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
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
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
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
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
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
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,
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 firstname.lastname@example.org.
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