Sticker shock: What employers should know about the cost implications of the PPACA

Sticker shock: What employers should know about the cost implications of the PPACA

Contents 1 Employee health benefits: The new normal? 4 PPACA provisions and penalties 11 New costs created by the PPACA 14 Conclusion 16 About Grant Thornton

Employee health benefits: The new normal? This is the first in a three-part series The Affordable Care Act: What employers, providers and businesses need to know designed to help employers, providers and businesses understand new health care reform costs and requirements in order to make their best coverage, care and tax decisions. Employee health benefits as we now know them are undergoing a radical change. Thanks to the passage of the Patient Protection and Affordable Care Act (PPACA), signed into law on March 23, 2010, employers across the country are now re-evaluating whether and how they will provide health benefits to their employees. Historically, employer-sponsored health plans have been the major source of health insurance in the United States, covering an estimated 149 million people. Over the years, this employee benefit has been a critical factor for employers in recruiting and retaining quality employees, and employees have often forgone a higher salary in favor of a good health plan. The fact is, employees are placing more value on health benefits than ever before. According to a recent MetLife study of employee benefits trends, most employers (61%) agree that the benefits they offer are a very important reason that employees choose to work for them. A majority (72%) of employers agree that benefits are a very important reason that employees remain with them. That same study reports that 49% of employees believe that health benefits were an important reason they came to work for a company, and 60% said benefits are an important reason for staying. 1 Strategies for managing health care costs Employers and employees alike are feeling the pinch of rising health care costs. The cost of health care services has trended higher than the CPI [Consumer Price Index], says Sharon Whittle, a principal and practice leader in the Compensation and Benefits Consulting practice of Grant Thornton LLP. In fact, the average per capita cost of health care services grew at more than three times the rate of overall inflation in 2012, with the cost of services covered by commercial health plans growing four times faster than those of Medicare. 2 One approach that employers are taking is to implement wellness programs and other wellness initiatives, which can reduce medical costs by more than 18% for the average worker. 3 While employers were able to hold the growth in total health benefit cost per employee to approximately 4% in 2012, 4 many recognize that, beginning in 2014, when PPACA provisions begin to take effect, they will need to provide more coverage for more employees and will be facing additional cost pressures. 1 10 th Annual Study of Employee Benefits Trends, MetLife, p. 12 and 26, 2012. Available at https://www.metlife.com/retirement-plan-edge/issues/2012-q1/ metlife-ebts.html. 2 Commins, John. Healthcare Cost Growth Steamrolls CPI, HealthLeaders Media, Aug. 17, 2012. Available at www.healthleadersmedia.com/content/hep- 283505/Healthcare-Cost-Growth-Steamrolls-CPI. 3 Bolnick, Howard, et al. Medical Care Savings From Workplace Wellness Programs: What Is a Realistic Savings Potential? Journal of Occupational and Environmental Medicine, pgs. 4-9, Issue 1, Volume 55. Available at http://journals.lww.com/joem/abstract/2013/01000/medical_care_savings_from_ Workplace_Wellness.2.aspx. 4 Family health premiums rise 4 percent to average $15,745 in 2012, national benchmark employer survey finds, Health Research & Educational Trust, Kaiser Family Foundation, Sept. 11, 2012. Available at www.kff.org/insurance/ehbs091112nr.cfm. Sticker shock: What employers should know about the cost implications of the PPACA 1

Taking a new look at health plans These anticipated new costs are driving plan decisions about whether to continue offering employer-based health plans or to rethink the way health benefits are offered to employees. Company strategy relating to health benefits for active employees over the next 10 years Continue offering employment-based defined benefit health plans as we do today Give serious consideration to moving to a defined contribution strategy Give serious consideration to discontinuing providing health care benefits Not sure Source: HR Policy Association, 2011. 46% 36% 6% 12% Many states will be offering health insurance exchanges as a source of health coverage for individuals in 2014. Over time, says Eddie Adkins, a principal in the Washington National Tax office of Grant Thornton, these exchanges may provide a viable alternative to employer-provided medical benefits, thus creating an opportunity for employers to discontinue providing health benefits. When all is said and done, however, Adkins believes that most employers will take a wait-and-see approach to assessing whether the exchanges really provide a viable alternative in terms of both cost and service before moving to discontinue employee health benefits entirely. In a 2011 survey of employers, the HR Policy Association found that while nearly half (46%) of companies were planning to continue offering employer-based health plans, a significant percentage (36%) were considering moving to a defined contribution strategy. 5 5 Fronstin, Paul. Private Health Insurance Exchanges and Defined Contribution Health Plans: Is It Déjà Vu All Over Again? Employee Benefit Research Institute, Issue Brief, July 2012. Available at www.ebri.org/pdf/briefspdf/ebri_ib_07-2012_no373_exchgs2.pdf. 2 Sticker shock: What employers should know about the cost implications of the PPACA

