Tag Archives: obama administration

Implications for Insurance Taxation?

Election-year politics are dominating legislative action this year as both parties lay down policy agendas for 2017 and beyond. President Obama and the Republican leaders of Congress are offering competing plans on how to reform the U.S. tax system and how to promote other policies intended to increase economic growth and make American companies more competitive. At the same time, both Democratic and Republican candidates seeking their party’s presidential nomination are advancing tax reform plans.

During his final year in office, President Obama likely will continue to rely on his administration’s regulatory authority and the presidential veto to preserve the 2010 Affordable Care Act (ACA)—as well as other legislative and regulatory actions taken during his years in office.

Obama administration action

On Feb. 9, President Obama submitted an FY 2017 budget to Congress that reaffirmed his support for “business tax reform” that would lower the top U.S. corporate tax rate to 28%, with a 25% rate for domestic manufacturing income.

Significant international tax increase proposals that have been re-proposed include a 19% minimum tax on future foreign income and a one-time mandatory 14% tax on previously untaxed foreign income. The president’s budget, again, reserves revenue from a large number of previously proposed tax increases to support business tax reform—including specific proposals affecting insurance taxation (discussed below)—but his budget identifies only part of the revenue that would be needed to support his proposed corporate rate reductions.

Congressional action

House Speaker Paul Ryan (R-WI) has called for House Republicans to vote in 2016 on comprehensive tax reform legislation and on changes to federal entitlement programs as a way to define and build support for a conservative legislative agenda. Senate Majority Leader Mitch McConnell (R-KY) is also expected to advance a conservative legislative agenda with a focus on demonstrating an ability to govern and with an eye on protecting the Republican Senate majority.

See Also: 19 Specific Taxes Directly Related to Healthcare Reform

House Ways and Means Committee Chairman Kevin Brady (R-TX) recently outlined his goals for producing a blueprint for comprehensive tax reform and plans to “move forward immediately to draft international tax reform legislation.” Chairman Brady has said he hopes the Obama administration and Congress can reach common ground on some policies and build on the momentum from the last year’s “tax extender” legislation, which included a provision making permanent Subpart F exceptions for active financing income.

Chairman Brady said comprehensive tax reform “will not happen until we have a new president,” but he is “hopeful that, next January, we will have a president—Republican or Democrat—who is committed to making pro-growth tax reform a reality for the American people.” The chairman outlined several principles for comprehensive tax reform, including a “competitive tax rate” and a “permanent, modern territorial-type system that helps American companies compete and win overseas.” He also said the Ways and Means Committee will look, “with fresh eyes,” at a range of tax ideas, including “consumption tax, cash flow tax, reformed income tax and any other approach that will be pro-growth.”

On international tax reform, Chairman Brady said “developments in the global environment demand our immediate attention.” He pointed to OECD  “base erosion and profit shifting” (BEPS) proposals that “disproportionately burden American companies” and the European Commission anti-tax avoidance package that would provide EU member countries with an “arsenal of new revenue-grabbing tax measures.” He also discussed the growing number of corporate inversions and foreign acquisitions involving U.S. companies: “We will send a clear signal to American companies and shareholders that help is on the way—that we won’t stand idly by while our tax code drives them overseas or makes them a target for a foreign takeover.”

Senate Finance Chairman Orrin Hatch (R-UT) has said he “doubts very much” that international-only tax reform can be enacted this year. The Finance Committee Republican majority staff has been working on options for corporate integration tax reform proposals that would seek to eliminate the double taxation of corporate earnings. Corporate integration proposals generally have focused on approaches providing that any distributions made by such entities would either be deductible by the entity (dividends paid deduction) or would be excludable by the recipient (dividend exclusion). A December 2014 report prepared by the Senate Finance Committee Republican staff stated that a dividends-paid deduction “would generally be easy to implement and would largely equalize the treatment of debt and equity.” Chairman Hatch recently asked Treasury Secretary Jack Lew to “keep an open mind” to a corporate integration proposal that might help to make U.S. corporations more competitive globally and could reduce inversions.

