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The Affordable Care Act (ACA) is slated to take effect for large companies in January 2015, and for smaller companies a year later. There is a great deal to do, and you likely have many questions about how to keep your company compliant.
Cynthia Marcotte Stamer, managing shareholder of Cynthia Marcotte Stamer, PC, an expert in employee benefit, health care and human resources matters, recently spoke as part of a panel of experts in a LexisNexis® Webinar about the ACA, its immediate requirements and how to decide whether your company should “pay or play.”
Does the ACA Apply?
The first thing employers must do is determine which provisions of the Affordable Care Act apply to them, and when, Stamer advised. Obtaining a correct count of your employees and their hours is important for determining whether the pay or play penalties apply, whether your company qualifies for exceptions and whether many of the mandates impact your company.
“Knowing how many employees you have and getting that right is absolutely critical to understanding and planning what you need to do here,” Stamer said.
Counting presents several problems for companies. Varying definitions for employee classifications such as seasonal, leased and part-time can make it difficult to get it right. In many companies there is a chronic failure to keep track of workers’ hours. Stamer warned that companies must immediately clean up their record-keeping because the measurement period for next year occurs during the previous year—meaning right now.
Despite the publicly available information, many companies still do not understand that the number of employees affects a company’s duties, Stamer said. The pay or play shared responsibility rules of Section 49080H apply beginning in January to large employers—those with more than 100 full-time equivalent (FTE) employees (fewer than 4 percent of employers). It applies to mid-size companies of 50 to 100 FTEs in January 2016. Companies with fewer than 50 employees, never need to think about 4980H shared responsibility, Stamer said.
Which New Rules Apply to Which Employers?
IRC§162 Employer Premium Deduction
IRC§46R Tax Credit
IRC§4980H Pay or Play
(Transition Relief Delays Enforcement to 2015 For Employer of >100 FTEs and 2016 If 50–99 FTEs)
Yes beginning 1/1/2016
Yes beginning 1/1/2015
IRC §105(h) Self-Insured Health Plan HCE Nondiscrimination
Yes if self-insured
Yes if self insured
PHS §2716 Insured Non-Grandfathered HCE Nondiscrimination Excise Tax
$100 per day, per non-highly compensated individual discriminated against (delayed by Notice 2011-1 until further notice, plus a possible civil action to enjoin the discriminatory practice)
Code§125 Taxability of Contributions Discriminating In Favor of HCE or Key Employees
Contractual Obligations When Union, Government Contractor, M&A or Other Obligation
How Do I Count Employees?
It is important to note that different rules count employees differently. To determine if you are a “large employer” under Section 4980H, Stamer said you must:
Accurately identify all “common law employees,” including seasonal employees, regardless of hours worked.
Count the number of full-time employees who work on average more than 30 hours per week, per month.
Calculate the number of “full-time equivalent employees” (total hours worked by all non-full-time employees, divided by 120).
Calculate (step 2 result + step 3 result) x 1/12. Is the result greater than 100 in 2015 or 50 in 2016? If yes, go to step 5. If no, stop. Code §4980 does not apply, and you can concentrate on other aspects of the law.
What is an Employee?
Stamer said an employee is an individual defined under the common-law standard of 26 CFR §31.3401(c)-1(b). The determination hinges on the details of the work performed and who controls the work.
“So, if you have independent contractors and outside staffing, you really need to be careful to scrutinize those,” Stamer said. Be sure not to include the income tax definition of employee under Section 530 relief. That does not change the definition of employee, it is just used for income tax withholding and payroll tax purposes.
Generally, a full-time employee averages at least 30 hours of service per week per month. Hours of service include each hour an employee:
Foreign source income earned by employees working outside the U.S. does not count for large-employer status or calculating the penalty, Stamer said.
Additionally, the definition of employee does not include:
“You need to be very realistic,” Stamer said. “Worker misclassification is rampant. The government is very hot on it, and you need to be honest about the common-law employer or employee.”
Use the controlled group test, such as what is used for your 401K testing, your 125 Plan testing or the like, to determine your full-time equivalent employees. So, commonly controlled and affiliated businesses are treated as a single employer, and the common-law test decides who is the employer of leased/staffing company workers, Stamer said.
Applicability of §4980 is generally determined based on prior-year employment figures, which is why it is imperative to obtain an accurate count right now, Stamer said. An employer that did not exist in the preceding calendar year is considered a large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees—taking into account FTEs—on business days during the current calendar year, and it actually employs them during the calendar year
What If I Have Not Been Counting Employees?
If you do not currently count employees, equivalencies exist that are similar to wage-and-hour equivalencies.
“Keep in mind that these equivalency rules are basically rules of convenience,” Stamer said. “They assume that you are willing to give up something and run the risk that you are going to have a presumption for coverage because you didn’t want to do the recordkeeping. Many people are going to be forced to do that because they currently do not have the number of employees and their hours counted.”
Should I Pay or Play?
Once they determine that §4980H applies, companies consider what, if any, shared responsibility they have.
Employers must again count their employees and hours of service, this time using the look-back measurement. Look-back numbers only apply to the penalty calculation, not the determination of what is a large employer. While seasonal employees count toward large-employer status, they do not count toward the penalty. A seasonal employee has not yet been defined; employers may apply a reasonable, good faith interpretation of the term, Stamer said.
