DEMYSTIFYING THE LANGUAGE OF THE ACA
By: Felicia Finston, Wilkins Finston & Friedman, Dallas, TX
This article was originally published in Texas CEO Magazine, September 2014 (reprinted with permission)
With all of the confusion and controversy regarding the Affordable Care Act (ACA), sometimes called “Obamacare,” the title of this article may seem like a tall order. However, from an employer perspective, deciphering the ACA is not as difficult as it would seem.
For 2015, the primary ACA compliance issue employers will face concerns the employer mandate also known as “pay or play” which generally requires employers who employ 50 or more full-time or full-time equivalent employees (Large Employers) to determine if they are going to provide health coverage to employees and satisfy the requirements of the ACA, or if they are not going to offer coverage and instead pay a penalty.
Determining Large Employer Status
Being a Large Employer is determined on a controlled group basis, meaning the employees of related entities as defined by the Internal Revenue Code (referred to as a Controlled Group), are combined. Thus, four related entities that are members of the same Controlled Group who only employ 20 full-time employees each will be a Large Employer for purposes of ACA.
A full-time employee means an employee who regularly works 30 or more hours a week. However, for purposes of determining Large Employer status, part-time employees are converted into full-time equivalent (FTE) employees. This means an employer cannot evade the employer mandate by only employing part-time employees.
For 2015 certain transition rules apply which allow employers with 50 to 99 FTEs to avoid the pay or play penalty. Generally, mid-size employers with an average of 50 to 99 FTEs will not be subject to the pay or play penalty until 2016 if the work force or overall hours of service of employees are not reduced or health coverage is not materially reduced or eliminated between February 9, 2014 and December 31, 2014.
What’s Required For Large Employers to Offer
Large Employers are required to offer minimum essential health coverage (MEC) under a group health plan to substantially all full time employees (70 percent for 2015 and 95 percent for 2016 and after) and their dependents, or pay a penalty. Most employer group health coverage constitutes MEC. However, for purposes of the employer mandate, such coverage must satisfy two requirements:
(i) it must be affordable (i.e., single coverage cannot cost more than 9.5 percent (or the adjusted percent specified by the Internal Revenue Service) of the employee’s household income), and
(ii) it must satisfy minimum value (MV) (i.e., the plan must pay 60 percent of the cost of the coverage, meaning employees pay 40 percent of the cost of coverage through deductibles, co-pays and coinsurance).
There are various safe harbors that may be used to determine if coverage is affordable. One of these safe harbors, the Federal Poverty Line Safe Harbor, doesn’t require an employer to know an employee’s actual household income. Under that safe harbor, employer coverage will be affordable if the employee’s annual contribution for single coverage does not exceed 9.5 percent (or the adjusted percent) of the federal poverty level for a single individual. For 2014, the federal poverty level is $11,670, which means an employee’s annual contribution for health plan premiums cannot exceed $1,108.65.
In addition to providing MV, the ACA requires employer provided group health coverage to include the following features: (i) cover preventive services without cost sharing (i.e., no deductibles, co-pays, co-insurance and other cost sharing), (ii) contain no annual or lifetime limits on essential health coverage, (iii) provide no pre-existing condition limits, (iii) continue coverage for dependent children until age 26, regardless of student status, (iv) satisfy specific cost sharing limitations which limit the out-of-pocket costs of employees (i.e., $6,600 for single coverage and $13,200 for other than self coverage for 2015) and, in the case of an insured plan, limit the maximum deductible that may be imposed, and (v) not impose a waiting period in excess of 90 days.
Potential Penalties
Penalties arise under the pay or play rules when at least one full-time employee is certified as having received a subsidy (premium tax credit or cost sharing reduction) when purchasing individual health insurance through the public marketplace, the state or federal exchanges. If the employee does not obtain a subsidy, then the employer cannot be penalized. Subsidies are available to an employee whose household income is between 100 percent and 400 percent of the federal poverty limit. This would include an employee with a family of four with family income up to $94,000. Notably, the penalties are determined separately for each entity member of a Controlled Group based on the coverage provided and its full-time employees.
Outstanding Issue: Currently, there is an open issue of whether employers who operate in a state without its own exchange, such as Texas, may be subject to the employer mandate penalty under the theory that only employees who reside in a state having adopted an exchange can be eligible for a subsidy. This was the conclusion by the U.S. Court of Appeals for the District of Columbia in a recent decision. However, in a similar case decided on the same day, the Fourth Circuit Court of Appeals ruled to the contrary upholding the eligibility of employees who participate in a federal exchange to receive a subsidy under the ACA. Until the conflict is resolved by the Supreme Court or otherwise, employers outside the jurisdiction of the D.C. Circuit should assume they have to pay or play regardless of whether their state operates its own exchange.
There are two types of penalties that may be imposed on a Large Employer under the employer mandate.
Failure to Offer Coverage Penalty
The failure to offer coverage penalty applies when the employer does not offer MEC to at least 70 percent (for 2015) or 95 percent (for years after 2015) of its full-time employees and at least one full-time employee obtains subsidized coverage under the exchange. The amount of this penalty equals:
· $2,000/12 x (number of FT employees – X*)
· In 2015, “X” equals 80. For future years, “X” equals 30. X is pro-rated among related entities in a Controlled Group based on the size of the employee base.
The failure to offer coverage penalty is calculated separately for each month coverage is not offered to full-time employees. The penalty is not deductible.
Example: An employer with 530 full-time employees and in 2016 fails to offer coverage to 28 of those employees will pay an annual penalty of $1 million ($2,000 x (530-30))
Coverage Offered Penalty
The second penalty,referred to as the coverage offered penalty, applies when the employer offers MEC to at least 70 percent for 2015 (95 percent for future years) of its full-time employees and at least one full-time employee obtains subsidized coverage under the exchange. The amount of this penalty, calculated on a monthly basis, equals:
$3,000/12 x full-time employees obtaining subsidized coverage OR
Failure to Offer Coverage Penalty, if less
Example: If the above employer that has 530 full-time employees in 2016 fails to offers coverage to 515 of those employees but 10 obtain a subsidy under the exchange will pay annual penalty of $ 30,000 ($3,000 x 10)
The key difference between the two penalties is that the coverage offered penalty is based solely on the number of employees who obtain subsidized coverage under the exchange, as opposed to all of the employer’s full-time employees.
Significantly, subsidized coverage is only available under the exchange if the employer failed to offer MEC to the employee, the coverage is not affordable, the coverage does not satisfy MV or the employee’s household income is between 100 percent and 400 percent of the federal poverty limit. Accordingly, by offering ACA compliant coverage to all or the majority of full-time employees, an employer can effectively avoid or minimize its penalties under pay or play.
Action Steps
In order to determine whether and how to comply with the employer mandate, Large Employers should evaluate the changes that may need to be made to their employer group health plan. Specifically,
· The waiting period, does it need to be shortened?
· The eligibility provisions, do they need to be changed?
· The premium cost, is it affordable at all income levels?
· The benefits offered, do they satisfy minimum value?
Large Employers should also prepare a financial analysis of the impact of being compliant versus non-compliant with the employer mandate, considering both the failure to offer coverage penalty and the coverage offered penalty. The financial ramifications of paying or playing, coupled with the associated employee relations impact of either scenario, will then need to be evaluated to determine the appropriate course of action.
Felicia Finston is a partner at Dallas-based Wilkins Finston Law Group, handling benefit and compensation issues for public and private companies. An important part of her practice is representing clients before the IRS, the DOL and the PBGC in employee benefit plan audits.