Although there is bipartisan agreement that the U.S. corporate tax rate should be lowered significantly and that our international tax system should be updated, there is significant disagreement over key business tax issues, including how to offset the cost of a corporate rate reduction.

See Also: How a GOP Congress Could Fix Obamacare

Insurance-related revenue raisers

The Obama administration’s FY 2017 budget re-proposes several revenue-increasing measures specific to insurance companies. The proposed legislative changes generally would apply for tax years beginning after Dec. 31, 2016.

Among the insurance-related measures are provisions that would:

  • Disallow the deduction for non-taxed reinsurance premiums paid to affiliates — This proposal would disallow any deduction to covered insurance companies for the full amount of reinsurance premiums paid to foreign affiliated insurance companies with respect to reinsurance of property and casualty risks if the premium is not subject to U.S. income taxation. The proposal would provide a corresponding exclusion from income for reinsurance recovered, with respect to a reinsurance arrangement for which the premium deduction has been disallowed. The proposal would also provide an exclusion from income for ceding commissions received with respect to a reinsurance arrangement for which the premium deduction has been disallowed. The exclusions are intended to apply only to the extent the corresponding premium deduction is disallowed. The proposal would provide that a foreign corporation that is paid a premium from an affiliate that would otherwise be denied a deduction under this provision may elect to treat those premiums and the associated investment income as income effectively connected with the conduct of a trade or business in the U.S. If that election is made, the disallowance provisions would not apply.
  • Conform net operating loss rules of life insurance companies to those of other corporations — This proposal would modify the carry-back and carry-forward periods for losses from operations of life insurance companies to conform the treatment to that of other taxpayers. Under the proposal, losses from operations of life insurance companies could be carried back up to two taxable years prior to the loss year and carried forward 20 taxable years following the loss year.
  • Modify rules that apply to sales of life insurance contracts, including transfer for value rules — This proposal would create a reporting requirement for the purchase of any interest in an existing life insurance contract with a death benefit equal to, or exceeding, $500,000. The proposal would also modify the transfer for value rule to ensure that exceptions to that rule would not apply to buyers of policies.
  • Modify dividends received deduction for life insurance company separate accounts — This proposal would repeal the present-law proration rules for life insurance companies and apply the same proration regime separately to both the general account and separate accounts of a company. Under the proposal, the policyholders’ share would be calculated based on a ratio of the mean of the reserves to the mean of the total assets of the account. The company’s share would be equal to one less than the policyholders’ share.
  • Expand pro rata interest expense disallowance for company-owned life insurance (“COLI”) — This proposal would curtail an exception to a current law interest disallowance of a pro rata portion of a company’s otherwise-deductible interest expense, based on the un-borrowed cash value of COLI policies. As modified, the exception would apply only to policies covering the lives of 20% owners of the business. The proposal would apply to contracts issued after Dec. 31, 2016, in tax years ending after that date.
  • Repeal special estimated tax payment provision for insurance companies under section 847 — This proposal would repeal IRC Section 847 and would include the entire balance of an existing special loss discount account in income in the first tax year after 2016. Alternatively, the proposal would permit an election to include the balance in income ratably over four years. Existing special estimated tax payments would be applied.

Insurance Developments: Judicial and Administrative

A number of judicial and administrative developments occurred in 2015 concerning insurance companies.

These developments affected insurers in various lines of business:

