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Guest Article


(From the April 17, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

New Mandates for Employers Under Massachusetts Health Coverage Law?

A new Massachusetts law is getting a lot of attention for requiring residents to carry health insurance if they can afford it. But the battle over whether employers should be compelled to provide health benefits also is coming to the fore in Massachusetts, as it is in many other states. As passed by the Massachusetts legislature, the Health Care Access and Affordability Act included a "play or pay" requirement for employers with 11 or more employees who do not provide and contribute to health insurance for their employees. However, Governor Mitt Romney exercised his line-item veto authority to delete that requirement from the bill before signing it on April 12, 2006. Leaders of the Massachusetts legislature will try to override Governor Romney's line-item veto of this and seven other provisions.

Employer Mandates

According to a summary of the Health Care Access and Affordability Conference Committee Report, the bill passed by the Massachusetts legislature would create "a 'Fair Share Contribution' that [would] be paid by employers who do not provide health insurance for their employees and make a fair and reasonable contribution to its cost." The Fair Share Contribution would be based on the state's cost for "free care" provided to uninsured workers. The summary estimates the Fair Share Contribution amount would be approximately $295 per full time employee (FTE) per year, and would be pro-rated for seasonal or part-time employees. This fee would be used to pay for subsidized health insurance and Medicaid rate increases. As noted, Governor Romney vetoed this provision.

But the Fair Share Contribution was not the only employer mandate in the bill approved by the legislature. The bill also imposes a Free Rider surcharge on employers who do not provide health insurance. The surcharge will be "triggered when an employee receives free care more than three times, or a company has five or more instances of employees receiving free care in a year. The surcharge [will] range from 10 percent to 100 percent of the state's costs of services provided to the employees, with the first $50,000 per employer exempted." Additionally, the bill requires employers with more than 10 employees to offer IRC 125 cafeteria plans to their employees. This will enable employees to pay their share of health insurance premiums on a pre-tax basis, which is beneficial to employers and employees. Governor Romney did not veto either of these provisions.

Fate of Employer Mandates

As noted, leaders of the Massachusetts House and Senate already have said they will attempt to override Governor Romney's line-item vetoes. If they are successful, the Fair Share Contribution and Free Care surcharge almost surely will be subject to an ERISA preemption challenge. An analogous "play or pay" mandate recently enacted in Maryland is being challenged on those grounds. Related proposals are now pending in at least 20 states.

An ERISA preemption challenge to the IRC 125 cafeteria plan mandate also is possible. However, a threshold issue in such a case would be whether the IRC 125 plan is an ERISA plan. The Department of Labor previously has taken the position that an IRC 125 plan with only a premium conversion feature is not an ERISA plan.

Other Key Provisions

Following is a summary of the bill's other key provisions. Governor Romney did not veto any of these provisions.

Individual Health Insurance Mandate

The bill's centerpiece is a requirement that, as of July 1, 2007, all Massachusetts residents have health insurance coverage. Residents will be required to certify they have coverage on their state income tax returns, and their certifications will be compared against a database of insurance coverage for all individuals. The penalty for failing to have coverage will be loss of the personal exemption for tax year 2007, increasing in subsequent years to a portion of what an individual would have paid toward an affordable premium. The penalties will not apply to individuals who cannot afford health insurance coverage, as determined according to a sliding "affordability scale."

Making Health Insurance Accessible

In order to help individuals acquire health insurance, the bill creates the Commonwealth Health Insurance Connector to connect individuals and small businesses with health insurance products. Those who obtain insurance through the Connector will be able to take coverage with them from job-to-job. For individuals with more than one job, the Connector will accept premium contributions from multiple employers. The Connector also will offer health insurance products specifically designed for individuals 19 to 26 years old -- a demographic notorious for lacking health insurance coverage. A separate provision to help this demographic will permit individuals to stay on their parents' insurance policies until two years after they lose dependent status or turn 25, whichever comes first.

Subsidized Health Insurance

The bill also creates the Commonwealth Care Health Insurance Program, a subsidized health insurance program for individuals who earn less than 300 percent of the Federal Poverty Level (FPL) and do not qualify for Medicaid. This program will offer health insurance plans without deductibles, and premiums will be based on household income. Even more favorable terms will be available to individuals earning less than 100 percent of the FPL.

Insurance Market Reforms

In order to make health insurance more affordable for everyone, the bill includes certain insurance market reforms. Beginning in 2007, the bill merges the non- and small-group markets. The Summary estimates this will reduce non-group premium costs by 24 percent.

The bill also permits Health Maintenance Organizations (HMOs) to offer high-deductible health plans that can be linked to health savings accounts (HSAs). Additionally, the bill imposes a moratorium on new health insurance benefit mandates through 2008.

DeloitteThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2006, Deloitte.

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