The Department of Health and Human Services (HHS) has just announced that any and all FDA approved “contraceptive methods, sterilization procedures, and patient education and counseling for women with reproductive capacity,” will be provided under ObamaCare “without cost” in college/student-based health plans, and for women of college age but not attending school.

Senators John Barrasso, R-WY, and  Sen. Tom Coburn, R-OK, have co-authored a report detailing the disaster known as Obamacare. Senators Barrasso and Coburn have a unique perspective on the emerging octopus of centralized/federalized health insurance: they are both physicians.

Some excerpts from the 38 page report:

• Warned the health care law could eliminate about 788,000 jobs. CBO Director Doug Elmendorf confirmed in Congressional testimony that the health care law would reduce the workforce by approximately 800,000 jobs.
• Concluded the Medicaid expansion’s “extra costs forced upon state taxpayers and state governments could climb into the hundreds of billions of dollars”. In fact, according to a tally of state estimates, the law will impose about $120 billion in additional costs on states, just in the first few years of the law’s implementation.
• Explained the Community Living Assistance Services and Support (CLASS) program was “a budget gimmick to appear to offset new spending” and warned the program could “expose taxpayers to tens of billions of dollars of loss” because it was would eventually collapse. The Department of Health and Human Services (HHS) has admitted CLASS was unworkable, and shuttered the program.
• Cautioned “the appearance of Medicare‘s extended solvency is actually only a mirage. In reality, under the new law, Medicare‘s unfunded liabilities will grow worse”. The Medicare Actuary late concluded that Medicare’s unfunded liabilities are made worse by about $2 trillion under the law.
• Warned that “as the new law is being implemented, millions of Americans are in danger of losing their current health insurance.” HHS concluded that, under the law, between 39 and 69 percent of businesses will lose their status as “grandfathered health plans”—plans largely unaffected by the law’s new mandates. HHS estimates by 2013, up to 80 percent of small businesses will lose their grandfather status.
• Noted that “rather than fixing an issue everyone in Congress agreed was a problem, Congressional leaders left the doc fix out of the final health bill” because of “budgetary shenanigans” to decrease the appearance of the bill’s cost. We warned that this policy omission “could endanger access to care for millions of seniors. In fact, Congress has already had to intervene several times to prevent severe cuts to physician reimbursements that would harm seniors’ access to care.

An eye opening report that every employee worried about their employer abandoning their health care, and every employer worried about the spiraling cost of benefits, should read.

Quote: 

“When I say ‘If you have your plan and you like it,… or you have a doctor and you like your doctor, that you don’t have to change plans..”

“What I’m saying is the government is not going to make you change plans under health reform.”

(Editors note: unless you have an HSA!)

These are well-known comments from POTUS Obama in the time leading up to the passage of The Affordable Care Act, and afterwards as he flew around ginning up support for an incredibly bad piece of legislation. We now know that these comments aren’t accurate, or even, strictly, truthful. And they directly impact so-called Bronze plans, of which HSAs should be a component. Only, they won’t be.

It should come as no surprise that Democrats despise Health Savings Accounts (HSA for short). Their leading left-wing think tanks routinely lambast them. It’s been somewhat hard to understand why the Administration hasn’t been dissing them openly since the passage of Obamacare; now we know why. They are simply going to eliminate them without a shot being fired, due to a complex series of rules and regs that could only be interpreted as willful, and involve the actuarial percentage of benefits paid in each Gold, Silver, and Bronze plan, and the confusing effects from a price control enacted for political purposes.

The Medical Loss Ratio (MLR) Rule is the culprit. HSAs, under this regulation, cannot qualify.

The MLR Rule requires insurers to spend no more that 20% of premium on administration in the small group and individual markets and 15% in the large-employer market. This spells trouble for high-deductible health plans in exchanges, since only 5% of those with an HSA qualified health plan in a year have any claims paid by their insurance.

HSAs, in summary, are high deductible plans that allow cash to be set aside in a fully tax-deductible savings plan to be used to pay for out-of-pocket expenses before the deductible is met. HSA-qualified health insurance policies are usually lower cost than many fully-featured health plans, and are especially well suited for many small business sole proprietors, or others who believe saving money to pay for their own out-of-pocket costs is better than giving it to an insurer, who is in essence subsidizing other health insurance claims with their dollars.

Here’s part of the problem: payments made by an insurer for health care expenses count towards meeting the MLR Rule; payments by individuals out of their health savings accounts do not. Taking into account the complex rules for “credibility adjustment” and “cost-sharing adjustment” for companies that sell high-deductible plans, HSA-qualified or not, it appears that, given the lower claims-paying of HSA  or other high deductible plans, it is mathematically impossible for any plan to meet the MLR of 80%. This would mean no Bronze plans in the Exchanges, since they cannot meet the complex and required Minimum Loss Ratio Rules.

Obviously, plans with higher deductibles are being intentionally disadvantaged by this arcane formula because they cannot count claims incurred below the deductible. Since Bronze plans under the PPACA cover 60% of the benefit costs of the plan, it seems unlikely that HSA plans will be eligible under this scenario, even though the original guidance showed HSA plans as being eligible based on their deductible range (See here). Further, the carrier must still process claims below the deductible to track deductible expenses, but no cost of that processing can be applied to the MLR’s.

