The Patient Protection and Affordable Care Act (PPACA) is full of employer mandates, but the most prominent and pressing for employers is the Shared Responsibility provision where large employers need to offer affordable coverage.
“The Employer Shared Responsibility part of PPACA is one of the most onerous and complex parts of the legislation, with employers needing as much guidance as possible,” says Tobias Kennedy, vice president of Sales and Service at Montage Insurance Solutions.
Smart Business spoke with Kennedy for an overview of the provision, as there are several intricacies that can confuse one from gaining a broad, basic knowledge on the topic.
How do you know if you’re a large employer?
Generally speaking, a large employer has 50 full-time equivalent employees. It’s important to note the word equivalent, because when the legislation defines 50 employees it is actually counting full-time workers plus full-time equivalent employees. As an example, if you have 45 full timers, and you also have a few people doing part-time work, the reform bill would have you add up all of those hours worked by the part-time people and figure out how many full-time equivalents that equates to.
The penalty for not offering coverage at all is basically $2,000 per year, per person, minus the first 30, applying only to full timers.
What does affordable coverage mean?
Talking high-level affordable coverage would ask an employer to evaluate two things. For any person where you are in violation of either of these two things, the employer is fined $3,000 annually.
- Does the plan have an actuarial value of at least 60 percent? To figure this you have several options, but the easiest is to use the calculator provided by the Department of Health and Human Services.
- Are the employee’s premiums affordable? This is asking for the employee-only portion of your cheapest — above 60 percent, of course — plan not to exceed 9.5 percent of an employee’s income. Income can be calculated a few ways, but the easiest is probably using the wages inserted in the most recent W-2.
Who are employers supposed to cover?
Any employee who works an average of 30 hours or more per week is considered full time, and therefore needs to be offered affordable coverage to avoid fines. If you do not know whether certain employees average more than 30 hours because of varying hours, busy seasons, etc., employers can use a measurement safe harbor.
It can be complicated, but generally speaking, if an employer choses to, the legislation allows for a measurement period. During the measurement period, you look at the employee’s hours and average it out over time. How long the measurement period lasts is up to the employer, but needs to be between three to 12 months.
Once the measurement period ends, an employer must enter a stability period. During the stability period, an employer treats all ongoing employees according to the results of the measurement period. In other words, regardless of hours worked during the stability period, if an employee was full time during the measurement period, you have to offer coverage for the stability period. And, regardless of hours worked during the stability period if an employee averaged below 30 hours per week during the measurement period, the employer does not have to offer insurance.
The measurement/stability period is quite complicated with very particular time frames; the option to implement an administration period; different treatment for new hires versus ongoing employees; rules to transition employees from new hires to ongoing; and a host of other technicalities that truly require the assistance of a trained PPACA professional.
As with all parts of the health care reform bill, consult your professionals for help in the details of this and other provisions.
Tobias Kennedy is vice president of Sales and Service at Montage Insurance Solutions. Reach him at (818) 676-0044 or firstname.lastname@example.org.
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Employers are scrambling to figure out the impact of the Patient Protection and Affordable Care Act (PPACA) on their business and whether it makes sense to “pay or play” when it comes to providing health insurance coverage for employees.
“Pay or play regulations were released Dec. 28, so we’re all trying to digest this. Employers want to know what the rules mean for them,” says Dwight Seeley, vice president of Employee Benefit Programs at Sequent. “I have several meetings scheduled to review the math of the penalty phase with companies so they know where they stand.”
Smart Business spoke with Seeley about the pay or play provisions under PPACA and what employers need to do in preparation for the Jan. 1, 2014, start of health care exchanges.
How do companies prepare?
They need to determine answers to these questions:
- Do they have a general understanding of pay or play?
- Are they considered a large employer?
- Will any employees receive federally subsidized exchange coverage?
- Does the company plan offer minimum essential coverage?
- Does the plan provide minimum value?
- Is the plan affordable?
- What penalties could apply and what is the potential cost?
