Preparing for 2016: How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive

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1 Updated as of August 2015 Preparing for 2016: How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive by Jeffrey Bennett, MBA, QPFC and Thomas Santa Barbara, QPFC 2015 Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More trustgcbt.com Competitive A

2 Why Act Now? The last phase of the Affordable Care Act s changes planned for employee health insurance benefits is scheduled to take effect on January 1, While the ACA s requirements create compliance challenges for employers, open shop construction companies have a unique opportunity to use the ACA to enhance their competitiveness when bidding for projects covered by Davis Bacon or state prevailing wage laws. Specifically, by using fringe benefit supplements to meet employer health insurance obligations under the ACA, open shop companies can significantly lower the labor burden portion of their bids to win more jobs. Table of Contents ACA Key Provisions and Decision Points Davis-Bacon / Prevailing Wage Regulation Background Supplemental Benefits....5 Potential Concerns for Open Shop Construction Companies....6 Solutions Summary References...11 How We Can Help Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 1

3 Introduction The Patient Protection and Affordable Care Act (ACA) was signed into law by President Obama on March 23, Together with the Health Care and Education Reconciliation Act of 2010, new requirements related to health insurance are in the process of being implemented across the country. While numerous provisions of the statute were effective shortly after the bill was approved, the important date that contractors and other companies must be aware of is January 1, Construction companies should pay particular attention to the ACA as it could have a significant impact on their cost structure and therefore their bidding. This paper describes some of the key provisions of the ACA as they apply to large non-union (open shop) construction companies, and discusses strategies on how these companies can pragmatically comply with the regulations. Particular strategies are outlined for those companies subject to the Davis-Bacon Act or state prevailing wage regulations about how to utilize fringe benefit supplements to comply with the ACA. ACA Key Provisions and Decision Points The ACA has some application to small employers, however only large employers (those with fifty (50) or more full-time and full-time equivalent employees) are subject to penalties. Under the ACA companies with common ownership will be aggregated for purposes of this calculation. Full-Time Employees Any individual who has thirty (30) or more hours of service per week (for seasonal employees, the employee will not be considered full time if the employee works less than 120 days/year, or 4 months/year) 2,3 Full-Time Equivalent Employees The total number of hours of service in a month by all part-time employees, divided by 120 hours: Example: 20 employees work 60 hours per month and 10 employees work 80 hours per month or: (20 employees * 60 hours) + (10 employees * 80 hours) = 2,000 hours 2,000 hours / 120 = which results in 16 full-time equivalent employees 2015 Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 2

4 The ACA is a mandate on individuals to obtain health insurance coverage. Although employers are not required to offer coverage (called an employer shared responsibility payment ), a penalty applies if the employer does not offer minimum essential coverage 4 or they offer such coverage but it is deemed unaffordable or not meeting minimum value standards and an employee receives a subsidy on the Health Insurance Exchange. If a large employer does not offer minimum essential coverage to 95% of its full-time employees, the penalty is $2,000 per year times the number of full-time employees less If coverage is not affordable (single person coverage cost more than 9.5% of monthly gross pay) or does not meet minimum value standards (pays for at least 60% of typical health care expenses) the penalty is $3,000 per year for each employee that obtains a subsidy for coverage on the exchange. For purposes of this analysis it is assumed all coverage meets minimum value standards. 6 An employee is eligible for a subsidy if the employer does not offer affordable minimum value coverage, and it is estimated that the employee will have income equal to % of the Federal Poverty Level. 7 Based upon 2015 FPL information for a family of four, 138% 400% household income eligibility range for a subsidy would be $33,465 $97,000. For an individual living alone with no dependents, the range would be $16,243 $47, The number of individuals participating in state and federal health insurance marketplace policies as of the close of the 2015 open enrollment period is 11.7 million people. 9 If any of your employees access insurance coverage in this manner and receive a subsidy to support the premium payment (ie: have incomes that fall within the % of federal poverty range level noted above), their ability to qualify for a subsidy will be affected when your company begins to offer insurance coverage on January 1, This is because individuals purchasing insurance through health insurance exchanges only qualify for subsidies IF their employer does not offer affordable coverage with minimum value coverage. 10 Individual access to premium subsidies to support participation in state and federal health insurance marketplace was upheld by the U.S. Supreme Court s decision in King v. Burwell, Slip Opinion , decided June 25, The number of employees that a company has affects the calculation of the Employer Shared Responsibility Payment owed by the company to the IRS if ACA-qualified health benefits are not offered to workers. In 2015 penalties will be assessed if a company employs more that 100 full-time or full-time equivalent workers and insures less than 70% of the workforce. In 2016 penalties will be assessed if a company employs 50 or more employees and insures less than 95% of the workforce. Please see example on the following page Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 3

