The Patient Protection and Affordable Care Act (PPACA) requires that each state establish a health insurance exchange for individuals and small businesses by 2014, or the federal government will establish one for them. Exchanges will essentially function as a health insurance marketplace for individuals and small businesses. For 2014 and 2015, states can decide whether to include businesses with 100 or fewer or 50 or fewer employees in their exchange. In 2016, all businesses with 100 or fewer employees must be able to purchase insurance through these exchanges. The exchanges have the option of including employers with more than 100 employees beginning in 2017.
Even if the U.S. Supreme Court were to declare unconstitutional the PPACA's so-called "individual mandate," requirng individuals to purchase health insurance or pay a penalty, many expect that other provisions of the sweeping bill, including those covering the creation of state health care exchanges, would survive.
In addition to health insurance functions—such as operating Medicaid and the Children's Health Insurance Program (CHIP)—states will be responsible for running their exchange. The new responsibilities they will have to take on include:
• Operating a toll-free number and website to inform individuals and businesses about insurance options.
• Certifying qualified health plans (QHPs) that will be available for purchase through the exchanges.
• Making eligibility determinations for tax credits and the state’s Medicaid/CHIP programs.
• Notifying employers if their employees are eligible for and receiving health insurance tax credits and if employees enroll in or disenroll from an exchange-sponsored plan.
Ready, Set, Go
Exchanges will be expected to be ready for their first open enrollment period by October 2013. The first coverage year for exchanges will begin Jan. 1, 2014. Exchanges must be fully operational and prepared to facilitate the purchase of QHPs for individuals and small businesses through the exchange.
As of March 2012, 21 states indicated that they intended to or have already passed health exchange legislation, 11 states said they will not pass legislation or host an exchange, and 17 states were undecided.
Full-time equivalents. PPACA language states clearly that all large employers—defined as having 50-plus full-time equivalent employees (FTEs)—will be required to provide affordable coverage of minimum value to FTEs and their dependents or face penalties. The U.S. Department of Health and Human Services (HHS) has yet to clarify some of the terms of this requirement, so employers do not yet have all of the information they need to develop compliant coverage options.
There are, however, several basic definitions available for employers to consider. For instance, the law defines a FTE as one who works an average of 30 hours per week per month. Employers with transitional or part-time workforces might have trouble determining who their FTEs are under this definition, so the Treasury Department and the Internal Revenue Service (IRS) were considering potential solutions. For example, the IRS stated in May 2011 that it planned to issue a proposal that would give large employers the option to use a look-back/stability period safe harbor to determine which employees would be considered full time for a particular coverage period. According to the IRS, this approach “would be designed to give effect to the statutory provisions while accommodating a wide variety of current eligibility and enrollment practices in group health plans.”
Affordability. Coverage is considered “affordable” only if the employee’s share of the premium does not exceed 9.5 percent of household income. But because employers do not have the ability to determine an employee’s household income, HHS will allow employers to base their definition of affordability on the employee's individual W-2 wages.
Minimum value. The term “minimum value” is not yet fully defined, but it has been established that a plan must pay 60 percent of the total allowed cost of benefits.
As federal regulators continue to develop regulations, large employers should monitor these rules and policies, as they will impact benefit plan design, budget and strategy.
Tax Credits and Penalties
Another function of the exchanges will be to certify whether an individual who does not have access to affordable health insurance through an employer is eligible for a tax credit to offset the cost of coverage purchased through an exchange. If a large employer’s employee seeks and receives such a tax credit because the employer failed to offer coverage to FTEs and their dependents, the employer will incur a penalty of $2,000 times the number of FTEs it employs. Similarly, if a large employer offers coverage that is unaffordable or not of minimum value, the employer will incur a penalty of $3,000 times the number of FTEs receiving tax credits. (The maximum penalty for providing coverage that is unaffordable or not of minimum value may not exceed $2,000 times the total number of all FTEs.) When calculating these penalties, employers may subtract the first 30 workers.
Keep in mind that employees who are eligible for Medicaid will not be eligible for tax credits, which means that employers will not face penalties on these employees. Under the PPACA, individuals earning up to 138 percent of the federal poverty level are Medicaid-eligible, so single employees earning from 138 percent to 400 percent of the federal poverty level (or $7.41- $21.48/hour based on 2012 numbers) may be eligible for a tax credit and could impact employer penalties.
It’s important to note that employers will not be penalized if they fail to provide coverage during a formal waiting period to a new FTE for the first three months following the employee’s date of hire. However, employers must offer coverage to eligible employees as soon as the three-month period is up to avoid potential fines.