First off, pay or play applies to employers with at least 50 full-time or full-time equivalent (FTE) employees, so you have to determine if that applies to you. PPACA rules are different from those of the IRS. Under PPACA, a full-time equivalent is considered 120 hours per month, 30 hours per week. There’s a fairly detailed structure for measuring FTEs based on employees with variable hours, seasonal employees, etc. Companies that have variable schedule employees, part-timers or a lot of seasonal employees are going to be challenged to determine how many FTEs they have.
If you have 50 or more FTEs, what do you need to do to avoid penalties?
Businesses can avoid penalties by providing minimum essential coverage with a plan that offers at least minimum value and is affordable. No guidance has been given on minimal essential coverage but there’s a general idea of what it’s going to look like based on industry standards.
Once you’ve established that a plan provides minimal essential coverage, you then look at whether it meets the minimum value requirement and if it’s affordable. It’s considered poor if it pays less than 60 percent of total benefits under the plan. To be affordable, it has to cost less than 9.5 percent of an employee’s household income.
What are the potential penalties?
If you do not offer coverage and at least one full-time employee receives a federal subsidy, the tax is $2,000 per the number of full-time employees minus the first 30. An employee can get a subsidy if their income is between 100 to 400 percent of the federal poverty level — about $92,000 for a family of four.
If you offer coverage that’s considered unaffordable and at least one full-time employee receives a federal subsidy, the annual tax is the lesser of $3,000 per subsidized full-time employee or $2,000 for all full-time employees.
Should some employers drop health care coverage and pay the penalties?
Studies corroborate the fact that a lot of employers feel they still need to offer health insurance as a differentiator and as a recruitment and retention strategy. What they want is to get the numbers straight in order to make an informed decision. That means going through the penalty scenarios and working out the math. Any penalties will not be deductible or tax favored, whereas the health insurance you’re providing is tax favored, so you have to calculate the impact from pre-tax and post-tax perspectives.
One other challenge that’s not being talked about is the cost companies are going to incur to implement the administrative changes required by the law. They’re going to have to put in new processes to allow easy access to data the way it is defined by the PPACA, such as an ongoing way to monitor the number of FTEs.
The published regulations contain many detailed examples so there has been an attempt to provide direction. Still, the sheer volume and complexity make it a lot to absorb.
Dwight Seeley is a vice president, Employee Benefit Programs, at Sequent. Reach him at (614) 839-4059 or email@example.com.
Save the date: Learn about the changing landscape of health care reform. Register for the March 19 Pay or Play Webinar at http://bit.ly/XFjwB3.
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The Patient Protection and Affordable Care Act imposes two new Medicare taxes — one on wages and self-employment income and one on net investment income.
“As a result, executives subject to these new Medicare taxes will now incur a 3.8 percent Medicare tax on most of their taxable income,” says Mark Watson, partner, Houston Tax and Strategic Business Services, at Weaver.
Smart Business spoke with Watson about what this new tax means for executives.
How will the Medicare tax impact wages and self-employment income?
Beginning this year, an additional 0.9 percent Medicare tax is imposed on wages and self-employment income in excess of $250,000 for joint filers and $200,000 for single filers. So, the total Medicare tax on wages and self-employment income is now 3.8 percent, up from 2.9 percent.
If a couple files a joint return, the added tax is imposed on their combined wages and self-employment income. Employers must withhold this additional tax on wages paid to an employee in excess of $200,000 in a calendar year. This withholding applies even though the employee may not actually be liable for the additional tax because, for example, the employee’s wages with that of his or her spouse doesn’t exceed $250,000. Any excess withheld Medicare tax will be credited against the total tax liability shown on the employee’s income tax return.
The $250,000 and $200,000 threshold amounts aren’t indexed for inflation. So, over time, more executives will likely be subject to the additional Medicare tax.
How is net investment income affected?