  • Life insurers: The most significant development for life insurers was not solely a tax development. Life principal-based reserves (PBR) will be effective when 42 states representing 75% of total direct written premiums amend their standard valuation law. At the current rate of adoption, Life PBR is expected to be effective Jan. 1, 2017, for contracts issued on or after that date. Life PBR will implicate a number of tax issues, and, for the first time, the IRS and Treasury included guidance on Life PBR in its annual Priority Guidance Plan. Also during 2015, the Tax Court decided in Webber v. Commissioner, 144 T.C. No. 17 (June 30, 2015) that a policyholder was liable for taxes on income earned on assets supporting a variable life insurance contract based on the policyholder’s control over the assets. The case accorded deference to a number of the IRS’s “investor control” revenue rulings and could result in closer attention to variable life insurance and annuity contracts that are privately placed.
  • Non-life insurers: In 2015, the Tax Court addressed what qualifies as insurance risk for purposes of classifying contracts as insurance contracts. In R.V.I. Guaranty Co., Ltd v. Commissioner, 145 T.C. 9 (September 21, 2015), the court held that residual value insurance (RVI) contracts that protect against an unexpected decline in the market value of leased personal property qualify as insurance contracts for federal income tax purposes. The case’s reasoning relies heavily on the treatment of the contracts by non-tax regulators, and it provides taxpayers further guidance for distinguishing between investment risk and insurance risk.
  • Health insurers: In 2015, a Treasury Inspector General for Tax Administration (TIGTA) report criticized the IRS for the “finality” requirement that prevents the service from assessing health insurers that inadvertently or otherwise were not assessed the correct amount (or any) of the health insurance provider fee, which is apportioned among all covered health insurers. Other health insurance providers still wait for the IRS to act on refund requests of the fee in 2015. The ultimate resolution remains uncertain.
  • Captive insurance companies: During 2015, the IRS issued two Chief Counsel Advice (CCA) that analyze whether specific types of policies issued by captive insurance companies constitute insurance for federal income tax purposes. In CCA 201511021, the IRS determined that contracts indemnifying the policyholder for loss of earnings resulting from foreign currency fluctuations did not satisfy the three-prong test to be considered insurance because foreign currency risk is not an insurance risk. The CCA was issued before the tax court’s decision in R.V.I. Guaranty Co., Ltd., so it did not take the tax court’s approach into account. In CCA 201533011, the IRS concluded that excess loss policies issued by a captive insurance company that covered healthcare risks of members of unrelated HMOs are not insurance contracts because they lacked the requisite element of risk shifting. Based on the facts as presented, the CCA analyzed the arrangement as an interest-bearing deposit, but it then concluded that receipts were included in income and deductions were allowed for future claim payments when made. Also in 2015, the IRS issued IR 2015-19, which added section 831(b) companies to the “Dirty Dozen” list of tax scams, indicating the IRS would target these companies in examination.
  • PFIC exception for income derived in the active conduct of an insurance business: Again during 2015, the IRS proposed regulations that would provide guidance on investment income that is treated as derived in the active conduct of an insurance business and, therefore, not treated as “passive income” under the passive foreign investment company (PFIC) rules. In particular, Prop. Reg. §1.1297-4 would provide that “active conduct” requires that an insurer conduct its activities through its own officers and employees and that investment income be earned on assets held to meet obligations under insurance and annuity contracts. Several comments were submitted on these issues and on the use of a bright line test for whether assets are held to meet obligations under insurance contracts.
  • Cross-border reinsurance: The Court of Appeals for the District of Columbia Circuit ruled in Validus Reinsurance, Ltd v. United States of America, 786 F.3d 1039 (2015) that the Federal Excise Tax (FET) on insurance premiums does not apply to retrocessions between two foreign insurers, regardless of whether the underlying risks are U.S.-based. Accordingly, the IRS issued Rev. Rul. 2016-3, 2016-3 I.R.B. 282, which revokes the ruling setting forth the IRS’s prior position on the application of FET on a cascading basis to either reinsurance or retrocession arrangements between two foreign insurers. The Validus decision and Rev. Rul. 2016-3 mark the end of the controversy with the IRS on this issue, and most companies already have submitted claims for refund of previously-paid excise tax on a cascading basis, or they plan to do so.
  • Inversions: In 2014, the Treasury Department and the IRS issued Notice 2014-52, which describes regulations the Treasury and IRS intend to issue concerning transactions sometimes referred to as “inversions.” The notice included a “cash box” rule, which targeted taxpayers who engage in certain inversion transactions with foreign corporations and their subsidiaries with substantial liquid assets. As a follow up to that notice, the Treasury and IRS issued Notice 2015- 79, providing more information about the intended regulations. In particular, Notice 2015-79 describes regulations that the IRS and the Treasury intend to issue addressing transactions that are structured to avoid the purposes of §7874 (concerning expatriated entities) and addressing “post-inversion tax avoidance transactions.” The latter notice clarifies that property held by a U.S. insurance corporation and a foreign corporation that is engaged in the active conduct of an insurance business will be exempted from the “cash box” rule. As in prior years, the IRS and Treasury jointly issued a Priority Guidance Plan outlining guidance it intends to work on during the 2015-16 year. The plan continues to focus more on life than property and casualty insurance companies. The following insurance-specific projects were listed as priority items. Many carried over from last year’s plan, including:
  • Final regulations under §72 on the exchange of property for an annuity contract. Proposed regulations were published on Oct. 18, 2006;
  • Regulations under §§72 and 7702 defining cash surrender value;
  • Guidance on annuity contracts with a long-term care insurance feature under §§72 and 7702B;
  • Guidance under §§807 and 816 regarding the determination of life insurance reserves for life insurance and annuity contracts using principles-based methodologies, including stochastic reserves based on conditional tail expectations;
  • Guidance under §833 (expected to address de minimis MLR relief);
  • Guidance on exchanges under §1035 of annuities for long-term care insurance contracts; and
  • Guidance relating to captive insurance companies.

