By Sally Lockwood Church, Special Counsel, Saul Ewing Arnstein & Lehr LLP
The Affordable Care Act (a/k/a Health Care Reform, or the ACA) is complicated. While there is nothing in the ACA that requires any employer to provide group health care coverage to its employees, the failure to do so can come with a price. The ACA is a game changer - one that requires a different approach to compliance than in the past. As with any complex law, the devil is in the details. This article contains some of the big picture strategies to consider when dealing with the ACA.
1. Look at What You are Doing Now
Is your coverage the same as it was in 2010 and remains "grandfathered" or is it not grandfathered? How valuable is your coverage (deductibles, co-payments, out-of-pocket maximums)? Is your coverage insured or self-insured? These are three important questions to ask yourself, as they all impact your compliance efforts.
2. Understand What is Changing for 2014
Important new "mandates" will apply to all group health care programs in 2014. Some include the elimination of any pre-existing condition exclusions, regardless of age; the elimination of any annual limitation on benefits; and the imposition of a maximum 90-day waiting period. In addition to new mandates, 2014 is the year of the highly-publicized "individual mandate." Under the individual mandate, if any employee fails to maintain "minimum essential coverage," he or she will, generally, be subject to additional taxes. Minimum essential coverage includes coverage offered under an "eligible employer-sponsored plan." An "eligible employer-sponsored plan" is a group health plan or group health insurance coverage offered by an employer, including both insured and self-insured plans. Based upon guidance to date, "minimum essential coverage" is basically any type of group health care coverage. However, certain health care benefits - like dental or vision - do not constitute "minimum essential coverage." Originally, the employer shared responsibility provisions of the ACA were to be enforced in 2014. The employer-shared responsibility rules, also known as "pay or play," only apply to "applicable large employers" - employers with 50 or more full-time or full-time equivalent employees. However, in accordance with both an informal announcement by the Administration and the issuance of IRS Notice 2013-45, the pay or play rules for large employers will not be enforced until 2015. Learn more about the delay here.
3. Determine the Potential Cost of Non-Compliance
Employer Shared Responsibility While counting your full-time equivalent employees is required to determine whether you are an "applicable large employer" for "play or pay" purposes, coverage only has to be offered to your "full-time" employees, as defined under the ACA as employees who work an average of 30 hours a week or 130 hours a month. The "assessable payments" (penalties) for non-compliance with the employer shared responsibility requirement are not deductible and are significant. There are two ways an employer can be hit with these penalties: No Offer Penalty If you fail to offer "minimum essential coverage" to at least 95 percent of your ACA full-time employees, and just one of your full-time employees obtains health care coverage in the marketplace and qualifies for subsidized coverage, then you can be assessed a penalty of $2,000 multiplied by your total full-time employees.
Penalty if Coverage Not Sufficient and/or Not Affordable
The coverage you offer must be both "affordable" and offer what is called "minimum value." That penalty is $3,000 per employee annually, but is more targeted and only imposed with respect to those specific employees who both obtain health care coverage in the marketplace and qualify for subsidized coverage. Also, if the second targeted penalty applies, it will never exceed the amount that would have been imposed had the "global" ($2,000 x each full-time employee) penalty applied. Penalties for Failure to Provide ACA Mandated Benefits The failure to provide mandated benefits also results in penalties. With certain exceptions, a failure to comply with an ACA mandate can result in an excise tax of $100 per day per employee to which the benefit was denied. No tax will apply if the failure was due to reasonable cause and not to willful neglect, and the failure is corrected during the 30-day period beginning on the date you first know (or by exercising reasonable due diligence would have known) that the failure existed. Correction of the failure would mean you have to put the individual back in the same financial position he or she would have been in had the failure not occurred.
4. Determine Your Organization's Benefits Controlled Group
In order to evaluate your risk under the ACA's pay or play provisions, you have to understand - Who is the employer? The "employer" is your entire benefits controlled group. The controlled group rules are extremely complex. These rules identify whether two or more corporations and certain other groups of related trades or businesses are treated as if they were one employer under many provisions of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code, applicable to employee benefit plans. These include parent-subsidiary groups, brother-sister groups, combined parent-subsidiary and brother-sister groups, and affiliated service groups. The rules for determining your benefits controlled group for purposes of the ACA are the same as for your tax-qualified plans. If, after determining whether you have other controlled group members, you determine you are not an applicable large employer, then the ACA employer shared responsibility provision does not apply to you. If you find you are an applicable large employer, but some or all of your controlled group members, standing alone, have less than 50 full-time and full-time equivalent employees, consider breaking the chain of ownership. However, this step requires serious consideration of whether you, as an owner, want to relinquish ownership interests to other individuals or entities just to avoid the ACA pay or play rules, or whether any reorganization makes sense from a tax perspective.
