Posted on November 16, 2012
This outline is intended to provide employers with a roadmap to assist with decision making regarding employee health benefits. The Patient Protection and Affordable Care Act (a/k/a Obamacare) appears, as a result of the Presidential election on November 6, 2012, to be a permanent part of U.S. health care.
The outline is focused on employer decisions. To provide a big picture view, consider Justice Scalia’s summary of the Act and the changes that it will bring to healthcare as set forth in his dissenting opinion in the Supreme Court’s National Federation of Independent Business et. al. v. Sebelius:
“In short, the Act attempts to achieve near-universal health insurance coverage by spreading its costs to individuals, insurers, governments, hospitals, and employers—while, at the same time, offsetting significant portions of those costs with new benefits to each group. For example, the Federal Government bears the burden of paying billions for the new entitlements mandated by the Medicaid Expansion and federal subsidies for insurance purchases on the exchanges; but it benefits from reductions in the reimbursements it pays to hospitals. Hospitals lose those reimbursements; but they benefit from the decrease in uncompensated care, for under the insurance regulations it is easier for individuals with pre-existing conditions to purchase coverage that increases payments to hospitals. Insurance companies bear new costs imposed by a collection of insurance regulations and taxes, including “guaranteed issue” and “community rating” requirements to give coverage regardless of the insured’s pre-existing conditions; but the insurers benefit from the new, healthy purchasers who are forced by the Individual Mandate to buy the insurers’ product and from the new low income Medicaid recipients who will enroll in insurance companies’ Medicaid-funded managed care programs. In summary, the Individual Mandate and Medicaid Expansion offset insurance regulations and taxes, which offset reduced reimbursements to hospitals, which offset increases in federal spending”. [567 U.S. ___ (2012) Dissent @ page 53].
(1) Any “applicable large employer” with at least fifty (50) full time employees (including full time equivalents) during the prior calendar year is subject to the penalty if the employer does not offer group health coverage [minimum essential coverage] to all full-time employees and any full time employee receives a tax credit to purchase coverage through an exchange. In 2014 the penalty is equal to the total number of full-time employees minus thirty (30), and the difference multiplied by $2000. After 2014, the penalty amount will increase. The penalty is calculated on a monthly basis and reported and paid annually.
(2) To be eligible for the tax credit (which may be used only to purchase coverage through an exchange): 1) household income must be between 100% and 400% of federal poverty level. In 2012 the poverty level for a family of four (4) is $23,050 and 400% is $92,200; and 2) the employee must not be eligible for Medicaid.
(3) Minimum essential coverage generally means that the group plan complies with the state health insurance rules and regulations. Minimum essential coverage is not disability coverage, workers compensation insurance, coverage limited to specific diseases, e.g. cancer insurance, coverage for ER only visits. NOTE: the policies available through the exchanges must be “essential health benefits package” and this is a more stringent standard than employer’s minimum essential coverage requirement.
(4) Full time employee means an employee who generally works thirty (30) hours/week or 130 hours per month.
(5) To determine the full time equivalents, aggregate the number of hours worked in a month for those employees with less than thirty (30)-hours per week and divide by 120. The resulting full time equivalent number is added to the number of actual full time employees to determine whether the employer is an “applicable large employer”. See IRS Notice 2012-58 for safe harbor guidance in determining full time status.
(6) Example: Company X has forty-eight (48) full time employees and six (6) full time equivalents in 2013. Company X is an applicable large employer because the 48 + 6 = 54 so X has met the fifty (50) full time threshold. X does not offer minimum essential coverage. One of the forty-eight (48) full time employees qualifies for the tax credit. For each month that X does not offer the minimum essential coverage, the penalty will be (48 – 30) x 1/12 x $2000 = $3000.
(7) Planning for Penalty #1:
(a) Remain at or get to less than fifty (50) full time employees and full time equivalents. 2013 will be the look back year for 2014. Count employee hours in 2013. It may be beneficial to hire more part time. See WSJ 11/5/2012 B1 “Health Law Spurs Shift in Hours”.
(b) Coverage must only be offered to full time employees in order to avoid the penalty.
© Do the math. The penalty is not deductible. The premium payment is deductible, so covering a few extra people or subsidizing a tax credit class may not be as costly on a deductible basis as the penalty on a non-deductible basis. Once the nondiscrimination rules are announced, it will probably be difficult to exclude full time employees.
(d) Remember, this Penalty #1 applies if even one (1) full time employee is not offered coverage and that employee gets a tax credit.
(1) Applicable large employer with at least fifty (50) full time employees (including full time equivalents) offers coverage, but the coverage is not “affordable” or the coverage does not offer the employee “minimum value”. The employer penalty for this #2 is equal to the number of each such full time employee who receives a tax subsidy when enrolling in an exchange plan multiplied by $3000 [but in no case more than the (total number of full time employees minus thirty (30)) x $2000, i.e. the penalty #1 amount].
