Disability, whether short or long term, can happen to anyone at any time. While that’s bad enough, most people find out – usually at the most inopportune time – that their benefits aren’t nearly as generous as they believed. Not because of the terms of their group policy, however, but because of taxes!

Not too many years ago, most employers offered group long-term disability coverage, with employees purchasing short term coverage outside of the company environment, or going without. Nowadays, its more the norm for an employer to offer both short and long term coverage for all employees. Many employees think this is a great deal; the reality is that it may not be. When they become disabled, the IRS steps in and determines who paid the premium – and if the premium was paid with dollars from the employer, the employee must then report the disability benefits as wages, subject to taxes.

Depending on the different types of policies, the tax rules can vary as well. For instance, short term disability payments generated by employer premiums are subject to Social Security tax, in addition to taxation as ordinary income. Employers might be liable for this tax, as well.

Long-term disability premiums paid for by the employer will not incur Social Security taxes, due to the longer waiting period for benefits to start. However, they are subject to taxes as ordinary income by the federal government.

Most employees would prefer to receive their disability benefits on a tax-free basis, especially since it is common for expenses to go up, not down, in the event of a disability. By guaranteeing that premiums for disability coverage’s are paid with taxed dollars, employers’ preserve the benefits their employees expect.

The simplest way for an employer to do this is to set up a plan properly in the beginning, with good employee communication, and a clear understanding of the risks inherent in relying upon employer-paid disability plans. Often, employees will opt for an employee-paid plan, even if the coverage is mandatory, once the risks are explained. Employee salaries can be adjusted to compensate for the after-tax payment of disability coverage, for instance.

For executives, individual list-bill disability policies can be bonused for costs plus taxes, thereby giving the employer a tax deduction while preserving the tax-free advantage of individually-owned disability plans.

“P O P” isn’t fizzy, but is does save you money. What is it? P O P stands for “Premium Only Plan”, a slimmed down version of a Section 125 plan, casually called a “cafeteria” plan or Flexible Savings Account (FSA). And it is one of the most under-utilized employee benefits around – one that any employer who has a contributory welfare benefit plan sorely needs. This concept can be an incredible way to enhance your benefits package, while simultaneously boosting your profits.

Background: Why is this known as a Section 125 plan? Because the IRS Code Section 125 is the legal authority and basis for such a  welfare benefit plan – which must meet non-discriminatory requirements, as well as other reporting requirements, especially to your employees.

Why is this concept under-utilized? Because Section 125 FSAs can be a costly to set up and operate, most employers with less than 10 employees assume that they will never make it pay for itself. especially since owners are often exempted from them. But these plans include three “modules” – premium only, flexible spending, and dependent care accounts. Since much of the cost of administration (not to mention the headache of account losses due to utilization rules that favor the unscrupulous employee) are in the flexible spending accounts, the premium only module is cheap, easy to set up, and provides immediate tax relief to both employee and employer, without the headaches or administration costs of a full blown FSA. It is the simplest type of Section 125 plan and requires little or no maintenance once it’s been set up.

Premium only plans allow employees who contribute premium dollars. out of their wages, for employer-sponsored health and welfare benefit plans the ability to withhold a portion of their salary tax-free to pay for their premium contributions. Because these benefits are viewed as tax-free under the IRS Code, an employee’s taxable income is reduced. Employers win because pre-tax benefits aren’t subject to FICA, FUTA, or work comp premiums on these wages. Simply put, every dollar through a P O P reduces an employer’s payroll, reducing the employers’ costs, which immediately drop revenue to the bottom line.

Since your employees are already paying for these expenses out of pocket, a P O P gives them a great way to save money by lowering their taxes, which increases the percentage of their take home pay. With taxes likely to rise in the future, this is a ‘gimme’ for any small business employer.

