Monday, June 17, 2013

Complying with Health Care Law’s Employer Mandate

By: Andy Andrews with Sirote & Permutt, PC

In the Fall 2012 edition of The Counselor, we examined the impact of the U.S. Supreme Court decision that upheld the Patient Protection and Affordable Care Act (ACA).  This article provides guidance to employers on how to plan for the “employer mandate” in January 2014.


The ACA introduces two new requirements that work in tandem to encourage expansion of health insurance coverage by individuals and employers.  The first requirement is the “individual mandate,” whereby most individuals must maintain qualifying insurance or otherwise pay an additional tax.  Health insurance exchanges will be established to facilitate expansion of the insurance market to individuals and small businesses.  The second requirement is the “employer mandate,” which generally provides that employers with more than 50 full-time employees must offer a minimum health care plan to their employees, or face one of two alternative required payments to the federal government.


As a business owner, what must I do now?  Employers need to consider how to address the employer mandate, decide on a plan, and begin to implement the plan now so that it will be in place once the employer mandate takes effect on January 1, 2014.  Below is a brief overview of 1) the basics of the employer mandate, 2) the payments employers may face and 3) employer considerations for addressing the mandate.


The basics of the employer mandate

The employer mandate includes two alternate payment provisions for employers known as “shared responsibility” payments.  They are often referred to as the “pay or play” penalty and the “pay and play” penalty.  To avoid these payments, applicable large employers must offer qualifying health insurance to substantially all of their full-time employees, the employee’s share of the insurance premiums must be affordable and the insurance offered must provide minimum value.


Applicable large employers.  Whether the employer is considered an “applicable large employer,” and therefore subject to the employer mandate payments, is determined by whether the employer employed an average of at least 50 full-time employees on business days during the preceding calendar year.  “Applicable large employers” are obligated to offer affordable insurance coverage that provides minimum value to full-time employees.  For 2014, employers may choose at least six consecutive months during the 2013 calendar year to determine whether they are applicable large employers.  There are special rules for “seasonal” employees.


Offer. The employer mandate does not require employers to ensure that all employees have health insurance, but that employers must offer insurance that meets the “affordability” and “minimum value” requirements to full-time employees.  Employers must make insurance available to employees and the employee’s dependents which includes the employee’s children.


Substantially all.  The Treasury Department recently proposed a rule that for applicable large employers to meet their ACA obligations, the employer must offer coverage to “substantially all” of their full-time employees—meaning 95% or more of full-time employees.  This proposal is not intended to exclude employees, but to forgive minor oversights.


Full-time employee. Under the ACA, full-time employees are those who average at least 30 hours of service per week.  Part-time employees’ hours count toward determining an employer’s status as an applicable large employer.  Hours from part-time employees add up to count as “Full-Time Equivalents” (FTE).  The FTE hours do not for calculating an employer mandate payment.


Affordable. For 2014, a plan is considered “affordable” when the employee’s required contribution for self-only coverage does not exceed 9.5% of the employee’s household income.  Some have argued that a plan could still be considered “affordable” where the required contribution for family coverage exceeds the 9.5% threshold.  The definition of “affordable” may be modified in the future, but for now it is based on the price of single coverage under an employer-sponsored plan.  Due to the difficulty of obtaining household income information, there are three “safe harbor” tests based on the employee’s wages that an employer may use to determine whether a plan is affordable.


Minimum value.  To meet the minimum value test, the health plan’s share of total allowed costs of benefits that are provided by the plan must amount to at least 60% of those total costs.  Essentially, this is an actuarial determination of the future benefits provided under a plan.  The determination is made on how much of the plan’s projected costs will be paid for by the plan.  The IRS and Department of Health and Human Services have proposed using a minimum value calculator whereby the components of a health plan can be plugged in to the calculator which will determine the “metal level” of the plan – whether bronze, silver, gold or platinum.


Employer mandate “shared responsibility” payments

If applicable large employers do not offer qualifying health insurance to substantially all full-time employees, which is affordable and provides minimum value, the employer will be subject to one of two payments.  Each payment is triggered by an employee obtaining a credit through a health Exchange.  Currently the proposed method of payment is that payments will be assessed on a monthly basis, but will be paid after the end of the year through a separate process administered by the IRS and not through an employer’s tax return.

