The Patient Protection and Affordable Care Act, commonly referred to as the Affordable Care Act (ACA), was enacted in March 2010, but its primary provisions go into effect Jan. 1, 2014.
The ACA is the most sweeping and widespread federal program in decades, equivalent to passage of the Social Security Act in 1933 and Medicare Act in 1964. During the past three years, three Cabinet-level federal agencies (Departments of Health and Human Services, Labor and Treasury, which includes the Internal Revenue Service [IRS]) have been drafting regulations and guidelines governing implementation. The regulations are a work in progress, but the basics of what is required of employers now are known.
The ACA's three principal purposes are to expand access to affordable health care, thereby increasing the number of Americans with health insurance coverage by about 30 million; reduce the rate of health insurance premium increases that had more than doubled during the decade before the ACA's passage; and prohibit certain insurance practices that adversely affected individuals with health problems.
Individual mandate
The ACA's most controversial aspect is the individual mandate, which requires individuals to maintain minimal essential health insurance or pay a tax. People with low incomes or premiums that are unaffordable are exempt as are people with only short gaps in coverage. The individual mandate was upheld by the U.S. Supreme Court as a lawful exercise of Congress' taxing power.
As of Jan. 1, 2014, your employees will be required to obtain health insurance. Depending on their incomes, individuals may be eligible for government subsidies to help pay premiums. Other than those who participate in Medicare and Medicaid, health insurance will be purchased from private insurers either directly or through insurance exchanges being established in each state.
Employer mandate
Starting in 2014, employers who have 50 or more "full-time equivalent" employees must offer health insurance to those employees or potentially pay fines. The ACA's employer mandate applies only to large employers, which are defined as employers with 50 or more full-time equivalent employees. If you have fewer than 50 employees, the employer mandate does not apply.
Large employers must offer coverage to full-time employees and their minor dependents. If you have more than 50 employees, you will need to offer health insurance coverage to employees working 30 or more hours per week on average starting no later than 90 days after they are hired. You do not need to offer health insurance coverage to part-time employees working fewer than 30 hours per week.
For ACA purposes, dependents for whom health insurance is to be provided are children under the age of 26. Employers are not obligated to offer insurance coverage for spouses. The IRS has indicated employers will not be penalized for failing to offer health care coverage to 5 percent of their full-time employees or five employees, whichever is greater.
Employers with more than 200 employees are required to provide automatic enrollment of all full-time employees into a health insurance plan though employees can opt out.
According to the Small Business Majority, a national nonprofit organization focused on solving the biggest problems facing small businesses, the employer mandate will apply to relatively few employers because 96 percent of all businesses have fewer than 50 employees, and of the 4 percent of employers who will be obliged to provide health insurance, 96 percent of those employers already offer employees health insurance. An employer health benefits survey conducted by the Kaiser Family Foundation indicated 90 percent of businesses with 51 or more employees already offer health insurance coverage as do 57 percent of businesses with 50 or fewer employees.
If you are subject to the employer mandate, you must offer full-time employees health insurance coverage that provides "minimal value" and is classified as "affordable." To meet the minimal value requirement, the health insurance plan you offer must cover 60 percent of the total allowed benefits cost.
Affordability focuses on the amount of an employee's premium contribution relative to the employee's income. To be affordable, the employee's share of the cost must not be more than 9.5 percent of an employee's household income for the taxable year.
To help you make this determination and meet the affordability requirement, the IRS has created several "safe harbors" for employers. A large employer is not subject to a penalty if the premium for the lowest-cost self-only coverage does not exceed 9.5 percent of the employee's W-2 wages and the employee's contribution remains consistent throughout the year. A large employer who contributes to a multi-employer health insurance plan offered to full-time employees and their dependents pursuant to a collective bargaining agreement is deemed to have satisfied the minimum value and affordability requirements.
Similarly, there is a safe harbor for an employer who contributes to a multi-employer plan and the employee contribution toward self-only coverage does not exceed 9.5 percent of wages reported to the qualified multi-employer plan.
