Obamacare – Delayed but Not Dead; Are You Analyzing Your Options and Traps?
Published in Employment Law Strategist
Volume 21, Number 8 – December 2013
Despite nationwide political debates surrounding the Patient Protection and Affordable Care Act (“ACA” or “Obamacare”), ACA is still the law of the land. As an employer, you need to understand your rights and obligations. This article analyzes some of the biggest issues large and small employers need to address.
ACA is a complicated web of new legislation and amendments to existing bodies of legislation which has spawned a plethora of regulations by many federal departments including the Internal Revenue Service (“IRS”), the Department of Health and Human Services, and the Department of Labor. Large and small employers should analyze these laws and regulations with competent counsel, tax advisors, and health insurance providers. Below is a good starting point for these discussions.
One of ACA’s most publicized provisions is the employer shared responsibility obligation that imposes a penalty on employers with 50 or more full-time equivalent (“FTE”) employees that do not provide full-time employees with health insurance. Fortunately, these provisions do not impact small employers, but for better or worse, there are many other provisions of ACA that do.
- You may be eligible for tax credits through the Exchange.
The Small Business Health Options Program (“SHOP”) is a tax credit program offered through both the state and federal Exchanges to eligible employers. (The Exchanges are markets created under ACA to facilitate the purchase of health insurance policies.) To be eligible, an employer must 1) cover at least 50% of the cost of single health care coverage for each employee, 2) have less than 25 FTEs, 3) have an employee average wage of less than $50,000 per year (owners and his/her family’s salaries are not included in this calculation), and 4) purchase health insurance through SHOP.
If these conditions are met, the employer could get a maximum credit of 50% of the premium paid by the employer for 2014. The credit is determined on a sliding scale based on employer size; the smaller the employer, the higher the credit.
The federal Exchange is now open to small businesses to begin the application process and provide an overview of the system. It should be fully functional and ready to accept enrollment in November. (However, as of the time this article was written, it was not fully functional.) There are 36 states relying on the federal exchange that are impacted by this delay. State Exchanges vary in their current ability to process SHOP enrollment. For example, in Connecticut, SHOP has been open for application and enrollment since October. On the other hand, in Maryland, SHOP will not be open until January 1, 2014. As time goes by, we expect more plans will be offered on SHOP and their quality will improve as insurance companies innovate and provide better and more creative plans.
- Even if you are not eligible for tax credits, you should look at the prices on the Exchange.
Although tax credits are not available to businesses with 25 or more FTEs, employers with less than 50 FTEs may still buy plans for their employees on the state and federal Exchanges. In 2016, the Exchanges will be available to employers with up to 100 FTEs. At minimum, small employers should look into plan offerings on the state or federal Exchange.
- Your employees may not necessarily be better off if you offer coverage.
Something to consider is the fact that employees who are offered insurance through their employer are not eligible for subsidized Exchange coverage as long as the offered insurance meets certain requirements (cost and coverage). If an individual purchases health insurance on the Exchange, that individual may qualify for a tax credit or a cost-sharing subsidy depending on income. If an employee makes within four times the federal poverty level, that individual may be entitled to tax credits and cost-sharing subsidies. The federal poverty level this year for individuals is $11,490 which means individuals making four times that amount, or $45,960, or less may be eligible for aid. The poverty level for families is $23,550 which means families making four times that amount, or $94,200, or less may be eligible for aid. The tax credits work like a cap on the cost of health insurance based on a sliding scale. The cost-sharing subsidies lower the amount that an employee has to pay out-of-pocket in copayments, deductibles, and coinsurance and is available to people making within 250 percent of the federal poverty level.
If an employer offers coverage that meets the minimum requirements, those employees can still buy coverage on the Exchange and pay for it themselves. However, they are disqualified from receiving any tax credits or cost-sharing subsidies since the employer offered adequate coverage. Therefore, the employer may be doing a disservice to employees, especially low-wage earners, by offering coverage where the worker could otherwise buy better, lower cost coverage on the Exchange. Employers who offer coverage to low-wage workers should seriously evaluate the kind of tax credits and cost-sharing subsidies those workers could receive if they purchase insurance on the Exchange and whether the employer’s plan really is a better option. You can go onto the Exchange and review various plans to see how the tax credits and cost-sharing subsidies might benefit your employees at various income levels.
- If you do not offer health insurance, your employees may blame you for the individual mandate penalty. (This is important to large employers as well.)
Employees will be hit with a penalty in 2014 under the individual mandate provisions of ACA for not buying health insurance if they make over $9,500 annually. For 2014, that penalty is $95 for individuals and $285 for families or up to 1% of total household income, whichever is greater. By 2016, that penalty will rise to a minimum of $695 for individuals and $2,085 for families, or 2.5% of total household income, whichever is greater. After 2016, penalties will be indexed for inflation.
Employees who pay the penalty may start to resent their employer for not offering health insurance and “forcing” them to pay the penalty. From an employee relations standpoint, you should evaluate this issue. If you suspect it will be a bone of contention, you should address it now with the employees. Explain how not offering coverage will help the employee obtain better insurance at a lower cost (based on the availability of subsidies and/or unspecified increased pay which employees could use to cover the costs – assuming you are offering this). Disregarding employee relations could produce a major workplace confrontation that could lead to unionization or a rash of anonymous complaints to various governmental employment watchdogs which are waiting to scrutinize your employment practices.
- If you offer health insurance to your employees, make sure you are in compliance with changes in the law.