Implications

  • Election year politics and disagreements between President Obama and Congressional Republicans (notably on how to offset any corporate tax reductions) make domestic or international tax reform unlikely in the coming year.
  • President Obama’s FY2017 budget proposes several revenue-increase measures specific to insurance companies. However, it remains to be seen which, if any, of the measures will come into effect.
  • Multinational insurers and reinsurers should closely monitor legislative and regulatory developments pertaining to taxation of overseas profits. Both the PFIC regulation and the promised regulations on inversions could have a significant effect on some companies and their shareholders.
  • Life insurers should consider the effect of Life PBR tax issues on product development, financial modeling and compliance as they prepare for the Jan. 1, 2017, effective date.
  • Non-life insurers with non-traditional lines of business should consider the effect, if any, that the R.V.I. Guaranty Co. case and the two chief counsel advice memoranda on the nature of insurance risk and the presence of risk shifting may have on insurance qualification.
  • Captive insurers should be prepared for additional IRS scrutiny as a result of the Priority Guidance Plan item promising guidance, and the inclusion of §831(b) companies in the IRS “Dirty Dozen” list.
health

Endangered Individual Health Market

And then there were none?

The individual health insurance marketplace is endangered, and policymakers need to start thinking about a fix right now, before we pass the point of no return.

Health plans aren’t officially withdrawing from the individual- and family-market segment, but actual formal withdrawals are rare. What we are witnessing, however, may be the start of a stampede of virtual exits.

From a carrier perspective, the individual and family health insurance market has never been easy. This market is far more susceptible to adverse selection than the group coverage market. The Affordable Care Act’s (ACA) guarantee of coverage only makes adverse selection more likely, although, to be fair, the individual mandate mitigates this risk to some extent. Then again, the penalty enforcing the individual mandate is simply inadequate to have the desired effect.

Then add in the higher costs of administering individual policies relative to group coverage and the greater volatility of the individual insured pool. Stability is a challenge, as people move in and out of the individual market as they find or lose jobs with employer-provided coverage. In short, competing in the individual market is not for the faint of heart, which is why many more carriers offer group coverage than individual policies. The carriers in the individual market tend to be very good ; they have to be to survive.

In 2014, when most of the ACA’s provisions took effect, carriers in the individual market suddenly found their expertise less helpful. The changes were so substantial that experience could give limited guidance. There were simply too many unanswered questions. How would guaranteed issue affect the risk profile of consumers buying their own coverage? Would the individual mandate be effective? How would competitors price their products? Would physicians and providers raise prices in light of increased demand for services? The list goes on.

Actuaries are great at forecasting results when given large amounts of data concerning long-term trends. Enter a horde of unknowns, however, and their science rapidly veers toward mere educated guesses. The drafters of the ACA anticipated this situation and established three critical mechanisms to help carriers get through the transition: the risk adjustment, reinsurance and risk corridor programs.

