Guest Article

(From the September 29, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

California Legislature Approves Bill Mandating Employer-Provided Health Coverage

The California legislature has approved a controversial pay-or-play bill that would require most California employers to provide health coverage directly to their employees (and, in the case of large employers, their dependents) or contribute to a state-operated fund that would purchase coverage for them. The bill is now headed to the desk of embattled Governor Gray Davis, who probably will sign it. But even before that happens, employer groups are preparing to challenge the bill's legality in court.

What Would SB 2 Do?

The Health Insurance Act of 2003 (SB 2) would require medium and large employers to pay a fee into the State Health Purchasing Program ("the Program") that would, in turn, purchase health insurance for their eligible employees and, in the case of large employers, their dependents. (As discussed below, the bill's use of the word "fee" is significant because of California's rules for enacting new taxes.)

The bill defines "medium employer" as any company with at least 20, but no more than 199, employees in California; a "large employer" is any company with 200 or more employees in California. However, the bill would not apply to medium employers with 49 or fewer California employees until a 20 percent tax credit is enacted to help them offset their costs.

The Managed Risk Medical Insurance Board ("the Board"), which would be responsible for managing the Program, would be authorized to set the fee amount based on the cost of providing coverage to eligible employees (and dependents) and related administrative costs. The Board also would be responsible for setting deductible, coinsurance, and copayment levels for specific benefits, and for setting limits on total out-of-pocket costs.

Credit for Coverage

Employers could avoid paying the fee (i.e., be eligible for a "credit against the fee") by proving to the California Employment Development Department that they already provide acceptable coverage to their employees and, if applicable, their dependents. For purposes of the credit, acceptable coverage would include--

Who Would Be Eligible for Coverage?

The bill would require coverage only for employees that have completed three months of service for the employer, and that work at least 100 hours per month for the employer. According to the bill's statement of findings, the legislature intends that seasonal workers, individuals who work for multiple employers, and those who work multiple jobs for the same employer, "be afforded the opportunity to have health coverage in the same manner as those who work full-time for a single employer."

As noted, large employers would be required to provide coverage for eligible employees and their dependents. The bill defines the term "dependent" to include the employee's spouse, domestic partner, or minor child. The term also includes an employee's age 18 or older child who is still dependent on the employee. (The Board would be given the authority to issue regulations relating to dependent status for employees' over age 18 children.) However, the bill specifies the term dependent does not include an employee's spouse, domestic partner, or child that has, or is eligible for, health coverage through his or her own employer.

Employee Contribution Limited

In most cases, the employer could require eligible employees to pay up to 20 percent of the fee. But the maximum contribution by certain low-income employees would be limited to 5 percent of their wages. For an employee purchasing individual coverage, this 5 percent of wages limitation would apply only if the employee's wages are less than 200 percent of the federal poverty guidelines for an individual; for an employee purchasing family coverage the 5 percent of wages limit would apply if the employee's wages are less than 200 percent of the federal poverty guidelines for a family of three.

Effective Date

The bill's requirements would become effective beginning January 1, 2006, for large employers, and January 1, 2007, for most medium employers. (As discussed, medium employers with 49 or fewer California employees would not have to comply with the bill until the legislature enacts a special tax credit to help offset their costs. Given California's budget problems, that is not expected to happen anytime soon.)

What's Next?

As noted, Governor Davis probably will sign the bill, but that will not be the end of the SB 2 story. Employer groups already are planning at least two difficult legal challenges to the bill. The first relates to whether the bill in fact imposes a "fee" or tax on employers. Under the California constitution, a new tax must be approved by a two-thirds majority of the California Assembly and Senate-- a level of support SB 2 did not achieve.

The second claim is that ERISA preempts the bill. The only other state that mandates employer-provided health coverage-- Hawaii-- has a statutory exemption from the ERISA preemption rule. The always unpredictable Ninth Circuit will have jurisdiction over the ERISA preemption claim.

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.