(2) “Affordable” means that the premium for single coverage does not exceed 9.5% of the employee’s household income, but the employer may use W-2 income. “Minimum value” means that the plan pays at least 60% of the total cost of the health benefits.
(3) Example: Company X has the same forty-eight (48) full time employees and six (6) full time equivalents in 2013. X offers coverage but it fails either the minimum value or the affordability requirement. X has two (2) full time employees who qualify for the tax credit. The monthly penalty is 1/12 x $3000 × 2 = $500.
(4) Planning for Penalty #2:
(a) Revise the plan to provide that the employee’s premium obligation for self-only will not exceed 9.5% of W-2 wages. For the moment, employees with dependents must pay the difference between the cost of the family coverage and the 9.5% of W-2 compensation. Watch for future guidance/limitations regarding family/dependent coverage.
(b) Subsidize the premium cost for those employees who are tax credit eligible. Again, the penalty is not deductible, but the premium paid by the employer is deductible.
© The affordability is measured by the least expensive plan available to an employee so an employer may be able to avoid penalties by establishing a low-cost plan option for its full time employees. Watch the nondiscrimination rules for guidance on this option.
(d) The 60% minimum value requirement is not generally an issue for an employer with an insured group health plan. Almost all of the insured plans have an actuarial value of benefits of at least 60%. See IRS Notice 2012-31 for more information regarding minimum value.
(e) For both Penalties #1 and #2:
i. Review your plan documents and make any amendments necessary to match your coverage decisions prior to the open enrollment for the 2014 plan year. Make corresponding changes to SPDs and SBCs.
ii. Review related cafeteria plans and HRAs to correlate eligibility and overall health benefits.
(A) . Before the Act, self insured plans could not discriminate in favor of highly compensated employees, top paid officers or shareholders owning 10% or more of the company, but an employer providing coverage through an insured group health plan could effectively discriminate in favor of particular groups of employees. Under the Act, insured plans may not discriminate, but the IRS has indicated that it will not enforce this provision until the calendar year following the year in which it issues regulations. Watch for theIRS guidance. It is critical to comply with this because the penalties are $100/day for each individual for whom the failure relates for each day of noncompliance. This is in contrast to the self insured rule that would include the value of the discriminatory benefit (typically the premium cost) as a taxable item to the HCE.
(1) Highly compensated Employee definition differs from retirement plan HCE definition. For health plans, HCEs are: five (5)-highest paid officers; a 10% or more shareholder; top 25% paid employees.
(2) Can exclude employees who have not completed three (3)-years of service; part time (less than thirty-five (35) hours/week); seasonal employees; collectively bargained employees; employees who have not attained age twenty-five (25) nonresident aliens.
(3) The plan must benefit 70% or more of all employees; or if at least 70% of all employees are eligible, then at least 80% of that 70% must actually benefit.
(4) The plan must be available on a nondiscriminatory basis: i.e. the plan may not allow a lower deductible or copayment for HCEs and all benefits provided for HCE’s must be available on the same terms to all other employees.
(1) If an employer has a plan that satisfies the affordability and minimum value requirements, can it also offer a richer plan with higher premiums? And if it does so, will the richer plan pass the nondiscrimination tests even if no NHCEs elect that coverage? We are expecting that this approach will be permissible.
(2) What exclusions will be allowed? Be very careful to compare permitted exclusions against the penalty provisions. Permitted exclusions under the current self-insured nondiscrimination rule will expose you to penalties under the pay or play rules. For example: if the employer is an “applicable large employer” and excludes those employees who work less than thirty-five (35) hours/week, the employer is subject to Penalty #1 because it does not offer coverage to all full time employees.
(3) NOTE: The nondiscrimination rules apply to all group insured employer plans, even small employers.
(4) Nondiscrimination failure penalty. Penalties are $100/day for each individual for whom the failure relates for each day of noncompliance.
(1) . Employers with more than two hundred (200) full time employees were originally required to auto enroll employees effective as of March 1, 2013, but the requirement has been delayed until the DOL issues guidance and that guidance is not expected until 2014.
(2) . Employers who issued more than two hundred fifty (250) W-2s for the 2011 tax year, must report coverage under any group health plan provided by the employer on the W-2s issued in January 2013 for the 2012 tax year. The reporting requirement applies to both private and public employers. Report the total value of the employer-provided health coverage in Box 12 and use Code DD. The total value is the sum of employer and employee contributions. If insured, report the premium and if self-insured, report the COBRA cost, without the 2% administrative charge. This applies to the core medical benefit, and does not include the cost of separate ancillary coverage, e.g. dental or vision.
