It's Time to Play or Pay - Part 2

Last issue, we took a brief look at the Affordable Care Act, a/k/a Obamacare (or scare). We examined which employers are “large” employers covered by the law, and looked at the Employer Mandate and Individual Mandate, both of which were scheduled to take effect on January 1, 2014. Recently, the Obama Administration announced that the effective date for the Employer Mandate will be postponed until January 1, 2015. While this is welcome news given the unanticipated complexity and cost of the law, contractors should not ignore the problems posed by the ACA and need to start planning now.

Let’s take a closer look at the Employer Mandate and how you can be penalized. The Employer Mandate requires large employers to provide “minimum essential coverage” to full-time employees. Basically, this is pretty much the same standard health insurance package that most employers offer today. The regulations permit you to put into place a plan that requires employees to pay for some of the costs, perhaps even a co-pay plan where the insurance pays for 60 percent and the employee pays for 40 percent of the benefits provided. But, there’s a catch.

Minimum Essential Coverage must also be “affordable” and provide “minimum value” in order to avoid penalties. Again, let’s take a look at each of these defined terms.

Affordability means that the employee’s share of the premium cost does not exceed 9.5 percent 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 percent. If so, you may face penalties.

“Minimum value” means that the coverage provides at least 60 percent 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 percent 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 that 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. In theory, contractors should be able to look to their insurance brokers or plan providers for products that meet the minimum value test.

What are the penalties?

The employer must pay a tax for any month in which the employer does not offer minimal essential coverage to substantially all (95 percent) 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 [$2,000 12 x (# of FTEs - 30)]. For some employers, especially those close to the 50 FTE eligibility threshold, it may be cheaper to pay the penalty than provide coverage, especially if there is no penalty assessed for the first 30 full-time workers.

If the coverage 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 [$3,000 12 x (# of FTEs getting 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.

The calculation of your headcount, availability of health insurance plans and how much they cost, comparison to the penalty cost of not providing coverage at all, and possible penalties for inadequate coverage are all factors that contractors should take into account when making the “play or pay” decision. Contractors should meet with their insurance broker now and start planning what to do to address this important issue.