It's Time to Play or Pay

Many employers will recall that health care reform was a priority of the Clinton Administration’s first term. It wasn’t until 2010, however, that the Obama Administration was able to push reform legislation through Congress. As House Speaker Nancy Pelosi said at the time: “We’ll just have to pass it, so we can all see what’s in it.” Many employers are regretting that decision, as the actual provisions of the law become apparent.

Health care reform includes expanded coverage, disclosure, and reporting rules, as well as individual and employer mandates, which can create substantial costs of compliance. The health care reform requirements become effective over a range of years beginning in 2010 through 2018.

Effective Jan. 1, 2014, most individuals must acquire or maintain minimum levels of health insurance coverage or pay a tax based upon a percentage of their income. The individual penalty increases annually to a maximum of $695 per adult and $2,085 per family in 2016. The penalty in 2014 is $95 per adult and $285 for a family. These penalties are far, far less than the likely cost of paying for individual/family coverage. In theory, if household income falls below certain thresholds, tax credits may be available to help pay for coverage. The law calls for creation of Health Insurance Exchanges where individuals and small employers can purchase coverage. Implementation of Exchanges has again been delayed. It remains to be seen whether coverage through the Exchange – with our without tax credits – will be an affordable incentive for individuals.

Of more concern to employers is the so-called Employer Mandate that also takes effect on Jan. 1, 2014. Under this provision, employers that fail to offer minimum essential health coverage to substantially all of their full-time employees or offer coverage that is not affordable or does not provide minimum value can be penalized. Let’s look a little closer at all of this.

Closeup on the employer mandate

The Shared Responsibility Mandate applies to “large” employers. This is defined to mean all private or public employers with 50 or more full-time employees. All employees who work more than 30 hours are considered full-time. To complicate things a little, “full-time employees” must also include part-time employees whose hours add up to “full-time employee equivalents” by adding their hours and dividing by 120. The answer is the number of FTEs. Note that there are special rules for counting workers with irregular hours, seasonal workers, employees on leaves of absence, etc. If your full-time employee plus FTE headcount is over 50, you are a large employer under the ACA. If you are a covered employer, you must offer “minimum essential coverage” to all full-time employees.

Minimum essential coverage is pretty much the standard health insurance package that most employers offer today. Covered employers cannot have a waiting period longer than 90 days before coverage is offered to full-time employees. Coverage need only be offered one time during the plan year; this is similar to a typical enrollment period applicable to most benefits plans today.

Minimum essential coverage must also meet an “affordability” test and provide minimum value in order to avoid penalties. Affordability means that the employee’s share of the premium cost does not exceed 9.5% of the employee’s household income for that tax year. IRS guidelines provide three ways to prove affordability: W-2 wages, Rate of Pay, or the Federal Poverty Line. In essence, the test compares the employee contribution to wages paid to see if the employee is contributing more than 9.5%. If you meet any one of these, you survive the affordability inquiry.

“Minimum value” means that the coverage provides at least 60% of the total allowable cost for the benefits provided under the plan. This calculation would look at deductibles, out-of-pocket maximums, co-pays, etc. for the different types of benefits available under the plan to see if the employee is ultimately bearing more than 40% of the total cost. Note that this might include separate calculation of costs for physician and practitioner care, hospital/ER services, pharmacy benefits, and lab/X-ray services. IRS and HHS have announced they will deploy web-based “calculators” to make the minimum value determination. These will require the employer to input information about costs and shared payments that should be provided by the carrier or plan sponsor.

What are the penalties?

The answer to this question depends upon your specific facts, but here is an overview of the possible penalties. The employer must pay a tax for any month in which the employer does not offer minimal essential coverage to substantially all (95%) of its employees and their dependents (children 26 or under but not spouses) and a full-time employee receives a tax credit or cost-sharing reduction for obtaining coverage through an Exchange. If no coverage is provided and merely one employee receives a subsidy or enrolls in an Exchange, the monthly penalty will be $2,000 divided by 12 times the number of full-time (i.e., 30+ hours per week) employees, not counting the first 30 such employees. For some employers, especially those close to the 50 FTE eligibility threshold, it might be cheaper to pay the penalty than provide coverage.

If an employer offers coverage, but it is deemed not to be minimal essential coverage (either because of affordability or minimum value), and any full-time employee receives a subsidy for coverage through an Exchange, then the employer may face a penalty of $3,000 divided by 12 times the number of full-time employees who obtained a subsidy. This penalty cannot be greater, however, than the penalty imposed for not offering coverage at all. In any calendar month, the employer could face liability for either penalty, but cannot be liable for both penalties for a single month.

Large employers can choose not to provide coverage and pay a penalty. It is vital that employers make the eligibility determination quickly and then work with an insurance broker to obtain realistic pricing if coverage is mandated and the employer wants to provide it. This creates the “pay or play” decision process. In other words, prudent employers will compare the cost of providing coverage (play) against the cost of not providing coverage and paying the statutory penalty (pay).