last updated on 2/21/2014
Under the Patient Protection and Affordable Care Act (referred to as PPACA or ACA, or just the Affordable Care Act), employer-provided coverage is considered "unaffordable" if it:
- Costs more than 9.5 percent of the employee's W-2 wages, or
- Doesn’t cover an average of 60 percent of the employee's medical expenses.
The ACA's employer mandate to provide health care is known formally as the "shared responsibility" provisions, and informally as "play or pay."
If an employer does not provide affordable coverage, the employee can shop for insurance through a public exchange and may qualify for federal tax credits. Employers that are midsize (the equivalent of 50 to 99 full-time workers based on a 30-hour work week) and large (100+) will face penalties starting at $2,000 per employee, after adjustments, if they fail to provide "affordable" coverage and have employees that receive federal tax credits to purchase exchange-based coverage (more on this below and yes, it's complicated).
Who is eligible for federal subsidies? Those who are single and make less than about $46,000, or are part of a family of four and make less than about $94,000, may receive a tax credit from the federal government to help pay their premium.
Starting Jan. 1, 2014, nongrandfathered, fully insured plans in the individual and small group markets and those in the exchanges were required to provide coverage of benefits or services in 10 separate categories that reflect the scope of benefits covered by a typical employer plan. Self-insured small group plans, large group plans, and grandfathered plans are not required to offer essential health benefits.
To clarify, small employers (that's 50 or fewer full-time employees) are not required to provide health care to their workers, but if they do, the plans they offer must provide the above essential health benefits (and meet other specifications), unless, as also mentioned, the plans are self-insured or grandfathered.
Starting Jan. 1, 2015, employers with the equivalent of 100 or more full-time employees must offer "affordable" care that meets minimum value specifications (as determined by minimum value calculations) to 70 percent of their full-time employees, to fulfill the employer mandate. By 2016, large employers will need to provide coverage to at least 95 percent of their full-time workers.
Starting Jan. 1, 2016, employers with the equivalent of 50 to 99 full-time employees may face penalties if they do not provide "affordable" care to at least 95 percent of their full-time employees as specified.
These deadlines are as of February 2014, when the Treasury Department issued its most recent mandate delay via a new final rule and related fact sheet and Q&A on Employer Shared Responsibility Under the Affordable Care Act.
The required coverage must be provided to employees who work an average of 30 or more hours a week. The measurement period can be three to 12 months, with a subsequent stability period that generally cannot be shorter than six months or, if longer, the length of the measurement period.
More than 50 but Fewer than 100
According to an analysis by Moulder Law, for the “Fewer than 100 Full-Time Employees” transition relief to apply an employer must certify that it meets the following three conditions:
1. The employer must average at least 50 full-time employees—including part-time employees' whose hours are added to comprise full-time equivalents (FTEs)—but fewer than 100 full-time employees (including FTEs) in 2014.
2. From Feb. 9, 2014 thru Dec. 31, 2014 the employer cannot reduce its workforce or its workforce’s hours of service to meet the condition of having fewer than 100 full-time employees (including FTEs) in 2014 (there is an exception for a bona fide business reason).
3. The employer must maintain and not materially reduce the health coverage the employer offered as of Feb. 9, 2014 until the last day of the 2015 plan year.
"The unanswered question is whether an employer who fails the second and/or third condition of the ‘Fewer than 100 Full-Time Employees’ transition relief rule is subject to the original §4980H(a) penalty, which only allows an employer to reduce its full-time employee amount by 30 not 80," according to the firm.
Still confused? Below is a reiteration of the various major plan design requirements along with an explanation of the related noncompliance penalties by Timothy Jost, J.D., a professor at the Washington and Lee University School of Law, from an article by Jost on the Health Affairs Blog:
"The employer mandate requires large employers to offer affordable and adequate insurance coverage to their full-time employees and their employee’s dependents or pay a penalty. The law actually imposes two different penalties. Under the statute, large employers that fail to offer “minimum essential coverage” to their full-time employees and dependents must pay a $2,000 penalty for every one of their full-time employees over the first 30 if any employee receives premium tax credits through the exchange (the 4980H(a) penalty). Large employers that fail to offer full-time employees coverage that is affordable (costs no more than 9.5 percent of an employee’s household gross income) and adequate (covering 60 percent or more of medical costs on average) face a $3,000 penalty for each individual employee who obtains premium tax credits (the 4980H(b) penalty). Small employers—employers with fewer than 50 full-time and full-time equivalent employees—are not required to offer coverage and are not subject to these penalties.
"Employees who are offered affordable and adequate coverage by their employers are ineligible for premium tax credits. Employees who accept an offer of employer coverage, even if it is not affordable or adequate, are also ineligible. Employees who are not offered coverage, or who are offered coverage that is not affordable or adequate, may be eligible for premium tax credits if their household income is between 100 and 400 percent of the poverty level and they are not eligible for public insurance coverage. Employees whose income is below 138 percent of poverty in states that have expanded Medicaid are eligible for Medicaid, even if their employer offers coverage. Employers are not penalized for employees who receive Medicaid coverage."
Mandate Delay Adds to Penalty Confusion
Paul Hamburger, a partner with law firm Proskauer Rose LLP in Washington, D.C., addressed ongonig confusion between the two different employer penalties under the ACA in his recent commentary on the latest mandate delay, excerpted below:
"[T]he pay-or-play penalties consist of two parts: the “(a)” penalty, which generally is equal to the number of full-time employees the employer employed for the year (minus up to 30) multiplied by $2,000; and the “(b)” penalty, which is $3,000 per year times the number of full-time employees who obtain a premium tax credit on the exchanges, but not more than the “(a)” penalty amount. The “(a)” penalty could apply if an applicable large employer fails to offer coverage at all to a sufficient number of its full-time employees and dependents. The “(b)” penalty could apply if the employer does offer coverage, but that coverage is either unaffordable or does not provide “minimum value” as defined by regulation. Also, these penalties are only triggered if a full-time employee otherwise purchases coverage on a public insurance exchange and obtains a premium tax credit or subsidy for that coverage. …
"Some have questioned whether large employers of 100 or more full-time employees subject to the new 2015 transition relief would be exposed to any penalties at all for 2015 with respect to those full-time employees to whom coverage is not offered as long as coverage is offered to at least 70 percent of the full-time employees. …
[T]he separate IRS FAQs issued at the same time as the final regulations (in particular FAQ 37) answer this question by stating that an employer offering health coverage to at least 70 percent of its full-time employees and dependents of those employees could still be exposed to a “(b)” penalty if a full-time employee obtains a premium tax credit “because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable … to the employee or did not provide minimum value ….” (Emphasis added.)
"Similarly, once 2016 arrives and all applicable large employers are subject to the pay-or-play requirements, employers need to be mindful of the fact that as long as they offer coverage to 95 percent or more of their full-time employees (and dependents), they should not be subject to the “(a)” penalty. However, they could be subject to the “(b)” penalty if the coverage offered is not affordable or does not provide minimum value or the full-time employee triggering the penalty was in the up to 5 percent of full-time employees to whom coverage was not offered."
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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