We have received many questions from you related to potential impacts of the Affordable Care Act (ACA) on units of local government. We reached out to a specialist in the insurance field and asked her to share her perspective on this very vital proposed regulation. Karen Breitnauer, JD, is a Compliance Attorney with M3 Insurance, Wisconsin's largest privately held commercial insurance agency, serving clients across the country. In this article we focus on the applicability and brief overview of the Pay or Play proposed requirements. This article is the first of several we will share with you on this still developing and crucial topic.
In our business, we describe 2013–2014 as a watershed year in terms of the Affordable Care Act (ACA). "Watershed" is defined as a moment in time that is pivotal. In 2014, both public and private sector employers will be asked to share in the responsibility of providing health insurance to employees who will be required to have health insurance under the individual mandate. This is also known as the employer "Pay or Play" requirements under the ACA. These requirements will significantly change how employers provide benefits to their employees. Below we describe some key elements of the "Shared Responsibility" or "Pay or Play" requirements.
Pay or Play requirements apply to large group employers
One of the most important tenets of the ACA is the definition of a "large employer" for purposes of the "shared responsibility" or Pay or Play requirements. A large employer is defined as an organization that employs 50 or more Full-Time and Full-Time Equivalent (FTE) employees on business days during the preceding calendar year. To determine whether or not an employer is a large employer, the following is taken into consideration:
- Full-time employees: Full-time employees = employees who work on average 30 or more hours per week (130 service hours in a calendar month)
- Aggregate of part-time employees: Any employee who is not a full-time employee must be counted in aggregate. Hours of service for all employees must be added together and then divided by 120.
- Monthly totals: Full-time and full-time equivalent numbers must be added for each month, including fractions.
- Annual average: Monthly totals are added for a yearly total which is then divided by 12. Fractions are disregarded at this point.
- Seasonal worker exemption: Seasonal workers who work fewer than 120 days or 4 calendar months need not be included.
The determination of whether or not an employer is a large employer must be based on the preceding calendar year. However, for this first year alone, employers can base it on six consecutive calendar months in 2013.
Regardless of whether an employer is a private or public sector employer, the ACA will require large employers to participate in the Pay or Play requirements of the law. Organizations trying to determine their large employer status should work with their human resources staff and legal counsel to make a proper determination of qualification. While no employer is exempt from this law, we have found that our public sector employers are faced with more of a challenge of counting their employees and this is based employment structure of public employers. For example, school districts have coaches, long term subs, adjunct professors, bus drivers, and other contract employees. Municipalities have a number of seasonal employees including, life guards, park and recreation, volunteer emergency service personnel, etc. this has made counting the employees quite challenging. This is why we recommend working with a consultant, attorney, and your human resources staff to determine who is eligible for benefits. The effective date of this guidance is January 1, 2014.
What are the Pay or Play requirements?
The ACA does not mandate that large employers provide health insurance coverage to their employees. However, whether the employer provides the coverage or not, there will most likely now be consequences.
Large employer – no offer of coverage
If an applicable large employer decides to no longer offer coverage to employees, and at least one full-time employee receives subsidized coverage in the Exchange1 , the employer will be subject to an annual penalty on all full-time employees. It is very important to note that the ACA defines a full-time employee as an employee who averages 30 or more hours per week.
The penalty in this situation is $2,000 per full-time employee minus the first 30 full-time employees. This penalty will be paid by the employer to the Internal Revenue Service (IRS) after the IRS makes a demand for payment. This will not occur until after individual tax returns are due for any given year. So, for tax year 2014, there will be no contact to employers by the IRS regarding potential penalty issues until after April 15, 2015.
Why have some public entities entertained the idea of dropping their medical coverage in 2014?
There have been discussions in the marketplace regarding the potential cost effectiveness of terminating health coverage and simply paying the penalty. Some pressure to make such a decision has been coming from their public sector boards and the community. While some employers might opt to go this route we have found that the majority of our public sector clients will continue to offer group medical coverage at least through 2014. M3 has prepared Health Care Reform Modeling Tools for our groups over 50 FTE’s to determine the financial impact of the penalties and taxes associated with ACA. Once the groups have had a chance to analyze the results most have found that it will be more beneficial to continue to offer the benefits for the following reasons:
- To attract and retain valuable employees
- To increase the value of the benefit package in a time of numerous wage freezes
- To give employees peace of mind in a time of uncertainty so they remain productive in their jobs
Large employer – offer of coverage
If an applicable large employer decides to continue to offer health coverage, the employer’s obligation under the ACA is to make that coverage valuable and affordable to all full-time employees or face a penalty. What makes coverage valuable and affordable?
- Valuable: The law requires that the coverage offered cover 60 percent of the cost of benefits, or "minimum value." Recently, the Department of Health and Human Services (HHS) issued a calculator to assist employers in determining whether their plan(s) provide minimum value. They have also alluded to the fact that there will be additional guidance forthcoming on how to determine value.
- Affordable: The law provides three different methods for determining whether or not the coverage offered by the employer to its full-time employees is affordable. Affordability is analyzed by looking at the lowest-cost single coverage that the employer provides, regardless of what the employee actually elects.
- W2 Safe Harbor: The employee’s contribution toward the lowest-cost single coverage cannot exceed 9.5 percent of the employee’s Box 1
- W2 wages. Rate of Pay Safe Harbor: The employee’s contribution toward the lowest-cost single coverage cannot exceed 9.5 percent of the employee’s hourly rate of pay multiplied by 130 or 9.5 percent of the employee’s monthly salary.
- Federal Poverty Safe Harbor: The employee’s contribution cannot exceed 9.5 percent of the single federal poverty level.
If the employer ensures that the coverage provided is valuable and affordable to all full-time employees, then the employer will avoid paying a penalty. However, if the coverage is unaffordable and at least one full-time employee goes to the Exchange and receives subsidized coverage, the employer penalty would be $3,000 per subsidized full-time employee or $2,000 per each full-time employee minus the first 30 full-time employees, whichever is less.
One of the biggest challenges that the public sector employers are facing is the requirement to offer affordable coverage to all 30+ hour/week. Since Act 10 and the resulting loss of many contracts, some public employers have found that they have employees working 30 hours or more who have not been offered medical insurance. Wisconsin State Law requires that all insurance companies offer coverage to all eligible employees working 30 or more hours per week. This State Law which historically has not been enforced is now coming to the forefront with the implementation of Federal Health Care Reform. As a result many public employers have had to make adjustments to their budgets in order to accommodate additional employees on the plan. This has also prompted employers to become more cognizant of the affordability issue regarding Federal Health Care Reform. Many public employers are concerned with having to change plan design or premium contribution level in order for the health plan to be considered affordable for this segment of their work force.
Final thoughts: In addition to the above requirements, regulations have also been released regarding how employers are supposed to track hours to determine the employees who are considered full-time. As we mentioned earlier this is a rather simple task for most employers, but for the public sector it is more complicated given the structure of the workforce. In a future issue we plan to cover the following:
- Counting employees—Measurement, Stability and Administration Period
- In-Migration Issues and the Cost Impacts
- Cadillac Tax
- Non-Discrimination Testing
If you have questions on how the Employer Shared Responsibility "Pay or Play" requirements apply to your situation, please contact a representative of Baker Tilly or M3: