The Patient Protection and Affordable Care Act is a complicated piece of legislation that promises to radically change America’s health care system. Although many of the key provisions of the health care law don’t go into effect until 2014, employers need to start to take action now.
Last week, the Boise Metro Chamber of Commerce held an informational symposium providing an overview of the newly adopted Idaho Health Insurance Exchange Act and examining the various issues that employers will face with health care reform. Here’s a look at the key points from that symposium and how your business may be affected.
I currently offer my employees health insurance, but I am considering dropping my employer-sponsored health plan to save costs. What penalties will I face?
Starting on Jan. 1, 2014, or the first day of the plan year following this date, all employers who employed an average of 50 or more full-time equivalent employees in the previous calendar year will be required to offer their full-time employees coverage that is both affordable and adequate, or else pay a penalty that is not tax deductible.
The penalty provisions are only triggered if a full-time employee applies for and obtains a tax credit or premium tax subsidy to purchase insurance on a state, federal or jointly run exchange. The penalty for not offering coverage at all is $2,000 multiplied by the total number of full-time employees an employer has (excluding the first 30). The penalty for offering inadequate coverage is $3,000 multiplied by the number of full-time employees who are certified to the employer as having received a tax credit or premium tax subsidy.
What constitutes affordable and adequate coverage?
Coverage is considered affordable if the cost of individual-only coverage does not exceed 9.5 percent of the individual’s household income. Recognizing that it is nearly impossible for an employer to know an employee’s household income, the IRS has proposed a safe-harbor rule that allows an employer to simply look at the employee’s Form W-2 adjusted modified gross income.
In addition to offering coverage that is affordable, an applicable large employer-sponsored plan must meet “minimum value.” Minimum value means the plan (including deductibles, copays and coinsurance) covers 60 percent of the actuarial value of the cost of the benefits for an average population. On Feb. 25, 2013, the Department of Health and Human Services published a Minimum Value Calculator to help employers figure out whether the coverage they are offering meets the minimum value standard set by the health care law.
I own multiple small businesses. How will the health care law affect my company?
For most employers, it will be fairly obvious whether they have employed on average 50 or more full-time equivalent employees during the preceding calendar year. Of course, the Internal Revenue Service has issued proposed rules that put a wrinkle in making this large employer determination.
Specifically, employees of a control group or an affiliated service group will be considered when determining whether any member of the controlled group or affiliated service group is an applicable large employer subject to the penalty provisions. As a general matter, there are three types of control groups: parent-subsidiary, brother-sister and affiliated service groups. Each has specific rules for determining if they apply, but the easy starting point is commonality of ownership.
Generally, this means that if 80 percent or more ownership-interest of an entity is held by a common owner, or if one entity performs management services for another entity, they are all considered members of a large-employer control group, and the large employer responsibility or penalty provisions are applicable to all of them.
What happens if one of my businesses does not offer health insurance to its full-time employees? Will my other businesses have to pay a penalty?
The IRS rules make clear that while large group determinations are made on a control group basis, penalties are imposed on an individual entity basis.
For example, Franchise A employs 35 full-time employees and wholly owns two other franchises, Franchise B and Franchise C. Franchises B and C each employ 20 full-time employees and 25 full-time equivalent employees for a total of 45 employees for each company. Franchises A, B and C are all considered members of a large employer with a total of 125 employees, and all are subject to the health care law’s employer responsibility provisions. If Franchise A does not sponsor an employer health plan in a given year and one of its full-time employees applies for and receives a premium tax credit, a penalty will be assessed against Franchise A only.
What is the difference between a full-time employee and a full-time equivalent employee, and why does it matter?
Under its proposed rules, the IRS treats 30 hours of service per week or 130 hours of service in a calendar month as a full-time employee. Hours of service includes each hour an employee is paid or entitled to payment, along with all periods of paid leave. Full-time equivalent employees include part-time or variable employees who work less than an average of 30 hours per week or 120 hours per month.
