Employer’s Health Care Obligations
After U.S. Supreme Court Decision
By Christopher W. Olmsted
On June 28th, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act. Employers have been planning and implementing portions of this law since its enactment in 2010. Now that the PPACA has survived a major legal challenge, and with final aspects of the law set to phase in by 2014, it is time to gain a better understanding of the employer mandates. Below is a short summary of the major components affecting employers.
Saved by a Tax
PPACA requires individuals who are not otherwise covered or exempted to obtain health care coverage or pay a penalty. The Supreme Court, in the case National Federation Of Independent Business et al. v. Sebelius reviewed the constitutionality of this requirement.
The Court held that Congress does not have the power, under the Commerce Clause, to mandate that individuals purchase insurance. However, Congress does have the power to tax. Chief Justice Roberts wrote: “The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax.” “Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”
Employer Insurance “Mandate”
Although advocates of the recent federal healthcare reform have emphasized that employers are not mandated to provide coverage for employees, that is only half true. Beginning in January 2014, large employers will be penalized if they do not provide healthcare.
Who is Large?
Beginning on January 1, 2014, employers with more than 50 full time or full time equivalent employees may be subject to penalties for failing to provide health care coverage to full time employees. The penalties will be imposed in the event that an employee obtains subsidized individual health insurance from the soon-to-be-created health care insurance exchanges.
The 50 employee headcount is made during the preceding calendar year. Therefore, an employer’s employee headcount in 2013 will determine whether it will be subject to the employer penalties in 2014.
Companies are not deemed to have employed over 50 employees unless that threshold is reached for a certain number of days. An employer will not be considered to employ more than 50 full-time employees if its workforce exceeds 50 full-time employees (and/or FTEs) for 120 days or fewer during the calendar year. Additionally, the threshold is not reached if the employees in excess of 50 employed during the 120-day period were seasonal workers.
The law provides rules for counting “full-time” employees. A full-time employee works an average of at least 30 hours per week. Part-time employees are counted pro rata as full-time equivalent employees. As mentioned above, seasonal workers (working less then 120 days) are excluded.
To determine the total number of full-time and full-time equivalent employees for a particular month for purposes of determining if the employer is a “large employer,” the employer must add together (a) the total number of full-time employees for the month, plus (b) a number that is equal to the total number of hours worked in a month by part-time employees, divided by 120.
Large Employer Penalty
If a large employer does not provide coverage at all, and an employee receives a government healthcare subsidy, the penalty will be $2,000 per full time employee ($166.67 per month). The penalty will be calculated by multiplying $2,000 times the total number of full time employees, minus 30. (Thus an employer with 70 full time employees would pay $2,000 x (70-30) = $80,000.
Since the penalty applies when no health care is provided and any full-time employee receives subsidized coverage, it is relevant to note that generally, an employee may qualify for subsidized coverage through an insurance exchange if her household income is less than 400 percent of the Federal Poverty Level. The gross dollar amount will increase with inflation over time. Currently, that level is set at $88,200 per year for a family of four and $43,320 for an individual. State health care exchanges will be required to notify employers when their employees qualify for subsidies.
If an employer does provide coverage, but the coverage is “unaffordable” or does not provide “minimum value,” the penalty will be $3,000 per full time employee who receives subsidized individual coverage or $2,000 per full time employee in entire workforce, whichever is less. The failure to provide “minimum value” happens when the employee’s household income is less than 400% of Federal Poverty Level, and the employer does not pay at least 60% of the plan costs. “Unaffordable” coverage happens where the same sort of employee is required to contribute more than 9.5% of her household income for the healthcare premium. (Note: The Internal Revenue Service has proposed a safe harbor in which premiums would be considered affordable as long as the premium contribution for single coverage did not exceed 9.5 percent of an employee's W-2 wages.)