Many executives also will be subject to a new Medicare tax on their unearned income in 2013. This new tax, commonly called the ‘net investment income tax,’ applies to individuals, estates and trusts when income exceeds $250,000 for joint filers, $200,000 for single filers and $11,950 for estates and trusts, and equals 3.8 percent of net investment income.
Net investment income equals investment income less properly allocable deductions. Investment income includes:
• Gross income from interest, dividends, annuities, royalties and rents.
• Gross income from a passive activity.
• Gross income from a trade or business of trading in financial instruments or commodities.
• Net gain from the sale of property.
• Gross income and net gain from the investment of working capital.
However, gain excluded from taxable income, such as gain on the sale of a personal residence and gain deferred through a like-kind exchange, isn’t included in investment income. Similarly, gain from the sale of certain property used in a non-passive trade or business isn’t included.
Properly allocable deductions include:
• Deductions allocable to rent and royalty income.
• Deductions allocable to income from a passive activity and to a trade or business of trading in financial instruments or commodities.
• Penalties imposed on early withdrawal of funds from a certificate of deposit.
• Investment interest expense.
• Investment adviser fees.
• State/local taxes on investment income.
In the case of an estate or trust, deductions also are available for distributions of net investment income to beneficiaries.
How can these taxes be minimized?
Executives subject to the net investment income tax and the maximum federal income tax rate — applying to joint filers with annual income in excess of $450,000 and to single filers with annual income in excess of $400,000 — will face a 43.4 percent federal tax rate on ordinary income and 23.8 percent federal tax rate on long-term capital gains and qualified dividends. Minimize taxable net investment income by:
• Documenting and claiming all allocable deductions.
• Making distributions from an estate or trust to beneficiaries with income below $250,000 or $200,000 who are not subject to the tax on net investment income.
• Investing through tax-sheltered investment vehicles such as 401(k) plans, Individual Retirement Accounts, annuities and life insurance policies.
On Mar. 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act of 2010 (PPACA) with the intention of providing comprehensive health care coverage to nearly all individuals. The law is being rolled out in phases and arguably the most significant aspect for employers is set for implementation on Jan. 1, 2014.
“We have found ourselves at the intersection of streets paved with good intentions and unintended consequences,” says Richard Leasia, shareholder at Littler Mendelson, P.C.
Effective Jan. 1, 2014, employers with 50 or more full-time or full-time equivalent employees will have to choose between providing affordable health insurance coverage to qualifying employees or paying a penalty. There is no per se requirement that all employers provide health insurance coverage and employers will need to evaluate the pros and cons of providing health insurance coverage or paying various penalties.
“Each business owner’s analysis should include not only the financial implications of one option over the other, but also issues of employee morale, competitiveness within the marketplace, tax implications and benefits, and potential internal compliance and monitoring requirements,” says Bill Norwalk, tax partner-in-charge at Sensiba San Filippo LLP.
Every company, regardless of size, will need to continue to decide whether and to what extent they will provide health insurance coverage for employees. While the PPACA mandate directly affects only those employers meeting the minimum threshold number of employees, small businesses, some of which are not legally required to provide health insurance coverage, may wish to do so as an incentive for employees, as a means of staying competitive within the market, and/or in order to take advantage of certain tax credits.
At a recent event hosted by Sensiba San Filippo, Littler Mendelson, ABD Insurance and Financial Services, and the Small Business Majority, panelists from each firm discussed the implications of health care reform
on small and medium-sized businesses.
Smart Business spoke with Leasia and Norwalk after the event to gather feedback and to have them answer questions about the basics of health care reform laws and what the laws will mean to businesses from a financial, tax, and legal perspective.
What are the legal implications?
Although the PPACA indicates in general terms what will be required on Jan. 1, 2014, many questions concerning the specific application of the law remain unanswered. A few of the open questions include:
1. When does an employee qualify as full-time or full-time equivalent?
2. What standard will be used when assessing whether the employer-provided health insurance coverage is ‘affordable’?
3. How do contractors affect the analysis?
4. What about seasonal employees?
5. What effect will the PPACA have on current city-specific mandated health care (e.g., San Francisco’s Health Care Security Ordinance)?
