As the Legislature decides whether Florida will implement certain provisions of the Affordable Care Act (ACA), businesses of all sizes are grappling with the impact of the law and the choices they must make. Employers in different industries or geographical areas, or of different sizes, will be affected differently. The ACA changes for 2014 will create options not previously available, and employers should be planning now for how they will respond.
Individual Mandate – What Will the Employer’s Employees Need?
Virtually all legal American residents will have to either be covered by a health plan providing at least “minimum essential benefits,” or pay a penalty “tax.” Federal cost sharing assistance and premium tax credits will be available to those with income below 400% of the federal poverty level, with the very poor being eligible for their coverage through an expansion of Medicaid.
Although some may pay the penalty, most individuals will likely enroll in coverage. Many will be accustomed to getting their health coverage through their employer, and each Florida employer should consider the impact its choices will have on its employees. Some employers may decide not to offer health coverage, even if that means terminating existing plans. Other employers will continue to offer it.
Exchanges – New Opportunities for Eligible Employees and Employers to Obtain Coverage
The legislature will have to decide whether to establish an Exchange. If it does not, the federal government will operate an Exchange for Florida residents.
An Exchange will provide a menu of policies from which eligible individuals may choose. An individual who has access to coverage from the employer is not eligible for the Exchange unless that employer coverage is not “affordable.” In general, coverage is not affordable if the premium the employer requires the employee to pay exceeds 9.5% of the employee’s pay.
Small employers will be able to purchase coverage for all their employees from the Exchange.
Employer Mandate and Employer Choice – To Maintain the Plan or Pay/Risk the Penalty
Small employers – those with fewer than 50 “full time employees” – are not required to provide coverage to any employees, and will not be subject to any penalty tax for not doing so. All employees in a “controlled group” are aggregated for purpose of this computation, so an owner of several businesses may exceed the aggregate 50-employee threshold even if no one business has that many employees. Also, all the hours of all the employer’s employees are aggregated to determine a full time equivalent number of employees. Thus, an employer with more than 50 individual employees, some of whom are part time, might still qualify as a small employer.
Freed from concern about a penalty tax, an employer with fewer than 50 employees may decide whether to provide coverage, and whether to do so through the Exchange.
Most “large employers” (those with 50 full time employees or more) will be required to offer coverage to “substantially all” their full time employees or pay the penalty tax. Under recent IRS guidance, substantially all means 95% or more.
This pay-or-play structure was designed to give employers a choice of whether to provide coverage as employers have done for decades, or to let their employees go to the Exchange or other resources for their coverage. Large employers who do not provide coverage will contribute to the federal government’s cost of doing so by paying the penalty tax.
The employer penalty tax is not deductible against the employer’s income tax, as the costs of providing the coverage would be, so there is a built-in incentive for employers subject to the penalty tax to provide the coverage instead of paying it. However, the penalty structure is designed to incentivize employers, not to punish them harshly, thus making a decision not to offer coverage a viable option for many employers.
In general, a full time employee works at least 30 hours per week on average. Employees expected to average 30 hours or more per week are considered full time employees immediately, and eligible for coverage after a waiting period no longer than 90 days. Those whose expected hours are uncertain or variable must begin to be covered once they actually work at least 30 hours per week on average over a measuring period. The IRS has provided a detailed (and somewhat complicated) safe harbor structure for determining when and if employees whose expected hours are uncertain must be offered coverage to avoid triggering the employer penalty tax.
Large employers that do not provide coverage to substantially all their full time employees will pay a penalty of $2,000 for each full time employee, whether they receive the cost sharing reductions and tax credits or not, but with no penalty on the first 30 employees. This penalty tax is only due if any of its full time employees receives a tax credit or cost reduction under an Exchange, but few employers will have a work force so highly paid that it could expect not to have some employee receive Exchange cost reductions or tax credits. Employers should carefully analyze their employee base in determining whether to provide the coverage or to pay the penalty.
An employer that offers coverage, but has employees who nevertheless qualify for a tax credit or cost sharing reductions under the Exchange, can be assessed a penalty of $3,000 per full time employee who receives such a reduction or tax credit. This could happen, for example, if the coverage is deemed unaffordable for certain employees (generally, more than 9.5% of the employee’s pay), or if the employer’s coverage fails to meet the minimum standards for coverage.
Because the requirements only apply to employees working 30 or more hours per week on average, some employers may consider limiting the penalties they pay by limiting the hours of more employees to less than 30 hours, so that those part time employees would not be covered (and not included in the penalty tax calculations). To work, such limits must be bona fide, and the employer must be careful to count all required hours (paid non-working hours are counted, for example). Employers should be cautioned against an aggressive search for loopholes.
Advantages of New Rules
All in all, it is hoped that the ACA will make coverage more affordable and more readily obtainable for employers and individuals. The Exchanges should create more competition among insurers, and the inclusion of most Americans in the overall market should spread the insurance risks, so that individuals are getting some form of coverage for their entire lives and do not have to worry about being unable to get coverage as they age or become ill.