An employer’s status as an applicable large employer subject to the employer responsibility provisions of the health care law is determined based on the number of full-time equivalent employees it employs. While full-time equivalent employees are considered when determining large-employer status, an employer only needs to offer employer-sponsored health coverage to its full-time employees and their dependents to avoid the penalty provisions.
How do I determine if I have 50 or more full-time and/or full-time equivalent employees in a given month?
Employers must pull the records for their hourly workers and calculate the actual hours of service of their hourly workers in a given month. Employers have a little more flexibility for determining the hours of service of their non-hourly workers.
For salaried employees, employers have the option to use an actual hours-worked calculation (like that used for their hourly counterparts), or use an alternative days-worked (presumptive eight hours per day) or weeks-worked equivalency (presumptive 40 hours per week) method. Nevertheless, the IRS cautions that employers cannot use a different method if the result would be to substantially understate the employee’s hours of service to avoid a full-time classification.
How do I actually determine who must be offered coverage to avoid imposition of a penalty?
Technically, the determination as to whether an individual is a full-time employee is made on a month-by-month basis. This method has the benefit of allowing employers to move employees in and out of coverage depending on the hours employees actually worked in a given month.
However, this option poses administrative difficulties and uncertainty for employees who risk moving in and out of full-time status in a given month. Recognizing the practical difficulty of this method, employers are given an optional “look-back” period method of calculation to determine the full-time status of their employees.
Under the look-back rule, employers credit hours worked during a “measurement period,” a period ranging from three to 12 months, to determine if an employee must be offered coverage during a subsequent “stability period.” The application of the look-back rule differs for ongoing employees, new hires and seasonal workers. Additionally, there are special rules for breaks in service.
I am a small business and offer my employees health insurance. Does the health care law offer any incentives for me to continue to offer coverage to my employees?
The health care law calls for the creation of a “small business health option program,” an insurance marketplace specifically set up for small businesses that employ fewer than 50 employees or fewer than 100 employees (if Idaho decides to expand business eligibility) to provide workers with a choice of health plans.
Employees of small employers are eligible to receive federal subsidies to defray the cost of purchasing insurance under a small business health option program. The chief task of the program is to allow individual consumers more choice while reducing the administrative burden on employers. Specifically, an employer will pay a lump sum to the exchange, which will in turn distribute the money to the insurance plan selected by the employee. The Obama administration recently announced that it will not require full implementation of the programs until 2015.
Additionally, during the first two years of the small business health option program’s existence, there are tax credits available to small employers who employ 25 employees or fewer (with an average wage of $50,000 or less per year). The tax credit will cover up to 50 percent of premium costs if the small employer purchases a plan from the program.
Employers face myriad requirements under the health care law that are not easily understood or implemented. Nevertheless, the various agencies tasked with carrying out the law seem to recognize the challenges that employers face and have adopted various safe harbors, methodologies and calculators to mitigate (somewhat) the law’s complexity. If they have not already done so, employers need to begin to critically evaluate their health insurance offerings to ensure they will be compliant with the new provisions set to take hold next year.
At the state level, Idaho leaders are fervently working to appoint the 19-member Idaho Health Insurance Exchange board that will be composed of members representing the interests of various stakeholders, including three legislators, three members representing health carriers, two members representing insurance agents, three members representing consumer interests, four members representing small businesses of varying sizes, two members representing health care providers, and two non-voting members: the director of the Idaho Department of Health and Welfare and the director of the Idaho Department of Insurance.
Over the next couple of months, the board is expected to develop, adopt, and implement procurement policies and guidelines both as to the structure of the exchange and the menu of qualified health plan options that will be available to consumers on Oct. 1, including deciding whether or not Idaho will follow the federal example and delay full implementation of the small business health option program until 2015.
Accordingly, small businesses will want to stay tuned in the coming months for opportunities to shape and staff the Idaho Exchange.
Katherine Georger is an attorney in the Boise office of Holland & Hart LLP, practicing in the areas of health care, employment and business law. Georger can be contacted at (208) 342-5000 or firstname.lastname@example.org. For more information about health law topics, including health care reform, and for a schedule of upcoming events, visit the firm’s blog at hhhealthlawblog.com.