As the key provisions of health care reform under the Patient Protection and Affordable Care Act (PPACA) move closer to implementation, employers need to consider how they will respond. More specifically, employers with 50 or more full-time equivalent employees need to decide whether they will “play” by continuing or beginning to offer affordable health benefits to employees working an average of 30 hours or more per week in a month, or “pay” the penalties for not offering affordable benefits.
Under the "shared responsibility" provision of the Patient Protection and Affordable Care Act (PPACA), beginning in 2014 employers with 50 or more full-time employees (FTEs) working 30 or more hours per week (including the sum of hours by part-time workers that added together equal "equivalent" full-time workers) will face penalties if they do not offer FTEs "affordable" insurance.
Large employers that do not offer coverage to their FTEs face a penalty of $2,000 times the total number of FTEs if at least one FTE receives a tax credit to purchase coverage through a government-run health insurance exchange established under the PPACA.
Large employers that do offer coverage to their FTEs (and dependent children up to age 26), but the coverage is “unaffordable” to certain employees or does not provide minimum value will face a penalty of $3,000 times the number of FTEs receiving tax credits for exchange coverage (not to exceed $2,000 times the total number of FTEs).
Under the law, employees with household income between 100 percent and 400 percent of the federal poverty level (among other tests) are eligible for tax credits for exchange coverage if they do not have access to affordable employer-sponsored coverage that is of at least a minimum value.
However, the $2,000-per-FTE penalty will not apply so long as employers offer coverage to at least 95 percent of their full-time employees and their dependent children up to age 26.
As employers begin pondering the "play or pay" question, the answer is not necessarily as straightforward as some expected. More than a few employers, it seems, are maintaining the status quo on their health benefit programs and focusing on making sure that their health plan offerings meet the affordability and other requirements under the PPACA.
These employers are not necessarily making a long-term commitment to providing health benefits to employees. Instead, they are postponing a decision until they see:
- How difficult and costly it is to comply with the "shared responsibility" provision requiring that employers provide coverage to all full-time equivalent employees.
- How the state health insurance exchanges will operate and what types of plans they will offer at what prices.
- The impact of all of these changes on the overall cost of health benefits.
All aspects of PPACA compliance will be very specific to the employer involved. Everything from differences in employee demographics and income levels, to hours worked, to benefits strategy will have a tremendous impact on compliance and decision making. However, there are a few key things for all employers to keep in mind.
Affordability Is Key
It is not enough for employers to begin or continue offering health benefits to employees to avoid penalties under the PPACA. That coverage must provide "essential health benefits" as defined by the U.S. Department of Health and Human Services, and it must be deemed "affordable," or the employer could be subject to penalties under the shared responsibility portion of the law.
"Affordability" in this case means that an employee's cost for self-only coverage should not exceed 9.5 percent of the employee’s W-2 wages from the employer. (On Feb. 1, 2013, the U.S. Treasury Dept. published a final rule clarifying that the determiniation of affordability is based only on single coverage, not family coverage.)
If the lowest priced health plan the employer offers does not fall within the 9.5-percent-of-income limit for every employee, the employer must pay a penalty of $3,000 for each employee who becomes eligible for federal subsidies when he or she purchases coverage through one of the government-run health insurance exchanges scheduled to launch in 2014.
“All employers should consider introducing a high-deductible health plan, then making sure that they are subsidizing it enough so that it is affordable (under the law),” said Kate Saracene, a labor and employment counsel with law firm Nixon Peabody LLP.
However, an employer mindful of costs does not need to do more than necessary to satisfy the law’s affordability requirements. For example, an employer with a large population of very highly paid employees making, say, $100,000 per year and a much smaller population of lower-paid employees making $20,000 per year may want to vary the amount it subsidizes plan costs by income level, so that it complies with the 9.5 percent affordability requirement for higher- and lower-paid employees while avoiding unnecessary costs.
Moreover, in some cases paying the penalty for not providing “affordable” plan options to those lower-paid employees may be less expensive than keeping the subsidy within the required 9.5 percent of income.
Over time, health care reform is likely to shift perception about health coverage. “The standard of coverage could become lower based on the availability of the public exchanges and the types of plans those exchanges will offer,” said Christopher Calvert, senior vice president with Sibson Consulting. At some point, “employers may have an opportunity to adjust their coverage to a more affordable level for themselves.”
Don’t Forget Taxes
One of the most attractive elements of employer-provided health benefits is that they are tax-free to the employee and tax-deductible to the employer. If employers decide to stop offering affordable coverage or to stop offering health benefits at all, any resulting penalty they pay under the PPACA’s shared responsibility provision will not be tax-deductible to the employer. Moreover, if employers increase employee compensation to make up for those lost benefits, that additional compensation will be taxed just like any other regular income, making the additional pay less valuable than the tax-free benefits they are replacing.
Employers that are considering whether to continue offering benefits or to begin doing so if they have not offered benefits in the past need to consider the value of the health benefits’ tax deductibility when making their cost calculations. “These employers should talk to a broker about the cost of offering a plan with just enough of a subsidy to make that coverage affordable under the 9.5 percent shared responsibility rule and then compare it to the cost of paying the penalty for not offering coverage,” said Saracene. “I would not be surprised if many employers can still save money by offering affordable coverage” rather than paying the penalties. In other words, if coverage costs as much or even more than the cost of the penalties, coverage still may be the more affordable option when the tax consequences are factored in.
Track Hours Carefully
The number of hours worked determines whether an employee is eligible for health coverage, so it is important for employers to track these hours carefully. Once again, the devil is in the details. Disability pay, paid time off, prorated periods for family or medical leave, military leave and so on must all be calculated and considered when determining if an employee has worked enough hours to be considered eligible for health benefits. “This can be really hard math,” said Saracene. “I have not seen anyone step up with a program to crunch the numbers and tell you who is a full-time employee according to how many hours your people have worked.”
In addition, employee status does not necessarily matter when making these calculations. For example, temporary or per-diem workers are eligible for health benefits if they meet the hours-worked requirement. For this reason, employers will need to be more diligent when it comes to tracking employee hours than in the past. Everyone from full-time to part-time salaried workers to commission salespeople will need to track their hours and submit time cards.
However, there does not appear to be any legal restriction against cutting employee hours to keep them below the 30-hour threshold for benefits. Still, employers that take this approach need to prepare for potential negative reaction to that approach both inside and outside the company.
Be Ready for Evolution
The decisions and actions employers take in the next couple of years are not irrevocable. Once the state health insurance exchanges are up and running and become a stable and viable option for coverage, “there is a high likelihood that more employers over time will move into the pay (penalties) category rather than the play (by offering health coverage) category,” said Calvert. “At some point, employers need to rise above the details of health benefits and health care reform and think clearly about the value proposition they are offering employees.”
Joanne Sammer is a New Jersey-based business and financial writer.
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