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.
Provision
|
Pay or Play
|
Pay and Play
|
Applicability
|
Employer fails to
offer coverage to full-time employees.
|
Employer offers
health insurance, but it either fails to provide sufficient coverage or is
unaffordable.
|
Payment
|
$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.
|
Exemption
|
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