Risk corridors are especially important in this context as they limit carriers’ losses—and gains. Carriers experiencing claims less than 97% of a specified target pay into a fund administered by the Department of Health and Human Services; health plans with claims greater than 103% of this specific target receive refunds. Think of risk corridors as market-wide shock absorbers, helping carriers make it down an unknown, bumpy road without shaking themselves apart.

While you can think of them as shock absorbers, Sen. Marco Rubio apparently cannot. Instead, Sen. Rubio views risk corridors as “taxpayer-funded bailouts of insurance companies.”

In 2014, Sen. Rubio led a successful effort to insert a rider into the budget bill, preventing HHS from transferring money from other accounts to bolster the risk corridors program if the dollars paid in by profitable carriers were insufficient to meet the needs of unprofitable carriers. This provision was retained in the budget agreement Congress reached with the Obama administration late last year. Sen. Rubio, in effect, removed the springs from the shock absorber. The result is that HHS was only able to pay carriers seeking reimbursement under the risk corridors program 13% of what they were due based on their 2014 experience. This was a significant factor in the shuttering of half the health co-operatives set up under the ACA.

Meanwhile, individual health insurers have taken a financial beating. In 2015, United Healthcare lost $475 million on its individual policies. Anthem, Aetna, Humana and others have all reported substantial losses in this market segment. The carriers point to the ACA as a direct cause. Supporters of the healthcare reform law, however, push back. For example, Peter Lee, the executive director of California’s state-run exchange, argues that carriers’ faulty pricing and weak networks are to blame. Whatever the cause, the losses are real and substantial. The health plans are taking steps to stanch the bleeding.

One step several carriers are considering is leaving the health insurance exchanges. Another is exiting the individual market altogether—not formally, but virtually. Formal market withdrawals by health plans are rare. The regulatory burden is heavy, and insurers are usually barred from re-entering the market for a number of years (five in California, for example).

There’s more than one way to leave a market, however. One method carriers sometimes employ is to continue offering policies but to make it hard to buy them. Because so many consumers rely on the expertise of professional agents to find the right health plans, a carrier can prevent sales by making it difficult or unprofitable for agents to do their job. Slash commissions to zero, and agents lose money on each sale.

While I haven’t seen documentation yet, I’m hearing about an increasing number of carriers eliminating agent commissions as well as others removing agent support staff from the field. (Several carriers have eliminated field support in California. If you know of other insurers making a similar move or ending commissions, please respond in the comments section).

So, what can be done? In a presidential election year, there’s not much to be done legislatively. Republicans will want to use an imploding individual market to justify their calls for repealing the ACA altogether. Sen. Bernie Sanders will cite the situation as yet another reason we need “Medicare for all.” Former Secretary of State Hillary Clinton, however, has an incentive to raise the alarm. She wants to build on the ACA. Having it implode just before the November presidential election won’t help her campaign. She needs to get in front of this issue now to demonstrate she understands the issue and concerns, to begin mapping out the solution and to inoculate herself from whatever happens later this year.

Congress should get in front of the situation now, too. Hearings on the implosion of the individual market and discussions on how to deal with it would lay the groundwork for meaningful legislative action in 2017. State regulators must notice the endangered individual market, as well. They have a responsibility to ensure competitive markets. They need to examine the levers at their disposal to find creative approaches to keep existing carriers in the individual market and to attract new ones.

If the individual market is reduced to one or two carriers in a region, no one wins. Competition and choice are consumers’ friends; monopolies are not. And when consumers (also known as voters) lose, so do politicians. Which means smart lawmakers will start addressing this issue now.

The individual health insurance market may be an endangered species, but it’s not extinct … yet. There’s still time to act. There’s just not a lot of it.

Will Rubio’s Measure Undermine ACA?

Republicans stated goal is to “repeal and replace” the Patient Protection and Affordable Care Act. That hasn’t happened and won’t at least through the remainder of President Barack Obama’s term. So a secondary line of attack is to undermine the ACA. And Sen. Marco Rubio has had success in that regard.

As reported by The Hill, Sen. Rubio accomplished this feat by weakening the ACA’s risk corridors program. Whether this is a long- or short-term victory is being determined in Washington now. We’ll know the answer by Dec. 11.