5 Example of Employer Shared Responsibility Payment calculation for all companies with 50 or more employees as of 1/1/16 for a Large Company (100+ Full-Time or Full-Time Equivalent Employees) with No Employer Provided Health Insurance: If the company does not offer health insurance and at least one employee obtains a health insurance subsidy through the Health Insurance Exchange, the company will be assessed the following penalty on a monthly basis: (# of Full-Time Employees 30) * (1/12 * $2,000) If the company has 100 employees, the penalty assessment is as follows: (100 30) * (1/12 * $2,000) = $11,667 per month (penalty will increase each year) If individual coverage costs less than 9.5% of an employee s income and the employer offers dependent/family coverage, then both the employee and their dependents are ineligible for subsidies. Pending final regulations, employers with greater than 200 full-time equivalent employees must auto-enroll employees in health insurance coverage if the employer offers coverage (employees would have the option to opt-out if they are required to contribute to the cost). An individual s penalty for not obtaining insurance is either 2% of yearly household income or $325 per adult and $ per child in the household* * Furrow, Barry R; Greaney, Thomas L; Johnson, Sandra H; Jost, Timothy S; and Schwartz, Robert L. Health Law: Cases, Materials and Problems. West Publishing Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 4

6 Davis-Bacon / Prevailing Wage Regulation Background Contractors and subcontractors must pay the prevailing rate of wage and supplements (fringe benefits) to all laborers, workers or mechanics employed under a public work contract. The Davis Bacon Act 11 is the federal law that applies to contractors on federally funded or assisted contracts for the construction, alteration, or repair of public buildings or public works. Section 8, article 220 of the New York State labor law is a similar law that applies to NY state-funded public works projects. All of the states surrounding New York have similar laws in place. The prevailing rates for wages and benefits are published by the federal and state government on a periodic basis. Supplemental Benefits Compliance with the supplements (fringe benefits) portion of the law can be accomplished in the following ways: The hourly amount can be provided in cash in the employee s weekly paycheck when working on a public work project; or Contributions can be made to a bona fide benefit plan on behalf of the employee for all hours worked, both public and private. Contractors who choose to comply with the law by paying the hourly prevailing benefit supplements as cash wages will be subject to the labor burden (payroll taxes, workers compensation premiums, etc.) on those payments. This typically amounts to an additional 25% - 30% of the wages. In addition, these payments are treated as fully taxable income to employees. Contractors who choose to comply with the law by making contributions to a bona fide benefit plan avoid paying labor burden on the benefit supplements. Many benefits provided to employees such as medical insurance, dental insurance, apprentice training, etc. are not taxable to the employees. Contractors participating in a collective bargaining agreement typically make payments to a union benefit fund (bona fide benefit plan) which gives them a significant cost advantage over contractors who make supplemental benefit payments as cash wages Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 5