Unfortunately, answers to these questions will be dependent on yet-to-come regulations, but business owners should address them with their advisers.
What are the tax and financial implications?
Many business owners remain focused on 2014, but they should not lose sight of some very specific requirements that will be rolled out this year. These include, for example, an implementation of a $2,500 cap on employee contributions to health flexible spending accounts for plans beginning on or after Jan. 1, 2013; W-2 informational reporting for the 2012 calendar year was due for many employers by Jan. 31, 2013; additional notice requirements to employees; and beginning Jul. 31, 2013, there will be the imposition of certain temporary taxes for insured and self-insured group health insurance plans. Additionally, businesses should ensure that they are harnessing the full potential of the various tax credits currently available, including those available to small businesses that offer health insurance coverage to their employees. Now is the time to start planning with your tax adviser.
Throughout the coming year it will be imperative for businesses to examine their particular situation, learn how the PPACA affects their specific workforce, and prepare a plan for implementing the requirements that will go into effect in 2013, 2014 and beyond.
Richard Leasia is a shareholder with Littler Mendelson, P.C. Reach him at (408) 998-4150 or firstname.lastname@example.org. Bill Norwalk is tax partner-in-charge at Sensiba San Filippo LLP. Reach him at (925) 271-8700 or email@example.com.
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Health care reform is on the way, with most mandates starting in 2014, but it will be 20 or 30 years before we really know how the Patient Protection and Affordable Care Act (PPACA) will work, says William F. Hutter, president and CEO of Sequent.
“That creates much uncertainty for small and middle-market companies.
They don’t know what to do. And that uncertainty is bad for the economy and it is bad for business. When business owners can’t make decisions, it’s bad for all of us,” says Hutter.
Smart Business spoke with Hutter about some of the lesser-known aspects of the PPACA.
What are the minimum participation standards?
There are two standards for minimum participation:
• 80 percent of all eligible employees must take coverage from the employer.
• 70 percent of net eligible employees must take coverage from the employer.
Net eligible employees won’t include those who decide to get coverage from a spouse’s plan.
A really unique caveat about this is that if a company cannot maintain those participation requirements, technically no carrier has to write it coverage. That would force the company into a state health care exchange because it would be unable to provide a health insurance program for employees.
You could try to increase employee participation by improving the plan, but then the cost goes up and the company can’t afford it. Or the cost goes up and somebody can go to the state health care exchange and get a subsidized plan for less.
A lot of companies with between 75 and 150 employees are really going to be challenged. If they can’t meet minimum participation requirements and can’t afford to design a plan to compete with the exchange, they can give up and let everybody go to the exchange. But then they have to pay a $2,000, per employee, nondeductible penalty. For a company with 100 full-time equivalents (FTEs), that’s a $200,000 tax and they still don’t have a health plan.
How can companies that provide adequate health insurance still wind up paying penalties?
Say I run a company that has more than 50 FTEs and I’m offering a good health care plan. However, because of the subsidies that are offered, an individual opts out of my health care plan and instead seeks out insurance from a state exchange. A family of four can earn up to $80,000 and get a subsidy for buying on the exchange. I could still wind up paying a $3,000 penalty if I have an employee who opts out.
So companies will be weighing whether it costs more to provide health care or simply pay the penalty?
Correct. If that’s the case, how does that impact my company culture and how do I want to take care of my employees and their families? We don’t know how some of those questions are going to manifest. Or the fact that, as an employee, I get my health care out of an exchange, therefore I can go to work anywhere I want to. That begins to break down the loyalty factors between employees and companies.
What impact will the PPACA have on health insurance costs?
Based on the average cost of $440 per month for an individual, 75 percent is used for claims. That means the remaining 25 percent, or $110, goes for administration costs, profits, compensation, rents and other expenses related to the health care plan. The legislation says that 85 percent of every dollar must be used to pay claims. In order to maintain that same $110 a month, the cost for an individual goes up to $730; it’s just a reverse calculation. This can be attributed to the legislation and how it ultimately impacts the medical loss ratios.