5. Determine Who Will be Your ACA Full-time Employees
There is very specific guidance on how you can set up tracking periods - called measurement periods - to determine if and when these types of employees should be considered full-time for ACA purposes. These rules provide for measurement periods (periods of time when you can determine whether an individual has worked on average 30 hours per week or 130 hours per month). In addition, once you determine whether an employee is entitled to group health coverage, there are fixed periods of time during which they must be offered the coverage ("administrative periods") and when coverage must be continued ("stability periods") regardless of the number of hours they work. The logistics of this are extremely complex and are beyond the scope of this article. In addition to determining your full-time and part-time employees, consider whether you have contingent workers (leased employees and individuals that are classified as independent contractors) that may be considered your own common law employees under the ACA. Be aware that certain strategies involving the utilization of leased employees or other contingent workers may not solve your ACA compliance issues. In fact, some of these strategies may put you at risk for not only pay or play penalties, but other liabilities related to worker misclassification.
6. Review Your Collective Bargaining Agreements
Note that there is no delayed compliance date for "pay or play" for your collectively-bargained employees. You need to review your contracts to see how "full-time employee" is defined, either in the agreement (or in practice), for the purposes of group health care eligibility. If eligibility is based on hours of service, both hours worked and hours paid for time off must be counted. You will also need to review the cost of individual coverage (if you intend the coverage to be affordable) and whether there is a right to obtain dependent coverage. If there are part-time employees or variable hour employees in the bargaining unit, you should consider selecting a measurement period, administrative period and stability period that will apply to those individuals.
7. Consider Your Options
Do not consider "pay" (assessable payments) or "play" (offering coverage) an either/or proposition. You should not just conclude it is cheaper to pay the penalty. Remember, the health care premiums you pay are deductible while the penalty is not deductible. Depending upon your workforce, it may be better to provide some coverage than none at all. If offering self-only coverage is too much of a financial burden, you can avoid the "global" penalty by offering some type of minimum essential coverage, even if your own contribution is minimal and the coverage is not affordable. By looking at the past history of your employees' group health care elections, you may be able to determine how many individuals generally opt out (which would indicate they may get coverage from a spouse). Based on earnings records, you can estimate how many individuals may qualify for subsidized coverage through the marketplace. By doing some due diligence about the options for coverage, strategies for cost-shifting, and the demographics of your workforce, you can make an informed decision about how to approach pay or play.
8. Keep Good Employment and Enrollment Records
Perhaps your records show that an employee was only part-time and was not required to be offered coverage. You may have, in fact, offered coverage to an individual, but he or she declined. If there was an offer of coverage that was affordable and provided minimum value, the individual is not entitled to receive subsidized coverage through the marketplace. This also means you should not be subject to an assessable payment with respect to this individual. Recordkeeping and substantiation will be essential. Also, based upon guidance to date, it would appear that if you offer coverage, you must allow each employee an opportunity to decline coverage at least once a year. Therefore, if you have "evergreen" elections, which remain in effect from year-to-year, you may need to move to an annual open enrollment process. It will not be permissible to automatically enroll employees in unaffordable coverage which would preclude them from getting subsidized coverage in the marketplace. Again, having adequate records of "who was offered what" will be critical to defending against the assessment of penalties.
9. Manage Your Employees' Expectations
No later than October 1, 2013 you will be required to provide a notice to your employees about the ability to obtain health care coverage through an exchange. Sample notices are now available (as of May 8, 2013). Employees who are clearly part-time will want to know whether you will be providing coverage to them or whether they may get hit with their own shared responsibility payment for not maintaining minimum essential coverage. The individual mandate goes into effect in 2014, which will require all of your employees (except those who are eligible for an exemption) to maintain health care coverage or pay an additional tax. Undoubtedly, your employees (both those who are entitled to coverage and those who are not), will be looking to you for guidance.
10. Enlist Others in Your Decision-Making Process
Any approach to ACA compliance should involve input from various constituencies within your organization. This requires a coordinated and collaborative effort involving individuals with decision-making authority from Finance, HR, Benefits, Legal and Labor Relations (if applicable). While your outside consultants and brokers are an essential part of the decision-making process, be careful what you discuss with them. Certain strategies employers may contemplate implementing are very sensitive in nature and could lead to litigation. These types of conversations should not be held in the presence of anyone outside your organization except your attorneys. Remember, there is no broker/client or consultant/client privilege.