I draw my final conclusions from this study prepared by the HSA Coalition:

“Clearly, the MLR adjustment factors for cost-sharing and credibility help companies offering high deductible plans but only if they have low enrollment. Most [insurance] companies will likely see little benefit because the adjustments end up being minimal and ultimately disappear because of the way the MLR formula is constructed. In the short-term, this could limit future growth of HSAs in the fully-insured markets (individual, small group, large group) and put extra pressure on premium pricing to minimize potential rebates. Insurance companies (especially the current market leaders) may be encouraged to sell more expensive plan designs with more first-dollar coverage (e.g., HMOs and traditional PPOs)because it will be easier to meet the MLR requirements. The result could be a future market dominated by more expensive plans, dramatically reducing affordability of coverage and adding significantly to the costs of income-based subsidies provided under the law, since the subsidies are based on the weighted average premiums for Silver plans in the “market area.”

The end result will be that the exchanges will likely be dominated by high-cost health plans with few lower cost options available, leaving people out of the market – until they desperately require health insurance coverage. This will quickly drive up the cost of coverage, expanding the subsidies needed to pay for it.

A summary of the problem is here. And, here is a detailed article on MLR’s Potential Effect of HRAs and HSAs.

UPDATE on 2/26/12 – Quote: “The obstacles Obamacare creates for consumer-driven health plans could lead to their extinction, even though they are an affordable form of coverage that is gaining in popularity.” See this link.

We tried to tell ’em, but no one on that side of the aisle listens: health reform inevitably drives health insurance rates even higher due to mandates and required coverage benefits on every policy (in Colorado, this was made worse by action at the state, not federal, level, when the Democrat ‘super-majority’ passed mandatory maternity coverage for every individual health policy sold or renewed in the state). This year, the average premium nation-wide rose 9 percent, higher than the last two years combined.

Want the whole story? go here.

And, before you think this report is biased, read this: the Centers for Medicare and Medicaid Services (CMS) estimates the growth in health insurance costs will increase 10 extra percentage points in 2014 because of health reform – a 14 percent increase, versus 3.5 percent without the law.

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.

This should really not come as any surprise to anyone who has followed Aetna and it’s on-again/off-again history in Colorado:

“Aetna retrenches in Colorado” – read, exit, stage left, once again.

Perhaps a quick look at the not-too-distant past is in order. Aetna, in a snit to this observers’ mind, left the Colorado market with the first whiff of “reform” that passed through Colorado in about 1995; this was the same period, more or less, marked by Roy Romers’ threat to put all of Colorado on a single-payor system unless the legislature enacted health insurance reform. And a bunch of recalcitrant, big name insurers (and a non-profit, if memory serves) had to be dragged, kicking and screaming, into the small group market, which they had avoided like the plague for eons. Exit number one for Aetna.

Then, in 1997, Aetna decided to come back into the state with the purchase of Frontier Community Health Plans, Inc., a small and fragile managed care company based here in Colorado. Known back then as Aetna U.S. Healthcare, they made quite a thing of being able to offer a variety of HMO-based products in Colorado – just before the crash-and-burn of HMOs and “managed care”.

And now, we have exit number two. Unless they buy someone (again), Aetna will be barred from re-entering the Colorado market for five years.  (By that time, individual plans will look, and cost as much, as small group plans do now. Care to guess how many people will be forced to drop their coverage?)

To its credit, Aetna grew its individual business here, eventually becoming the sixth largest provider of individual health plans. With its decision late last year, in the wake of health care reform, which mandates a minimum loss ratio for small and large group carriers, to leave the  small group market, Aetna set the stage for the abandonment of the Colorado insurance market once again, just as it did in the mid-nineties.

Now, don’t get me wrong – I have no problem with any private sector corporation doing what it needs to do to survive in a bad economy. But from this agents’ perspective, Aetna always seemed more interested in protecting their bottom line the easy way, rather than stay and slug it out in a “competitive” environment, like some others have – Anthem, United Healthcare, and Assurant Health, to name three. Even some that aren’t particularly competitive in terms of product or premium make up for those weaknesses with superior service and other products – or they remain as admitted carriers who aren’t actively in the market, as any veteran of the health insurance biz in Colorado will attest to.

Unfortunately, we have less and less competition in the group or the individual market in Colorado than ever before, and much of the blame for that can be laid directly at the feet of the legislators who feel that doing everything they can to make things “fairer” is the answer to controlling costs (hint: it isn’t). One only has to look at the cloistered relationship between legislation/regulation and admitted carriers to understand that, to a degree, existing carriers in Colorado don’t really want more competition, and legislators, at least on the Democrat side, are all the more interested in making it harder to compete here in any event, thereby strengthening the hand of the existing carriers at the expense of any other carrier who wants to do business here but can’t or won’t risk insolvency for the privilege of serving Colorado and its shrinking small business and other health insurance base. Certainly, mandating “reproductive services” (mandatory contraceptive and maternity coverage) for all new individual policies sold in the state, in the name of equality and fairness, won’t attract any new carriers, and likely played a hand in Aetnas’ exit, as well.