William F. Hutter is president and CEO at Sequent. Reach him at (888) 456-3627 or firstname.lastname@example.org.
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President Barack Obama’s re-election means health care reform is certain, and businesses need to plan to meet Patient Protection and Affordable Care Act (PPACA) mandates, most of which will be effective on Jan. 1, 2014.
There are ways companies can structure themselves to avoid any type of penalty and maintain their employees’ benefits, says Stefan Thomas, an associate with Kegler, Brown, Hill & Ritter.
“Because of the ambiguity of the law, it’s a difficult subject matter for companies to understand. Some are opting in or opting out of insurance plans, some are self-insured and some are privately insured. It’s really specific and handled on a case-by-case basis.”
Smart Business spoke with Thomas about steps that companies should take in order to meet PPACA mandates.
What steps do companies need to take in order to be prepared for the PPACA requirements?
First,companies need to determine if the law will affect them. Depending on the size of the company, it might not. They would have to be an applicable large employer, which means having 50 or more employees, including full time, full-time equivalent and seasonal workers.
There are other things to consider, such as whether the seasonal exception is applicable or whether full-time-equivalent workers (2-to-1) or seasonal employees, defined as those who work four or more months, have caused them to become large employers.
If a company is subject to PPACA mandates, what is their logical next step?
The next thing for a company to do is to figure out whether or not they’re providing any insurance and, if they are, whether it’s adequate. If it’s not adequate, it needs to be, meaning that they’re paying a certain percentage of the premium, which should be 60 percent.
If they’re large and have insurance that meets the 60 percent threshold, then they don’t have to worry about anything. But if they fail to provide the adequate amount, they have to pay a tax penalty, which is based on a ratio and can be $2,000 or $3,000 per employee. On top of that, they have to determine whether an employee has opted into an exchange. However, if the employee hasn’t gone through the exchange, the company still might not be penalized.
Some businesses are trying to limit hours employees are working or they’re changing the way they are providing health insurance in order to avoid penalties.
Is there anything smaller companies need to know about the PPACA?
Small employers could be eligible for a tax credit if they have 25 or fewer employees, with salaries averaging $50,000 or less and they provide insurance. They also have to fill out tax form 990T to determine whether they qualify for credits.
Have all the regulations of the PPACA been determined now or are provisions still subject to change?
There is still quite a lot of ambiguity regarding the new law and that is just how it is going to be for the next few years. For example, it has recently been discovered that the Medicaid expansion is mandated.
If states fail to expand coverage to people up to 138 percent of poverty level, those states will not be able to receive full funding from the federal government. That is a big issue because Medicaid is one of the largest items in state budgets.
The health care reform law is evolving every day, so companies are advised to pay close attention to the regulations as they are rolled out. Consider dedicating staff to monitoring the act’s developments, otherwise your company could be missing tax credits or penalties that could be incurred because of lack of knowledge.
Stefan Thomas is an associate at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5484 or email@example.com.
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The election is over and full implementation of the Patient Protection and Affordable Care Act (PPACA) is expected to proceed. What does this mean for employers? The health care decisions made during 2013 will determine the financial impact of this legislation, and employers that plan to continue to sponsor group health plans must prepare for upcoming deadlines.
“Pay or play” penalties provide some incentive for employers to continue coverage, as they will be at risk for significant penalties if they do not, says Chuck Whitford, Client Advisor at JRG Advisors, the management arm of ChamberChoice.
“The first step is to determine which, if any, penalties will apply by determining the number of employees that regularly work an average of 120 hours or more per month for each month of the preceding year,” says Whitford. “Penalties will apply only to employers with 50 or more full-time-equivalent employees during the preceding calendar year, with full time under PPACA defined as 30 hours per week.”