(1) . Group insurance providers and self insured plans will pay $1/capita for plan years ending after October 1, 2012 and $2/capita for plan years ending after October 1, 2013 and before October 1, 2014; and thereafter the rate is adjusted for medical inflation. HRAs are subject to the fee if not aggregated with a self-insured plan. A HRA maintained in conjunction with a group insurance plan will be subject to the fee. This is scheduled to be phased out in 2019. The filing of Form 720 is due by July 31st of the calendar year following the end of the plan year.
(2) . To the extent that health insurers do not meet certain medical loss ratios, rebates are paid to the plan. The rebates may be held as a plan asset subject toERISA fiduciary rules or, if re-distributed to participants within three (3) months of receipt, are exempted from the fiduciary rules.
(3) . Employee FSA limit is $2500 per employee. This would allow husband and wife $2500 each, up to total of $5000, even if H & W are employed by the same employer. Plans must be amended by December 31, 2014.
(4) . This maximum four (4)-page double sided benefit statement must follow a model format and is effective now for annual enrollments after September 23, 2012 or plan years beginning on or after January 1, 2013. This applies to both grandfathered and non-grandfathered plans, self-insured and fully insured plans. Compliance is critical. Insurer and administrator penalties may be up to $1000 per failure and subject the employer to a $100/day per individual penalty. Make sure that that the SBC does not contradict the SPD.
(5) . Sixty (60)-day advance notice is required for any material modification of coverage described in the SBC. Advance notice is not required for SBCchanges identified as part of an open enrollment. Modifications include plan or benefit improvements. Watch for guidance as to how this will impact mergers and acquisitions, but pending guidance, anticipate a sixty (60)-day advance notice of change.
(6) . As of March 1, 2013 notice must be given to employees of Exchange provided coverage. This applies to all employers without any exemption for small employers. Stay tuned for changes on this since the exchanges are not scheduled to come on line until January 1, 2014.
(7) . For plan years beginning on or after August 1, 2012 certain breastfeeding, contraception, diabetes and domestic violence screening must be covered on a first dollar basis with no cost sharing. Grandfathered plans are exempt for the present. Nonprofit employers have a one (1)-year delay until August 1, 2013.
(8) . For taxable years beginning January 1, 2013, the hospital insurance or Medicare component of the FICA tax increases by .9% from 1.45% to 2.35% on the employee portion (but not the employer portion) of compensation in excess of $200,000 (single) and $250,000 (married). Employer must withhold if wages paid by that employer reach $200,000.
(9) . Beginning in 2013, a 3.8% tax applies to the net investment income in excess of a modified adjusted gross income of $200,000 for single filers and $250,000 for married filing jointly ($125,000 married filing separate). For this tax, gross income does not include interest on tax exempt bonds or the excluded gain on the sale of the principal residence. However, dividends, interest and capital gain items will be exposed to this 3.8% tax. For the year in which you attain age 70½ you may not want to defer RMDs to the period before April 1 of the next year. The bunching of the RMDs for two (2) years may push your AGI to the $200k or $250k threshold and trigger the 3.8% tax on unearned income items.
(10) : Note that the Act prohibits annual and lifetime dollar limits on essential health benefits and in order to avoid pay or play penalties, self insured plans will have to cover FTEs based on thirty (30) hours/week.
(1) . A tax credit is available for employers with less than twenty-five (25) employees, whose average wages are less than $50,000/year and for whom the employer pays more than 50% of the premium for health insurance. For more information, click here.
(2) . This is an exchange that will be available for small business (less than one hundred (100) employees). The expectation is that the increased risk pool will lower premium costs for these small employer groups. Employers who expand to more than one hundred (100) employees will be able to remain on the SHOPexchange.
(3) : If you already offer insurance, see if you qualify for the credit. If you do not already offer insurance, you may want to take a wait and see approach relative to whether your employees benefit from the exchange or whether you believe theSHOP exchange will provide you and your employees an affordable and desirable benefit. This is a wait and see strategy.
(A) Determine whether you’re an applicable large employer. Start now. IRS Notice 2012-58 provides safe harbor guidance utilizing a measuring period to determine whether an employee works at least thirty (30) hours/week; an administrative period to handle enrollment; and then a coverage or stability period. The guidance also deals with variable hour and seasonal employees.
(B) If you are not an applicable large employer consider employees who work less than thirty (30) hours per week as part of your business model.
© If you are an applicable large employer review your plans. Consider adding a low cost (less than 9.5% of W-2) plan as one of the available options. Consider targeted subsidies to employees who may otherwise be eligible for a tax credit.
(D) Do the math. The premiums are deductible; the penalties are not deductible.
For additional information, please contact David M. Mosier by phone at (814) 459-2800 or via email at firstname.lastname@example.org.
David M. Mosier is an Shareholder at Knox McLaughlin Gornall & Sennett, P.C.’s Erie office.