Department of Employee Trust Funds
October 20, 2010

FEDERAL HEALTH INSURANCE CHANGES

Background

The recently-enacted federal Patient Protection and Affordable Care Act (H.R. 3590) and the Health Care and Education Affordability Reconciliation Act (H.R. 4872) will make changes to health insurance coverage. The Department of Employee Trust Funds (ETF), the state agency that administers the state and local group health insurance programs for state employees and participating local government employees, is currently reviewing the Act to determine the effect it will have on the health insurance programs administered by ETF.

The Acts contain a substantial amount of language (more than 2,500 pages). The federal government’s rules related to the Acts are still in the process of being developed and implemented as of this writing. Therefore, it may be awhile before we have complete information on how the new laws will affect our health insurance programs. In the meantime, please find below a sampling of questions we have received from people who participate in our health insurance programs. Note: For information about the provisions that become effective in 2011 and how those provisions affect the coverage provided by the state and local group health insurance program, please refer to the 2011 It’s Your Choice Decision Guide, particularly the Important Changes section. Click here for the State It's Your Choice Decision Guide. Click here for the Local Employers It's Your Choice Decision Guide.

If you are a state resident and seeking general and reliable information about how the Acts affect you, please visit http://www.healthcarereform.wisconsin.gov

Questions and Answers

Q: Does the new health care law require workers (and retirees who use sick leave credits to pay for health insurance premiums) to pay income tax on the value of employer-provided health insurance?

A: No. Based on our interpretation of the Act, the value will appear on employees’ W-2 forms for information purposes, but will not be considered taxable income.

Q: How does the Early Retiree Reinsurance Program (ERRP) in the Act work?

A: The program reimburses plan sponsors (such as ETF) for a portion of health insurance costs for retirees not covered by Medicare. The program is designed to encourage sponsors of health programs to maintain coverage for early retirees. $5 billion has been allocated for the program, with funds distributed on a first-come, first-served basis. However, experts predict that the $5 billion in federal funding for this program will not be enough to meet the demand from plan sponsors nationwide. ETF submitted an application for program funding in July 2010, and our application was approved in October 2010. The Group Insurance Board's actuary previously indicated that ETF's application would make ETF eligible for a reimbursement of up to $18 million for the retiree health insurance program, subject to the availability of funds at the federal level. We do not know the exact amount of funds that will be available to ETF at this time. ETF will keep members informed about the reimbursement process as information becomes available.

Q: Did the Act make any changes to imputed income (and what is imputed income)?

A: Under federal tax law, employer contributions for health insurance are excluded from an employee’s gross income. However, the exclusion is permitted only for coverage of the employee, the employee’s spouse, and the employee’s tax dependents. For all other individuals covered on the employee’s health insurance, the employer must include the fair market value of the health insurance benefits in the employee’s gross income. This is known as “imputed income.” To learn more about imputed income, visit our website at: http://etf.wi.gov/employers/benefit_programs_imputed_income.htm

Effective March 30, 2010, the Health Care and Education Affordability Reconciliation Act amended previous law to provide that expenses incurred for the medical care of a taxpayer's child who is under 27 at the end of the tax year are not taxable. For these purposes, a "child" is the son, daughter, stepchild, adopted child (or child placed for adoption) or eligible foster child of the taxpayer.

Note that this is a change in federal law -- not state law. Therefore, for Wisconsin tax purposes, one would still have imputed income for the fair market value of any employer-sponsored health insurance coverage of a non-tax-dependent adult child under age 27. Elimination of the imputed income at the state level would require legislation to conform the state tax code to the federal change.

The federal Act did not make changes to the imputed income requirement relating to health insurance coverage of non-tax-dependent domestic partners.

Q: What provisions are effective in 2011 and how will they affect the state and local government group health insurance programs administered by ETF?

A: There are other provisions, such as the elimination of lifetime maximums on health insurance coverage that are effective in 2011. The 2011 It’s Your Choice Guide, which is available here State It's Your Choice Decision Guide or Local Employers It's Your Choice Decision Guide will explain the specific provisions and how the provisions effect coverage in the our health insurance programs.