7 Potential Concerns for Open Shop Construction Companies As of January 1, 2016, the ACA s impact on larger open shop construction companies (those with more than 50 employees) will be significant. For example: Many open shop construction companies do not currently offer medical insurance to field workers. Many companies choose to pay fringe benefit supplements as cash wages to easily satisfy the federal and state regulations. Those companies will now be faced with a substantial penalty which is not tax deductible in the likely event that just one employee obtains coverage on the exchange and receives a subsidy. As noted above, 11.7 million people participate in state and federal health insurance marketplace plans. If any of your employees fall into this category today or in the future, the ACA Employer Responsibility penalty will be triggered. Insurance companies regularly require minimum participation levels of 75% of all eligible employees as prerequisite to writing the policy. Segregating coverage according to employee classification (office workers, superintendents, field workers, etc.) will no longer be permitted. In order to meet the 75% participation requirements all workers without waivers will need to be included in the calculation. An employer who is unable to obtain a policy or keep an existing policy because of the coverage requirement will face a penalty as described above. However, employers with generally fewer than 100 employees can shop for a policy on the Small Business Health Options Program (SHOP) exchange. The February 10, 2014 IRS rules for employers with employees require these companies to report health insurance status for employees in 2015 even though the penalty will not apply until Careful planning now will help you keep your company in compliance with the 2015 reporting mandate. Solutions Employers have three broad strategies they can pursue: 1. Not offer any health insurance coverage 2. Offer minimum essential coverage that is not affordable 3. Offer minimum essential coverage that is affordable Option #2 and #3 are complicated by the minimum participation requirements enforced by insurance companies. These requirements are set not by the ACA, but by the individual insurance companies according to their underwriting standards. 75% participation is a common standard and what we use for our analysis. It is important to note that a company that does not achieve the minimum participation requirements will not be able to offer coverage and will be subject to penalty Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 6

8 As referenced earlier in the ACA Key Provisions section of this article (see page 3), a 100 person company that does not offer coverage to 70% of their workforce will be subject to a monthly penalty in 2016 (95% of workforce in 2016). Also, an Employer Shared Responsibility fee will be assessed for all companies that employ 50 or more workers and do not provide qualified health benefits as of January 1, A company may try to avoid this penalty by instead offering minimum essential coverage, but unless the employee s share of the premium is less than 9.5% of their gross pay, the company cannot avoid the shared Employer Responsibility Payment here either. Example: A large company with 100 full-time employees offers minimum essential coverage, but contributes $0 to the cost: Assumptions: 75 employees participate in the plan (minimum participation) 10 employees obtain coverage on the exchange and receive a subsidy (employees are only eligible for a subsidy if the employers health insurance product is not affordable ). The employer penalty is: The number of employees that declined coverage with the employer and instead obtained coverage on the exchange and received a subsidy x $3, employees x (1/12 x $3,000) = $2,500 per month ($30,000 per year) It is difficult to estimate the number of employees that will seek coverage from the exchange. However, as the individual mandate penalty for non-compliance increases, employees are likely to increasingly seek coverage. Although the 2014 individual penalty assessment was only $95, in 2015 the penalty increases to the higher of either 2% of yearly household income or $325 per adult and $ per child, and in 2016 increases to the higher of either 2.5% of household income or $695 per adult and $ per child. Therefore this would appear to be a financially advantageous strategy, however, we believe it is highly unlikely an employer would be able to achieve the participation requirements (75%) of the insurance company. Without meeting the participation requirements an employer will lose their policy and be subject to the $2,000 per employee penalty discussed earlier ($140,000 per year with 100 employees). Most construction companies may be best served by providing minimal essential coverage to eliminate any chance of paying a penalty, assuming the cost of the penalty is greater than the cost of offering coverage. At current premium rates, an employer who structures the employee contribution towards the coverage at 9.5% of compensation will likely find that the cost of providing the coverage is less than the penalty. Please see example on the following page Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 7

