011 health care expenditure rate for large employers (100+ employees) will be $2.06 per hour. For medium-sized employers (20-99 employees), the rate will be $1.37 per hour. An employee who is a manager, supervisor, or confidential employee and who earns at or above an annual salary of $81,450 (or $39.16 per hour) in 2011 is exempt from coverage under the HCSO. The regulations contain definitions of a manager, supervisor, or confidential employee for this purpose. ________________________________ This is only a brief synopsis of certain laws, bills, and regulations. The terms of the laws, bills, and regulations summarized can be detailed and complex, and this summary does not purport to cover every aspect of each. This summary does not constitute legal advice. Employers should consult their own legal counsel concerning whether and how these laws, bills, and regulations should be implemented, and whether there are other labor and employee benefit legal standards that need to be put into place or updated.