Many changes in the law have already gone into effect. For example, small-group plans must cap deductibles at $2,000 for individual coverage and $4,000 for family coverage. Further, for high-deductible plans that are compatible with Health Savings Accounts (“HSA”), the deductible for 2014 is capped at $6,350 for individuals and $12,700 for families. Insurance brokers should address this, but in case they don’t, employers should know the basics.
- Be sure you are a small employer under ACA.
The employer shared responsibility provisions apply to employers with 50 or more FTEs. This calculation is very important and determines whether the employer will pay penalties. There are two calculations that must be done – determining the number of full-time employees and determining the number of FTEs based on part-time workers. Full-time employees are those that work an average of 30 hours per week which will generally mean anyone working 130 hours per month. To calculate FTEs, aggregate the monthly hours of all employees who are not full-time and divide by 120 hours. The result, rounded down to the nearest whole number, equals the number of FTEs employed. If the total number of full-time employees and FTEs is greater than 50, that employer is a large employer and subject to the employer shared responsibility provisions of ACA. Remember, an employer with all part-time workers may still be considered a large employer based on the FTE calculation.
In addition, if an employer has less than 50 FTEs but is a member of an ownership group with 50 or more FTEs, that employer may be a large employer. There are several tests that are part of the Internal Revenue Code (“Code”) that help determine whether businesses with common ownership will be treated as a single employer for purposes of ACA. This will be especially problematic for franchise owners who own multiple franchises. If this might fit your situation, do a specific analysis so you know where you stand.
Even though the employer shared responsibility (the provision whereby large employers who do not offer employees and their dependents health insurance coverage face penalties) has been delayed until 2015, large employers should be thinking of a number of issues.
- Decide whether it makes more sense to offer health insurance or pay the penalty.
Perhaps the most complex and biggest decision for large employers is whether to offer coverage. Large employers will face a penalty if they do not provide insurance to full-time employees and at least one employee buys health insurance on an Exchange and receives a premium tax credit. The penalty is equal to the number of full-time employees minus 30, multiplied by $2,000. Employers will also face a penalty if 1) they provide coverage but that coverage is not affordable to an employee or does not provide minimum value and 2) an employee purchases health insurance on the Exchange and receives a premium tax credit. This penalty is $3,000 per employee who receives such a tax credit (not to exceed a certain total amount). The decision on whether to offer health insurance comes down to a detailed analysis taking into account the demographics of the workforce and the potential penalties.
This decision is unique to each employer. For example, in the rare instance that an employer employs only high-earning employees who would not be eligible for a subsidy on the Exchange, they will not face any penalties (see number 4 below). Another example is if an employer has designed the business so there are only part-time employees, this may also result in zero penalties (see number 3 below). Each workplace is very different. You should work with competent counsel now during this transitional period to evaluate their specific workplace and determine the best course of action.
- Make sure if you are providing health insurance and other benefits, that those benefits fulfill all of the requirements of ACA.
Under ACA, large employers must offer coverage that is affordable and of a minimum value. Affordable means the premium paid by the employee for individual coverage is not over 9.5% of the employee’s household income. There are several safe harbors for determining affordability including usage of the employee’s W-2 to determine if the premium costs more than 9.5% of income. Regarding minimum value, the plan’s portion of the total covered costs of health services by the plan must be 60% or more of the cost of those services.
Many other changes have also been made to health insurance by ACA. For example, health plans may not impose any waiting period for coverage of more than 90 days and individuals cannot be disqualified for pre-existing conditions. Flexible Spending Accounts are limited to employee contributions of $2,500 or less, HSAs cannot be used to buy over-the-counter drugs (except insulin), and employees will be charged 20% for using HSA funds for nonmedical expenses. Hopefully, your insurance company is aware of all of these changes and your benefits packages are compliant. If you have any doubts, ask your insurer immediately.
- Do not cut hours to avoid offering health insurance – it may be illegal.
According to a provision of the Employment Retirement Income Security Act of 1974 (“ERISA”), employers are not allowed to make employment decisions, such as layoffs or reducing hours, for the purpose of preventing an employee from receiving or retaining benefits. There have been many cases where employers have maintained internal or secret policies which prevent employees from becoming eligible for benefits as they approach the threshold for entitlement. Since ERISA applies to all benefits, including health insurance benefits, employers are likely running afoul of this provision by manipulating employees’ hours in an effort to stop them from obtaining health insurance. Of course, nothing stops employers from hiring an employee to work a specific amount of hours so long as it is not for this purpose. We rarely see enforcement on this issue but that may change as ACA becomes more established.
- If you have an insured group health plan, you cannot discriminate in favor of highly compensated individuals. (Applies to small employers as well.)
For insured group health plans, ACA amends the Public Health Service Act and adds a rule prohibiting discrimination in favor of “highly compensated individuals” defined in the Code as someone who is 1) one of the 5 highest paid officers, 2) a shareholder who owns more than 10% in value of the stock of the employer, or 3) is among the highest paid 25% of all employees. The nondiscrimination prohibition includes both plan eligibility and plan benefits. The Code contains complicated tests to determine if a plan discriminates in either regard, as well as specific rules excluding certain employees from those tests. Under this prohibition, the plan or plan sponsor who is not in compliance with the nondiscrimination rule will generally face an excise tax or civil money penalty of $100 for each day of noncompliance per employee who is discriminated against, or a civil action compelling it to provide nondiscriminatory benefits, absent some exception. The IRS has stated compliance with this rule and assessment of penalties is on hold until regulatory guidance is issued. Even so, employers with insured group health plans should be evaluating whether or not they are in compliance with the law.
Small and large employers should be aware that the law is changing daily. Guidance from various agencies is being issued that clarifies and in some instances changes what certain provisions mean. You should seek competent legal counsel on these issues.