Smart Business spoke with Whitford about the changes that employers need to be aware of.
What is the goal of PPACA?
Ultimately, PPACA seeks to achieve and sustain the availability and affordability of employer-sponsored group health care benefits. Otherwise, full-time employees become eligible for a subsidy from the government to purchase insurance through an exchange.
A full-time employee becomes eligible for subsidy if his or her household income is less than four times the poverty level and one of the following is true: the employee is not eligible for a group health plan that meets minimum standards (thus failing the requirement that coverage must be available) or the monthly employee contribution for single coverage is greater than 9.5 percent of household income (thus failing the affordability requirement). In 2012, four times the federal poverty level was $44,680 for a single individual and $92,200 for a family of four.
At issue is the fact that many employers are not likely to know employees’ total household income, nor may employees be willing to share this information. To that end, employers will most likely use the wages paid to the employee as a basis for determining the affordability requirement.
For example, an employee earning $30,000 would be limited to a monthly contribution for single coverage of approximately $238. Any higher contribution would exceed the 9.5 percent level.
What are the penalties for employers that fail to either make the coverage available or fail to provide affordable coverage?
If one or more employees are eligible for your group health plan and they qualify for a subsidy on the exchange, your penalty is equal to $2,000 per year times the number of full-time employees, minus 30. For example, an employer with 100 full-time employees would pay a penalty of $140,000.
If, on the other hand, you make coverage available and an employee still qualifies for a subsidy on the exchange because the employee contribution is more than 9.5 percent of household income, your penalty is $3,000 per year for each full-time employee eligible for the exchange.
Has everything been settled?
Regulations on many issues remain outstanding. All of the uncertainty has left many employers reluctant to make any large-scale changes.
The regulatory agencies responsible for implementation and enforcement of health care reform (departments of Labor, Internal Revenue Service and Health and Human Services) will issue additional guidance to help determine how to comply with new provisions of the law.
ChamberChoice will continue to monitor the progress of PPACA and its implementation and keep you informed of important developments.
Chuck Whitford is a client advisor at JRG Advisors, the management arm of ChamberChoice. Reach him at (412) 456-7257 or firstname.lastname@example.org.
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As the Patient Protection and Affordable Care Act (PPACA) implementation unfolds, health lawyers continue to answer employers’ questions about its impact.
“The act has multiple potential penalties for failure to comply with its various requirements. The risk of not complying is a financial risk,” says Jules S. Henshell, of counsel at Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Henshell about what employers need to be aware of as they take their next steps under the PPACA.
What do employers most frequently ask?
The most frequent questions relate to the ‘pay or play’ penalties in the law. The majority of employers are currently providing health care coverage through group insurance plans. However, it’s too early to determine whether to provide coverage at levels required by the act or pay the penalties because future premium costs and the affordability of employer offerings through health exchanges are uncertain.
Employers also are concerned about reporting health care benefits on W-2 forms, whether they qualify for transitional relief, and the provisions against discrimination in favor of highly compensated individuals.
What’s important to know about W-2 reporting and IRS transitional relief?
In 2012, employers are required to report health care costs to the employer and employee on employee W-2 forms or face a $200 per-form penalty.
The IRS has provided transitional relief from reporting for employers that file fewer than 250 W-2 forms. Some employers question if they are entitled to relief from reporting when their company files fewer than 250 W-2 forms but is one of a number of related companies. The IRS’s informational Q&A suggests that it will not aggregate among related companies to calculate the threshold for reporting.
Whether the W-2 reporting currently applies or not, it’s a good idea to formalize the practice of tracking these health insurance costs to better enable retrieval of information in the future.
How do provisions about non-discrimination impact employers?
The PPACA prohibits discriminatory practices in favor of highly compensated individuals. Prohibited practices include providing benefits to highly compensated individuals that are not provided to other employees as well as affording greater choice, higher amounts, lower premiums, a higher employer subsidy or more favorable benefits. Many companies have used such practices to create competitive compensation packages for executives and management. Penalties include an excise tax or civil monetary penalty or civil action to compel provision of nondiscriminatory benefits.
