Health Care Reform Glossary
The following is a plain English summary of some of the terms it may be helpful to understand in connection with Health Care Reform. Many of these definitions could change as the appropriate agencies publish guidance.
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- Actuarial Value
The amount the plan will pay toward allowable costs. The participant makes up the remainder of the costs in the form of cost-sharing. One possible way to calculate actuarial value is to divide:
- Allowable costs minus cost-sharing, by
- Allowable costs.
The concept of actuarial value is used in the Health Care Reform law in connection with the Free Rider Penalty, qualification for federal premium assistance to purchase Exchange coverage, and the "precious metal" levels of Exchange coverage. Regulations clarify how to calculate actuarial value for these purposes.
For purposes of the Free Rider Penalty, the health coverage must have an actuarial value of at least 60% in order to be considered adequate. If coverage is inadequate, the employer may owe a Free Rider Penalty and the employee may be entitled to receive federal premium assistance to purchase Exchange coverage.
Under the Free Rider Penalty, coverage is affordable if the employee does not have to pay more than 9.5% of household income for employee only coverage in at least one health coverage option offered by the employer. If coverage is unaffordable, the employer may owe a Free Rider Penalty and the employee may be entitled to receive federal premium assistance to purchase Exchange coverage .
In connection with the individual mandate, if an employee only has access to employer-sponsored health coverage that is unaffordable (the lowest cost option available costs more than 8% of the employee's household income), the individual will not owe a penalty for failing to obtain minimum essential coverage.
- Affordable Care Act
See Healthcare Reform below.
- Allowable Costs
The amount on which payment is based for health care services covered by the health insurance policy or self-funded plan (eligible expenses). The amount is usually the negotiated rate (after applying any discounts the health insurer/administrator has negotiated with in-network providers) or the usual, customary, and reasonable (UCR) rate (the amount paid to a non-network provider for a medical service in a geographic area based on what providers in the area usually charge for the same or similar medical service).
- Cadillac Tax
The excise tax on high cost plans that will be imposed on insurers/administrators beginning in 2018 to the extent the aggregate value of specified employer-sponsored health coverage exceeds applicable thresholds.
The participant's share of the cost for a covered health care item or service (such as a physician's visit or prescription drug), calculated as a percentage (e.g., 20%) of the allowable cost for the item or service. The health insurance policy or self-funded plan pays the remainder of the allowable cost.
A fixed amount (e.g., $15 or $20) a participant is required to pay for a covered health care item or service (such as a physician's visit or prescription drug). The health insurance policy or self-funded plan pays the remainder of the allowable cost.
The amount a participant will pay toward the cost of health coverage, not including premiums. For example, deductible, copayments, and coinsurance.
- CPI – Consumer Price Index
Is defined by the U.S. Bureau of Labor Statistics as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. CPI is calculated by observing price changes on a wide variety of products in urban areas and weighing the price changes by the portion of income the consumer spends purchasing the products. The annual percentage change in CPI is used as a measure of inflation. CPI is used as the basis for indexing (i.e., adjusting for the effect of inflation) various provisions in the Health Care Reform law.
The amount a participant is required to pay for covered health care services before the health insurance policy or self-funded plan begins to pay. Before satisfying the deductible, a participant will pay 100% of allowable costs. After a participant has satisfied the deductible, the participant will typically be required to pay coinsurance or copayments until satisfying the out-of-pocket limit for the plan year.
- Essential Health Benefits
Essential benefits must include ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness, disease management, and pediatric services. The concept of essential benefits is used in connection with the restrictions on annual limits, prohibition on lifetime limits, requirement for insured plans to cover essential benefits, and the Exchanges. Agency guidance allows states to decide, among benchmark plans, the parameters of essential health benefits for Exchange coverage. For purposes of the annual and lifetime limits, self-funded plans may use any permissible definition of essential health benefits, including any available benchmark plan.
- Exchanges or Exchange Coverage
Health Insurance Exchanges are online marketplaces required to be established by states (or the federal government on the state's behalf) by 2014 that will offer private health insurance choices to individuals and small employers (generally with 100 or fewer employees). After 2017, it is possible larger employee groups will be able to participate in the Exchanges as well. A variety of plans in "precious metal categories" will be available, such as bronze, silver, gold, and platinum level options. The federal government is responsible for establishing the rules that apply to the Exchanges and the states (or the federal government on a state's behalf) are responsible for building and operating the Exchanges. (See also "precious metal categories.")
- Free Rider Penalty
The penalty a large employer will have to pay beginning in 2015 for either not offering full-time employees (and their dependents) health coverage or offering coverage that is either unaffordable (the premium contribution to receive employee only health coverage from the employer costs the employee more than 9.5% of household income) or inadequate (the coverage has an actuarial value of less than 60%). The employer will only owe a Free Rider Penalty if at least one employee receives premium assistance to purchase Exchange coverage. A large employer for this purpose is defined as one having an average of 50 or more full-time equivalent employees during business days of the previous calendar year. (Certain seasonal workers do not have to be included.)