Shifting costs to employees: Defined contribution Many employers are looking to cut costs by shifting some or all of the costs of providing health coverage to their employees by moving to high-deductible consumer-directed health plans, or are simply raising the deductibles of existing preferred provider organization plans. Many companies, such as Darden Restaurants and Sears Holdings Corporation, for example, have chosen an approach called defined contribution health insurance the employer giving employees a fixed amount of money to choose coverage that fits their individual needs. 6 In a defined contribution plan, the employer s contribution may cover any amount from the entire premium to a small percentage of the premium. 6 More employers send workers to find their own health insurance, Associated Press, Nov. 16, 2012. Available at http://vitals.nbcnews.com/_news/2012/11/16/15218342-more-employerssend-workers-to-find-their-own-health-insurance?lite. Sticker shock: What employers should know about the cost implications of the PPACA 3

PPACA provisions and penalties Just as the PPACA individual mandate requires all individuals not covered by an employer-sponsored health plan or other public insurance to secure an approved private insurance policy or pay a penalty, the PPACA employer mandate could affect employers that do not provide coverage that meets certain requirements. While the PPACA does not require employers to provide health care coverage to their employees, there are potential penalties (nondeductible excise taxes) imposed on applicable large employers that do not provide coverage. DEFINITION: Applicable large employer An employer with 50 or more full-time employees and full-time equivalents, taking into account all related employers. There are three situations in which an employer might face the possibility of a penalty tax, says Adkins. The first is imposed when an employer does not offer a plan to 95% or more of its full-time employees. The second can be imposed when an employer offers a plan, but the plan does not meet minimum standards. The third, often referred to as the Cadillac plan tax, is on that portion of the value of a plan considered to be too generous. It s scheduled to take effect in 2018. 1. Play or pay penalty A penalty could be imposed on a large employer that does not offer health benefits coverage to 95% or more of its full-time employees. As we all know, the PPACA requires that, beginning in 2014, individuals must obtain minimum essential coverage for themselves and their dependents or pay a penalty (with some exceptions). As part of the shared responsibility for coverage provision of the PPACA, applicable large employers must offer health benefits or be subject to a penalty. DEFINITION: Minimum essential coverage Health insurance coverage including that offered in the individual market, such as a qualified health plan with enrollment through an affordable insurance exchange; an eligible employer-sponsored plan; or government-sponsored coverage such as Medicare, Medicaid, the Children s Health Insurance Program, TRICARE or veterans health care. 7 In order to comply with the employer side of this equation, an employer must make the critical decision about whether to continue providing health care coverage to employees and their dependents or quit providing coverage entirely and pay a penalty. 7 Request for Comments on Reporting of Health Insurance Coverage, Notice 2012-32. Available at www.irs.gov/pub/irs-drop/n-12-32.pdf. 4 Sticker shock: What employers should know about the cost implications of the PPACA

The PPACA created a new Internal Revenue Code Section (4980H) to impose nondeductible excise taxes on employers. According to the code, an employer (together with any related companies) that employed 50 or more full-time workers and full-time equivalents during the prior calendar year must offer health benefits to substantially all full-time employees and their dependents. And those health benefits must provide minimum essential coverage. DEFINITION: Substantially all full-time employees A requirement that an employer offer minimum essential coverage to at least 95% of its full-time employees and their children. For employers with fewer than 100 employees, it is acceptable to exclude up to five employees. The penalty can be imposed if an employer does not offer minimum essential coverage to 95% or more of its full-time employees in any given month. According to Adkins, If an employer fails to reach the 95% threshold, the employer is treated as not offering coverage to anyone, even if the employer offers coverage to the vast majority of its employees. The penalty is equal to $166.67 per full-time employee (less the first 30) multiplied by the number of months in violation. Thus, for a full year, the penalty is $2,000 per full-time employee. The penalty is imposed if a full-time employee purchases coverage through an affordable insurance exchange and has household income that is low enough to qualify the employee for a premium tax credit. Most employers have employees with income low enough to qualify. For example, the threshold for a family of four is $92,200. It takes only one employee to trigger the full tax. So, for example, an employer with 500 full-time employees that does not offer minimum essential coverage to substantially all its full-time employees for three months in 2014 would be liable for a penalty of $2,000 for each of 470 workers, multiplied by three-twelfths (or one-twelfth x three months) or $235,000. Here s how the play or pay penalty would be calculated for employers that do not offer health benefits coverage to 95% of their full-time employees. Play or pay penalty calculation $2,000 One-twelfth times number X X = of months employees in violation Number of full-time minus 30 Penalty Sticker shock: What employers should know about the cost implications of the PPACA 5