The IRS, U.S. Department of Labor and U.S. Department of Health and Human Services (HHS) have stated that non-discrimination requirements will not be enforced until the first plan year after regulations are issued. And so far, they have not issued regulations.
Employer health plans with grandfather status are not impacted, but should be conscious of how their status could be jeopardized. Raising co-insurance, significantly raising co-pays and deductibles, lowering employer contributions, and adding or tightening annual limits on what the insurer pays will result in loss of grandfather status. Those without grandfather status need to review their compensation packages and practices in anticipation of future regulation and enforcement.
Do any significant PPACA cases remain?
The most active litigation challenging the PPACA in multiple jurisdictions target the requirement that new, non-grandfathered group insurance plans provide contraceptive coverage. The lawsuits focus on alleged violations of either the First Amendment right to free exercise of religion or the Religious Freedom Restoration Act.
Regulations have granted exceptions for certain religious employers and provided a one-year safe harbor for religiously affiliated institutions that wouldn’t otherwise qualify for exemption. HHS has stated it will provide further accommodations before the end of the safe harbor period.
Jules S. Henshell, of counsel, Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-3754 or email@example.com.
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With the election settled and a number of lawsuits decided, it’s clear the implementation of the Patient Protection Affordable Care Act (PPACA) is moving forward.
There could be numerous timing glitches with implementation through delayed issuance of regulations and enactment of the exchanges, but Matthew R. Huttlin, vice president, Employee Benefits Division at ECBM, says it is important that every organization continue with its planning.
“This law will continue to be modified and adjusted over the next few years and employers are going to need sound, detailed guidance to negotiate their way through the PPACA legislation,” he says.
Smart Business spoke with Huttlin about the decision of whether to continue your health care program or relinquish coverage to the exchanges.
What risks are employers facing from the PPACA and health care exchanges?
For employers with more than 50 full-time equivalent employees — considered ‘large’ employers under the law — a number of areas need to be reviewed in anticipation of the 2014 effective date of the government health exchanges. However, none is more important than the financial impact. Employers that do not provide adequate coverage or offer coverage that is considered unaffordable may face penalties. However, the calculation to determine whether any penalties will apply in 2014 is fairly straightforward.
Once you’ve assessed potential penalties, what’s the next step?
The more difficult question is whether an employer should continue its health care program or relinquish coverage to the government exchanges. The two primary areas of concern are financial and human resources. From a financial standpoint, a risk manager can run a detailed analysis to determine the cost impact of each option. The results depend heavily on the current cost of coverage, both for the employer and the employees, and the salary distribution of the full-time employees. The human resource impact is difficult to quantify, having to gauge the impact of each option on retention and recruitment.
Do employers that continue to offer health plans need to revisit their decision?
Employers that decide to maintain their programs should test these programs annually. Rates vary from year to year and from group to group based on the impact of the group’s claim losses in the determination of their rates. The impact of a group’s actual experience on their projected costs increases as the size of the group increases for insured programs. The projected rates for self-funded plans are typically based solely on the group’s claim losses. Whether self-funded or not, the greater a group’s claim losses impact their rates, the more important it is to control costs through utilization management, wellness, plan design, etc.
On the other side of the equation, PPACA penalties are expected, at a minimum, to be indexed for inflation. Also, the cost to obtain coverage from the exchanges — particularly for employees with salaries that exceed 400 percent of the federal poverty limit — is anticipated to increase, possibly at a rate greater than inflation.
How should employers that decide to eliminate their health insurance handle it?
This is a major undertaking for the HR personnel. Detailed communications with the employees explaining the organization’s decision and guidance will be required. This decision also will have a critical impact on administration. Businesses that choose this path should reach out to risk managers and consultants for assistance.
What is the risk of upcoming ‘Cadillac’ tax?
