It's Time to Play or Pay – Part 1

Many employers will recall that health care reform was a priority of the Clinton Administration’s first term. However, it wasn’t until 2010 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, and individual and employer mandates, which can create substantial compliance costs. The reform requirements become effective over a range of years, beginning in 2010 and lasting through 2018.

Between 2010 and 2012 we began to see the impact of this sweeping legislation. The law caused expansion of preventative care, coverage of dependents to age 26, elimination of pre-existing condition exclusions for those less than 19 years of age, prohibition of lifetime spending limits, annual limits on costs of essential health benefits, radical modification of the Flexible Spending Account mechanism, W-2 reporting of the value of benefits (applies in 2012 to employers with more than 250 W-2 employees), enhanced claims and appeals processes, and new notices to employees of “Summary of Benefits Coverage.” Whew, that is only the start.

In 2013, we are witnessing creation (eventually) of the Health Insurance Exchanges, a required notice to employees about the exchanges (now due by October 1, 2013), an increase in the available deduction for medical expenses from 7.5 percent to 10 percent of Adjusted Gross Income, an increase in the Medicare tax on high income earners from 1.45 percent to 2.35 percent, and a maximum Flexible Spending Account contribution of $2,500. The agencies regulating ACA implementation — IRS, DOL and HHS — are finally getting their act together. But, the best is yet to come …

Get ready

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 or without tax credits — will be an affordable incentive for individuals.

Of more concern to contractors 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. All of these terms have specific meaning under the law. We will save a discussion of most of these terms, as well as the penalty provisions, for the next issue. For now, however, let’s take a look at who is covered.

The Employer Mandate applies to “large” employers. This is defined to mean 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 count 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. If your full-time employee plus FTE headcount is over 50, you are a large employer under the Affordable Care Act. The headcount calculation is particularly difficult for contractors that employ seasonal workers as there are special rules that look at time periods, nature of the work, length of worker engagement, etc.

Large employers may choose not to provide coverage and pay a penalty. This creates the “play or pay” decision process. Contractors need to make the eligibility determination quickly and then work with an insurance broker to obtain realistic pricing if coverage is mandated and you want to provide it. In other words, prudent contractors will compare the cost of providing coverage (play) against the cost of not providing coverage and paying the statutory penalty (pay). You need to get working on this one, as it can be a very costly decision.