Many people are puzzled by media reports that center on “the doc fix” and other aspects of the Medicare and Medicaid programs, and this is to be expected, given that media outlets do a spectacularly poor job of explaining any aspect of federal health care policy, in my opinion. I’m writing this article in an attempt to broadly illustrate a basic tenet of federal health care spending, namely, price controls, and the cost-shifting to private patients that occurs because of centralized price-fixing at the federal level. I submit that this centralized pricing, which purchases on demand and without contract, health care at below-market prices, is a hidden tax passed directly to all Americans who purchase health care, or health insurance, and is a major driver, if not THE major driver, in ever increasing health care costs.

[Disclaimer: federal health care spending is so complex and obtuse that it’s extremely easy for the average person to get “lost in the weeds”, a situation tailor-made for policy wonks who feel we are all too ignorant to draw basic conclusions without their help.  This article is intended to cut through the chaff and provide a common-sense rationale for much of the current premium pricing debacle that we face. Frankly, given the behavior of regulators at the federal level, it’s astonishing to me that private insurers aren’t forced to demand double digit premium increases yearly from private payors just to stay in business.]

This column is in direct response to a clients’ question: how is the federal government purchasing health care at below-market rates? The client asked me to send him additional information on this topic, since I brought it up in a meeting. I must first confess that I provided him with a statistic, incorrectly stated: I inadvertently transposed a percentage when detailing the true costs of  federal health care costs as compared to the costs related to the private delivery of health care. I’ll fix that with this post, and provide substantial ammunition to support the idea that it is imperative that the federal government get out of the business of centralized price-controls in the health care arena. Sadly, it is very unlikely that this will happen, as the two sides on the issue are separated by a divide the size of the Grand Canyon on the heart of the matter – how to pay for and deliver health care to the nation, and by extension either control health care delivery at the federal level via central planning, or allow the free-market, and private insurers, working in harmony (important consideration) with various regulators to provide solutions to the health care woes of the nation with insurance programs that avoid rationing and expand care.

On one hand, progressive Democrats view insurance as evil, and wish to have health care costs borne by a progressive system based on a social policy of wealth redistribution through the tax code, the word “insurance” not being in their vocabulary. Conservative Republicans view health care, on the other hand,  as a free-market product that insurers, using standard reserve techniques, can provide far more economically and efficiently, without the centralization or government control demanded by progressives in their march towards utopia (a rationed utopia, at that). And it should be pointed out that Democrats have done a superb job of forcing the market conditions that have created a health care system in which there is little if any competition, where the federal government pays substantially less than the true cost of care for its Medicare/Medicaid programs, and where continued market and pricing stresses, literally created by Democrats intent on their end goal of a single-payor system, provide the perfect excuse for the federal government to proclaim that it alone can save the day, when in fact they have created the very problem they will now take pains to “fix”. But we are getting into partisan waters here, and it’s best to stick to the facts, and answer my clients’ question.

That the federal government purchases a great deal of the nations’ health care is beyond dispute. According to the Department of Justice, federal, state, and local governments pay for approximately 45 percent of total U.S. expenditures on health care. This figure, first published in 2003, is likely higher today. The problem is that Congress, rather than any free-market mechanism, approves the reimbursement schemes for much of that care – and we all know how well centrally planned price-fixing schemes usually work out. And herein lies the true problem: the controversy concerning Medicare or Medicaid isn’t that it under-pays health care providers and facilities, but that the under-payment is over-stated, or even, depending on whom you are listening or talking to, non-existent or even irrelevant. In fact, there does appear to be two schools of thought, which, coincidentally, mirror the two different philosophies of the left & the right. The left views the “underpayment” of costs related to its share of health care costs as unimportant, even illusory, due to the scale of care they are “purchasing”, and point to the complex (and politically tainted) process of Medicare price-setting as proof that all’s well with the way the feds pay for care. To explain, Medicare’s physician and other fee rates are based on the relative cost of providing services determined by what’s known as the Resource-Based Relative Value Scale (RBRVS), a system of “comparable worth” in medicine, and is itself based on “the objective theory of value, one of the fundamental tenets of Marxist economics”. This cumbersome process, updated every 5 years or so, is guided by input from the AMA, as well as others, but is ultimately set by the federal government, under the Federal Health Care Financing Administration, part of HHS, and then submitted to Congress. In the words of Michael F. Cannon, director of health policy studies at the Cato Institute, “The Medicare bureaucracy is somehow supposed to divine the correct prices for more than 7,000 distinct physician services in each of Medicare’s 89 physician-payment regions (yep, some 623,000 separate prices). And – unlike market prices – these price controls don’t automatically adjust to reflect the value of goods and services.” Central planning, at its finest.

