Although implementation of the first wave of reforms enacted under the Patient Protection and Affordable Care Act of 2010 (“ACA”) has been underway for several years, employers should prepare now for the second wave of ACA’s reforms – including the “employer mandate” – which go into effect January 1, 2014. Most employers will be affected by these reforms, whether they currently offer health insurance coverage to their employees or not. With 2014 rapidly approaching, employers need to act now to determine how the reforms will affect them. This article explains many of the second wave of ACA reforms, including ACA’s so-called “employer mandate,” new reporting and notice requirements, and plan design reforms; identifies steps for employers to take in preparing for and implementing those reforms; and provides suggestions to help employers contain costs during the implementation process.
Perhaps the most discussed of the new ACA reforms is ACA’s so-called “play or pay” rules, which require most employers to decide whether to “play,” by providing health insurance coverage meeting certain requirements to the employer’s full-time employees and their dependents, or “pay” certain penalties for failing to do so.
Beginning on January 1, 2014, any “applicable large employer” that has at least one “full-time employee” receiving a government subsidy for health insurance obtained through a federal or state health insurance exchange (an “Exchange”) during any month may be subject to a penalty for such month, if certain requirements are not met. If an applicable large employer does not offer a health plan providing “minimum essential coverage” during the month, the employer is required to pay a penalty equal to $166.67, multiplied by the total number of such employer’s full-time employees during that month (subtracting 30 employees from such total) (the “Subpart A Penalty”). If the employer does offer a health plan providing “minimum essential coverage,” but such coverage is either “unaffordable” or does not offer “minimum value,” the employer is required to pay a penalty equal to the lesser of (i) the Subpart A Penalty, or (ii) $250.00, multiplied by the number of the employer’s full-time employees who received a government subsidy for health insurance obtained through an Exchange during such month (the “Subpart B Penalty”).
In order to completely avoid a play or pay penalty, an employer must make a series of determinations, including whether the employer is an “applicable large employer,” which of the employer’s employees are “full-time employees,” whether “substantially all” of the employer’s full-time employees and dependents have been offered “minimum essential coverage,” and whether such coverage is “unaffordable” and/or has “minimum value.” Because each of these determinations is subject to extensive and continuing guidance issued by the Departments of Labor, Treasury, and Health and Human Services (the “Departments”), simply making the determinations can be a complex and time-consuming process, as explained below.
Determining “Applicable Large Employer” Status
Since the pay or play rules only apply to “applicable large employers,” which ACA defines as employers that employ an average of at least 50 “full-time employees” on business days during the prior calendar year, an employer must determine whether it is an “applicable large employer” on an annual basis. For this purpose, any individual who is employed on average at least 30 hours per week (or at least 130 hours per month) during any month in the prior calendar year counts toward determining an employer’s average. The employer must also include the number of “full-time equivalent employees” (“FTEs”) it employs during such month toward determining its average. Proposed regulations issued by the Internal Revenue Service (“IRS”) provide guidance on the FTE calculation and the “applicable large employer” determination process more generally, and address special issues such as educational and new employers, and temporary and seasonal employees. The proposed regulations clarify that all entities treated as a single employer under the “controlled group” and “affiliated service group” rules of Section 414 of the Internal Revenue Code are treated as one employer, and provide a transition rule that allows an employer to determine its “applicable large employer” status for 2014 by calculating whether it employed an average of at least 50 “full-time employees” on business days during any consecutive six-month period in 2013.
Offering “Minimum Essential Coverage” to “Substantially All” “Full-Time Employees” and “Dependents”
Once an employer has determined that it is an “applicable large employer,” it must offer “minimum essential coverage” to “substantially all” of its “full-time employees” and their “dependents,” in order to avoid imposition of the Subpart A Penalty. IRS proposed regulations state that coverage under any employer-sponsored insured or self-insured group health plan should be considered “minimum essential coverage,” but that such coverage must be offered to at least 95 percent of an employer’s “full-time employees” and their “dependents” for the “substantially all” requirement to be met. ACA is clear that only an employee’s children – but not his/her spouse – need to be offered coverage as “dependents.” An employer is not required to offer part-time employees coverage in order to avoid a play or pay penalty; however, in order to calculate an employer’s potential penalty for a given month, the employer must designate each of its employees as either “full-time” or “part-time” for such month and then count the number of full-time employees for such month, which could be an administrative burden for employers employing variable-hour employees. The IRS has issued proposed regulations and guidance providing safe harbors for determining “full-time employee” status, allowing an employer to identify its full-time employees by calculating employees’ hours during a specified period of months (a “measurement period”) and then locking in that status (full-time or not) for a separate specified period (a “stability period”), in order to avoid having to make a monthly determination. However, many questions remain outstanding regarding the “full-time employee” determination process.
