The Patient Protection and Affordable Care Act (PPACA) mandate for employers to provide employees health care or pay a penalty takes effect Jan. 1, 2014, and many businesses aren’t sure how to prepare.
“We regularly talk with people in various industries about what is important to them. For the past six months, every person from every industry has mentioned the employer mandate. There’s a lot of uncertainty,” says Joseph R. Popp, JD, LLM, tax supervisor at Rea & Associates.
Smart Business spoke with Popp about the employer mandate and steps business can take now to be ready for 2014.
What do employers need to do first?
The first step is to determine if you’re considered a large employer. The test is whether you have 50 full-time equivalent (FTE) employees; if not, the employer mandate does not apply to you. This will be easy to answer for many businesses. However, for some it will be difficult to calculate. Employers will have to add up their full-time workers, which are those who work 130 total hours a month or more, and all the part-time people. Part-time employees must be converted to FTEs by adding up the total hours they worked that month and dividing by 120. When that figure is added to your number of full-time workers, you have your monthly FTE count. Businesses with 40 to 60 FTEs may want to look at how they can stay or get under 50, and they may need to pull in various professionals to help them with that planning.
If they are deemed a large employer, what’s next?
Determine which employees may pose a risk for penalties based on your current situation if you were to make no changes. To do so, you need to look at a number of factors on a case-by-case basis.
One factor is whether the coverage provided by the employer is considered affordable. If an employee’s income is between 133 and 400 percent of the federal poverty level based on family size, you have to provide him or her with affordable coverage. Affordability is based on a sliding scale that starts at 3 percent and goes to 9.5 percent of gross income. There are a number of safe harbors that the IRS has provided to calculate if your coverage is considered affordable to a particular employee.
There’s also the coverage test, which is not concerned with premiums but instead an employee’s actual out-of-pocket medical costs. The minimum standard is 60 percent of medical costs paid by the plan — the new bronze-metal tier plan. If you have a plan with a high deductible, this along with other plan features may disqualify it from being considered adequate coverage. The Department of Health and Human Services (HHS) has released a calculator that allows you to enter details of your plan and it will calculate its value in percentage terms. That will work for most plans. If it doesn’t, you’ll need to have an actuary calculate that value.
What are the penalties for not providing affordable or adequate coverage?
If you provide coverage to 95 percent of full-time workers, but it fails one of those tests for some employees, the penalty is $250 per month per full-time employee or $3,000 annually. If you don’t provide adequate coverage to 95 percent of full-time workers, the penalty is $166 per month per full-time employee, or $2,000 annually. On this $166 penalty, you’re not penalized for the first 30 employees each month.
Based on analysis we’ve done for companies, in most cases the least expensive option as an employer/employee group is for the employer to enhance health insurance payments to correct affordability and adequacy test failures. But that’s the most expensive option for employers.
Many employers will most likely make some plan changes so coverage is more affordable to the employee group as a whole, and then pay penalties on the outlying employees. In many cases, paying those annual penalty amounts for some employees will be cheaper than implementing a 100 percent compliance plan. Early planning will give businesses adequate time to build the best course of action.
Joseph R. Popp, JD, LLM, is a tax supervisor at Rea & Associates. Reach him at (614) 923-6577 or email@example.com.
Webinar: Our free webinar, ‘Bracing for Impact: What You Need To Know About Health Care Reform,’ offers more on this topic.
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As the 2014 date looms, a lot of news is spreading about having to offer affordable coverage to all employees by Jan. 1, 2014, or pay big fines.
“Employers, you may be asking yourself, ‘Hey, our plan year starts on July 1 every year. Does the employer mandate apply to us on Jan. 1, 2014, or does it start on July 1, 2014?’” says Tobias Kennedy, vice president at Montage Insurance Solutions.
Smart Business spoke with Kennedy about possible transitional relief for some employers.
How does the employer mandate work for plans that don’t start with the calendar year?
The good news is there has been special transitional relief for employers to avoid the unaffordable coverage fines and the ‘pay or play’ mandate until later in the year. Generally speaking, the employer shared responsibility mandate is effective on Jan. 1, 2014, but there are special transitional rules that might apply and, if they do, they delay the assessment of penalties until the first day of your first plan year that starts after Jan. 1, 2014.
In other words, if you are that employer with a July 1 plan date and you qualify for the special transitional relief, you don’t face penalties until July 1, 2014, and will not be fined for the January through June months — even if you are out of compliance.
So, how can you qualify for this special transitional relief?
Basically, the transition rules say that if you maintained a non-calendar plan as of Dec. 27, 2012, you might be eligible. There are two parts to eligibility. The first one is whether or not you had a plan in place on Dec. 27, 2012, which is easy enough to figure out.
The second part is based on whom your plan was offered to. If your plan was either offered to at least a third of your employees or covered at least a quarter of your employees, then you quality. For the purposes of figuring out if you offered it to one-third of your employees, you’d look at the number of people offered coverage at your most recent open enrollment season, and for the purposes of figuring out if it covered one-fourth of your people, you can pick any day between Oct. 31, 2012, and Dec. 27, 2012, and check on what percentage of your employees were enrolled.
You still have to correct any violations — unaffordable or under-accessible plans — by your anniversary date or you will be fined. But if you qualify, you have the full year to assess the situation and to make plans to come into compliance by your 2014 plan anniversary.
Which companies can’t get the transitional relief?
The federal government has specifically stated that companies who already have a calendar year plan can certainly change now to a different anniversary date, but they will not be eligible for this relief and those companies — ones who had a Jan. 1 anniversary as of this year or prior — will still be assessed the ‘shared responsibility’ fines as of Jan. 1, 2014.