The conservative right enthusiastically supports a contrarian view, and points out that “the hydraulics of health care“, which the left takes great pains to vigorously support as somehow necessary and equitable, and at the same time labels as overblown, is real and impacts every non-federal health care transaction. This controversy serves the left well, as it obscures the true costs associated with below-market federal reimbursement. It is, indeed, the 800 pound gorilla in the room.

To say that there is a lack of any consensus would be an understatement, and this explains the lack of clarity when discussing the impact of cost-shifting. And there is plenty of evidence, outside of left-wing policy wonks trying to re-define “costs” and “shifting”, to support the notion that federal reimbursement is below-market. Much of the evidence, as illustrated by this report, is troubling: cost shifting as a percentage of premium more than tripled over a five year time period, and appears to me to be accelerating. In fact, “employers and consumers in California pay up to 10 percent more for health care coverage because of government underpayments”, according to data compiled by Milliman for Blue Shield of California a few years ago. Even the Colorado Division of Insurance, in its most recent Annual Report, acknowledges that “..members of..Medicaid and Medicare.. typically pay less than commercially insured populations” when discussing cost-shifting.

So, an acknowledgement that cost-shifting is real and has an impact on, at least, premiums. But, how much is that impact, and how much more do private carriers and health care facilities wind up paying? In this study, The Lewin Group addresses cost-shifting relative to Medicare and Medicaid reimbursement. Lewin defined “cost-shift” as “not simply a set of differential prices as seen in the airline industry, but rather higher prices (above cost) systematically paid by one payer group to offset lower prices (below cost) paid by another payer group”[italics mine]. The study goes on to show a payment “hydraulic” (payment-to-cost-ratio) of 1.22 for private payers, compared with .95 for Medicare and .92 for Medicaid (1.00 would be cost). With a cost advantage of 5 to 7% below cost, and private insurers obligated to provide a profit to physicians and carriers in response, this represents a 30% increase in private payor costs compared to federal programs. In another article, entitled “At the Intersection of Health, Health Care and Policy”, published in Health Affairs, the authors acknowledge the Lewin Study and make note of  “The Cost Shift As A Form Of Premium Taxation” :

• “The cost-shifting dynamic places hospitals in the unenviable position of playing the role of private-sector tax collectors, to maintain their financial solvency. To the extent that public programs are not adequately funded through general tax revenues and trust funds, and the uninsured get care for which they do not fully pay, hospitals must attempt to “tax” the privately insured to make up the shortfall. Some of this shortfall is absorbed by increased hospital efficiency or a decreased emphasis on hospitals’ social missions, but much of the difference eventually resurfaces in the form of increased health insurance premiums. Employers indirectly fund the cost-shifting tax through their purchase of health insurance. They bear not only the cost of health care insurance for their employees but also a portion of the under- and uncompensated care pool. This is one reason why—aside from the underwriting cycle—private-sector employers’ payments rise faster than underlying health care costs..”

This hidden tax is estimated at 32% by some observers (in 2007, hospital payments for the care of privately insured people were equal to about 132 percent of their actual costs of care; Shields, House Ways & Means hearings). And the “cost shift” appears to be increasing: In 2007, Medicare paid on average only 91 percent of the actual cost of hospital care for Medicare patients, as shown in the original Milliman report.

America’s Health Insurance Plans (AHIP), through a spokesman, goes further: “Right now, Medicare only reimburses hospitals about 85% of their cost. It’s employees and families that are paying $1500 a year to subsidize the Medicare program.” Given the 20% or higher differential that private payors, through their insurers, pay, this translates into an almost 40% differential between what Medicare reimburses and what private payors are expected to pay for the same services.

