by Jay F. Brubaker December, 2012
Are you concerned about how the obligations imposed on employers by health care reform will affect your business? If so, you are certainly not alone. Even though the Patient Protection and Affordable Care Act (the "PPACA"), often referred to as "Obamacare," was enacted in 2010, many of us have waited to see which, if any, of the law's provisions would actually take effect. Most of those questions were answered when the U.S. Supreme Court upheld the law this summer and President Obama was re-elected. While there are still questions as to how all of the provisions will be implemented, it is very unlikely that any major changes to the law will be made and employers need to begin planning how they will meet their new obligations under the Act.
The employer provisions of the PPACA are generally intended to target large businesses who employ a high number of low or minimum wage workers, individuals who often end up relying on Medicaid or other government programs to meet their health care needs. Therefore, as a general rule smaller businesses or businesses with a higher average employee salary will have fewer burdens and lower penalties imposed on them by the PPACA. Understanding how many persons you employ, and how that number is calculated, is key to understanding what your obligations are under the PPACA.
The most pressing provision of the PPACA is a requirement beginning this year that employers report the amount they contribute towards health insurance for their employees. This information must be included on each employee's W-2 form, starting with W-2's for the 2012 year. However, this obligation only applies to businesses who issue 250 or more W-2's for the year in question.
Next, starting March 1, 2013, employers will be required to post certain information for employees regarding the employees' ability to obtain insurance through a state health insurance exchange. The required notice must include: (1) the identity of the exchange; (2) a description of the services provided by the exchange; (3) how the employee may contact the exchange for assistance; (4) that the employee may be eligible for a premium tax credit for a qualified health plan purchased through an exchange if the employer's health benefit plan's actuarial value is less than 60%; and (5) that the employee will lose the employer contribution toward health coverage, and that all or a portion of the contribution may be excludable from federal income taxes, if the employee purchases a qualified health plan through an exchange.
The remainder of the obligations for employers are scheduled to take effect in 2014, when certain provisions requiring employers to offer health insurance coverage go into effect. Employers with 50 or fewer full time equivalent employees will be exempt from these requirements. To determine whether or not an employer has 50 or fewer employers, the employer must not only count its full time employees but also the number of full time equivalents (FTE's) accumulated with its part-time employees.
An FTE is determined by dividing the yearly total number of hours worked by all employees by 2,080. For example, an employer may have one employee who averages 25 hours per week (a total of 1,300 hours for the year) and another employee who averages 15 hours per week (a total of 780 hours for the year). Since these two employees worked a total of 2,080 hours for the year, these two employees would count as one FTE towards the total of 50 FTE employees.
Employers with 25 or fewer FTE employees will be eligible for certain tax credits if they do offer insurance to their employees. The 25 FTE calculation is made in the same way as discussed above. The actual amount of the credit, which can potentially be up to 50% of the amount the employer contributes towards the health care plan, is calculated by a formula that takes into account factors such as the number of employees and the average salary of those employees. In general, employers with fewer employees and/or employees with lower salary will be able to receive a larger tax credit.
Employers with 50 or more FTE employees are obligated by the PPACA to contribute towards health insurance for all full-time employees, or employees who work an average of 30 or more hours per week. Employers who do not contribute will be assessed a tax penalty of $2,000 per full time employee per year (assessed on a monthly basis) if at least one of their full-time employees obtains a tax credit or other government assistance to obtain health insurance through an insurance exchange. There is a threshold number of 30 full-time employees, so the penalty will only be assessed for each full-time employee in excess of 30. For example, while Company A (with 20 full-time and 62 half time employees) is required to contribute towards health insurance for its full-time employees, it would not be subject to a penalty for failing to do so as it has fewer than 30 full-time employees. If Company A had 35 full time employees instead of just 20, then the company would be assessed a penalty of $833.33 ($2,000 per employee for 5 employees, divided by 12 months) for each month that Company A failed to offer insurance.
There are exceptions to this requirement for employers of seasonal employees (where the employee is considered full-time for 120 days or less of the year). It also should be noted that while employees working less than 30 hours per week are included for calculating whether an employer is required offer health insurance, employers are not required to offer health insurance to such employees and they are not included when the calculating penalties.
Even if an employer does offer health insurance coverage, the employer can still be subject to penalties if the insurance coverage is not affordable. Insurance coverage is considered to be affordable if pays for at least 60% of covered claims and the employee's contribution does not exceed 9.5% of the employee's household income. For instance, the maximum employee contribution for an employee earning $25,000 per year (and with no other household income), would be $2,375 for the year for the insurance to be considered "affordable". If the insurance coverage offered is not affordable, and at least one of the employer's full-time employees obtains a tax credit or other government assistance to obtain health insurance through an insurance exchange, the employer can be assessed a penalty of up to $3,000 per person per year. This penalty is calculated based only on the number of people who both cannot "afford" the insurance and receive government assistance, and based upon the total number of employees.
The amount of the penalty for failing to provide affordable insurance is capped at the amount an employer would have been penalized for failing to provide coverage. For example, the most Company B could have been penalized for failing to provide coverage is $140,000 per year, or $11,666.67 per month. Therefore, any penalty imposed on Company B for failing to provide affordable insurance could not exceed that amount.
One way an employer can avoid incurring penalties is by offering "free choice vouchers". Starting in 2014, employers who offer health insurance to employees will be required to offer these vouchers to full time employees whose household income is less than four times the federal poverty level (an amount currently equal to $88,200 for a family of four). The vouchers have to be equal to the same amount the employer would otherwise contribute to the employee's health coverage under the employer's plan, and can be used by the employee to purchase insurance through a state exchange. While there is no penalty for an employer who does not comply with this requirement, an employer will be exempt from the penalties listed above if it does provide the vouchers.
Provisions in the PPACA also will require employers with more that 200 FTE employees to automatically enroll employees in employer provided plans and will require all companies to provide reports on the health care coverage provided. Employer sponsored health care plans will also be required to conform to standards set out in the PPACA.
As shown above, the obligations imposed on employers by the Patient Protection and Affordable Care Act and the penalties imposed for failing to comply with those obligations can vary widely depending on the specific situation of each employer. While this article provides some general guidelines, every business should review its own individual employment situation to develop an employee health care strategy. The attorneys at Allen Wellman McNew Harvey, LLP, have a broad range of experience in business and employment matters, and would be happy to consult with you as to how the provisions will affect your individual business.