2. Affordability penalty A large employer could incur this penalty if it offers health coverage to 95% or more of its full-time employees, but the coverage does not provide minimum value or is not affordable. Remember: Even if you do offer health coverage to your employees, you could still be in danger of incurring a penalty if you do not offer employees and their dependents coverage that is considered affordable or that provides minimum value. The good news: This penalty cannot exceed the penalty you would pay if you did not offer health care coverage at all, and it is likely to be much lower. Under the minimum value requirement, a health plan must pay for at least 60% of covered expenses. The IRS and the U.S. Department of Health and Human Services (HHS) have announced plans to make available online calculators designed to help employers determine whether their plans provide minimum value. DEFINITION: Minimum value Coverage providing minimum value if the plan s share of total costs under the plan is at least 60%. Now, what about affordability? To determine whether the coverage you provide is considered affordable, you must first identify the lowest-cost plan option that you offer to your employees. (Make sure that the plan also provides minimum value.) If the cost of the amount of the premium paid by the employee for self-only coverage in that plan exceeds 9.5% of an employee s household income, the plan will be considered unaffordable and will put you at risk of a penalty. DEFINITION: Affordable coverage Coverage considered affordable if the employee portion of the self-only premium for the employer s lowest-cost coverage does not exceed 9.5% of the employee s household income (but the lowest-cost coverage must also provide a minimum value). But, wait. How do you determine an employee s household income? The IRS has provided affordability safe harbors for determining whether coverage satisfies the 9.5% affordability test. (See IRS affordability safe harbors. ) 6 Sticker shock: What employers should know about the cost implications of the PPACA

IRS affordability safe harbors W-2 safe harbor: An employer can satisfy this affordability safe harbor by setting an employee s contribution for the year at a level that does not exceed 9.5% of the employee s Form W-2 wages for the year. Rate-of-pay safe harbor: An employer can satisfy this affordability safe harbor by setting an employee s monthly contribution at a level that does not exceed 9.5% of the employee s monthly rate of pay as of the beginning of the plan year. Federal poverty line safe harbor: An employer can satisfy this affordability safe harbor by setting an employee s monthly contribution at a level that does not exceed 9.5% of one-twelfth of the federal poverty line for a single individual as of the beginning of the plan year. Sticker shock: What employers should know about the cost implications of the PPACA 7

Let s say the coverage you offer does not provide minimum value or is unaffordable and at least one fulltime employee receives a premium tax credit for purchasing individual coverage through one of the new affordable insurance exchanges. (Under the PPACA, premium tax credits are available to employees who meet certain income requirements and who do not have access to affordable employer-provided insurance.) Here s how that penalty would be calculated: Affordability penalty calculation $3,000 One-twelfth times X X = number of months who received subsidy in violation Number of full-time employees or cost-sharing reduction Penalty The penalty is not to exceed the penalty imposed for not offering health care insurance at all: Affordability max penalty calculation $2,000 X X = One-twelfth times number of months in violation Number of full-time employees minus 30 Max penalty 8 Sticker shock: What employers should know about the cost implications of the PPACA

