What you need to know now about the health care reform act

The new health care rules will be phasing in over the next serveral years.  Here are the important changes that are effective now.

September 23, 2010 was the six-month anniversary of the comprehensive health care reform package (the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act). The date was more than a symbolic anniversary; it also marked the implementation date of many important provisions in the new law affecting adults, children, employers and health plans.


Health care reform is being implemented by the U.S. Department of Treasury and the IRS; the U.S. Department of Labor (DOL) and the U.S. Department of Health and Human Services (HHS). The three agencies have issued joint guidance in many areas since passage of the health care reform package. Recently, the three agencies reiterated that their approach to implementing health care reform is “marked by an emphasis on assisting, rather than imposing penalties on, plans, issuers and others that are working in good faith to understand and come into compliance with the new law.” The three agencies noted that their approach may include transition relief, safe harbors and other policies to ensure that the new law takes effect smoothly.

Young adults

The health care reform package requires group health plans that provide dependent coverage for children to continue to make the coverage available for an adult child until the child turns 26 years of age with some exceptions. Plans are required to provide a 30-day period, no later than the first day of the plan’s next plan year that begins on or after September 23, 2010, to allow participants to enroll an adult child. Plans must notify participants of this enrollment opportunity in writing. Some plans began covering young adults voluntarily before the September implementation date.

Before passage of the health care reform package, employer-provided health insurance coverage was generally excluded from income if the employee’s child was under age 19 (or under age 24 if a student). The health care reform package extends the exclusion from gross income to any employee’s child who has not attained age 27 as of the end of the tax year. This tax benefit applies regardless of whether the plan is required by law to extend health care coverage to the adult child or the plan voluntarily extends the coverage. The income exclusion provision was effective March 30, 2010. The IRS, DOL and HHS issued regulations in July 2010.

Preventive services

The health care reform package prohibits cost-sharing (co-pays, co-insurance and deductibles) for preventative services for new plans beginning on or after September 23, 2010. Preventive services include:

  • Blood pressure, diabetes and cholesterol tests
  • Cancer screenings
  • Counseling on smoking-cessation, weight loss, and other wellness endeavors
  • Routine immunizations
  • Preventive services for women
  • Well-baby and well-child visits

If plan or issuer has a network of providers, it may impose cost-sharing requirements for recommended preventive services delivered by an out-of-network provider. However, health plans and insurers will not be able to charge higher cost-sharing (copayments or coinsurance) for emergency services outside of a plan’s network. The IRS, DOL and HHS issued regulations on cost-sharing for preventive services in July 2010.


The health care reform package also expanded rights of individuals to appeal adverse determinations made by their health plans. New health plans beginning on or after September 23, 2010 must have an internal appeals process that allows individuals to appeal denials or reductions for covered services and rescissions of coverage. If an internal review denies an individual’s claim, the individual has the right to an external appeal.

Health plans must notify individuals of their right to appeal adverse determinations and the appeals procedures. Additionally, health plans are required to continue coverage pending the outcome of an individual’s internal appeal. The IRS, DOL and HHS issued regulations on the expanded appeal rights in July 2010. DOL recently issued a Technical Release that provides an enforcement grace period for compliance with certain new provisions with respect to internal claims and appeals.

Lifetime and annual limits

Lifetime limits on most benefits are generally prohibited in any health plan or insurance policy issued or renewed on or after September 23, 2010. The new law also restricts and phases out the annual dollar limits that all job-related plans, and individual health insurance plans issued after March 23, 2010, can put on most covered health benefits. None of these plans can set an annual dollar limit lower than:

  • $750,000 for a plan year starting on or after September 23, 2010 but before September 23, 2011
  • $1.25 million for a plan year or policy year starting on or after September 23, 2011 but before September 23, 2012
  • $2 million for a plan year or policy year starting on or after September 23, 2012 but before January 1, 2014
  • No annual dollar limits are allowed on most covered benefits beginning on January 1, 2014.

Other provisions

The health care reform package also prohibits group health plans and health insurance issuers from imposing pre-existing condition exclusions on children under 19 for the first plan year beginning on or after September 23, 2010. Additionally, insurers and plans will be prohibited from rescinding coverage except in cases involving fraud or an intentional misrepresentation of material facts for plan years beginning on or after September 23, 2010. Group health plans must also meet certain nondiscrimination requirements effective for plan years beginning on or after September 23, 2010. It should also be noted that all the September 23, 2010 deadlines apply to “plan years beginning on or after September 23, 2010” so that, for example, a plan that runs on a calendar year would not be required to put these additional benefits in place until January 1, 2011.

Grandfathered plans

A grandfathered health plan is a plan that existed on March 23, 2010, the date of enactment of the Patient Protection and Affordable Care Act. Grandfathered plans, like new plans after September 23, 2010, must extend coverage to young adults under age 26; not place lifetime limits on coverage; not exclude coverage for children with pre-existing conditions; and not rescind coverage except in cases of fraud or an intentional misrepresentation of material fact.

Grandfathered plans may make certain changes to their plans, such as cost adjustments to keep pace with inflation, and not lose their grandfathered status. However, some changes, such as a significant reduction in employer contributions, will result in loss of grandfathered status.

Imminent bar on reimbursement of over-the-counter drug purchases highlighted

Purchases of over- the-counter medicines and drugs made after December 31, 2010 without a prescription will no longer be reimbursed by health flexible spending accounts (FSAs) or health reimbursement accounts (HRAs), the IRS has reminded taxpayers. These new rules for health FSA and HRA reimbursements were part of the health care reform package, the Patient Protection and Affordable Care Act (PPACA), enacted in March 2010.

New rules

The PPACA added new Code Sec. 106(f), which provides that an expense incurred for a medicine or a drug after December 31, 2010 is eligible for reimbursement by a health FSA only if it “is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.” Reimbursements under HSAs and Archer MSAs (collectively also known as HRAs) are similarly restricted under PPACA amendments to the Tax Code.

In explaining the new rules on qualifying health FSA and HRA reimbursement, the IRS has emphasized:

— Over-the-counter medicines and drugs will continue to be reimbursable after 2010 if the taxpayer obtains a prescription for them;

— Over-the-counter medical supplies and equipment (for example, crutches, bandages, blood-sugar test kits, glasses, and contact lenses) will continue to be reimbursable without a prescription, as will insulin;

— Requiring a prescription only applies to purchases made after December 31, 2010, irrespective of any later date under plan grace-period rules for which a claim for reimbursement may be made or paid and irrespective of the period during which the amounts that are paid were contributed and withheld from compensation; and

— Items that are merely beneficial to the general health of an individual continue to be excluded from reimbursement, even if a prescription is written.

Handling Rx substantiation

Any purchase on or after January 1, 2011 of an over-the-counter medicine or drug for which reimbursement from an FSA, HSA or Archer MSA is claimed must be made under a prescription. The existence of a valid prescription, which is written by anyone authorized under applicable state law to do so, may be shown by the following:

— A customer receipt from a pharmacy showing the date of sale, amount of the sale and a copy of the prescription; or

— A customer receipt from a pharmacy showing the name of the patient and an Rx number in addition to the date of sale and the amount.

Debit cards and cafeteria plans

The IRS has explained it will not challenge the use of health FSA/HRA debit cards for expenses incurred through January 15, 2011 without the new substantiation to give debit systems time to reprogram. Starting January 16, 2011, however, all such claims must contain an Rx number, third-party verification of an Rx or the Rx itself, or similar documentation.

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