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Health Care

Sands Anderson PC: The Affordable Care Act: What Employers Need to Do Now to Plan for 2014

By Jessica Rogers

Beginning January 1, 2014, most U.S. citizens and legal residents will be required to have qualified health care coverage pursuant to the Affordable Care Act ("Act"). The Act requires employers defined as "large" to offer that coverage for its "full-time" employees or pay a penalty. Employers must act now to determine if they are required to provide that coverage (or pay a penalty), and to determine which employees are "full-time." The look-back periods for determining large employer status and for determining full-time status must begin in 2013.

You must determine now: (i) if you are an applicable large employer under the Act, (ii) if so, which employees must be offered health care coverage, and (iii) what penalties you may face for not offering coverage. Much has been written, and new guidance issues almost daily,but following is a quick checklist:

1. Are You a "Large Employer" Subject to the Act?

Only employers with at least 50 full-time common law employees, or the equivalent, are subject to penalties under the Act. To determine if you meet the "large" employer definition, you must determine how many full-time employees (and their equivalent) you have as defined by the Act, and whether or not you qualify as a single or joint employer.

How Do You Count Employees? For purposes of calculating employer size, a full-time employee is anyone who regularly provides at least 30 hours of service (all paid time) a week, on average. You must also calculate full-time equivalent positions. To determine full-time equivalent positions in a month, the total number of hours worked by part-time employees is divided by 120. The number of full-time employees for each month, plus the number of full-time equivalent positions for each month are added together, divided by 12, and then rounded down to the nearest whole number. If that number is 50 or more, the employer will be subject to the Act's penalties in 2014. Because employers have not had much time to plan for this initial look-back period, they may choose to use any consecutive 6 month period in 2013 to determine large employer status for 2014 (but must use the full previous calendar year for subsequent years).

Are You A Single or Joint Employer? The Act also requires joint employers to combine their employee counts for purposes of determining large employer status under the Act. Recent regulations make clear that any employer considered a single employer under IRS pension plan definitions will be treated as a single employer for purposes of determining large employer status. If you have any relationship with another entity, you will need to determine if that relationship qualifies you as a joint employer.

2. What Are Minimum Essential Coverage, Affordability, and Minimum Value?

In order to avoid shared responsibility payments (i.e. penalties), a large employer must offer minimum essential coverage that is both affordable and meets certain minimum value requirements.

Minimum essential coverage includes most private health insurance plans that an employer would offer its employees (but certain limited benefits will not qualify).

A health care plan is considered affordable if the employee's share of the premium for employee-only coverage does not exceed 9.5% of his household income. Remember that employers must offer dependent coverage (for children up to age 26, but not spouses), but the cost of dependent coverage does not affect the affordability calculation. Because an employer will not necessarily know an employee's household income, the Act provides a safe-harbor for the employer, requiring only that the cost of employee-only coverage is not more than 9.5 % of the wages reported on the employee's W-2.

The coverage offered must also meet certain minimum value requirements. In simplest terms, the plan must pay at least 60% of the expected health care costs. The employee would pay the other 40% through copayments, deductibles, and coinsurance. In other words, the employer's plan should meet the same minimum value as the "bronze" plans to be offered in the health insurance exchange. In terms of the specific benefits offered, the requirements will vary. Some plans are required to offer the same essential health benefits as plans offered through the exchange, while others are not (self-insured plans, for example, are not).

3. How Do You Determine Which Employees You Offer Coverage to and When the Coverage is Offered?

This provision will be especially important for those in retail who qualify as a large employer. Not only will you need to determine if your employees are full-time, variable hour, or seasonal (working less than 4 months a year), you will also need to keep rigorous track of hours in order to be able to prove that they do not qualify for coverage in order to avoid penalty assessments. The Act gives employers the option to use a look-back period to determine which employees are full-time (or not). For 2014, you need to begin that analysis now. The calculation for this analysis is too complicated to discuss here, and assistance from a qualified professional is recommended.

