Employer Responsibilities Under the Affordable Care Act; Avoiding the Penalties Under the Public Health Services Act-Your Road Map

Affordable Care Act Employer Responsibility Road-map for Health Plans

Businesses had a reprieve from the Affordable Care Act mandates in 2014, but next year they too will have to meet certain standards for health care plans in the United States and this article provides a road-map for compliance. Most of the information in this column was gleaned from an August seminar sponsored by the U.S. Department of Labor. Other than one employer representative who felt his employees, or perhaps we should call them serfs, should be thankful to get paid at all, and not receive any work force benefits, most of the seminar participants were working on understanding their compliance responsibilities. To assist in that proposition, here are the crib notes for those who want to be on the fast track for health plan readiness.

Provisions Which Have Are Being Phased in for All Employers with Fifty or More Workers

Public Health Services Act, Section 2708 stipulates that health plans offered by employers with fifty or more employees may have a maximum waiting period of ninety days before an employee is added to the medical plan.

If a self-insured plan fails to comply with the provisions of the Public Health Services Act, highly compensated individuals could lose the tax favored status of their benefits, which means they would have to pay tax on their health plan benefits. If an insured group health plan fails to comply with the provisions of section 105 H of the Public Health Services Act, an excise tax may (most assuredly) be exacted. [1]

Though the Patient Protection and Accountable Care Act mandate to provide medical coverage to employees applies to all firms employing fifty or more employees, the specific benefit design mandates mostly apply to insured plans. However, neither self-insured nor fully insured medical plans may exceed the ninety day waiting period limit, they must cover adult children to age 26, and pre-existing conditions clauses which prevent coverage are not allowed. Minimum health benefits, which are part of the insurance mandates for essential coverage, also apply to self-insured medical plans. If a self-funded plan does not offer a medical plan that meets the minimum for essential health benefits, an excise tax may be demanded, starting in 2015

Safe harbor provisions include foreign employees, or those working in other countries. The PHSA and the ACA applies to employees working within the confines of the United States and its territories.

Mandates which will Commence in 2015

Determining the Number of Eligible Employees

Determining full-time employee equivalents requires an algorithm and here are the steps:

1.       Have you had fifty or more fulltime or fulltime equivalent employees in the prior year? If you have a lot of part-time employees or if you own multiple corporations which are part of a controlled group, you still need to do this analysis.

2.       Determine your fulltime employees, which for purposes of the ACA are those working at least 30 hours a week. The language “on average” is used, but that can be a bit dicey, I suggest using a quarterly look-back.

3.       Next, determine your fulltime equivalent employees, which is defined as anyone who has worked at least twenty hours in a month. The ACA also allows employers to use the 130 hours  per month of work definition to determine fulltime status. Take the number of hours the employees worked in this category and divide it by the number of employees to arrive at your sum.

4.       Determine all other employees, regardless of the hours worked and divide that sum by 120

5.       To assess whether or not your firm is subject to the fifty employees and greater ACA compliance mandates, add the sums of the fulltime employees, the fulltime equivalents, and the sum for the “other employees” criteria. If this total equals or exceeds fifty, you must comply with the federal mandates of the Affordable Care Act. This total also determines which provisions of the Public Health Services Act apply and the various sections of the Internal Revenue Service Code.

How to Avoid an Employer PHSA Shared Responsibility Penalty

The good news is that a modest health plan can still avoid the tax penalties and here are the criteria to meet this hurdle, based on the presentation from Tax Counsel for the Department of the Treasury, Alan Tawshunsky[2].

The health plan must be offered to the fulltime employees, as defined in the previous eligible employee section or the employer will have to pay a tax penalty. The “B” penalty would only apply to employees who opted to purchase insurance through a federal or state insurance exchange (only for those firms with fifty or more eligible employees). To avoid the “A” penalty, which can be up to $3,000 per employee, the health plan must meet the minimum benefit threshold of 60% based on an actuarial formula. The acceptable health plan benefit threshold can be determined two ways, by going to the government Health & Human Services web site and use their calculator[3] or by using one of these methods:

1.       W-2 Method-Determine employee compensation, calculate the maximum insurance or health plan premium contribution made by that employee; if it exceeds 9.5% of that employee’s compensation you probably owe a penalty. If the proportion falls below the 9.5% level you have met the test. The W-2 method is based on earned income reported by the employer.

2.       Look-back Method-This involves taking the employee’s rate-of-pay at the beginning of the year, assume 130 hours of service monthly, and make an assessment using this criteria.