President Obama and Congress recognized that, given the massive changes to the market imposed by the ACA, health plans would have difficulty accurately setting premiums. Without some protection against under-pricing risk, carriers’ inclinations would be to price conservatively. The result would be higher than necessary premiums.

To ease the transition to the new world of healthcare reform, the ACA included three major market stabilization programs. One of them, the risk corridors program, as described by the Kaiser Family Foundation, “limits losses and gains beyond an allowable range.” Carriers experiencing claims less than 97% of a targeted amount pay into a fund; health plans with claims greater than 103% of that target receive funds.

The risk corridor began in 2014 and expires in 2016. As drafted, if payments into the fund by profitable insurers were insufficient to cover what was owed unprofitable carriers the Department of Health and Human Services could draw from other accounts to make up the difference.

Sen. Rubio doesn’t like risk corridors. He considers them “taxpayer-funded bailouts of insurance companies at the Obama administration’s sole discretion.” In 2014, he managed to insert a policy rider into a critical budget bill preventing HHS from transferring money from other accounts into the risk corridors program.

The impact of this rider has been profound.

In October, HHS announced a major problem with the risk corridors program: Insurers had submitted $2.87 billion in risk corridor claims for 2014, but the fund had taken in only $362 million. As a result, payments for 2014 losses would amount to just 12.6 cents on the dollar.

This risk corridor shortage is a major reason so many of the health co-ops established under the ACA have failed and may be a factor in United Health Group’s decision to consider withdrawing from the law’s health insurance exchanges. (United Health was not owed any reimbursement from the fund but likely would feel more confident if the subsidies were available).

The Obama administration certainly sees this situation as undermining the Affordable Care Act. In announcing the shortage, HHS promised to make carriers whole by, if possible, paying 2014 subsidies out of payments received in 2015 and 2016. However, the ability to do so is “subject to the availability of appropriations.” Which means Congress must cooperate.

That brings us back to Sen. Rubio’s policy rider. It needs to be part of the budget measure Congress must pass by Dec. 11 to avoid a government shutdown. If the policy rider is not included in that legislation, HHS is free to transfer money into the risk corridor program fund from other sources.

Sen. Rubio and other Republicans are pushing hard to ensure HHS can’t rescue the risk corridors program, claiming to have already saved the public $2.5 billion from a “crony capitalist bailout program.” Democrats and some insurers, seeing what’s occurred as promises broken, are working just as hard to have the rider removed.

By Dec. 11, we’ll know whether the ACA is further undermined or bolstered.

Firms Must Now Clean Up Health Plans

Businesses, brace yourself for health plan enforcement! With the Supreme Court’s much anticipated June 25, 2015, King v. Burwell decision dashing the hope that the Supreme Court would provide relief for businesses and their group health plans from the Patient Protection and Affordable Care Act (ACA) mandates by striking down ACA, U.S. businesses that offered health coverage in 2014 and those continuing to sponsor health coverage must swiftly act to review and verify the adequacy of their 2014 and current group health plan’s compliance with ACA and other federal group health plan mandates. Business must also begin finalizing their group health plan design decisions for the coming year.

Prompt action to assess and verify compliance is particularly critical in light of the much-overlooked “Sox for Health Plans” style rules of Internal Revenue Code (Code) Section 6039D. The rules generally require group health plans that violated various federal group health plan mandates to self-identify and self-report these violations, as well as self-assess and pay the excise taxes of as much as $100 a day per violation triggered by uncorrected violations. While the mandates were applicable prior to 2014 for uncorrected violations of a relatively short list of pre-ACA federal group health mandates, ACA broadened the applicability of Code Section 6039D to include ACA’s group health plan mandates beginning in 2014. This means that, in addition to any other liability that the company, its group health plan and its fiduciaries might bear for violating these rules under the Employee Retirement Income Security Act, the code, the Social Security Act or otherwise, the sponsoring business also will incur liability for the Code Section 6039D excise tax for uncorrected violations, as well as late or non-filing penalties and interest that can result from late or non-filing.

