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This is the second in a series of articles about the Affordable Care Act (ACA). This article examines pay or play and the penalties underlying that decision.
Every year the Affordable Care Act (ACA) is in effect, some employers must decide whether they will play according to the ACA's rules or pay ACA penalties.
Understanding those rules is imperative, especially now that
repeal and replace efforts have failed. Even employers that are trying to comply may slip up and have to pay fees, which are adjusted up each year.
"The ACA is still alive and kicking, noted Steven Friedman, an attorney with Littler in New York City.
Each year, Crystal Frey, vice president, human resources, with Continental Realty Corp. in Baltimore, conducts a pay-or-play analysis. She compares the costs of providing health care to the penalty for failing to offer coverage to all eligible employees ($2,260 per full-time eligible employee this year), the estimated costs to recruit and train new staff members, and additional salary to make staff members whole who no longer would have health benefits.
Greta Engle, a consultant with BB&T Insurance Services, headquartered in Frederick, Md., said she does not see many clients leave the group health care market under pay or play. Most of her clients have more than 100 full-time equivalent employees—well over the 50 employees needed to activate the employer mandate to provide health care coverage or pay the penalty.
The number of full-time equivalent employees that must be included in the employee count is calculated by dividing the aggregate number of hours of service of part-time employees by 120. These full-time equivalents are added to the number of full-time employees working 30 hours or more.
One of Engle's clients that left the group market "came right back to me because they had sent their employees to the insurance exchanges. Instead of typical 5 to 7 percent net premium increases in group coverage, their renewals were 40 percent to 50 percent [higher] with twice the deductible obligation, among other changes to their individual plans," she said.
"Employees categorically state that health coverage is the benefit that is most important to them, so an employer who opts to pay rather than play may be at a disadvantage when competing for talent," said Kim Buckey, DirectPath vice president of client services. DirectPath is a health care cost consultancy headquartered in Birmingham, Ala. "Since the penalty for noncompliance increases annually, there may come a point where it will be more cost-effective to play."
Under the ACA, a large employer, one that employs at least 50 full-time equivalent employees on average, must offer "affordable" medical coverage to at least 95 percent of its full-time employees and their dependent children age 26 or younger or face stiff penalties. Buckey noted that there are two penalties:
--A penalty of $2,260 per full-time employee minus the first 30 if the employer fails to offer minimum essential coverage to 95 percent of its full-time employees and their dependents and any full-time employee obtains coverage on the exchange.
--A penalty of $3,390 per full-time employee who receives a premium tax credit because the employer offered coverage that was unaffordable or did not provide minimum value. The premium tax credit is entirely distinct from the discontinued subsidies to insurers that provide cheap plans for low-income people. President Donald Trump ended the subsidies Oct. 13.
These penalties, which took effect Jan. 1, 2016, go up in 2018 to $2,320 for the first penalty and $3,480 for the second.
An employer may be subject to one of these penalties, not both, said Mark Johnson, founder and CEO of Creative Benefit Solutions, headquartered in Birmingham, Ala. "The latter penalty cannot exceed the amount that would have been payable under the former penalty had the employer not offered minimum essential coverage," he noted.
"Organizations that traditionally do not offer affordable health coverage with essential benefits will struggle to find the best path forward in the ACA employer mandate era," Johnson said. Employers that previously defined a full-time employee based on 40 hours of service have had to adjust their definition of full-time to 30 hours to comply with the employer mandate. "The construction, hospitality, restaurant, security and janitorial industries are examples of types of organizations that have had to make significant adjustments to their health benefits philosophy in order to comply with the employer mandate."
Whether an employee is entitled to health care coverage is based on the complex tracking requirements of the employer mandate. Employers can use one of two tracking methodologies—the look-back measurement method or the monthly measurement method—to determine if an employee is a full-time employee qualified for an offer of coverage, noted Arthur Tacchino, J.D. He is principal and chief innovation officer for SyncStream Solutions, which is headquartered in Baton Rouge, La., and helps employers comply with complex regulations.
[SHRM members-only how-to-guide: How to Use the Look-Back Measurement Method to Determine Full-time Status Under the ACA]
The look-back method is administratively much easier because under the month-to-month method employees could fall in and out of coverage, Friedman said.
If the employee maintains an average of 30 hours a week, the employer must offer the employee the chance to enroll in coverage and be prepared to report the information to the IRS for the appropriate calendar year, Tacchino said. "The consequences of neglecting this responsibility are either penalties to the IRS for not offering coverage for a qualified employee or the costs of covering an employee who is no longer entitled to coverage," he explained.
It can be difficult to track variable hour employees—those who work a nonregular schedule such as 24 hours one week, 40 the next, 32 the next and so on—to tell if they are full-time employees qualified for an offer of coverage, noted Gary Kushner, president and CEO of Kushner & Co., a benefits consultancy in Portage, Mich.
If an employee no longer works 30 hours a week and is dropped from coverage, the employer must offer COBRA coverage, noted Fernan Cepero, chief human resources & diversity officer at The YMCA of Greater Rochester—Association Office in Rochester, N.Y.
"Defining 'full-time' as an employee working 30 hours a week is inconsistent with standard employment practices in the U.S. today and other federal laws," said Chatrane Birbal, senior advisor, government relations with the Society for Human Resource Management. "Some employers have opted to eliminate health care coverage for part-time employees, while others have re-engineered staffing models to reduce employee hours below the 30-hour threshold that triggers the coverage requirement."
She said, "The ACA's definition of full-time as 30 hours of service per week severely restricts an employer's flexibility to offer a benefits package that best meets the needs of their business and employees."
This was the second in a three-part series of articles on the ACA. The first installment was on the Form 1095-C. The next installment will be on the Cadillac tax.
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