- FPL – Federal Poverty Level(s)
Thresholds used for administrative purposes, such as determining financial eligibility for certain federal programs (including premium assistance to purchase Exchange coverage). The levels are issued each year by HHS and published in the Federal Register. The most recent levels are available at http://aspe.hhs.gov/poverty/index.shtml#latest.
- FSA – Flexible Spending Account
Allows an employee to elect to have a certain amount of money withheld on a pre-tax basis from the employee's salary and to use the dollars to reimburse qualified health care or dependent day care expenses incurred during the year on a tax-free basis. Click here for more information.
- Full-Time Employee
For purposes of the Free Rider Penalty, a full-time employee is one who works 30 or more hours per week or 130 hours per month. The definition of who qualifies as a full-time employee for other purposes of Health Care Reform provisions (such as automatic enrollment) is expected to be clarified by regulations.
- Full-Time Equivalent Employee
For purposes of determining whether an employer is subject to the Free Rider Penalty, the number of full-time equivalent employees is determined by adding:
- The number of full-time employees working 30+ hours per week, and
- The hours worked by part-time employees during the month divided by 120.
Certain seasonal workers may be excluded from the calculation.
For purposes of determining whether an employer is eligible for the small employer tax credit, the number of full-time equivalent employees is determined by dividing:
- The total number of hours of service (up to 2,080 per employee) for which wages were paid by the employer to employees during the taxable year, by
Certain seasonal workers may be excluded from the calculation. Self-employed individuals and their wages are not taken into account.
- Grandfathered Plans
Grandfathered status is available for health plans that were providing coverage as of March 23, 2010. Making certain changes to benefit offerings, plan design, or employer contributions toward the cost of coverage will cause a plan option to lose its grandfathered status. Grandfathered plans do not have to comply with several plan design mandates imposed by the Health Care Reform law.
- HDHP – High Deductible Health Plan
A health plan with lower premiums and a higher deductible than most traditional plans. HRAs are generally offered in conjunction with HDHPs. Internal Revenue Code section 223 allows HSAs to be offered in conjunction with qualified HDHPs that must comply with several design parameters, including minimum deductibles, out-of-pocket expense limits, and benefits the HDHP may provide before the deductible is satisfied.
- Health Care Reform (HCR)
The Patient Protection and Affordable Care Act (PPACA, HR 3590) enacted on March 23, 2010, with amendments made by the Health Care and Education Reconciliation Act (HCERA, HR 4872) enacted on March 30, 2010. The federal government often refers to these collectively as the Affordable Care Act (ACA).
The U.S. Department of Health and Human Services, which is one of three federal agencies (along with the Departments of Labor and the Treasury) with primary responsibility for implementing the key provisions of the Health Care Reform law impacting employers/plan sponsors.
- HIPAA Excepted Benefits
Supplemental benefits that Congress recognized do not provide benefits in the nature of medical care and, therefore, do not have to comply with a number of requirements that apply to major medical plans, including the Health Care Reform plan design mandates. The following are examples of HIPAA excepted benefits: accident, disability, limited scope dental, limited scope vision, long-term care, specified disease, hospital indemnity, and gap coverage insurance. These benefits must satisfy certain requirements in order to qualify as HIPAA excepted benefits. For more information, contact your legal counsel.
- HRA – Health Reimbursement Arrangement
A IRS-sanctioned program funded entirely by an employer to reimburse qualified medical expenses for participating employees and their spouse and children. An HRA is typically offered in conjunction with a high deductible health plan. The employer may choose the amount to make available, how the funds can be used, if unused funds can be rolled over from year to year, and whether funds will be available after termination of employment. HRAs may also be used to fund retiree health care.
- HSA – Health Savings Account
An individual savings account established by a participant in a qualified HDHP. An HSA provides a triple tax advantage for those savings: tax-free contributions, earnings, and withdrawals used to pay for qualified medical expenses. Internal Revenue Code section 223 establishes qualification requirements for the HSA, HDHP, and individuals eligible to contribute to an HSA.
- Individual Mandate
Effective January 1, 2014, all individuals must obtain minimum essential coverage or pay a penalty. The penalty applies for each month during which an individual doesn't have minimum essential coverage. Exceptions are available for unaffordable employer coverage (the lowest cost option available costs more than 8% of the individual's household income), for low-income taxpayers, and for coverage gaps up to three months.
- Minimum Essential Coverage
Coverage an individual must maintain in order to satisfy the individual mandate, such as coverage under Medicare, Medicaid, employer-sponsored health coverage, or an individual health insurance policy, so long as the arrangement provides major medical coverage (as opposed to simply providing supplemental benefits such as dental or vision coverage).
- MLR – Medical Loss Ratio(s)
Targets for health insurance coverage offered in the individual, small group, and large group markets. Beginning in 2011, if a health insurer does not achieve the target MLR, it must provide rebates to enrollees in that market.