Additionally, if your company does not qualify for this transitional relief because you either didn’t offer insurance or didn’t cover enough people, beginning Jan. 1, 2014, you will need to offer affordable coverage to at least 95 percent of your employees or be fined. In other words, even if you did have a plan in place but it covered so few people it doesn’t fit the transitional relief provision, you’ll need to either change the plan year date to Jan. 1., 2014, or consider offering coverage to your employees at the 2013 renewal to avoid any fines.
Is there anything else employers should know?
If your employees do not have a medical plan effective Jan. 1, 2014, they will be fined personally. At this plan year, it’s recommended that you sit down and audit your employee benefits program to make sure your employees are offered the coverage and the coverage is affordable, per the 9.5 percent rule that begins in 2014.
Next month we will further review these potential fines for ‘unaffordability’ and the details of that 9.5 percent rule so you know how to comply.
Tobias Kennedy is a vice president at Montage Insurance Solutions. Reach him at (818) 676-0044 or firstname.lastname@example.org.
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The constitutionality of the Affordable Care Act was upheld recently by the U.S. Supreme Court, defining and solidifying many legal obligations employers have when it comes to health care coverage for employees.
“The crux of the Affordable Care Act is to make ‘minimal essential coverage’ more available,” says Christopher J. Carney, chair of the Labor and Employment Practice Group at Brouse McDowell. To achieve this, the Act contains provisions referred to as the ‘employer mandate’ or ‘play or pay.’
However, he says the Act does not require employers to provide minimal essential coverage.
“It is more accurate to state that the Act requires employers that meet a certain minimum employee threshold to make available minimal essential coverage or pay a penalty for failing to do so,” says Carney.
Smart Business spoke with Carney about some of the law’s caveats and what employers need to know in order to become compliant.
How does the law impact employers of various sizes?
The employer mandate provides that ‘large’ employers, or those with 50 or more full-time employees, are required to offer full-time employees health coverage effective Jan. 1, 2014. Businesses with fewer than 100 employees will also be eligible to shop for plans in health benefit exchanges that each state is required to establish as part of the Act.
What are the consequences of noncompliance?
Starting in 2014, large employers will be assessed an annual fee of $2,000 per full-time employee — in excess of 30 employees — if any full-time employee is not offered coverage and enrolls in and receives an income-based tax credit to participate in an insurance exchange. For example, assuming at least one employee satisfies the tax credit requirement, a business with 51 full-time employees that does not offer coverage must pay a monthly penalty of 21 (51 total employees minus 30) times the per-employee penalty amount, i.e., one-twelfth of the annual $2,000 per full-time employee. For purposes of the Act, a full-time employee is one employed at least 30 hours per week on average.
Furthermore, if an employee opts out of an employer’s health plan — either because the employee’s share of the premium would exceed 9.5 percent of his or her income, or because the employer’s or insurer’s share of the total cost of benefits is less than 60 percent and the employee obtains a tax credit for coverage in a health insurance exchange — the employer is also subject to a penalty.
Under these circumstances, the employer must pay a monthly penalty of one-twelfth of $3,000 multiplied by the total number of full time employees who obtain the income-based tax credit for that month. This penalty is capped at one-twelfth of $2,000, multiplied by the total number of full-time employees.
How do the state exchanges come into play?
The Act provides for government-run health benefit exchanges from which individuals and employers with fewer than 100 employees can purchase insurance. Plans in the exchanges will be required to offer four levels of coverage that vary based upon factors such as premiums and out-of-pocket costs. Premium and cost-sharing subsidies will be available for low-income families.
Each state is required to have its own health benefit exchange. If a state chooses not to create its own health benefit exchange, then one will be set up by the federal government. Ohio Gov. John Kasich says the state will not create its own and will rely upon the federal government’s health benefit exchange.
Considering the efforts to derail the Act, what would you advise an employer to do?
Employers should continue with their efforts to comply with the Act’s requirements and some provisions need immediate attention. For example, employers and insurers must provide a Summary of Benefits and Coverage for the open enrollment period beginning on or after Sept. 23, 2012. The SBC is similar to, but does not supplant, the Employee Retirement Income Security Act’s Summary Plan Description. If an employer’s SBC fails to satisfy the requirements of the Act, then the employer is subject to a penalty of $1,000 per failure, per participant. Another example is that the aggregate cost of employer-sponsored health coverage must be reported on Form W-2 for 2012 and going forward.
I would not expect a repeal of this law any time soon. Therefore, employers should determine the extent to which the new rules apply. Because the Act does not apply uniformly, an employer should review the law to identify which requirements apply and the compliance deadlines corresponding to each requirement.
When must employers come into compliance with the law?
The Act was passed on March 30, 2010, and not all changes set forth were imposed immediately. Generally, the provisions that were not controversial went into effect first. The provision prohibiting health plans from denying coverage or limiting benefits for children under the age of 19 because the child has a pre-existing condition went into effect immediately. But the ‘play or pay’ provisions for employers go into effect after Dec. 31, 2013.
What can legal counsel offer as employers look to come into compliance with the law?
Particularly when an employer is close to the 50-employee threshold limit, legal counsel can be helpful in identifying and analyzing employer options and obligations. The ‘play or pay’ regulations have not even been promulgated yet, but expect them to be complicated. Issues that will likely require the assistance of counsel include how to account for independent contractors to whom employee functions have been outsourced and whether common ownership of business would require the aggregation of employees.
Christopher J. Carney is Chair of the Labor and Employment Practice Group at Brouse McDowell. Reach him at (216) 830-6825 or email@example.com.
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