There are three periods for the look-back calculation—measurement, stability and administrative. Full-time status is determined based on the hours worked during the preceding measurement period of 3 to 12 months. Employers can select the length of the period. The stability period, which is limited to six to 12 months, must be the same as the measurement period.
“If you have a lot of variations in employees, a quarterly or bi-monthly system of measurement might be better,” Stamer said. “Once you know your numbers and your employment patterns, you can then do some planning to see if you can minimize penalties by designating your measurement and your stability periods.”
She noted that once an employee qualifies as full-time during the measurement period, he/she is considered full-time for the balance of the period, even if switched to part-time or on a leave of absence.
Employers may apply an administrative period of up to 90 days in connection with an initial measurement period and before the start of the stability period. The administrative period, which is optional, allows employers to deal with elections and continuity issues, Stamer said.
Although the large-employer test is performed on a controlled group basis, the penalties are applied separately for each member of the controlled group. Thus, a controlled group member employer that covers its employees does not automatically face the 4980H penalty merely because other members do not cover their employees and incur penalties, Stamer said.
Employers may be able to reduce 4980H penalties by placing employees not intended to be covered into separate subsidiaries, but they need to be careful to avoid non-discrimination issues under ERISA §510, COBRA, FMLA and other implications, Stamer said.
When Is a Shared Responsibility Payment Owed?
A large employer on a controlled group basis owes a penalty if it has at least one full-time employee who is certified as enrolled in a qualified health plan and is receiving an applicable premium tax credit—a subsidized employee—and either:
A plan is deemed not affordable if the premium is greater than 9.5 percent of the employee’s household income. Minimum value is based on an actuarial formula that considers if the plan’s share of the total allowed costs of benefits provided under the plan are at least 60 percent of the value of benefits covered by a benchmark plan with an essential health benefits package. Stamer said preventive plans will not meet minimum value requirements under any circumstances. Stamer said most existing employer plans exceed this minimum value standard.
Stamer noted that a large employer that takes steps during the 2014 plan year toward offering dependent coverage will not be subject to a shared responsibility payment solely due to its failure to offer coverage to dependents. A spouse is not considered a dependent.
How Much Will I Owe?
The penalty a large employer must pay depends on which test it fails.
4980H(a)—Assume you offer no minimum essential coverage plan and you are covered by the rules, Stamer said. Using the statutory formula, take the total full-time employees (not full-time equivalents but the actual full-time employees based on the measurement period you had before) and then subtract 30. Multiply that by $2,000 and divide by 12. That results in $165 per month times the number of full-time employees, minus 30.
Don’t forget about the 95 percent safe harbor. If you’ve offered the MEC to 95 percent of the people, but not the other 5 percent, then you do not need to apply this formula.
“You can plan into that rule, or you can accidentally fall into that rule,” Stamer said. “Some people plan for it; some people don’t, but if you goof it up, you are pretty much fried.”
Companies must assess the penalty at year end and report it for each month. You will receive the §1411 certification for each month stating that you have at least one full-time subsidized employee in an exchange.
“If you don’t get notification that at least one employee was subsidized for that month, then there is no penalty for that month,” Stamer said.
Once you have determined whether you’ve offered minimum essential coverage, the next question is whether what you have offered meets the minimum value and affordable tests, which may take you out of the “a” penalty and into the “b” penalty.
4980H(b)—The 4980H(b) penalty is the lesser of $250 per month, or $3,000 times the number of subsidized full-time employees, divided by 12. In calculating full-time employees, do not count new full-time employees in their first three months, new variable-hour or seasonal employees in their initial measurement period.
Should I Provide or Drop Coverage?
Stamer said she talks to a lot of employers with 25 to 30 employees that are considering dropping their coverage, when they are not even covered by the rule. Be certain you are covered before taking any action, she cautioned.
If you are a large employer, some factors to consider when deciding whether to keep or drop coverage are:
What Are Some Alternatives?
Employers have a lot to consider. They can:
Can I Offer a Skinny Plan?
So-called “skinny plans” offer very limited coverage—usually only mandatory benefits—but are being considered by companies as possible alternatives for avoiding a 4980H(a) penalty. They often are offered in conjunction with benefit options or with the option to enroll in more expensive bronze or higher MEC/MV plan coverage.
“If you have a lot of low-paid workers, they may still opt into the exchange because you’re not offering them a minimum value affordable plan,” Stamer said. “To mitigate this, a lot of people consider offering the skinny plan as an alternative to a plan that otherwise qualifies as minimum value affordable coverage. But there are some discrimination rules that might apply. If you’re going to do a skinny plan, you need to get the advice of counsel experienced in these areas to make sure you understand what those rules are.”
Additionally, if a subsidized employee enrolls in an exchange rather than accepting the skinny plan, the employer pays the $3,000 penalty under 4980H(b) rather than the $2,000 penalty under 4980H(a), Stamer said. She suggested offering a minimum essential coverage plan providing minimum value that is affordable, along with a non-minimum value plan. Since most current employer plans have more than a 60 percent value, there may be room to reduce the value of an option by increasing employee cost sharing. She also said companies could scale premiums by pay level, to stay below the 9.5 percent gross income requirement.
Regardless of which road you choose for your company health plan, remember that many aspects of the Affordable Care Act require immediate attention. You may benefit from specialized counsel in plotting your course of action.