February 2013 The Effect of Obamacare on Construction Companies Strategies for compliance leading to more competitive bidding by Jeffrey Bennett, MBA, QPFC and Thomas Santa Barbara, QPFC GCBT Government Contractors Benefit Trust Administered by Direct Retirement Solutions 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies A
Why Act Now? On January 1, 2014 significant aspects of the Affordable Care Act will take effect. This law could have a major impact on the cost structure and bidding of open shop construction companies. Without careful planning, these companies may be subject to onerous penalties and may be in jeopardy of losing their existing health insurance coverage. Construction companies that regularly work on projects covered by the Davis-Bacon Act or state prevailing wage regulations have an opportunity to use the fringe benefit supplements to more easily comply with the new health care law and significantly lower their labor burden leading to more competitive bidding. Table of Contents ACA Key Provisions and Decision Points... 2-3 Davis-Bacon / Prevailing Wage Regulation Background.... 4 Supplemental Benefits....4 Potential Concerns for Open Shop Construction Companies....5 Solutions... 5-7 Summary....8 How We Can Help....9 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 1
Introduction The Patient Protection and Affordable Care Act (ACA) was signed into law by President Obama on March 23, 2010. 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, 2014. 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 non-union 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 applies to large employers only (those with fifty (50) or more full-time and full-time equivalent employees). 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) 1 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 = 16.67 which results in 16 full-time equivalent employees 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 2
The ACA is a mandate on individuals to obtain health insurance coverage. Although employers are not required to offer coverage, a penalty applies if the employer does not offer affordable coverage and an employee receives a subsidy on the Health Insurance Exchange. If a large employer does not offer affordable health insurance to 95% of its full-time employees, the penalty is $2000 per year times the number of full-time employees less 30. Affordable coverage is defined as single person coverage that costs the employee no more than 9.5% of his/her monthly gross pay. Coverage must meet minimum value standards (pays for at least 60% of typical health care expenses). For purposes of this analysis it is assumed all coverage offered meets these standards. 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 138 400% of the Federal Poverty Level. 2 Based upon 2012 FPL information, 138% - 400% household income eligibility range for a subsidy would be $31,809 - $92,200. For an individual living alone with no dependents, the range would be $15,414 - $44,680. Example: 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. 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 $95 in 2014 prorated monthly. The penalty increases each year, reaching $695 in 2016. 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 3
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 3 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. 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 4
Potential Concerns for Open Shop Construction Companies As of January 1, 2014 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. Workforce demographics for open shop construction companies are typically made up of young males who commonly decline medical insurance, even when it is offered. Insurance companies regularly require minimum coverage 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% coverage 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. Those that had previously had coverage through the employer (owners, office workers, etc.) will need to obtain coverage through other means (the exchange, etc.). Solutions Most construction companies would be best served by providing affordable health insurance 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. Example: A large company with 100 full-time employees offers health insurance: 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 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 5
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 However, in order for the above example to work, the minimum coverage requirements discussed earlier (75% of the workforce accepts coverage) will need to be achieved. As pointed out earlier, the majority of field workers have declined coverage in the past. This is not likely to change based on the low penalty the employee will be charged for failure to obtain coverage ($95 in 2014). A possible solution to achieve minimum coverage would be to auto-enroll all employees for coverage. Employers with 200 employees are required to auto-enroll, but nothing prevents a smaller company from doing the same. However, because employees would be paying a portion of the premium, they must be given the option to opt-out of coverage. The number of employees who opt-out of coverage will most likely increase as the amount deducted from their paycheck increases. It is reasonable to expect that a deduction of up to 9.5% of pay will result in a significant number of employees opting out of the coverage, thereby putting the employer in danger of not meeting the mandated coverage requirements. 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. 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 6
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 $2.92 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 + $13.20 + $2.92 = $60.12 per hour Base wage + Fringe + Labor burden + ACA Penalty = Bid Cost $27 + $17 + $8.10 + $0 = $52.10 per hour (13.3% 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. 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 7
Summary The Patient Protection and Affordable Care Act (ACA) will have an effect on many employers beginning in 2014. Although a year remains until penalties will apply to companies not offering affordable healthcare coverage to their employees, construction companies must start planning much sooner so they can quantify how this change will affect cost structures and bidding on future projects. 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 References 1 26 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 2 The Federal Poverty Level published on January 26, 2012 for a family of four is $23,050. See Federal Register Volume 77, No. 17, Jan. 26, 2012, pp. 4034-4035. 3 40 US Code Sec 3141-314840 US Code Sec 3141-3148 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 8
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 2012, our construction company clients contributed over $22 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 principle 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 principle 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: jeff.bennett@directretirement.net tom.santabarbara@directretirement.net Media Inquiries: media@directretirement.net Direct Retirement Solutions Administrators of the Government Contractors Benefit Trust 7 Wembley Court, Albany, New York 12205 (866) 796-1173 (518) 362-2119 www.trustgcbt.com Speaking Inquiries: speaking@directretirement.net Member of: 2013 Jeffrey Bennett The Effect of Obamacare on Construction Companies 9