9 Example: A large company with 100 full-time employees offers minimum essential coverage: Assumptions: The employee cost is capped at 9.5% of monthly compensation The average employee earns $4,166 per month ($50,000 per year) The total premium for individual coverage is $500 per month The employer cost for coverage is: $500 ($4,166 * 9.5%) = $104 per employee x 100 = $10,400 per month or $124,800 annually The employer penalty if they did not provide coverage is: (# of Full-Time Employees 30) * (1/12 * $2,000) (100 30) * (1/12 * $2,000) = $11,667 per month or $140,000 annually This example results in a savings of $1,267 per month or $15,204 annually The concens regarding minimum participation requirements outlined above remain the same. The best way to guarantee meeting the coverage requirements is to auto-enroll all employees and pay 100% of the single person premium. Paying 100% of the premium will likely eliminate an employee s ability to opt-out of coverage (an exception can be made for those that have coverage from a spouse s plan). Clearly the cost of individual coverage paid 100% by the employer is greater than the cost of the penalty. However, open shop contractors that are working a substantial amount of public work can utilize the fringe benefit supplements to pay for the coverage. Fringe benefit supplements contributed to a bona fide plan or trust are employer contributions and can be used to pay for health insurance coverage. Furthermore, such contributions are not subject to payroll labor burden and provide a significant savings to the employer. Below are two examples showing the difference between a company that pays fringe supplements as cash wages and does not offer medical insurance, and a company that pays fringe supplements to a bona fide plan and trust and offers affordable medical insurance Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 8

10 Scenario A: Company with 100 full-time employees paying fringe supplements as cash wages and does not offer health insurance: Assumptions: The employee base wage is $27 per hour Supplemental benefits (fringe) is $17 per hour An employee works 40 hours per week Payroll labor burden is 30% (payroll taxes, workers compensation, general liability premiums) Scenario B: Company with 100 full-time employees utilizing a bona-fide plan and trust that includes employer paid individual medical insurance: Assumptions: The employee base wage is $27 per hour Supplemental benefits (fringe) is $17 per hour An employee works 40 hours per week Payroll labor burden is 30% (payroll taxes, workers compensation, general liability premiums) The total premium for individual coverage is $500 per month or $3.13 per hour Base wage + Fringe = Total wage $27 + $17 = $44 per hour Base wage + Fringe = Total wage $27 + $17 = $44 per hour Total wage x labor burden % = Labor burden $44 x 30% = $13.20 per hour Base wage x labor burden % = Labor burden $27 x 30% = $8.10 per hour (supplemental benefits are not subject to labor burden when contributed to a bona fide plan and trust) ACA Penalty (# of Full-Time Employees 30) * (1/12 * $2,000) (100 30) * (1/12 * $2,000) = $11,667 per month or $0.73 per hour ACA Penalty (# of Full-Time Employees 30) * (1/12 * $2,000) Does not apply employer is providing affordable coverage Base wage + Fringe + Labor burden + ACA Penalty = Bid Labor Cost $27 + $17 + $ $0.73 = $57.93 per hour Base wage + Fringe + Labor burden + ACA Penalty = Bid Cost $27 + $17 + $ $0 = $52.10 per hour (10.1% savings) Note: In this example the bona fide plan and trust is being funded with $17 per hour which is far greater than the full cost of the medical insurance, i.e., $3.13 per hour. The substantial difference of $13.87 per hour can be used to provide other benefits such as dental insurance, long-term disability insurance, safety and training benefits, vacation benefits, supplemental unemployment benefits and/or retirement plan benefits Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 9

11 Summary To improve competitiveness, open shop contractors can use fringe supplement dollars to meet health insurance obligations under the new law and reduce their labor burden for public bids. Employers with over 100 employees must target 70% of their workforce for compliance in 2015 and all companies with 50 or more employees must target 95% of their workforce for compliance in Careful planning today will ease the transition. Construction companies utilizing union labor will be largely unaffected by the ACA providing a possible competitive advantage over open shop construction companies. However, open shop construction companies that work a significant amount of public work can level the playing field by utilizing a bona fide benefit plan and trust funded with required supplemental benefit payments which can: Provide sufficient funds to pay the entire cost of health insurance coverage and assure compliance with the ACA Provide a method to bank funds to pay premiums during seasonal layoffs Provide funding for other benefits such as dental, long-term disability, apprentice and safety training, vacation, supplemental unemployment and/or retirement benefits Substantially reduce labor burden cost for more competitive bidding Maintain regulatory compliance with federal and state laws 2015 Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 10