If a large employer does not offer health insurance and one of its employees obtains a tax credit to purchase insurance from a state exchange established under the ACA, the employer will be assessed $2,000 per year for each full-time employee excluding the first 30 full-time employees.
Large employers who offer health insurance that is unaffordable or lacks minimum value are subject to an assessment of $3,000 per year for each full-time employee receiving federal financial assistance. This payment cannot exceed the assessment the business would pay if it did not offer health coverage.
Insurer mandate
Among the numerous sweeping mandates applicable to insurance carriers is insurers are to provide coverage regardless of pre-existing medical conditions. An estimated 129 million Americans have pre-existing health conditions. Under the ACA, premiums applicable to new health insurance plans no longer will be based on employees' health and can vary based only on a participant's age, smoking history and geography.
The ACA also made it illegal for insurance companies to cap certain annual and lifetime benefits. The objective here is to try to eliminate individuals going into bankruptcy because of medical expenses when suffering a serious illness or injury.
The ACA also put into place an 80-20 medical loss ratio rule. Insurance carriers are required to spend at least 80 percent of premium dollars on health care and health care improvements. If the 80-20 rule is not satisfied, the insurance carrier must provide rebates to customers. Before the ACA, some insurance companies reportedly spent as much as 40 percent of their premium dollars on administrative costs such as overhead, marketing and executive salaries. Insurance companies now must publicly justify rate increases if they want to raise premiums by 10 percent or more.
In addition, children now can remain on their parents' policies until age 26 even if they are not dependents for tax-exemption purposes.
Exchanges
One of the ACA's objectives was to make it more economical for small businesses to obtain health insurance for their employees. The federal government determined small businesses paid an average of 18 percent more than large businesses for the same coverage and many more small businesses than large businesses did not offer health insurance coverage to employees. Smaller employers tend to change health insurers more frequently because of annual increases in insurance premiums.
The primary ACA mechanism intended to help small businesses and individuals procure affordable health insurance is the creation of health insurance exchanges, or marketplaces, where small businesses and individuals can compare and purchase health insurance.
Exchanges will allow small businesses and individuals to gain the benefit of less expensive health insurance plans previously available only to larger businesses. The exchanges are intended to provide small businesses, individuals and families with better health insurance buying opportunities than would otherwise be available to them.
Insurance sold through an exchange is not government-provided; all policies are private health insurance policies provided through private insurance carriers. Employers can continue purchasing health insurance through the traditional marketplace, self-insure or purchase through an exchange depending on the number of employees.
As of Oct. 1, there is to be a health insurance exchange operating in every state, and open enrollment will run from Oct. 1 through March 31, 2014, for eligible small businesses and individuals who can select and purchase policies effective as early as Jan. 1, 2014. In subsequent years, open enrollment is scheduled to run from Oct. 15 through Dec. 7.
Depending on state governments, there will be three types of health insurance exchanges: state-run exchanges, state-federal partnership exchanges and federally facilitated exchanges in states that have chosen not to establish their own exchanges.
Through a state-based exchange, you will be able to compare policies, find out whether you are eligible for tax credits and enroll in a health insurance plan. The exchanges are open to businesses with 100 or fewer employees and individuals. However, for 2014 and 2015, states may choose to restrict participation in their exchanges to businesses with 50 or fewer employees. Employers with more than 100 workers will not be eligible to purchase through the exchanges until 2017.
Although the amount of cost-sharing, value of benefits and premiums will vary, all policies offered through exchanges are to meet ACA requirements for essential health benefits coverage and minimal value. Employers determine the level of coverage they want to offer employees and how much they will contribute to their employees' coverage. Costs and coverage are to be presented in a standard format that will allow the various plans to be easily understood and compared. A broker is not necessary to access an exchange.
It may be advantageous for an employee to purchase insurance through an exchange rather than participate in an employer-sponsored plan. With exchanges, individual policies should become less expensive and individually purchased coverage may be more flexible.