Part time employees are not counted in the penalty calculation because there is no mandate to provide coverage to them. Commentators suggest that this fact will provide strong incentive to employers to limit employees to part time work of fewer than 30 hours per week. Under the rules stated above, an employer with more than 50 employees, but only 30 full-time employees would not owe a penalty for failing to offer health care.
Commentators are predicting that some employers may opt to pay the penalty rather than provide the health insurance, because it may turn out to be cheaper to do so.
Small Business Exemption
Businesses with 50 or fewer full time or full time equivalent employees will not be subject to these penalties.
This exemption will apply to most businesses. According to government statistics, 96 percent of all firms in the United States, or 5.8 million out of 6 million total firms are exempt from any employer responsibility requirements. These 5.8 million firms employ nearly 34 million workers.
The law includes loophole-closing provisions which would prevent a company from avoiding the penalty by, say, dividing a 100 employee workforce into two companies.
Employers are responsible for reporting the total calendar year cost of benefits provided on employee Form W-2s. Employers will report the entire cost of group health plan coverage (employer and employee)
The effective date depends on the size of the employer. Companies issuing 250 or more W-2s must report the data on 2012 W-2s (issued in January 2013). Smaller companies are not required to report the data until issuing 2013 W-2s in January 2014.
The penalty for noncompliance is $200 per W-2, up to a maximum of $3 million.
The IRS has issued rules describing how to calculate the amount, which will be included in box 12 of the form. One method uses a figure that is essentially the same as what an employee would pay for COBRA continuing coverage, minus the 2% premium. See IRS Notice 2012-9 at this link: http://www.irs.gov/pub/irs-drop/n-12-09.pdf
The law includes a number of other mandates, many of which are summarized below. In some circumstances, existing plans have “grandfather” rights exempting them from the new rules.
Employer Certification. Beginning in 2014, large employers and certain other employers will be required to report to the government regarding their full-time employees. Among other information, employers will report whether health care is offered and certain details regarding the type of coverage.
Uniform Explanation of Coverage. Employer sponsored group health plans must provide a four page summary of coverage. Notice of any changes must be given 60 days in advance.
Highly Compensated Employees. IRS rules for HCEs applicable to self-funded medical plans apply to group health plans. The law forbids discrimination as to eligibility or benefits offered.
Employer Notification of Exchange/Subsidy. By March 1, 2013, employers must notify each current employee about the existence of state insurance exchanges (where individual coverage may be purchased), and the availability of subsidies where the employer pays less than 60% of the cost of benefits, among other information.
Medicare Tax. For tax years beginning in 2013, an additional tax of 0.9% on wages for individuals earning over $200,000 (single) or $250,000 (married). This tax is imposed on the employee’s portion of the tax, not the employer’s portion.
Maximum Waiting Period. Waiting periods for coverage cannot exceed 90 days effective January 1, 2014.
Automatic Enrollment. Beginning January 1, 2014, employers with more than 200 full time employees (who work over 30 hours per week) must automatically enroll all new employees. Employees can opt out.
No Pre-existing Condition Exclusions. Group health plans may not exclude coverage based on pre-existing conditions (currently for enrollees under age 19, and for all enrollees as of January 1, 2014).
No Annual Limits. For plan years beginning on or after January 1, 2014, group health plans may not impose any annual limit. (Currently there are caps on the limits.)
“Free” Preventative Care. Group health plans must cover preventative care like immunizations, breast cancer screenings, well-baby care, etc. without co-pays or deductibles.
No Rescissions. Group health plans may not rescind individual coverage except for fraud or intentional misrepresentation.
Adult Children Covered. Unmarried children under age 26 must be offered coverage as dependents.
Limits on FSA. Starting in 2013, annual contributions to employer-sponsored FSAs are capped at $2,500 (indexed) and reimbursement for over the counter medicines are limited to those which are required by a prescription.
With 2014 less than 1 ½ years away, employers should begin planning for the financial and administrative burdens imposed by PPACA.