Hint: That individual policy you have, right now? It just became a whole lot more valuable.

On one hand, I wish Aetna had stayed – we need the competition. By the same token, leaving when things get , well, tough, isn’t endearing, either. Maybe Aetna just needs to admit that it can’t live on the paper-thin profits of the health insurance industry – after all, when was the last time Wall Street was bullish on health insurance? Especially with the individual mandate, the dubious gift hailed by John McCain, Mrs. Clinton, and by POTUS Obama, all but dead and gone for now, skewered on the sword of a Federal Judge who understands the constitutional mandate of limited federal power. Too bad that no one thought of that before they passed the bill – so that we could read what was in it, of course.

The Republicans, to their credit, are determined to fulfill a campaign promise to repeal Obamacare and have scheduled debate and most likely hearings on the legislation, which should keep the issue front-and-center as a national campaign issue as we enter the 2012 Presidential campaign – something that has already started, for those who don’t yet know it.

“Let’s be clear” – to borrow a phrase – the POTUS will veto anything that smacks of repeal, or anything that waters down his intent to bring the private health insurance industry under the wing of the federal regulatory apparatus via wage and price controls that were legislated and are now being promulgated as regulations by HHS, CMS, and the IRS. The “battle lines” are drawn (sorry for the un-civil reference; it is a good one, though).

Democrats are doing their usual bang-up job, aided and abetted by like-minded media types, of characterizing Repubs as cruel and inhuman for wanting to, say, do away with the reforms that Obamacare brought to pre-existing conditions limitations, even though, in practical terms, the issue really isn’t an issue, only affecting 2-4 million people yearly, out of a total insured population of around 260 million under age 65. And the solution they’ve proposed through Obamacare, which essentially forces individual health plans to become small group health plans in all markets, will be substantially more expensive for all, driving even more people into the ranks of the uninsured – until the subsidies kick in, mind you, which really just redistribute tax dollars from those with more income to those with less income (and explains why the feds are setting up for a massive increase in Medicaid enrollees – I’ve seen estimates of more than 80 MILLION enrolled by 2014!). Never mind that solutions already exist, and have existed for years, but have never been enthusiastically developed to provide an efficient, truly workable safety net for those unfortunate 2-4 million people who do have pre-existing conditions and would like to remain covered. No, what was needed, claim the proponents of Obamacare, was a massive expansion of the federal entitlement bureaucracy and a new redistributive scheme. We even have the words of Donald Berwick, recess appointed as administrator of the CMS, as proof.

So, what now?

Opponents of Obamacare need to counter the overblown and, frankly, inaccurate claims by progressives that repeal of any part of the Affordable Care Act will lead to “people dying” or other incendiary comments thrown around by those who are in a lather about dismantling their latest entitlement expansion. Bottom line is that it needs dismantling.

First, Republicans need to outline, in no uncertain terms, what they are proposing and what they will support – and then let everyone know it. Otherwise, from this observers’ position, the Democrats’ win the public relations battle hands-down. It’s the old “they are going to take away your Social Security” argument, one that Dems have honed to a fine edge – and that some people accept as conventional wisdom, even if it contains not one shred of truth.

Second, while repealing Obamacare right now is essentially a symbolic act (although, given the nervousness of some Senate Democrats, I’m not so sure a repeal couldn’t land on POTUS’ desk for him to veto; that would be a gift) politics is all about symbolic acts, and the Republicans need to stick to their principles, and the promises made during the 2010 election cycle, and do everything possible to repeal it entirely, now and in the months ahead. This is a defining moment for Republicans, and they better not waver. Symbolic or not, it will prove to the voters who handed them the keys that they can be trusted.

Since outright repeal is probably not going to happen, given the veto pen over at the White House, constructive replacement is called for, and here is a good list to start.

The biggest danger, though, is one that is receiving little media coverage, which, to my suspicious eye, is by design. The Medical Loss Ratio (MLR) provisions are essentially wage and price controls which will drive out companies currently in the health insurance market, further weakening an already under-performing industry and essentially mandating their financial performance. For proof, look no further than Forbes, which gave the industry a 2.2% profit margin – lower than your grocer. What’s more alarming is that MLRs make no practical sense, as detailed here.

If Republicans want to gain traction quickly, this is one of the first places I’d target (oops -my bad) to change. Mandatory Medical Loss Ratios only make sense if you hate insurance companies and see no practical benefit to allowing them to survive – a view not endorsed by the millions of Americans (a majority, actually) who view them favorably.

What with all the changes (18 new regs so far, and that’s just the start) emanating from the Affordable Care Act (!), here is a handy checklist for employers both large and small to review. There are a blizzard of new required disclosure notices, any one of which can put you in harms way if you miss one. Especially important are the grandfathered plans notice disclosures, which, based on my reading of things, will invalidate your grandfathered plan status if you miss the required employee disclosure. My recommendation would be to do this yearly, either at renewal or right now, at end of year.

Model language is important, too: this article includes links for the language that’s been “approved”.

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.