The consensus, then, is that, even if the left characterizes “cost-shifting” as an exercise akin to differential pricing with airline tickets or new cars, pricing hydraulics exist in health care, made all the more problematic by price controls that are neither realistic or flexible, and serve to exacerbate the current difficulty with fewer and fewer insureds paying a higher and higher tariff for more and more people who, by virture of mandated government cost-shifting in the form of reduced payments for services, are provided with services at less-than-cost, primarily to save the federal government from the true cost of its social welfare programs. This, then, is the “taxation without representation” present in your health insurance premiums.

I’ll address “the doc fix” is another post, since the reduction in Medicare payments for physicians services relates directly to the hydraulics of health care, and was a central feature in the purported “savings” that Obamacare was to provide in its first ten years – an estimate that has already been wiped out with further CBO estimates, not to mention Congress’ restoring the cuts to avoid political damage to a powerful lobbying group.

An interesting comment on what agents and brokers bring to their clients:

“The thing many people don’t know about our industry is that health insurance agents are in the business of saving lives. Like family physicians or ER surgeons, agents are intimately connected with their clients’ quality of care — and are often exceptionally hands-on in fighting for a treatment or surgery to be approved by the insurer so that it can be performed by the doctor.

This same hands-on guidance is needed before coverage is in place. Choosing a health care plan is no easy task, as anyone who has shopped for an individual health plan will tell you. It is also frequently not an affordable task. In a struggling economy, one of the biggest challenges agents now face is convincing people that health care coverage is a necessary expense, not an expendable one.”

I thank the contributor for an industry newsletter for this observation. This commitment to the client is a hallmark of all good agents and brokers. Somehow, Washington misses the point when they pass legislation that specifically excludes agents from assuming their rightful place as a trusted advisor to the public, and instead empowers entities with an agenda not wholly in keeping with the best interests of the general public (or, private-sector employees!) to do the job that trained and ethical insurance agents have been doing for decades. How so, you say? Believe it or not, under the Affordable Care Act, agents and brokers may not be compensated, and aren’t recognized as traditional insurance licensees for the purposes of placing health insurance. In essence, your health insurance agent or broker, whether you use individual or group insurance, will be out of business on January 1st, 2014. He most likely won’t be able to assist you – and, assuming you need to use an exchange-based product (a good bet for many people) you won’t be allowed to use him.

Of course, the conventional wisdom from HHS is that agents and brokers will of course be allowed to assist their clients and prospects through the exchanges. And this is about as far as the mainstream media will take it (they really don’t want to get involved in the details, you see). What HHS is really saying is that if a state wants to allow agents to enter the exchanges, they can do so, under new rules announced recently. But under the AFA, they still can’t earn a commission for the placement of a health insurance policy or group plan. We can however, receive “grant money” through the health insurance exchange, known as a “Navigator” grant (but the funding for these grants cannot come from federal funds). What’s really interesting is that agents and brokers are a long way down on the list of specific “entities” are are allowed as navigators, and, as I recall, weren’t originally included in the Navigator section under Obamacare, and this is telling: included in this list are groups and organizations whose primary focus isn’t in serving the public with accurate insurance information: consumer-based nonprofits and unions lead the list. I’ll let you, the reader, figure out why unions would be allowed to act as navigators with employees of primarily non-union employers.

Of course, HHS will allow the state exchange to “enforce existing licensure standards, certification standards, or regulations for selling or assisting with enrollment in health plans and to establish new standards or licensing requirements tailored to navigators”. Color me sceptical, but I foresee some Insurance Departments making it easier, not harder, for previously unlicensed entities to act as navigators, and harder for traditional agents and brokers, who primarily work as independent contractors with a cottage-industry business model. It’s simply a matter of scale – a union or a non-profit is very familiar with the way government works, and can easily acquire any expertise required to achieve navigator status and apply for grants to enroll large numbers of eligible individuals – they themselves have the resources to hire employees, under a broker license, to do just that. As a national operation, they are tailored-made for the kind of large scale enrollment activity that Obamacare requires. Individual agents work alone, sometimes in larger agencies, but rarely with more than a few dozen agents. Inevitably, there will be problems with compensation for agents and brokers. We don’t receive salaries from a union.