Even though the penalty equates to $3,000 per employee per year, it is likely to be much less than the $2,000 per year penalty, since the $3,000 penalty is paid only for those employees who receive a premium tax credit when they purchase insurance through an affordable insurance exchange. The $2,000 penalty is paid for all full-time employees, minus 30. Thus, employers are likely to pay a much lower penalty if they offer coverage than if they don t offer coverage. 3. Cadillac plan tax Beginning in 2018, an excise tax could be imposed upon an employer or passed on to the employer from an insurance company if an employer offers health insurance that is considered to be too generous or too expensive. In what is perceived as an effort to encourage employers to offer employees lower-cost health plans, 8 one PPACA provision calls for a 40% excise tax on the portion of health insurance plans (excluding dental and vision benefits) that brings the cost to more than $10,200 per year for individuals or $27,500 per year for families. For example, if an employer offers family coverage with an annual value of $28,500, that would put the employer at risk of a penalty equal to 40% of $1,000 (the amount that the plan is in excess of the $27,500 limit). While this penalty is years away, it is already creating concerns among employers. Even plans of average cost may find it difficult to meet the premium thresholds of the provision. Whittle explains: While it will most likely affect larger employers or unions, the so-called Cadillac plan tax is likely to affect more organizations than we previously thought. Many of them are already making projections about what the value of their health plans will be in 2018 and what they ll need to do to avoid the penalty. How one company reduced the Cadillac plan tax Many of our clients are already looking at ways that they can avoid the Cadillac plan tax, says Sharon Whittle, a principal and practice leader in the Compensation and Benefits Consulting practice of Grant Thornton LLP. She notes that members of the Grant Thornton Compensation and Benefits Consulting practice recently helped a midsized employer plan ahead in order to reduce the potential impact of the Cadillac plan tax. Through plan design changes and the implementation of strong wellness initiatives, the business was able to reduce the impact of the excise tax from an estimated $3.6 million to an estimated $230,000. 8 Sahadi, Jeanne. Supreme Court: Mandate penalty is tax, CNN Money, June 28, 2012. Available at http://money.cnn.com/2012/06/28/pf/taxes/health_reform_new_taxes/index.htm. Sticker shock: What employers should know about the cost implications of the PPACA 9

New costs created by the PPACA In addition to the potential penalties faced by employersponsored health plans, other PPACA provisions will have a financial impact. PPACA can be a bit overwhelming for employers, so it s important not to overlook the other fees created by health care reform that might affect your organization, Whittle says. PCOR fee One such provision calls for the establishment of a fee that employers would pay to cover the work of a not-for-profit organization that will conduct patient-centered outcomes research (PCOR) on comparative treatments in order to determine optimum outcomes for patient care and reduce unnecessary spending. The PCOR fee is $1 for policy or plan years ending before Oct. 1, 2013, multiplied by the average number of individuals covered under the policy or plan. Employers will be required to report and pay the fee on Form 720 no later than July 31 of the year following the last day of the applicable policy or plan year. Transitional reinsurance fees PPACA also requires that each state establish a transitional reinsurance program by Jan. 1, 2014, that will operate through 2016. According to proposed rules issued by HHS, the program is to be designed to help stabilize premiums in the individual insurance market. As part of this new program, fully and self-insured group health plans that provide major medical coverage will be assessed by HHS a fee, or contribution rate, of $63 per plan participant. The fee will be calculated by multiplying the average number of individuals covered by the plan by the contribution rate for the applicable year. From 2014 through 2016, health insurance issuers will be required to pay these fees. Self-insured group health plans, which are ultimately responsible for paying the fees, may choose to use a third-party administrator for payment of the fees. Employer withholding obligation for increased Medicare payroll tax. Beginning Jan. 1, 2013, the PPACA requires an increase of 0.9% (from 1.45% to 2.35%) in the employee portion of the Medicare payroll tax rate for high-income earners. DEFINITION: High-income earners Single individuals who earn more than $200,000 or married individuals who jointly earn more than $250,000. Employers are responsible for collecting this additional tax by withholding 0.9% on wages in excess of $200,000, regardless of whether the individual is single or married. However, employers are not required to match the additional tax, so the employer-paid portion of the Medicare tax will remain at 1.45% of employee wages. 10 Sticker shock: What employers should know about the cost implications of the PPACA

