The ACA will pose challenges that must be managed as part of your company’s growth trajectory. Now is the time to understand the information, evaluate your options, and make the best decision for your business and your employees.
Only large businesses must decide to pay or play. Are you large or small?
If you are a “large” employer, then, as of January 1, 2014, you must decide to provide your workforce health insurance that meets the law’s requirements, or incur a tax. In other words, you are faced with the choices to “pay or play.” First, determine if your workforce qualifies you as “large” or “small” under the law. The definitive watermark of a “large” employer is fifty (50) full-time equivalent employees (“FTEs”).
How is an FTE defined?
A full-time employee is one that works, on average, 30 or more hours per week. When counting full-time employees, an employer must aggregate the employees of all entities in its controlled group and must also count its FTEs. Note: Creating entities with separate corporate tax ID numbers does not enable your company to escape pay or play penalties. The number of FTEs for a month is determined by taking the number of hours worked by all employees not working 30 or more hours per week (up to 120 hours per worker) and dividing by 120. If FT + FTE = 50 or more, then pay or play penalties may apply.
What is a look-back period?
For purposes of the pay or play penalties, an employer looks back to the prior calendar year when determining employee count. For 2014, employers are granted “transitional relief” and may choose any six consecutive month period in 2013 to determine if the company is a large employer subject to the pay or play penalties in 2014.
Salaried employees may use service hours counted under a days or weeks worked equivalency, or under the same method as hourly workers. Each hour for which an employee is paid, or entitled to payment, on account of vacation, holiday, illness, disability, or other leave of absence must be counted. Variable hour employees pose special challenge to an employer, as do seasonal workers. Generally, the legislation is forgiving to employers in its treatment of variable hour and seasonal employees, such that good faith reasonable interpretation may apply. While hours worked are counted in determining the number of employees, an employer need not offer coverage to seasonal employees.
Large employers, this is what it means to “play”
Large employers must offer adequate and affordable medical benefits to all employees who work 30 or more hours per week, on average, throughout the year. Under the proposed regulations, 130 hours of service in a calendar month is the monthly equivalent of 30 hours per week.
Coverage is considered “adequate” if it is expected to pay for at least 60% of all plan benefits (“minimum value”), considering what is paid through deductibles, coinsurance, and copays. Exactly what constitutes “60% Actuarial Value” has not yet been defined.
Coverage is considered “affordable” if the employee’s premium contribution for self-only coverage does not exceed 9.5% of the employee’s household income. The proposed regulations provide three “safe harbors” to determine whether coverage is unaffordable:
1. Using the employee’s own W-2 wages for the prior calendar year (without regard to true “household” income);
2. Using the employee’s actual rate of pay (monthly = hourly rate of pay x 130); or,
3. Using the most recently published federal poverty level guidelines for a single individual.
Under each safe harbor, provided coverage is affordable if the cost of self-only coverage under the employer’s plan does not exceed 9.5% of the safe harbor figure used.
And this is what it means to “pay”
If a large employer fails to offer substantially all of its full-time employees and their dependents (to be defined) the opportunity to enroll in an eligible employer-sponsored group health plan that provides minimal essential coverage, the employer will be subject to a non-deductible penalty equal to $2,000 per year per full-time employee, IF at least one full-time employee enrolls in coverage through an exchange AND receives a premium tax credit or cost-sharing subsidy. The $2,000 penalty will be adjusted for inflation after 2014.
This penalty is calculated on a pro-rata basis for each month that the employer fails to offer minimal essential coverage to at least 95% of its full-time employees and their dependents. The penalty is based on all full-time employees less the first 30 (example: 100 full-time employees – 30 employee “deductible” = 70 x $2,000 penalty). For purposes of penalty calculations, full-time employees don’t include FTEs, only actual full-time employees. A dependent is a child to age 26 but does not include spouses.
If a large employer offers substantially all of its full-time employees and their dependents the opportunity to enroll in an eligible employer-sponsored group health plan, but the coverage offered is EITHER of inadequate quality or is unaffordable, the employer will be subject to a non-deductible penalty of $3,000 per employee that enrolls in coverage through an exchange AND receives a premium tax credit or cost-sharing subsidy. The $3,000 penalty will be adjusted for inflation after 2014 and cannot exceed the total of the “no offer” penalty ($2,000 x FT-30 employees).
An eligible full-time employee of an employer offering a medical plan that is either inadequate or unaffordable MUST purchase coverage through an exchange AND receive a premium tax credit or cost-sharing subsidy in order for penalties to apply.
Who is eligible for tax credits?
Individuals with a household income between 100% and 400% of the federal poverty level (FPL) for a family of the same size are eligible for tax credits to assist in the purchase of medical coverage available through an exchange. Individuals qualifying for a tax credit will be required to pay only a stated percentage of income towards the cost of premium for the medical insurance plan selected. For example, an individual at 250% of FPL will be required to pay no more than 8.05% of income towards required premium. Employee premium cost in an exchange is not tax-deductible. Individuals below 100% of FPL are eligible for Medicaid, and would not be used in penalty calculations.
An employee offered adequate and affordable coverage by her or his employer is NOT eligible for either a premium tax credit or cost-sharing subsidy.
Weighing the options
Large employers will be strategic in the offer of group medical insurance coverage and in the premium contributions required of employees. Unless resolved to “pay” in total and cease offering an employer-sponsored group health plan, an employer may still choose to offer coverage that is unaffordable if the result assists low paid employees in the purchase of exchange-based health coverage and where the penalty for the employer is less than the cost of coverage provided.
This article is the first in a series authored by Clark Schaefer Hackett and The Scheller Bradford Group to provide guidance on implementation of The Affordable Care Act (“ACA”). Read the second article here, and review these definitions that are crucial to understanding the ACA.