Determining Eligibility for Tax Credits
HHS’ final regulations on eligibility determinations and exchange standards for employers gives exchanges the authority to decide who is eligible for tax credits and whether employers are providing appropriate coverage. The rule allows exchanges to verify the annual and current household income of individuals seeking coverage through an exchange via HHS, the U.S. Treasury and individual self-disclosure. This particular provision may be challenging for exchanges, as the information available might not always be accurate or up to date. In addition, HHS will permit individuals to report to the state whether they are covered through their employer and exchange must notify employers when their employees is eligible for premium tax credits. Future guidance is expected the structure of this employer notice.
The Treasury Department’s proposal on the premium tax credits contains an affordability safe harbor that might be of interest to employers. For example, if an employee enrolls in an employer’s plan—regardless of whether the plan meets the affordability or minimum value requirements—the employee will not be eligible for tax credits. This means that the employer cannot be penalized. Additionally, even though employers are required to offer coverage to dependents, the affordability test will be based on the employee’s household income compared to the employee’s contribution to the lowest cost plan for self-only coverage. Finally, the Treasury proposed establishing an affordability safe harbor to protect employers from penalties with respect to an employee who receives a tax credit or subsidy “if the employee portion of the self-only premium for the employer’s lowest cost plan that provides minimum value does not exceed 9.5 percent of the employee’s current W-2 wages from the employer.” Treasury requested comment on whether employers will need a “transition relief period” as they adjust to new requirements in 2014.
Once all of these rules have been finalized and exchanges are operational, employers will be required to report new information to the exchanges and the IRS to help them determine individual eligibility for tax credits and liability for tax penalties. The new data that employers will be obligated to report includes:
• Employer name, date and employer identification number.
• The number of FTEs for each month during the calendar year.
• The name, address, and taxpayer identification number (TIN) of each FTE during the calendar year and the months (if any) during which the employees (and any dependents) were covered.
• Certification of whether the employer offers minimum essential coverage to FTEs and their dependents. If so, the employer must report: length of wait period (not to exceed 90 days), months during the calendar year during which coverage was available, monthly premium for the lowest-cost option in each of the plan’s enrollment categories, and large employer’s share of the total allowed cost of benefits under the plan.
Not all employers operate on a January-to-January timeline, and plan year does not always coincide with calendar year or with the open enrollment season for the exchanges. Consequently, the agencies will have to grapple with timing issues as they develop regulations.
Prepare for Challenges Ahead
Going forward, employers and state exchanges will face a number of challenges related to the PPACA. In order to remain compliant, employers must be prepared to interact with exchanges quite frequently, including receiving notifications about employees seeking exchange coverage and fulfilling new reporting requirements (unless the final rule says otherwise). This could be particularly burdensome for employers that operate offices in multiple states, as they might have to contend with different exchange rules depending on how individual states choose to set their exchanges up. Employers will want to ensure that exchanges are making their determinations based on accurate data, so they might have to establish new verification processes for income information self-reported by employees. In addition to these challenges, employers must continue to focus on containing rising health care expenditures while absorbing new compliance costs.
Ultimately, employers will need to ensure that they’ve coordinated with their employees, exchanges and the IRS in order to minimize administrative burdens, ensure proper verifications and protect themselves from erroneous penalties.
Even if large employers are already providing coverage that they feel is affordable, they will still be subject to reporting requirements and might still need to consider whether their coverage meets HHS’s definitions of affordability, minimum value and FTE. Therefore, employers are encouraged to stay involved in the process and to be mindful of future guidance.
Arika Pierce is the division vice president for federal government relations at HMS, a provider of health care cost containment solutions. HMS helps its clients ensure that health care claims are paid correctly and that those enrolled to receive program benefits meet qualifying criteria. © 2012 HMS.
States Unprepared for Health Exchange Deadline, SHRM Online Benefits Discipline, updated July 2012
HHS Issues Final Rule for State-Run Health Exchanges, SHRM Online Benefits Discipline, updated March 2012
Large Employers Weigh Future Use of Private Exchanges, SHRM Online Benefits Discipline, March 2012
IRS Issues Guidance on Reporting Health Coverage Cost on Forms W-2, SHRM Online Benefits Discipline, updated February 2012
States Receive More Flexibility, Resources to Create Insurance Exchanges, SHRM Online Benefits Discipline, December 2011
Agencies Issue Proposed Rules on State Exchanges, Premium Subsidies, SHRM Online Benefits Discipline, August 2011
Health Care Exchanges Will Alter Competition and Choice, HR News, March 2010
SHRM Online Benefits DisciplineSHRM Online Health Care Reform Resource Page