By Christine Moehl
Although Health Care Reform was originally effective in 2010, so far employers have experienced relatively minor changes to the rules applicable to their health care plans. The status quo will change drastically in 2014, when the “employer shared responsibility” provisions of Health Care Reform, a.k.a., “Play or Pay” penalties, take effect. These provisions impose penalties on large employers if they either: (1) fail to offer group health coverage to all of their full-time employees (i.e., the “no coverage” penalty), or (2) offer group health care coverage that either does not provide “minimum value” or is not “affordable” (i.e., the “not acceptable coverage” penalty).
Which Employers are Affected? The Play or Pay penalties only apply to “applicable large employers.” An applicable large employer is an employer who employed an average of at least 50 “full time equivalent” employees (FTEs) during the preceding calendar year. This means that employers will be looking back to 2013 in order to determine whether they are “applicable large employers” in 2014. In determining whether an employer is an applicable large employer, all members of the employers “controlled group” (i.e., businesses under common ownership) are included in the calculation. IRS Notice 2011-36 outlines a multi-step method for calculating the number of FTEs for purposes of determining whether an employer is an applicable large employer. Those steps are as follows:
Step 1: Calculate the number of full-time employees (i.e., employees who worked on average over 30 hours per week) for each month in the preceding calendar year. Each full-time employee is equal to 1 FTE.
Step 2: Calculate the number of remaining FTEs for each month by dividing the hours of service during the month for each part-time employee by 120 hours.
Step 3: Add the number of FTEs calculated in Step 1 to the number calculated in Step 2. This is the number of FTEs for each month in the preceding calendar year.
Step 4: Average the monthly FTEs over the preceding calendar year. If the number is less than 50, the employer is not an applicable large employer 50, the employer is not an applicable large employer for the current calendar year. If the number is greater than 50, the employer may be an applicable large employer.
Step 5: If an employer has over 50 FTEs, but that number includes seasonal employees, the employer may be able to disregard the seasonal employees if: (1) the workforce exceeded 50 FTEs for 120 or fewer days during the year, and (2) the employees in excess of 50 FTEs were seasonal workers. This makes it possible for many employers with seasonal workforces to escape classification as an applicable large employer for purposes of applying the penalties.
The “No Coverage” Penalty. An applicable large employer may pay a penalty if it fails to offer at least 95% of its full-time employees (and the dependents of those employees) the opportunity to enroll in a group health plan. A full-time employee for this purpose is defined as any employee who is employed an average of at least 30 hours per week. Hours of service includes each hour for which an employee is paid, including paid sick leave and paid vacation time. The determination of who is a full- time employee for purposes of this requirement is calculated on a month-by-month basis. Special rules apply to employees whose hours vary considerably from month to month.
In 2014, the monthly “no coverage” penalty is equal to the number of full-time employees employed by the employer during the month, minus 30 employees, times $167.77. This penalty amount will be adjusted for inflation after 2014.
The “Not Acceptable Coverage” Penalty. Even if an applicable large employer offers group health coverage, it may still face a penalty if the plan fails either the “minimum value” test or the “affordability” test. In order to meet the “minimum value” test, the plan must cover at least 60% of the costs of benefits. The IRS, along with the Department of Health and Human Services, is planning to develop a web-based minimum value calculator to make it easier for employers to determine if their plans satisfy this requirement. In order to pass the “affordability” test, the employee portion of the self-only premium for the lowest cost coverage that meets the minimum value test cannot exceed 9.5% of the employee’s W-2 wages. For example, assume an employee makes minimum wage and works 170 hours per month (i.e., $1,657 per month). In order for a health plan to satisfy the “affordability” test with regard to this employee, the employee portion of the self-only premium cannot exceed $157 per month.
In 2014, the monthly “not acceptable coverage” penalty is equal to the lesser of (1) $250 times the number of full-time employees who receive a premium assistance credit (discussed below), or (2) the amount of the “no coverage” penalty.
What Triggers the Penalty? Neither the “no coverage” penalty nor the “not acceptable coverage” penalty is triggered until an employer’s full-time employee receives a premium assistance tax credit. This tax credit is available to individuals and families and it is used to help purchase health insurance through the state health insurance exchange. In order to be eligible to receive a premium assistance tax credit, an employee’s household income cannot exceed 400% of federal poverty level, and the employee cannot be eligible for group health care coverage that is both “affordable” and provides “minimum value.” This includes coverage offered under a spouse’s employer-sponsored plan. In addition, an employee who is eligible for Medicare or Medicaid is not eligible to receive a premium assistance tax credit.
Will Employers “Play or Pay”? From the early days of Health Care Reform, some commentators have argued that employers who do not already have qualifying health plans will simply elect to pay the penalties rather than offer coverage. However, the decision of whether to offer qualifying coverage or pay the penalty will be based on many competing considerations. One factor that employers will need to weigh is that the Play or Pay penalties are not tax-deductible to the employer, while the cost of providing employer-sponsored health coverage is tax-deductible. Another factor is whether the state exchanges will work as intended. If the exchanges prove difficult to navigate, employees will be less likely to apply for premium assistance tax credits. Finally, no one is certain how the reforms will affect the cost of providing group health insurance. If the cost to provide coverage increases drastically, most employers will find it cheaper to offer no coverage and pay the penalty. However, if the cost to provide coverage decreases significantly, many employers will find it more cost-effective to avoid the penalties and offer qualifying coverage.
Although employers may not be able to anticipate all of the factors that will go into their decision-making process in 2014, employers should start planning now by working with their advisors to construct a comprehensive “Play or Pay” analysis. If you would like assistance in developing an analysis that is tailored to the specific needs of your business, please contact a member of the Saalfeld Griggs’ Employee Benefits & Executive Compensation group at 503-399-1070.