Many employers have significant exposure to these Code Section 6039D excise tax liabilities because many plan sponsors or their vendors have delayed reviewing or updating their group health plans for compliance with some or all of ACA’s mandates. In many cases, businesses delayed in hopes that the Supreme Court would strike down the law, Congress would amend or repeal it, or both. In other cases, limited or continuing changes to the regulatory guidance about some of ACA’s mandates prompted businesses to hold off investing in compliance to minimize compliance costs. Regardless of the past reasons for such delays, however, businesses sponsoring group health plans after 2013 need to recognize and act to address their uncorrected post-2013 ACA violations exposures.

Although many businesses, as well as individual Americans, have held off taking long overdue steps to comply with ACA’s mandates pending the Supreme Court’s King v. Burwell decision, the three agencies charged with enforcement – the IRS, Department of Labor and Department of Health and Human Service — have been gearing up to enforce those provisions of ACA already in effect and to finalize implementation of others in the expectation of the ruling in favor of the Obama administration. As a practical matter, ACA opponents need to recognize that the Supreme Court’s King decision realistically gives these agencies the go-ahead to move forward with these plans for aggressive implementation and enforcement.

Although technically only addressing a challenge to the Obama administration’s interpretation of the individual tax credit (“Individual Subsidy”) that ACA created under Code Section 36B, the Supreme Court’s decision eliminates any realistic hope that the Supreme Court will provide relief to businesses or their group health plans with any meaningful past or current ACA violations by striking down the law itself. Of all of the currently pending challenges to ACA working their way to through the courts, the King case presented the best chance of a Supreme Court ruling that would wholesale invalidate ACA’s insurance reforms, if not the law itself, because of the importance of the Individual Subsidy to the intended workings of those reforms. By upholding the Obama Administration’s interpretation of Code Section 36B as allowing otherwise qualifying individuals living in states without a state-run ACA health insurance exchange to claim the Individual Subsidy for buying health care coverage through the federal Healthcare.gov health insurance exchange, the Supreme Court effectively killed the best possibility that the Supreme Court would invalidate the insurance reforms or ACA itself. While various challenges still exist to the law or certain of the Obama administration’s interpretations of its provisions, none of these existing challenges present any significant possibility that the Supreme Court will strike down ACA.

While the Republicans in Congress have promised to take congressional action to repeal or reform ACA since retaking control of the Senate in last fall’s elections, meaningful legislative reform also looks unlikely because the Republicans do not have the votes to override a presidential veto.

In light of these developments, businesses must prepare both to meet their current and future ACA and other federal health plan compliance obligations and defend potential deficiencies in their previous compliance over the past several years. The importance of these actions takes on particular urgency given the impending deadlines under the largely overlooked “Sox for Health Plans” rules of Code Section 6039D for businesses that sponsored group health plans after 2013.

Under Code Section 6039D, businesses sponsoring group health plans in 2014 must self-assess the adequacy of their group health plan’s compliance with a long list of ACA and other federal mandates in 2014. To the extent that there exist uncorrected violations, businesses must self-report these violations and self-assess on IRS Form 8928 and pay the required excise tax penalty of $100 for each day in the noncompliance period with respect to each individual to whom such failure relates. For ACA violations, the reporting and payment deadline generally is the original due date for the business’ tax return. Absent further regulatory or legislative relief, businesses providing group health plan coverage in 2014 or thereafter also should expect to face similar obligations and exposures. As a result, businesses that sponsored group health plans in 2014 or thereafter should act quickly to verify the adequacy of their group health plan’s compliance with all ACA and other group health plan mandates covered by the Code Section 6039D reporting requirements. Prompt action to identify and self-correct covered violations may mitigate the penalties a company faces under Code Section 6039D as well as other potential liabilities associated with those violations under the Employee Retirement Income Security Act (ERISA), the Social Security Act or other federal laws. On the other hand, failing to act promptly to identify and deal with these requirements and the potential reporting and excise tax penalty self-assessment and payment requirements imposed by Code Section 6039D can significantly increase the liability the business faces for these violations substantially both by triggering additional interest and late payment and filing penalties, as well as forfeiting the potential opportunities that Code Section 6039D otherwise might offer to qualify to reduce or avoid penalties through good-faith efforts to comply or self-correct.