3.       Federal Poverty Method-This rule stipulates that as long as the premium contribution for which the employee is expected to make does not exceed 9.5% of their income, the plan is deemed affordable. Please note, this criteria differs from the insurance exchange standard which is 8% of income. FYI, the federal poverty level for a single individual in the United States in 2014 is $11,670 (more than that if you live in Alaska or Hawaii). For a family of four, it is $23,850. For a family of eight, it is $40,000. Prudence dictates that employers make a calculation for all employees earning less than $24,000, especially if they are single, head-of-household tax filers. The employers will have some access to tax filing status information, because the employees have to complete a W-9 tax filing form when they make changes in their tax filing status or when they are hired.

4.       Once you have determined if your plan meets an acceptable level of employer responsibility you only need to pay a tax penalty for the employees who opt out of the employer plan for the insurance exchange model. Typically these employees will make this selection because they are eligible for the federal tax credits, which apply to all (green card or citizen requirements apply) individuals within 400% of the federal poverty rate.

Measurement Period for Assessing the Eligible Employees and Determining Plan Acceptability

For employers choosing to use the “look-back” period, this can be done annually, semi-annually, or quarterly. It is best not to use a monthly calculation as it takes a month to assess eligibility, especially for new employees, so administrators wouldn’t know who is eligible until the end of the month and insurance plans require enrollment at the beginning of the month.

The government has coined a new phrase, called the stability period, which means once the initial eligibility is determined for employees, there is a period of time where the employees must remain on the plan, if they remain active employees. So if an employer chooses an annual measurement period, eligible employees will be allowed to remain on the plan for 12 months. If an employer opts to check eligibility every three months under the measurement period criteria, then the stability period will only be for three months. This effectively means that an employee’s health plan inclusion status could change every quarter.

Transition Relief for Employers in 2015

During 2015, the employer group can use any six months in a plan year to determine eligibility and it does not have to be six consecutive months. This means the employer could “game the system” if it wanted to put in the effort. Also, medical coverage must be offered to 33% of the workforce and 25% must actually be covered on the plan. In other words, an employer can’t have a sham group health plan. This harkens back to the pre ERISA days when employers set up fabulous pensions for themselves, to the exclusion of their employees, resulting in the “top heavy” rules to prevent discrimination and tax ruses.

In conclusion, the government has determined and the courts have upheld the provision of medical insurance as a requirement and if you are an employer with fifty or more equivalent employees, you must provide medical insurance or a medical plan, contribute an acceptable amount toward the cost of the program, or pay a tax penalty. However, since the cost of a group medical plan is now $4,885 per year just for the employee, employers may elect to pay the $2,000-$3,000 per employee penalty and avoid the employer health plan morass. According to the Kaiser Family Foundation’s 2013 Survey of Employer-Sponsored Health Benefits, family health plan premiums now run $11,786.[4]  This means the employer may also opt to pay a penalty on some classes of employees who fall under the annual shared responsibility rules, but continue to operate a health benefit plan. It is doubtful that many employers with fifty or more employees would cancel a medical benefits program, as this would have a negative impact on recruitment and retention of employees.

For brevity purposes this article has not listed any of the exemption criteria for the Accountable Care Act or Public Health Services Act provisions, but last month’s article addressed religiously exempt plans in detail.

This article was written by Roberta E. Winter, who is a health policy analyst and consultant, independent journalist, and author of http://www.amazon.com/Unraveling-U-S-Health-Care-Personal/dp/1442222972# . Though anyone may use this article, if quoting or reproducing any of the material please make sure that correct attribution of authorship is given. The healthpolicymaven thanks you for reading.

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[1] Internal Revenue Service Notice 2011-1 and found online at: http://www.irs.gov/pub/irs-drop/n-11-01.pdf

[2] Alan Tawshunsky, Tax Counsel, U.S. Department of the Treasury; Affordable Care Act: Employer Shared Responsibility, Compliance Assistance Seminar, U.S. Department of Labor Health Benefits Education Campaign in coordination with the Washington Office of the Insurance Commissioner, Bothell Washington, August 20, 2014

[3]Centers for Medicare and Medicaid, Fact Sheet, May 16, 2014, and found online at: http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/Final-Master-FAQs-5-16-14.pdf

[4] Kaiser Family Foundation 2013 Survey of Employer Sponsored Health Benefits and found online at: http://kff.org/report-section/2013-summary-of-findings/