12 References 1 U.S. Dept. of the Treasury. Regulations Implementing Employer Shared Responsibility Under the Affordable Care Act for Feb. 10, USCA 4980H; 78 F.R. 218 et seq. There is an optional look-back period that may be applied to determine if an employee who works variable hours works 30 or more hours of service per week, on average. 3 The February 10, 2014 Fact Sheet issued by the U.S. Treasury Department defines seasonal employees as those in positions for which the customary annual employment is six months or less generally will not be considered full-time employees. 4 Section 5000A(f) of the IRS regulations defines minimum essential coverage as one of the following: (1) coverage under a specified government sponsored program, (2) coverage under an eligible employer-sponsored plan, (3) coverage under a health plan offered in the individual market within a State, (4) coverage under a grandfathered health plan, and (5) other health benefits coverage that the Secretary of Health and Human Services, in coordination with the Secretary, recognizes for purposes of section 5000A(f). 5 Based on the February 10, 2014 delay, large employers must offer minimum essential coverage to 70% of its full-time employees in The 95% health insurance coverage requirement has been delayed until The Fact Sheet from the U.S. Treasury states like the proposed regulations, the final rules provide safe harbors that make it easy for employers to determine whether the coverage they offer is affordable to employees and these safe harbors permit employers to use the wages they pay, their employees hourly rates, or the federal poverty level in determining whether employer coverage is affordable under the ACA. 7 The Federal Poverty Level published on January 22, 2015 for a family of four is $24,250. See Federal Register Volume 80, No. 14, Jan. 22, 2015, pp The Federal Poverty Level used here represents the 2015 Poverty Guidelines for the 48 contiguous states and the District of Columbia. For Alaska and Hawaii poverty level information, please see Federal Register, Vol. 80, no. 14, January 22, 2015, pp Health Insurance Marketplace 2015 Open Enrollment Period: March Enrollment Report. ASPE Issue Brief. Department of Health and Human Services. Mar. 10, Web. Jun. 26, Health Insurance Premium Tax Credit. Federal Register. Vol. 77. No May 23, Web. Jun. 26, US Code Sec US Code Sec Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 11

13 How We Can Help Direct Retirement Solutions consults with some of the largest construction companies throughout the northeast regarding prevailing wage benefit plans. We provide third party administration services to the Government Contractors Benefit Trust, a bona fide third party VEBA trust organized under IRS 501(c)(9). In 2013, our construction company clients contributed over $33 million in fringe supplements for thousands of employees. Each of our clients has an individual customized plan designed to best meet the needs of the owners and their employees. There are no requirements to use specific insurers or products. Jeffrey Bennett is a principal of Direct Retirement Solutions. He has worked with construction companies for over twenty years including three years as the Director of Human Resources for a large construction company. He holds a B.S. in Accounting and an M.B.A. and has earned the Qualified Plan Financial Consultant designation from the American Society of Pension Professionals and Actuaries (ASPPA). Thomas Santa Barbara is a principal of Direct Retirement Solutions. He has also worked with construction companies for over twenty years including ten years with two very large insurance and bonding agencies. Tom has also earned the Qualified Plan Financial Consultant designation from the American Society of Pension Professionals and Actuaries (ASPPA). Consulting Inquiries: Media Inquiries: Speaking Inquiries: Direct Retirement Solutions Administrators of the Government Contractors Benefit Trust 421 Loudon Road, Albany, NY (866) (518) Member of: The content of this analysis regarding the applicability of the Patient Protection and Affordable Care Act (Affordable Care Act) to contractors engaged in public works projects reflects our best professional judgement of the implications of the law as of the date of circulating the document (August 2015). Readers are cautioned that federal and state rules and regulations regarding the implementation of PPACA are still evolving and not all final rules have been promulgated to date. Please be advised that all individuals should consult with their legal and accounting professionals before relying upon the information contained herein Jeffrey Bennett How the Obamacare Employer Insurance Mandate Can Make Open Shop Companies More Competitive 12

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