The Affordable Care Act: What s next for employers? Prepared by: Jill Harris, Director, Washington National Tax, McGladrey LLP 507.226.0482, jill.harris@mcgladrey.com Bill O Malley, Director, Washington National Tax, McGladrey LLP 309.497.1407, bill.o malley@mcgladrey.com January 2014 The Affordable Care Act (ACA, or the Act) has caused many employers to question whether or not they must provide health insurance to their employees. The short answer is no. The Act does not require any employer to offer health insurance to its employees. However, employers could face hefty tax penalties if they do not offer health insurance, or if the insurance they do offer fails to meet ACA standards. Therefore, employers of all sizes need to understand the changes made by the Act, and how those changes may affect their decisions regarding health insurance. Key changes Effective in 2014 y Insurance market reforms New requirements to offer guaranteed-issue policies without preexisting condition limitations, lifetime benefit limits or annual benefit limits will tend to increase the cost of coverage in both the individual and group health insurance marketplace. y Individual mandate Individuals must maintain health insurance on themselves and their dependents or potentially pay a penalty. The penalty is the greater of two amounts: (1) a flat dollar amount ($95 for 2014, $325 for 2015 and $695 thereafter), or (2) a percentage of income amount (1 percent for 2014, 2 percent for 2015 and 2.5 percent thereafter). The penalty is a per person penalty, with a 50 percent reduction for children and a family maximum. This potential penalty, while initially modest, may encourage some employees who have opted out of taking insurance from their employer to consider joining their employer s health insurance plan. y Health insurance exchanges Exchanges are an Internet-based way for individuals and small businesses with up to 50 employees to obtain health coverage from private insurance companies. The exchanges will allow individuals and small businesses to compare qualified health plans, find out if they are eligible for tax subsidies, and select and enroll in a health plan. The exchanges will also direct qualified individuals to free health programs such as Medicaid. y Individual tax subsidies Individuals purchasing health insurance through the new exchanges may be eligible for premium tax credits or cost-sharing subsidies. Premium tax credits will lower the individual s monthly premium, and will be available to those with incomes of 100 percent to 400 percent of the federal
poverty level. Cost-sharing subsidies will limit the amount of out-of-pocket costs (i.e., deductibles and copays) that would otherwise apply, and will be available for individuals with incomes under 250 percent of the federal poverty level. It is an employee s receipt of a tax credit or subsidy that triggers potential employer penalties. However, employees will not be eligible for tax credits or subsidies if they can enroll in employer-sponsored health plans that meet ACA requirements. y Health plan fees Employers with health plans will pay new government fees of up to $65 for each employee, spouse and dependent covered by the plan. The fees will be paid directly to the government by employers that sponsor self-insured health plans and indirectly through the insurance companies for employers that have insured health plans. y Improved small employer health insurance tax credit This credit is available for employers that have no more than 25 full-time employees. Starting in 2014, the credit is up to 50 percent of the employer s premium cost for the year, but the credit will only be available for policies purchased through the exchanges. Effective in 2015 y Employer mandate Large employers (those with a combined total of 50 or more full-time and full-time equivalent employees) that do not offer minimum essential health coverage to substantially all of their employees and their dependents may be subject to a penalty. Penalties may also apply if the coverage offered by the employer is either unaffordable or does not meet a minimum actuarial value standard. Employer mandate concepts The Act introduces three new concepts to the employer-provided health insurance marketplace: minimum essential coverage, minimum value and affordability. Minimum essential coverage: Minimum essential coverage is not precisely defined by the Affordable Care Act. However, most employer-provided group health plans will qualify. Minimum value: An employer s plan provides minimum value if, after considering the combinations of copays and deductibles provided, the plan is designed to pay at least 60 percent of the covered charges under the plan. Affordability: A plan is affordable if an employee s cost for self-only coverage does not exceed 9.5 percent of the employee s household income. The IRS has proposed a safe harbor approach, whereby an employer can use 9.5 percent of an employee s Form W-2, Box 1 wages or rate of pay as a proxy for household income. How employer mandate penalties work A large employer can be penalized if it: (1) does not offer health insurance to substantially all employees (the $2,000 penalty), or (2) offers health insurance that does not meet the minimum value requirement, or is unaffordable for employees (the $3,000 penalty). $2,000 annual penalty: If an employer fails to offer minimum essential health coverage to 95 percent of its full-time employees and their dependents, and any employee receives tax-subsidized coverage through the exchange, the employer must pay a $2,000 nondeductible penalty for each full-time employee. The first 30 employees are not counted in calculating the penalty. Assuming a 40 percent combined federal and state effective tax rate, this is the equivalent of $3,300 per employee. Full-time employees are those who work at least 30 hours per week. 2