- Out-of-Pocket Limit
The total cost-sharing a participant must pay during a plan year, after which the health insurance policy or self-funded plan must pay 100% of allowable costs for the remainder of the plan year.
- Plan Design Mandates
For purposes of this summary, plan design mandates refer to the provisions in the Health Care Reform law that dictate eligibility and benefit requirements for an employer's group health plan coverage.
- Plan Sponsor
The entity that provides group health plan coverage to employees, typically the employer. Most of the Health Care Reform requirements apply to plan sponsors (acting on behalf of their plans), although some apply directly to employers (regardless of whether they sponsor group health plans).
- Precious Metal Categories
Levels of coverage available through the Exchanges, including bronze, silver, gold, and platinum. All levels must cover essential benefits but actuarial value and cost-sharing will vary by level. With each higher level, the insurance premium and amount the insurance will pay (actuarial value) will increase while the amount the participant will pay (cost-sharing) will decrease.
- Pre-existing condition
A health condition, disease, illness, or injury for which medical advice, diagnosis, care, or treatment was received or recommended within a specified time period prior to enrolling in a health plan.
- Pre-existing Condition Limit
A period of time during which a plan will not provide coverage to treat a pre-existing condition. Under HIPAA, a pre-existing condition period cannot exceed 12 months (18 months for late enrollees), and must be reduced by any period of "creditable coverage" (i.e., prior health plan coverage) that an individual had prior to joining the plan (after not more than a 63-day break in coverage).
Example: A plan imposes a 12 month pre-existing condition period. A newly-hired employee who enrolls in the plan has a pre-existing condition but also had creditable health plan coverage for the 7 months immediately before enrollment. That 7-month period of creditable coverage would reduce the 12-month limitation period to 5 months. The plan could deny coverage to treat the pre-existing condition for the first 5 months, but after that would have to provide coverage for the pre-existing condition. A plan may not impose pre-existing condition limits for plan years starting on and after January 1, 2014.
- Premium Assistance
A refundable federal income tax credit to help certain individuals who have household income between 133% and 400% FPL pay health insurance premiums for Exchange coverage. (Individuals with household income under 100% FPL (and 133% in some electing states) are eligible for Medicaid coverage.) Reduced cost sharing for Exchange coverage is also available for certain low-income individuals. Individuals who are eligible for employer-sponsored coverage are not eligible for premium assistance unless the employer's coverage is unaffordable (the premium contribution for employee-only coverage from the employer costs the employee more than 9.5% of household income) or inadequate (the coverage has an actuarial value of less than 60%).
- Section 125 Cafeteria Plan
Allows an employee to choose between taxable benefits (typically cash) and non-taxable benefits. For example, a premium-only cafeteria plan allows an employee to choose between salary and payment of the employee's premium contribution to participate in the employer's health coverage via pre-tax salary reduction. In addition, a cafeteria plan may allow employees to contribute to FSAs or HSAs on a pre-tax basis. Cafeteria plans are often called Section 125 plans because they are governed by Internal Revenue Code section 125.
- SPD - Summary Plan Description
A summary of benefits provided by an ERISA plan, such as an employer provided health plan. Department of Labor regulations require SPDs to include certain information about plan benefits and participant rights.
- Tax-Qualified Dependents
For benefit plan purposes under federal income tax rules, the following individuals are tax-qualified dependents:
A "Qualifying Child" is:
- A child (including natural, adopted, foster and/or step child) and descendent of such person (i.e., grand and great grandchildren), or a brother or sister (including step) and a descendent of such person (i.e., nieces or nephews, including step nieces and nephews);
- Has the same principal abode as the employee for more than half of the year;
- Is under the age of 19 at the end of the year, or, if a full-time student, under the age of 24 at the end of the year, or is permanently and totally disabled; and
- Does not provide more than half of his or her own support.
A child of parents who are divorced or separated is a qualifying child of both parents.
A "Qualifying Relative":
- A child (including natural, adopted, foster and /or step child) and descendent of such person (i.e., grand and great grandchildren), or a brother or sister (including step siblings), parent or ancestor of the parent, stepparent (not including ancestors), aunt or uncle, niece or nephew, in-laws, or any other individual not listed above who, for the taxable year (1) has the same principal place of abode as taxpayer, and (2) is a member of taxpayer's household (and the relationship does not violate local law), and
- Receives more than half of his or her support from the employee, and
- Is not a "qualifying child" of any taxpayer.
Under the Health Care Reform law, adult children may also receive health coverage/reimbursement on a tax-free basis (for federal income and FICA tax purposes) through the end of the calendar year in which the child turns age 26. However, the child would have to satisfy the definition of a qualifying child or qualifying relative in order to qualify as a tax dependent for federal income tax purposes. American Fidelity does not provide tax or legal advice. For more information about who qualifies as a tax dependent, contact your tax advisor.
American Fidelity Assurance Company does not provide tax or legal advice.