In order to simplify compliance with the Act, some employers are contemplating limiting all part-time workers to 29 hours a week. This strategy may prove unwise; it could be viewed as an interference with employee benefits (ERISA 510 claim). Until the nuances of the Act have been tested in court, it may be better to simply start measuring current employees' hours under the variable hour employee analysis, and redefine new positions to be either clearly part-time (less than 30 hrs/week) or full-time (30+).

4. Play or Pay?

Technically speaking, the Act does not require any employer to provide health insurance to any employees. Rather, the Act contains certain penalties for applicable large employers who fail to offer coverage to full-time employees. Large employers can face penalties for either (i) not offering minimum essential coverage to full-time employees and their dependents (children up to age 26, but not spouses), or (ii) offering coverage that is deemed unaffordable or does not provide minimum value. There are no penalties for not offering coverage to part-time employees.

If a large employer does not offer coverage at all, and any full-time employee seeks coverage through a health insurance exchange and that employee also receives a subsidy for such coverage (either a premium tax credit or cost-sharing subsidy), the employer will be fined $2000/year for each full-time employee, disregarding the first 30 full-time employees (assessed monthly). Note that one full-time employee receiving a subsidy through the exchange will result in a penalty for each full-time employee (after the first 30). There is a safe-harbor for employers who offer coverage to their full-time employees and dependents but mistakenly exclude no more than five percent (or five, whichever is greater), of employees from coverage who otherwise should have been covered because of full-time status. The IRS will then assess a penalty only for any employee who was mistakenly not covered and who receives a subsidy through the exchange.

If an employer offers coverage, but that coverage is deemed unaffordable or does not provide minimum value (as defined by the law), and any full-time employee receives a subsidy for coverage through an exchange, the employer will be fined $3,000/year, in monthly installments, only for full-time employees that actually receive a subsidy. The amount fined under this scenario is capped at the amount the employer would be fined for not offering any coverage.

Keep in mind these dollar amounts are for 2014 only. The Act states that the penalties will increase based on premium inflation. So employers will have to calculate the potential cost of not offering coverage each year going forward. Under both scenarios penalties are triggered by a full-time employee receiving a subsidy through the exchange. In order to be eligible for such subsidy, an employee must have an income between 100 - 400% of the federal poverty level ("FPL"), and cannot have been offered affordable, minimum value coverage. For a family of four, 400% of the FPL in 2013 is $94,200. Going forward, employers would need to know these (almost impossible to know) details about their workforce in order determine the cost of not providing coverage.

Some with "large" employer status have considered dropping all employee coverage and simply "paying the penalties." However, before doing so, the employer should consider the following: (i) the unknown future cost of the penalties; (ii) the lost tax benefit to the employee, and in the private sector, to the employer, and (iii) recruitment and retention of quality employees. You may also want to consider finding a plan that offers at least bronze level coverage for variable hour employees who may be close to the 30 hour per week threshold. If you offer at least the bronze level coverage, you eliminate the risk of penalty assessment.

The Act also provides employees with whistleblower protections. Employees who: (i) report alleged violations of Title I of the Act (the health care requirements discussed in this article, plus other elements of the Act, including insurance plan requirements), or (ii) receive health insurance tax credits or cost-sharing reductions (thus causing employer penalty assessments), are protected against retaliation from their employer and their insurance provider. In short, firing (or dropping from coverage, or otherwise adversely affecting the employment of) an employee for reporting violations or going to the exchange will bring additional liability upon the employer or insurance provider.

One final consideration should be the tax implications, for both the employer and employees. Penalties are not tax-deductible, whereas health care contributions are deductible. Also, employees may expect an increase in salary to compensate for the lack of health benefits offered by an employer; a dollar-for-dollar increase will be taxed, and therefor potentially not as valuable to the employee.

The Act is new and complicated, so it is important to stay updated on new developments. New guidance will continue to be issued throughout 2013 (and beyond). The bottom line is that employers must begin analyzing their workforces now, in 2013, in order to make informed business decisions for 2014.

The above article is a condensed version of a longer Sands Anderson PC article by the same name by Ms. Rogers, Karen S. Elliott and Phyllis Katz. If you would like the full article, or if you would like to seek legal advice regarding application of the Affordable Care Act to your business, please contact us at

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