Administrative and other costs The PPACA creates dozens of requirements regarding training, record keeping, reporting, care management and discipline for businesses of all sizes. In addition to potential penalties and additional fees, many of the new PPACA provisions may result in additional core benefit and administrative costs. Following is a summary of some PPACA provisions that may have a financial impact on employers that offer health plans to their employees. PPACA provision New reporting requirements Summary of benefits and coverage Coverage for women s preventive services Cap on deductibles and maximum out-of-pocket limits Auto-enrollment for large employers Required participant notices Dependent coverage to age 26 What you need to know Employers must report on Form W-2 the cost of coverage under an employer-sponsored group health plan. Insurers and group health plans are required to provide employees with an easy-to-understand summary about the plan s benefits and coverage. Group health plans must now include coverage for eight preventive services to women at no out-of-pocket costs. All plans are required to cap patient out-of-pocket costs at a specified level. Employers with more than 200 employees must automatically enroll new full-time employees in one of the employer s health benefits plans. Sponsors of defined contribution plans with certain features are required to provide annual notices to participants. Plans and issuers that offer dependent coverage must make that coverage available until the adult child reaches the age of 26. Employee cost-sharing for preventive care services A non-grandfathered group health plan and health plan issuer offering group insurance must provide coverage for preventive services without any cost-sharing (copayments, coinsurance or deductible) requirements as long as services are rendered by physicians and other health care professionals in the plan s network. Fully insured plans nondiscrimination requirements Group health plans may not discriminate in favor of highly compensated employees. Sticker shock: What employers should know about the cost implications of the PPACA 11

Help for small businesses The PPACA provides resources and tax credits that can help small businesses continue to provide health insurance to their employees. Businesses with 25 employees or fewer that provide health insurance and pay an average annual salary of less than $50,000 may qualify for a small business tax credit of up to 35% (up to 25% for not-for-profits). The Early Retiree Reinsurance Program was established by the PPACA to provide reimbursement to employer and union sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents. Starting in 2014, small businesses with fewer than 100 employees will be able to shop in an affordable insurance exchange. The good news for small businesses is that, unlike larger employers, they will not be required to pay an assessment fee if their employees get tax credits through an exchange. 12 Sticker shock: What employers should know about the cost implications of the PPACA

Conclusion As employers make decisions about providing health insurance for their employees, they will need to take into consideration the costs and requirements. Readied with a firm understanding, they will be in the best position to make coverage, care and business decisions. Grant Thornton can assist in your planning. Professionals in our Compensation and Benefits Consulting practice are prepared to help organizations understand the complexities and cost implications of the PPACA, and its impact on their employee health benefit plans. With our experience in tax compliance, health care consulting, actuarial advice and plan administration, we can work with you to help you avoid penalties and achieve savings. To learn more about how Grant Thornton Compensation and Benefits Consulting professionals can help you, contact: Eddie Adkins Principal, Washington National Tax Office T 202.521.1565 E eddie.adkins@us.gt.com Sharon Whittle Principal, Practice Leader, Compensation and Benefits Consulting T 704.632.6884 E sharon.whittle@us.gt.com Sticker shock: What employers should know about the cost implications of the PPACA 13

Your PPACA checkup As you get ready to comply with PPACA provisions taking effect in 2013, gauge your understanding with these strategic questions: 1. Does the employer mandate apply to you? Are you an applicable large employer? An applicable large employer is defined on a calendar year basis. If your company employed an average of 50 or more full-time employees in 2013, for example, your company is an applicable large employer for 2014. (To calculate the full-time equivalence of part-time employees, add the number of total hours worked by parttime employees in the previous calendar year and divide that total by 120.) 2. Do you plan to continue to offer health care benefits? Is your current plan affordable? Does it offer minimum value? Coverage is considered unaffordable if the required employee contribution to the cost of self-only coverage exceeds 9.5% of the employee s household income. The IRS has established safe harbors to determine whether coverage is affordable. Coverage that offers minimum value must pay at least 60% of the total allowed cost of benefits provided under the plan. 3. Should you consider discontinuing the provision of health benefits? If you stop offering health benefits, what will you need to do? Should you consider a defined contribution approach to offering health benefits that is, giving your employees a fixed amount of money to choose their own coverage? Some considerations: Are you willing and able to pay the penalty? Should you adjust employee salaries? Will you be at a disadvantage when recruiting and retaining qualified talent? If you provide a defined contribution to purchase coverage through a public exchange rather than through an employer plan, you would likely be subject to the PPACA penalty. If you offer access to a private exchange, you would be considered to be offering health coverage and would not be subject to the penalty. 4. Does your current health plan qualify as a grandfathered plan? Was your plan in effect on March 23, 2010? Do you plan to make changes to your plan? Any plan in effect on the data that the PPACA became law is considered grandfathered. Grandfathered plans are not required to follow some PPACA provisions, including the requirement to cover all preventive care services with no cost-sharing. Changes to your insurance carrier, third-party administrator or funding type (e.g., insured to self-insured) will not affect your plan s grandfathered status. 14 Sticker shock: What employers should know about the cost implications of the PPACA

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