While current guidance allows businesses the opportunity to extend the deadline for filing of their Form 8928, the payment deadline for the excise taxes cannot be extended. Code Section 6039D provides opportunities for businesses to reduce their excise tax exposure by self-correction or showing good faith efforts to comply with the ACA and other group health plan mandates covered by Code Section 6039D. Businesses need to recognize, however, that delay in identification and correction of any compliance concerns makes them less likely to qualify for this relief. Accordingly, prompt action to audit compliance and address any compliance concerns is advisable to mitigate these risks as well as other exposures.

Businesses preparing to conduct audits also are urged to consider seeking the advice from qualified legal counsel experienced in these and other group health plan matters before initiating their audit, as well as regarding the evaluation of any concerns that might be uncovered. While businesses inevitably will need to involve or coordinate with their accounting, broker and other vendors involved with the plans, businesses generally will want to preserve the ability to claim attorney-client privilege to protect all or parts of their audit investigation and analysis and certain other matters against discovery. Business will also want assistance with proper evaluation of options in light of findings and assistance from counsel to document the investigation and carefully craft any corrective actions for defensibility.

Are Annual Physicals Really Worthless?

Dr. Ezekiel Emanuel wrote a contrarian opinion piece in the Jan. 8, 2015, issue of the New York Times titled, “Skip Your Annual Physical.” Dr. Emanuel is an oncologist at the University of Pennsylvania and was an adviser to the Obama administration regarding the design of health reform. He is also the brother of Rahm Emanuel, a former presidential chief of staff.

As you can guess from the title of the opinion article, Dr. Emanuel believes that annual physicals are not worth having because they do not reduce mortality. He cites a Cochrane Review study to back up his statement. Click here to read a summary of the study by the American Association of Family Practice.

Dr. Emanuel’s comments bring the following question to mind: How is one to have the evidence-based screenings recommended by the U.S. Preventive Services Task Force (USPSTF) without an annual physical?

Here is a list of some of the USPSTF screenings and interventions that studies have shown to be of value by reducing morbidity or mortality that could be accomplished at an annual physical:

  1. Screening for Type II diabetes
  2. Screening for hypertension
  3. Screening for lipid disorders (e.g. high cholesterol)
  4. Screening and counseling for alcohol abuse
  5. Screening for cervical cancer every 3-5 years
  6. Screening for obesity
  7. Potential use of aspirin for the prevention of heart attack
  8. Counseling on folate vitamin supplements for all women capable of pregnancy to prevent neural tube defects
  9. Counseling overweight and obese patients to improve their diet and exercise habits

Source: American Association of Family Practice

Many of these conditions are not rare.  For example:

  • 9.3% of the U.S. population has diabetes-of whom, 9 million are undiagnosed (Click here for ADA source). Assuming a U.S. population of 300 million, 9 million is 3% of the population, so three in 100 screenings would find undiagnosed diabetes. In a company with 1,000 employees, screening for diabetes would result in identifying 30 new cases of diabetes.
  • 29% of the adult U.S. population has hypertension-17% are undiagnosed (Click here for CDC source). 17% of 29% is about (again) 3% of the adult U.S. population, so three in 100 screenings would find undiagnosed hypertension. In a company with 1,000 employees, screening for hypertension would result in identifying 30 new cases of hypertension.

An annual physical is a great way to address these nine proven screening tests and interventions that will lengthen life and reduce suffering. This is only a representative sample from the USPSTF.  There are actually more than nine. You would not “technically” need an annual physical, but you would have to have some other mechanism for having these screenings and interventions performed.  A similar point is made by the American Academy of Family Physicians in its review of the Cochrane study. However, the use of the doctor’s office as the setting for the screening means that if an abnormality is found (i.e. diabetes, hypertension, etc.), then the doctor can prescribe an intervention.

To skip an annual physical and to not have the screening performed some other way-and followed up on-is hazardous to your health