While the Affordable Care Act does not require employers to provide their employees with access to employer-sponsored health care plans, the ACA does include incentives and penalties intended to: 1) minimize disruptions of the existing employer-provided health care system, and 2) to encourage smaller employers to provide their employees with access to employer-sponsored health care plans.
“Play-or-Pay” System (Employer Mandate)
Under the Affordable Care Act’s “play-or-pay” or “shared-responsibility” system, larger employers – those with 50 or more full-time equivalent non-seasonal employees – are subject to two basic rules, now scheduled to take effect on January 1, 2015:
- If an employer does not offer health care coverage meeting certain standards to all full-time employees and any one full-time employee receives tax-subsidized coverage through a Health Insurance Marketplace, the employer must pay a $2,000 penalty for every full-time employee over 30.
- If an employer does over health care coverage, but a full-time employee obtains tax-subsided coverage through a Health Insurance Marketplace, the employer must pay a $3,000 penalty for that employee. While any employee is free to decline to participate in an employer-sponsored health care plan and, instead, purchase coverage through a Health Insurance Marketplace, a premium tax credit (tax-subsidized coverage) us available only if the employee’s required contriubution to the employer’s plan for single coverage is more than 9.5% of the employee’s income or the employer-sponsored plan pays less than 60% of the cost of covered services.
Full-Time Equivalent Employees (FTEs)
According to the Affordable Care Act, only “large” employers are subject to the “play-or-pay” requirements, with a large employer defined as an employer who employed an average of at least 50 full-time equivalent employees (FTEs) during the previous calendar year. While the penalties associated with the “play-or-pay” requirements do not take effect until January 1, 2015, employers are advised to record employee hours in 2014 in order to determine if they will be subject to the employer mandate in 2015. FTEs are calculated as follows:
- Full-time employees are defined as having worked on average at least 30 hours per week, with full-time seasonal employees who work under 120 days during the year excluded from the calculation.
- Part-time employees (i.e. those working less than 30 hours per week) are not excluded from the calculation. Instead, the hours worked by part-time employees are converted into FTEs and used in the calculation to determine if an employer is a large employer for ACA purposes. This is done by adding up the total hours worked by part-time employees during a month and dividing the total by 120. The result is added to the number of full-time employees to arrive at the number of FTEs for affordable care act large employer requirements.
Owner of Multiple Entities
The owner of multiple entities, such as a franchise owner with several restaurants, is treated as a controlled group for ACA purposes. This means that if one individual or entity owns, or has a substantial ownership interest in, several franchises, all of those franchises are essentially considered as one entity and the employees in each of the franchises must be aggregated for purposes of determining large employer “play-or-pay” status.
Application of Penalties
The calculation of FTEs as described above serves one purpose only…to determine if an employer us considered a “large” employer for purposes of the Affordable Care Act “play-or-pay” requirements.
Any penalties actually assessed apply only to full-time employees. Part-time employees are not included in actual penalty calculations and an employer will not pay a penalty for any part-time worker who receives a premium tax credit through a Health Insurance Marketplace.
Employer-Sponsored Health Plan Requirements
Beginning in 2014, new employer-sponsored health care plans must meet the qualified health plan requirements. These include extension of family coverage to adult children under age 26, prohibition of annual and lifetime limits on the dollar value of coverage, required coverage of preventive services without cost sharing, a waiting period no longer than 90 days and certain consumer protections.
Other considerations faced by larger employers that offer employer-sponsored health care plans include:
- Employers will need to decide whether to adjust plan benefit or contribution amounts in order to pass the affordability test and, beginning in 2015, to avoid potential $3,000 per employee penalty.
- Some employer-sponsored health care plans are discriminatory, providing “richer” benefits to more highly-compensated employees. Plans that do not remove such discriminatory coverage face penalties beginning in 2015: $100 per day for each non-highly compensated employee who is not eligible for the “richer” benefits, with a maximum penalty of $500,000.
- It is not unusual for employer-sponsored health care plans to exclude some full-time employees, typically those with lower incomes. These employees will have to be included beginning in 2015.
Some of the new rules do not apply to “grandfathered” health care plans…those in existence when the Affordable Care Act was signed into law on March 23, 2010. Since there are very tight limits on changes that can be made to a plan and have it retain its grandfathered status, expectations are that not very many plans will remain grandfathered in the coming years.
Beginning in 2018, employer-sponsored health care plans with a plan cost per enrollee that exceeds a cap will face a 40% excise tax. The 40% excise tax is initially set at the amount by which the costs of the plan per enrollee exceed $10,200 for single workers and $27.500 for family coverage. These caps may end up being higher if health care costs rise faster than currently projected.
While insurers or plan administrators will have to pay the 40% excise tax, the reality is that the cost will probably be passed through to employers. Employers offering so-called “Cadillac” plans may begin revising them prior to 2018 when the excise tax first becomes payable.
Finally $10,200/$27,500 thresholds will be increased by $1,650/$3,450 for retiree health plans (age 55 and over who are not Mediare-eligible) and for certain high-risk jobs.