“Unaffordable” Coverage & Coverage Having “Minimum Value”
Even if an “applicable large employer” offers “minimum essential coverage” to “substantially all” of its “full-time employees” and their “dependents,” it will still be subject to a Subpart B Penalty if such coverage is “unaffordable” and/or does not have “minimum value.” ACA provides that coverage is “unaffordable” if the premium cost to an employee of employee-only coverage is more than 9.5 percent of the employee’s household income. Given that an employer likely will not know the household income of its employees, IRS guidance has been issued that provides several alternate, safe-harbor methods to determine affordability, including a method that allows an employer to use its employees’ Form W-2 pay for this purpose. Coverage has “minimum value” if the employer’s share of the total allowed costs of benefits provided under the plan is at least 60 percent. The employer’s share of such costs can be determined using one of several methods, such as a “minimum value calculator” designed by the IRS and HHS available online, completion of a design-based safe harbor checklist to be provided by the Departments, or using an actuary.
In addition to the play or pay rules, other ACA reforms will require action by employers in the coming months, including required changes to eligibility, plan design, and wellness incentives, and new reporting and notice requirements, discussed below.
All employers sponsoring a group health plan will be required to make additional changes to their plan design in order to comply with new ACA requirements. Employers should determine which of the new reforms apply to its plan, and then amend the plan as necessary to conform to those reforms. Employers should then determine and implement any upcoming ACA reforms that apply to its plan. For example, beginning January 1, 2014, all plans will be prohibited from imposing (i) annual dollar limits on the value of essential health benefits, (ii) pre-existing condition exclusions on any plan enrollee regardless of age, and (iii) waiting periods for coverage in excess of 90 calendar days. In addition, non-grandfathered plans will be prohibited from conditioning health plan eligibility on health-status related factors (such as medical conditions, claims experience, medical history or genetic information). ACA also provides that employers subject to the Fair Labor Standards Act (“FLSA”) with more than 200 employees that offer health insurance coverage will be required to automatically enroll new full-time employees in coverage and allow such employees to opt out of coverage, although this requirement will not be effective until the Departments issue final guidance. Further, beginning January 1, 2014, employers sponsoring group health plans will be permitted to offer rewards of up to 30 percent of the cost of coverage in connection with wellness programs (up to 50 percent for smoking cessation programs) that condition rewards on satisfaction of a standard related to a health factor (currently, such rewards are limited to 20 percent of the cost of coverage).
New Reporting and Notice Requirements
ACA also imposes new reporting and notice requirements, which will affect most employers. All employers subject to FLSA will be required to provide a written notice to existing employees explaining the coverage options available through the health insurance exchanges no later than October 1, 2013 (and thereafter to new hires within 14 days of their start dates). In addition, beginning in January 2015, most employers who offer group health plans will be required to submit a coverage report to the IRS annually, which addresses the length of any applicable waiting periods and certain other criteria related to the cost and quality of healthcare available under their plan. This reporting requirement will be in addition to ACA requirements already in effect that require employers to report the aggregate cost of employer-sponsored health coverage on an employee’s Form W-2.
Cost-Effective Strategies for Employers
For most employers that decide to offer group health coverage, complying with ACA’s reforms in the most cost-effective way possible is a priority. Understanding certain characteristics of its workforce may assist an employer in creating a plan design that will comply with the reforms without breaking the bank. For example, an employer with employees in poor relative health may want to incorporate outcome-based wellness programs, in order to encourage healthy behavior that could lower premium costs. Similarly, if an employer discovers that its employees under-utilize other benefits it offers, such as dental, vision, or long-term disability benefits, the employer could reallocate money spent on such benefits toward the health plan’s costs. Employers may also wish to evaluate coverage offered to employees’ spouses and dependents, in order to “tweak” such coverage through tactics such as increasing the portion of the premium cost paid by an employee for coverage of spouses and dependents, charging an increase in premiums for each additional family member receiving coverage under the plan, or dropping spousal coverage altogether. Other actions that could result in cost savings to employers include consolidating services with one outside vendor to increase efficiency, and assessing and adjusting the employer’s communications regarding benefits to employees by taking advantage of technology to offer access to insurer and vendor websites, social media tools, and smartphone apps, to help employees understand the cost and extent of available health services.
Even though employers need to decide whether to “play or pay” and how to implement ACA’s reforms more generally well before January 1, 2014, there are many issues for which additional guidance is needed. As such guidance is issued, employers will need to determine how such guidance will affect their chosen plan design. An employer who keeps abreast of the new guidance should be better equipped to offer a group health plan in 2014 that meets both ACA’s requirements and the employer’s needs.
Kenneth A. Raskin is a Partner and Chair of King & Spalding’s Employee Benefits & Executive Compensation Practice. Laura R. Westfall is an Associate in King & Spalding’s Employee Benefits & Executive Compensation Practice, both resident in the New York City office.