Employers can help employees purchase coverage with a defined contribution in cash or in the form of a health reimbursement account or flexible spending account. From an employer's perspective, developing a defined contribution plan an employee can use to purchase health insurance reduces the employer's exposure to increased premiums and gets the employer out of the business of being the employee's health insurance provider.
Tax credits
Some small businesses may be able to obtain a tax credit to offset the premiums they pay for health insurance plans purchased through an exchange. The small-business tax credit is intended to help small employers who have low- to moderate-wage workers because this group historically has had a high percentage of uninsured workers. Since 2010, the ACA has provided tax credits up to 35 percent of the employer's payment of health insurance premiums for employers with 10 or fewer employees.
As of Jan. 1, 2014, the small-business tax credit will be expanded to reduce employer cost and encourage more small businesses to purchase health insurance for their employees. The tax credit will be increased up to a maximum of 50 percent of the premium paid by the employer, and employers with up to 25 full-time equivalent employees will be eligible to obtain a tax credit. To obtain the tax credit, a small-business employer must pay at least 50 percent of the cost of single (not family) health care coverage for each employee and purchase the policy through an exchange and employees must have average annual wages of less than $50,000 per year.
Individual tax credits
Individuals with household incomes between 100 and 400 percent of the federal poverty level who are not eligible for Medicaid and who are not participating in employer-provided coverage are entitled to a tax credit, which is intended to make coverage more affordable.
Under the current poverty level designation, individuals with incomes ranging from $11,000 to $44,000 and families of four with incomes ranging from $22,000 to $88,000 are eligible for the tax credit. The amount of the tax credit, which can be rebated, depends on income and the premium paid.
Eligibility for individual tax credits is important because if an employer does not offer health insurance and an employee obtains an individual tax credit, the employer is hit with the $2,000 penalty for every full-time employee after excluding the first 30 full-time employees. If an employer's plan fails either the affordability or minimal value tests, the employer is subject to a $3,000 penalty for each employee who obtains federal assistance.
Grandfathered plans
Employers are permitted to continue employer-sponsored health plans that were in effect on March 23, 2010, when the ACA was enacted. As long as these plans are not significantly changed, they are grandfathered and exempt from various ACA provisions. Regulations issued to date state grandfather status will be lost if any of the following six changes are made:
Employers and their existing insurers will be able to make routine changes without losing grandfather status. Premium adjustments to keep pace with medical inflation, adding new benefits, making modest adjustments to existing benefits, and making changes to comply with state or federal laws are considered routine adjustments that will not cause loss of grandfather status. Premium changes do not affect grandfather status. If grandfather status is lost, the new plan will need to comply with the ACA. As of Sept. 23, 2010, all health insurance plans, including grandfathered plans, must:
W-2 reporting
Starting with the 2012 tax year, the ACA requires employers who issue 250 or more W-2 forms to report the value of health benefits in box 12 of the standard W-2 form. The amount reported reflects the total cost of employer-sponsored health insurance coverage for the employee—the employer and employee portions. The reportable cost includes coverage for the employee, spouse and dependents. For most employers, the reportable cost will be the premium charged by the insurer.
Currently, employers who issue fewer than 250 W-2 forms annually are not required to report health insurance payments on W-2s, but the IRS could expand the requirement. If it does, the IRS has indicated it would give employers at least six months' notice. Employers who are required to report health insurance benefits but fail to do so are subject to penalties of $200 per W-2 form.
Although employer-provided health benefits comprise the largest tax break in the tax code, reportedly resulting in $180 billion per year in lost tax revenue, employer-provided health insurance benefits received by employees remain tax-exempt under the ACA. The new W-2 reporting requirement was the work of a bipartisan group of senators and was intended to make workers more aware of the cost of health insurance coverage.
