What You Need to Know About the Affordable Care Act: Offering Health Care Insurance to Employees

The Patient Protection and Affordable Care Act

PURPOSE

The Patient Protection and Affordable Care Act, often referred to as the Affordable Care Act (ACA), requires covered employers to either offer group health insurance to at least 95 percent of their qualifying, full-time employees or choose to pay a penalty fee. This is known as both the "play or pay" and "shared responsibility" feature of the act.

COVERED EMPLOYERS

Employers with 50 or more full-time employees, including full-time equivalents (FTEs), are referred to as "applicable large employers" (ALEs) and are covered under the law. Smaller employers are exempt but may be eligible for a tax credit if they choose to offer group health insurance.

ELIGIBLE EMPLOYEES

Full-time employees averaging at least 30 hours of work per week (or 130 hours in a calendar month) are eligible for coverage. Plans offering dependent coverage must also cover dependent children up to age 26. There is no requirement to offer dependent coverage to spouses.

FULL-TIME STATUS DETERMINATION

Employees hired full time with the expectation of working 30 or more hours per week meet the criteria for coverage and may not have an enrollment waiting period longer than 90 days.

When it cannot be reasonably determined at hire if an employee will average 30 hours per week, the ACA provides two options for determining full-time status:

1. Monthly Measurement Method. As the name indicates, this method determines full-time employee status (and therefore eligibility) on a month-by-month basis. This method may be impractical for employers with many variable-hour employees moving in and out of coverage on a monthly basis.
2. Look-Back Measurement Method. This method sets a specific amount of time (between three and 12 months, known as the measurement period) in which the hours actually worked by the employee are averaged to determine full-time status. The administrative period is the time allotted for the employer to calculate the average hours of the measurement period. If found to qualify as full time, the employee will be granted a stability period during which he or she will become and remain eligible for coverage regardless of whether hours worked drop below 30 per week during that period.

QUALIFYING COVERAGE

ALEs must offer full-time employees health insurance that is affordable and that meets a minimum value standard in order to avoid the penalty fee:

• Affordable. The concept of affordability is based on the cost of the employee's premium contribution for employee-only coverage under the lowest-cost qualifying health plan offered by the employer. The calculation is based on the employee-only rate regardless of whether the employee chooses family coverage or any other tier of coverage. If this rate is above the annually indexed limit (9.12 percent for 2023) of the employee's income, then coverage is not affordable.
• Minimum Value. A plan provides minimum value if it is designed to pay at least 60 percent of the total cost of medical services for a standard population and provides substantial coverage of inpatient hospitalization and physician services.

NOTIFICATIONS

The ACA requires ALEs—and in some cases all employers—to provide certain notices to employees, including:

• Notice of the Health Insurance Marketplace. All employers (not just ALEs) must provide written notice about the Health Insurance Marketplace (sometimes referred to as the Health Insurance Exchange) to each new employee at the time of hiring, within 14 days of the employee's start date.

• Summary of Benefits and Coverage (SBC). The ACA requires all plans to provide an SBC to participants and beneficiaries at several points during the enrollment process and upon request, explaining what the plan covers and what it costs.
• Notice of Material Modifications. Plans must ensure that participants and beneficiaries are provided with notice of any material modification that would affect the content of the SBC (and that occurs other than in connection with coverage renewal or reissuance) no later than 60 days prior to the effective date of the change.
• Disclosure of Grandfathered Status. A plan must include a statement indicating that the plan believes it is a grandfathered plan, along with certain other information, in any plan materials provided to participants or beneficiaries describing plan benefits.

PENALTIES

If the employer does not offer qualifying health insurance, or if it does but, despite that, at least one full-time employee qualifies for and receives the premium tax credit for purchasing coverage through the Health Insurance Marketplace, the employer will owe a shared responsibility payment. A full-time employee could receive the premium tax credit if he or she was offered minimum essential coverage that either was not affordable for that employee or did not provide minimum value.

Additional penalties based on related ACA requirements may also apply.

REPORTING

The ACA places certain reporting and fee requirements on employers and insurers providing group health plan coverage to employees, including:

• W-2 Reporting. Employers that must file 250 or more W-2 forms for the preceding calendar year and that sponsor a group health plan are required to report the cost of coverage provided to each employee on Form W-2 (provided to employees in January), with certain exceptions.
• IRS Information Reporting. Requirements are as follows:
  • ALEs are required to report information to the IRS and to their employees about their compliance with the "pay or play" provision under Internal Revenue Code Section 6056 using Forms 1094-C and 1095-C.
    
  • Self-insuring employers that are not ALEs that provide minimum essential health coverage are required to report information on this coverage to the IRS and to covered individuals under Section 6055 of the Internal Revenue Code using Forms 1094-B and 1095-B.
    
• Patient-Centered Outcomes Research Institute (PCORI) Fees. Employers that sponsor certain self-insured plans—including health reimbursement arrangements that are not treated as excepted benefits—must pay fees to fund the Patient-Centered Outcomes Research Institute (fees are filed annually using Form 720 and are due no later than July 31 of the year following the last day of the plan year to which the fee applies). 
  

COMMON ISSUES

GRANDFATHERED GROUP HEALTH PLANS

These are plans with unchanged major provisions since March 23, 2010, the date of the ACA's enactment, whether fully insured or self-funded and regardless of size. Grandfathered plans are exempt from many changes required under the ACA. Group plans or individual policies may lose their grandfathered status if they make certain significant changes that reduce benefits or increase costs to consumers.

COVERAGE OF PREVENTIVE SERVICES

Employers should continue to monitor guidelines for preventive services, which are regularly updated to reflect new scientific and medical advances. As new services are approved, nongrandfathered group health plans will be required to cover them with no cost-sharing for plan years beginning one year later.

COUNTING HOURS OF SERVICE

Hours of service in determining full-time status include actual hours of work as well as paid time off such as for vacation, holidays, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

DETERMINING FULL-TIME STATUS

Many employers define full-time status as working 40 or more hours per week. However, under the ACA, employees are considered full time if they average at least 30 hours of work per week (or 130 hours in a calendar month), regardless of the employer's internal definition of full time versus part time. In addition, circumstances may change when an employee's hours are increased or decreased, resulting in a change of full-time status under the ACA.

EMPLOYER AGGREGATION RULES

Small employers that individually do not have 50 or more full-time employees or FTEs may still be subject to the requirements if they meet the threshold when combined with other companies under common ownership or that are otherwise related. 

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