There are other hurdles that agents will find hard to meet – almost as if they were specifically being targeted for extinction through the use of the navigator process. For instance, navigators must “provide information in a manner that is culturally and linguistically appropriate to the needs of the population being served”, along with other heretofore nonexistent requirements for agents and brokers working in the private-sector insurance market. While, again, the devil is in the details, I doubt that many agents, assuming a strict interpretation of these requirements to receive navigator grants, will be able to meet these onerous requirements, especially given the nature of the lack of any clear compensation path. It’s another matter entirely if the governing board of the health insurance exchange, empowered with granting navigator status, is anti-broker, as will almost certainly happen in some (most?) states. As proof of the politics involved, consider the number of state insurance commissioners who continue to insist that agent compensation not be excluded from the Minimum Loss Ratio rules as a pass-through cost – almost ensuring the death of the traditional insurance agent in the role he’s always played in the delivery of health insurance policies to the public.

In Colorado, exchange legislation was adopted in May 2011, with the passage of SB 11-200, The Colorado Health Benefit Exchange. The legislation as passed and adopted does not address any issues regarding navigators in Colorado, and in fact does not mention agents or brokers in any way shape or form.

I can only draw the conclusion that, barring a Supreme Court decision invalidating The Affordable Care Act in it’s entirety, or the election of a super majority of Republicans in the House and Senate at the federal level (and the election of a Republican President in 2012) my role as an agent/broker advising the public as a licensed insurance agent on health insurance and group benefits will most likely come to an end in 2014. This isn’t anything new, of course: Hillary Clinton, who headed up her own scheme for a government takeover of health care, was asked by an agent in 1993 what would happen to health insurance agents under her plan. The Wall Street Journal quoted Clinton as saying, “I’m assuming anyone as obviously brilliant as you could find something else to market.”

Spoken as a true central planner. One wonders what else they will “nationalize”.

The small employer tax credit, which was added to the Internal Revenue Code by the health care reform law, is effective for taxable years beginning in 2010.

Anthem has been gracious enough to produce a fact sheet on the tax credit.

For more details about whether you qualify for the tax credit and how to claim the credit,  talk with your tax advisor, due to the complexity associated with determining the amount of credit an employer is entitled to receive. Or, call me and I can help.

Employers may want to carefully review their fully-insured group health insurance plans given the changes wrought by The Patient Protection and Affordable Care Act (PPACA).

A fully insured health insurance plan sold on or after September 23, 2010 is not “grandfathered” under the current grandfather regulations, and is immediately subject to IRS Code Sec. 105(h) rules, which prohibit employers from discriminating in favor of highly compensated individuals, relative to other employees in eligibility and benefits under a group health plan. Non-grandfathered class/carve-out plans that only cover a class of employees, or cover such a class at a higher benefit level than another class, are prohibited under these new rules, and are subject to a $100 per day per failure penalty.

Plans sold after March 23, 2010 and before September 23, 2010, are also non-grandfathered, and are subject to the new 105(h) rules on the first day of its next plan year.

Lastly, a fully insured plan that was grandfathered on March 23, 2010, and subsequently loses its grandfathered status due to changes in the plan will be subject to 105(h) rules when the grandfathered status is lost, and may not be in compliance with the 105(h) rules.

So, what is a grandfathered plan? I thought you’d never ask! If coverage was provided by a group health plan in which an individual was enrolled on March 23, 2010, the coverage is grandfathered. To keep grandfathered status, the health plan must continuously enroll someone from March 23, 2010, onward (the plan must continuously cover someone since March 23, 2010).

There are a number of rules which affect a grandfathered health plans status; any one of these rules serve as a means to lose grandfathered status. Plan modifications to grandfathered health plans could cause loss of status; these modifications could include benefit eliminations, an increase in coinsurance percentage, increased cost-sharing, increased deductibles,  increased copayments, a decrease in an employers’ contribution by more than 5%, or any change in overall annual dollar limits.