A survey conducted by the Kaiser Family Foundation found annual premiums for employer-sponsored health insurance in 2012 averaged $5,615 for single coverage and $15,745 for family coverage. The information reported on W-2 forms will help the IRS enforce the ACA's health insurance coverage requirements and facilitate treating employer-provided health insurance benefits as taxable income should future administrations or Congress change the law.
Notice requirements
On May 8, DOL announced employers covered by the Fair Labor Standards Act have until Oct. 1 to notify employees in writing about the availability of health care exchanges, a description of the services provided by exchanges and the possibility that employees may be eligible for a premium tax credit if the employer-sponsored plan does not meet the 60 percent minimal value standard.
The notice must be given to all current employees no later than Oct. 1, and after Oct. 1, it must be given to all new employees at the time of hire. DOL has developed a Model Notice to Employees of Coverage Options employers can use to meet this notice requirement.
As of Sept. 12, 2012, insurers and employers who offer health insurance coverage are required to provide a Summary of Benefits and Coverage (SBC) to plan participants and applicants. An SBC must be easy to understand and include a glossary of terms and coverage examples. An SBC must be provided to employees before the outset of an open enrollment process or application, renewal or, in the event of a material modification of a plan's coverage, at least 60 days before the modification becomes effective.
An employer who does not send the SBC to eligible employees on time may be subject to a fine of up to $1,000 for each person affected if the employer intentionally failed to send the SBC or a fine of $100 per day per affected person until there is compliance even if the noncompliance is not willful.
Next steps
Many contractors and other employers historically have provided generous health insurance benefits to office staff but have not offered health insurance to field workers. If you have 50 or more full-time employees, you will not be able to continue that practice without facing penalties if any of your employees purchase health insurance through an exchange and obtain a tax credit or subsidy.
If you do not meet the 50-employee threshold, the employer mandate does not affect you, but not offering a health insurance plan may make it more difficult for you to attract and maintain employees. Smaller contractors may want to consider purchasing a modest health insurance plan through a state-based exchange and determine whether they qualify for a federal tax credit.
Contractors whose work forces hover around 50 employees may want to outsource certain activities and use more part-time and seasonal workers to avoid having to offer health insurance.
Depending on the size of your company and the size eligibility standards in your state, you may be able to obtain more affordable insurance through your state exchange rather than purchasing insurance on your own. In any event, you will need to carefully assess how to handle health insurance for your company. ???
Stephen M. Phillips is a partner with Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.
How to determine your number of employees
Part-time employees are considered when determining the number of full-time equivalent employees in a business. Two part-time employees who each work 20 hours per week count as one full-time equivalent employee. If the number of employees you employ varies during the year, you first must determine whether you hit the 50 full-time equivalent employee threshold. To determine the number of full-time equivalent employees, you must:
If the average exceeds 50 full-time equivalent employees, you will be subject to the ACA's employer mandate unless the seasonal employee exception applies. This number tells you whether you have 50 or more full-time equivalent employees; it does not tell you which employees are to be offered health insurance coverage. You are not required to offer health insurance to part-time or seasonal employees.
A seasonal employee exception will affect roofing contractors who employ more individuals during the peak roofing season than other months. If your company employs more than 50 employees during the months of the peak roofing season and fewer than 50 employees other months, you may exclude seasonal employees who worked for 120 consecutive days or less during the calendar year.
Per the IRS' Dec. 28, 2012, Questions and Answers publication, the IRS will look at the number of employees you had in the previous calendar year to ascertain whether you will be considered a large employer. So, for 2014, the IRS will consider the number of workers you employed during 2013.
The determination of whether an employer has 50 or more employees for ACA purposes will not necessarily be based solely on the legal structure of your company but also take into account controlled group rules.
Controlled group rules are used to determine whether there is sufficient common ownership or control of several companies such that they should be combined for purposes of the ACA and other regulations when calculating numbers of employees. If, for instance, you are the sole owner of several legally separate companies, which may not even be related with regard to the nature of their activities, the employees of all your controlled groups will be aggregated for ACA purposes.
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