Pay or Play
Pay and Play
Employer fails to offer coverage to full-time employees.
Employer offers health insurance, but it either fails to provide sufficient coverage or is unaffordable. 
$2,000 per full-time employee, per year, for all full-time employees.
$3,000 per employee, per year, for each employee who gets a credit or cost-sharing reduction.
No payment for first 30 full-time employees.
No exemption, payment for each employee that is certified as receiving a credit or cost-sharing reduction.
Part-time employees
Part-time employees do not count for the payment calculation, even though hours count for FTE determination of employer size.
Part-time employees do not count for the payment calculation, even though hours count for FTE determination of employer size.


Employer considerations for addressing mandate
Refusing to offer insurance.
If an employer fails to offer health insurance at all, then the employer must pay a $2,000 nondeductible payment per full-time employee per year, not including the first 30 full-time employees.  For example, a company with 100 employees would be charged $140,000 per year.  Employers must consider the trade-offs of this decision.  The employer mandate payments are nondeductible.  In contrast, employer-provided health insurance is deductible for the business and the employer’s contributions are generally not included in the

employee’s income.   Payments for health insurance deliver a benefit to employees while employer mandate payments do not deliver any direct benefits to a company’s employees.


Employee retention.  Beginning in 2014, individual employees who do not have health insurance will also face their own separate tax payment under the “individual mandate.”  Consequently, employees may decide that they would rather work for an employer who offers health insurance.  If employees go elsewhere to obtain health insurance, an employer’s productivity losses could outweigh any health insurance savings gained by avoiding the employer mandate with operational changes. 


Full-time v. part-time.  An important distinction under the ACA is that part-time employees count to determine whether a company is an “applicable large employer,” but part-time employees are not included in the payment calculations.  Before an employer begins shifting to a part-time workforce to reduce the employer mandate payments, it is wise to consider the impact of this decision on operations.  An employer must also consider the litigation risk that exists with any change in employment practices.  The Employee Retirement Income Security Act (ERISA) generally prohibits taking adverse action against an employee for the purpose of interfering with benefits.   Whether a reduction of hours will implicate ERISA or other employee protections is unclear and will be decided by the courts.  Hence, an employer should discuss any plans to change the workforce with counsel.  


Offering minimum essential coverage. The ACA requires most employer plans to cover 10 broad categories of Essential Health Benefits (EHB).  Exactly which items and services must be included is to be determined at the state level.  Determining the precise cost of compliance is difficult because insurance companies do not know exactly what must be covered to price a plan that meets the minimum requirements.  The price for a “bronze” plan (the minimum coverage level) may vary significantly by state.  


Nondiscrimination rules.  The ACA contains nondiscrimination rules.  An employer’s health plan may not discriminate in favor of highly compensated individuals, such as officers, shareholders, and top employees.  This rule applies with regard to participation in the health plan and the benefits provided under the plan.  This generally means that the benefits provided for participants who are highly compensated must be provided for other participants.   The regulations to implement the nondiscrimination rules have been postponed several times, so the rule is not yet effective.  In planning for the ACA, employers should assume that whatever plans they offer across the range of employees will likely have to be fairly similar to avoid nondiscrimination violations.


Tax credits are available for small businesses.  The ACA provides tax credits for some small businesses to help with employee health insurance expenses.  To be eligible, the employer must be an “eligible small employer” —an employer which 1) has no more than 25 FTE employees for the taxable year, 2) the average annual wages of those employees do not exceed certain limits and 3) the employer makes certain non-elective contributions on behalf of each employee who enrolls in a qualified health plans offered through a health exchange.  There is also a phase-out calculation to consider where an employer may no longer be eligible for the credit depending on certain factors.  However, for qualifying small businesses, the credits could be a great aid in providing valuable benefits to attract and retain employees. 


Restructuring the company. The ACA introduces more variables into asset protection and succession planning, and thus more options for thoughtful planning.  Another possible option to address the ACA requirements is to reduce the workforce size through transactions —such as accelerating a succession plan, selling a division or franchising operations.  It may be much more attractive to sell a division if doing so would prevent the overall enterprise from being an applicable large employer.  The ACA could also have the impact of accelerating succession planning.  If it would save the company tens of thousands of dollars, it may be time to fully transfer ownership of part of the company’s operations to a successor.  However, the ACA uses the IRS “control group” and “affiliated service group” rules and will require careful navigation. 


Employers must begin planning now for 2014

The ACA is here to stay.  Even if the ACA seems complicated and burdensome, there is a possibility for significant savings for employers who understand the rules and address the ACA in the most efficient manner.  While some employers may see it as an onerous administrative requirement, ACA compliance can also be an opportunity.   Where there are more variables in play, there are more opportunities for sharp business owners to move ahead.

Andy Andrews can be contact at the below link.
Sirote & Permutt, PC
2311 Highland Avenue South
| Birmingham, AL 35205

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