Looking further out, there is another ‘test’ looming under PPACA for 2018, commonly called the ‘Cadillac’ tax. Under this provision, if the combined cost for health care benefits exceeds the dollar threshold limits of $10,200 for single person plans and $27,500 for other plans, the PPACA will tax these rich benefits at a rate of 40 percent on the cost above this amount. According to a 2011 survey by Mercer, approximately 60 percent of employers with more than 500 employees believe their plans would trigger the tax unless they take action to avoid it. Employers will need to keep a close watch on costs as they progress toward this test.
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As a result of the Patient Protection and Affordable Care Act (PPACA) and its effects, employers are taking steps to manage the cost of care by moving toward self-funded insurance and greater oversight of health benefit plan subcontractors. Others are making a cost trade-off between the tax burden of providing versus not providing coverage.
Selvadas Govind, a senior manager in Assurance Services at Weaver, says it’s too soon to say whether costs will go up or down in our complex health care system.
“The only thing one can do is try to manage the risks that are presented at a particular point in time,” he says. “You’re not going to be able to influence the market or analyze it in any significant way.”
Smart Business spoke with Govind about some of the risks employers face in this new era of health plan benefits.
What is the impact of companies increasingly self-insuring?
Larger businesses are making the shift toward self-insurance, which is more transparent in terms of management. Insurers no longer go to a company and give them a rate; rather, companies can pay medical costs themselves and hire a third-party administrator (TPA) to handle administration. It’s a great business practice, but the downside is employers are on a less-than-level playing field with insurance companies that know how the industry works.
It’s a big risk that needs to be managed, and many organizations are not in a position to mitigate those risks. In fact, one study found employer audits of TPAs had error rates for medical claims of 3 percent to 16.8 percent. Similarly for pharmacy benefit programs, errors ranged between 3 percent and 8 percent. A 3 percent error rate by a plan’s pharmacy benefit manager in a medium-sized entity of 2,000 employees can amount to an overpayment of $155,000. For this reason, it is often worthwhile to bring in external auditors with specialized knowledge to mitigate this risk exposure.
Employers also need greater oversight of health benefit plan subcontractors. For example, after an employee pays his or her pharmacy co-pay, the balance is charged to a pharmacy benefit manager (PBM) which, in turn, pays off the distributor or manufacturer and submits the claim to the self-insured company. However, there is usually a rebate from the distributor or manufacturer to the PBM. By right, that rebate — which can be quite substantial — belongs to the employer, not the PBM.
How does the individual mandate create new risks for employers?
With the individual mandate and the increased dependent eligibility age of 26, there’s a financial incentive for children to remain on their parents’ health care plans. The risk companies should consider is that some may try to retain children on their plans beyond age 26 and/or include dependents who are not necessarily their own. The benefit of this abuse to perpetrators is that they can choose to pay the lower tax penalty for not having individual coverage and still obtain coverage through their parents at employer-subsidized rates. So, the situation leads to an educated decision on whether it is more cost effective to try to stay on the parents’ plan, pay the penalty for not buying coverage, or buy coverage through an employer or a health benefit exchange.
You can audit this risk, but health benefit plan audits tend to be invasive, which could irritate employees. A way to sensitively handle it is to educate employees on the potential issue and what the cost could be if even a small percentage of employees are dishonest. Companies should also review the amount of evidence required to justify a dependent; however, if the requirements are too stringent, employees could resist.
Are many employers deciding to take the penalties and not offer insurance?
It depends on the attitude of the employer and the type of work force. There will always be employers who offer better benefits than others. However, it’s a very industry-specific question, and in an industry with narrow margins, businesses may simply not be able to offer insurance. There could also be a shift away from full-time employees who qualify for health care benefits to the use of more part-time employees who would not qualify for employee-sponsored health benefits.
Selvadas Govind, MPA, CPA, CIA, CICA, CRMA, senior manager, Assurance Services, Weaver. Reach him at (512) 609-1940 or Selvadas.Govind@WeaverLLP.com.
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