(While it was originally ruled that changing a group health plan carrier would trigger loss-of-grandfathered status, federal regulators recently ruled that an employer may change carriers if the new plan is similar enough to the old plan to qualify for grandfathered status.)

A fully insured group health plan with a class/carve-out must maintain it’s grandfathered status or be in violation of the nondiscrimination rules under 105(h). For some employers, this is critical. Luckily, grandfathered health plans will be able to make routine changes to their policies and maintain their status. For instance, making modest adjustments to existing benefits, adopting new consumer protections under the new law, or making changes to comply with state and federal laws are allowed. Premium changes are not taken into account when determining whether or not a plan is grandfathered.

Caution: To maintain status as a grandfathered health plan, a plan or health insurance coverage must include a statement, in ANY plan materials provided to a participant, subscriber, or beneficiary describing the benefits provided under the plan or health insurance coverage, that the plan or coverage believes it is a grandfathered plan within the meaning of Section 1251, PPACA. Model language satisfying this disclosure requirement is available on-line. Employers need to be certain this information is distributed, or risk loss of their grandfathered status due to non-disclosure. Don’t assume that your health insurer is doing this!

Lastly, don’t forget that these new rules are largely intended to eliminate any discrimination in insured benefits. Given the new $100 per day, per participant excise tax penalty for nondiscrimination violations, a thorough review of employment agreements, offer letters and other documents providing for extended health coverage, as well as long term care insurance, for key employees or anyone highly compensated under Section 105(h), is highly recommended.

Q: “Would you mind enlightening me on the credit given to employers after March 2010 for up to 35% of employee health premiums if under 10 employees? I want to make sure I understand it correctly. Is this done by the insurance company or is this something the employer must do on their 941 report..”

Excellent question! The credit for small employer health insurance premiums was part of the Affordable Care Act passed earlier this year, and gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010, or, in IRS-speak in Notice 2010-82, “the credit is available for taxable years beginning after December 31, 2009”. The credit is, generally, 35% of premiums paid, claimed on Form 3800, General Business Credit.

The regulation deals with Form 8941, which allows some small employers a credit on a percentage of health insurance premiums paid for by the employer. That’s the easy part – the difficulty is in the details, which are described, based on the notice guidance, here. A summary flier is available, as well.

An “eligible small employer” uses Form 8941 to figure the credit. An eligible small employer must meed the following three requirements:

1. You paid premiums for employee health insurance coverage under a “qualifying arrangement”.
2. You had fewer than 25 “full-time equivalent employees” (FTEs) for the tax year.
3. You paid average annual wages for the tax year of less than $50,000 per FTE.

FYI: A “qualifying arrangement” is generally considered to be a fully-insured health insurance policy that requires you to pay a uniform percentage, not less than 50%, of the premium cost for each enrolled employee’s health insurance coverage.

Note that, for a tax-year beginning in 2010 only, “a qualifying arrangement includes any arrangement that requires you to pay at least 50% of the premium cost for single (employee-only) coverage for each employee enrolled in any health insurance coverage you provide to employees, whether or not you pay a uniform percentage of the health care premium cost for each enrolled employee”. For tax years after 2010, you must pay at least 50% of the enrolled employees health insurance coverage, not excluding dependents.

In your question, you mention 10 employees as a limit. Actually, what happens is that the credit is reduced if you had more than 10 FTEs; if you had more than 25 FTEs for the tax year, your credit is reduced to zero. There is also an average annual wage limitation which further reduces your credit if  you paid average annual wages of more than $25,000 for the tax year. The exact details and worksheet for figuring the credit are in the instruction for Form 8941, linked above.

So, who isn’t an employee for purposes of this credit?

1. The owner of a sole proprietorship,
2. A partner in a partnership,
3. A shareholder who owns, generally, more than 2% of an S Corp,
4. A shareholder who owns more than 5% of the outstanding stock in a non-S Corp

Note that there are additional details that expand on the above limitations in the Notice and instructions, and there are additional limitations on leased employees, seasonal employees, household and other non-business employees (although you do not have to be in a business or a trade to qualify for the credit), and Ministers.