$3,000 annual penalty: If an employer offers employee and dependent coverage, but charges more than 9.5 percent of the employee s pay for the self-only option, and the employee declines the employer s plan and obtains tax-subsidized coverage through the exchange, the nondeductible penalty is $3,000 for each such employee. This penalty can also be triggered if the employer s coverage fails the 60 percent minimum value test. With a combined 40 percent tax rate, this would be the equivalent of $5,000. Employer decision tree Large employer? penalty: explore small business health care tax credit ; consider insurance exchange Minimum coverage? $2,000 nondeductible penalty on all full-time employees (less first 30) Minimum value? $3,000 nondeductible penalty for each employee with tax-subsidized exchange coverage Affordable? $3,000 nondeductible penalty for each employee with tax-subsidized exchange coverage penalty Steps employers should take now To prepare for 2015, we recommend that employers analyze their workforce and health plans now. Considerations include: y Is the company a member of a controlled group with any other companies? A company with less than 50 full-time and full-time equivalent employees may be a large employer subject to penalties once it is aggregated with other companies in the controlled group. This is because all employees of a controlled group are deemed to be employed by a single employer. Controlled groups exist when one company owns at least 80 percent of another company, or when certain individuals, estates or trusts own interests in more than one business. Because the controlled group rules are complex, assistance from an experienced advisor may be needed to make this determination. 3
y Does the company have policies and procedures in place to track the number of full-time and parttime employees, as well as the number of hours worked by each employee? Employers need to track employees and hours worked on a monthly basis to determine large or small employer status and potential liability for penalties. Special rules apply with regard to seasonal employees and employees with variable hours. y Is the company offering minimum essential health coverage to substantially all full-time employees? Restructuring the workforce may help avoid penalties, but could negatively impact customer service, employee morale, the company s ability to attract new employees and other important business considerations. y Is the company offering minimum essential health coverage to substantially all full-time employees? If not, the employer could be subject to the $2,000 penalty for each full-time employee in 2015. y Is the company s health coverage affordable, and does it provide minimum value? Answering no could cause the employer to be subject to the $3,000 penalty in 2015 for each employee receiving taxsubsidized coverage through an exchange. y Can the company prove that it offered employees and their dependents coverage under its health insurance plan? Since it is the offer of coverage (not acceptance of coverage) that is the key to avoiding the $2,000 penalty, employers should carefully document all responses from employees. y Does the company have procedures in place to track the names, addresses, Social Security numbers and dates of coverage for employees and dependents enrolled in its health insurance plan? Employers will be required to file new information returns with the government to report this information for 2015. y Why do employees opt out of the company s health insurance plan? Is it an issue of affordability? Do they obtain health coverage through a spouse s employer? How likely is it that employees who currently waive coverage will join the plan in 2015? Gaining an understanding of employee behavior may help employers predict health plan enrollment and costs in 2015. y What percentage of the employer s workforce qualifies for tax-subsidized health insurance through the exchanges? What percentage qualifies for Medicaid? Employees are unlikely to need employerprovided health coverage if they can obtain coverage at less cost through the exchanges or Medicaid. y How would increasing the number of part-time employees by reducing employee hours below 30 per week impact the company and the health plan? Restructuring the workforce may help avoid penalties, but could negatively impact customer service, employee morale, the company s ability to attract new employees and other important business considerations. y How would terminating the health plan impact the company and the employees? The decision to terminate a company-sponsored health plan should only be made after careful analysis of a variety of business factors. 4
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