For employers who are offering HRA’s or HSAs, there could be confusion. The guidance allows high-deductible health insurance plans (HDHPs) as health insurance coverage; it does not allow payments to HSA accounts, as defined under Sec. 223(d)(1) of the IRS Code. Similar restrictions on FSAs and other self-insured plans apply to the credit.

Lastly, if you reward your employees with a richer health insurance plan than average, you credit is further reduced for tax years beginning in 2010. Example: for Colorado employers, the average annual premium must not exceed $4,972 for employee-only coverage, or $11,437 for family coverage.

UPDATE: IRS guidance on small business health care tax  credit

DISCLAIMER: I am not a tax consultant, and this information is considered to be general in nature. Check the links above to download the Notice, Form, and Instructions. Always check with a tax professional, as the above information may change.

Health care reform will change how employees may use their health care flexible spending accounts, health reimbursement arrangements, health savings accounts, and Archer medical savings accounts, starting on January 1, 2011.

The IRS issued Notice 2010-59 which provides information about these changes. Two important changes are an increased penalty for nonqualified HSA and MSA distributions, up from 10% to 20%, and that prescriptions are now required for over-the-counter (OTC) drugs, with the exception of insulin. Flexible spending account holders who have valid prescriptions for OTC items must pay up front and then provide proof when they request reimbursement.

For OTC items that aren’t drugs, such as bandages, blood sugar testing supplies, catheters and so on, members can continue to use spending account funds to pay for these expenses.

TIP: If an employer has a cafeteria plan allows members to use spending account funds for OTCs, the plan will need to be amended. There is a transition period allowed for this change – an amendment made before June 30, 2011 may be made retroactively for expenses incurred on or after January 1, 2011. Contact your third party administrator (TPA) to get this accomplished.

The new health care reform law established, for the first time, federal definitions of “small employer” and “large employer” for health insurance markets. Prior to the passage of this legislation, states defined these markets for themselves.

Here are the new rules:

• From now until 2016, states can define the size of small employer groups as either 50 and fewer employees, or 100 and fewer.

Colorado has defined “small employer” for group insurance purposes as 50 or fewer, and there doesn’t seem to be any rush to change this with the passage of federal law, for now.

Beginning in 2016, the new definitions will apply – businesses with, on average, 1-100 employees in the preceding calendar year will be “small employers”. “Large employers” will be those who had, on average, 101 or more employees in the preceding calendar year (and at least one employee on the first day of the plan year).

For employers who are used to calculating COBRA continuation eligibility, the full-time calculation accounts for both full-time and part-time employees, using the same general formula (part-time employees counted as fractions).

TIP: Full-time seasonal employees who worker fewer than 120 days during the year are excluded.

There are inconsistencies in the application of these new federal definitions that will need to be ironed out, assuming the entire health reform act isn’t amended, repealed and replaced, or successfully challenged in court.

An excellent article posted at Patient Power, the health care policy blog at The Independence Institute. The Colorado Division of Insurance is claiming that, for small group policies in 2010, premiums will climb an additional 5% due to the effects of new Federal requirements, while individual plans will climb up to 7.8%.

Federal regulators have amended the grandfathered-status rule under the health care law known as Obamacare. Employers with insured group health plans can switch plans and carriers that provide similar coverage, but at lower cost, without losing their grandfathered status.

Under the original rules, group plans could lose their grandfathered status if the employer switched from one insurance carrier to another.  The original regulation only allowed self-funded plans to change third party administrators without losing grandfathered status; now, all groups health plans can change TPA’s or carriers and maintain their grandfathered status.

According to Mercer, the average deductible for popular PPO plans now stands at $1,200 annually for employers with 10 or more employees.

The Mercer survey also found that health benefit costs rose 6.9% this year – up from 5.5% in 2009.

Another trend noted in the study is that large employers were adopting high-deductible plans, linked to health savings accounts, more quickly than small employers. The reason? Lower costs – high deductible HSA plans are more than $2,000 a year less expensive per employee, including employer contributions to the savings account.