Employers' "shared responsibility" to provide health care coverage under the Affordable Care Act (ACA) were delayed until 2015 for large companies (100 or more full-time equivalent employees) and until 2016 for midsize companies (50 to 99 employees), but employers should not delay fine-tuning their health care and employment strategies, advised Penny Wofford, an attorney shareholder with Ogletree Deakins in Greenville, S.C. Speaking at the Society for Human Resource Management's 2014 Employment Law & Legislative Conference on March 17 in Washington, D.C., Wofford addressed a number of health care reform strategies to put in place this year.
"We're dealing with a number of twists and turns under the final rules on shared responsibility, also known as the employer mandates or as play or pay," Wofford noted. “Even if you have under 50 full-time employees, your company may grow or you may be acquired. So be prepared."
Wofford noted that two distinct penalties will come into effect. The "a" penalty applies when a large employer fails to offer coverage to a sufficient number of full-time workers. This penalty is equal to the number of full-time employees (minus up to 30) multiplied by $2,000. Wofford referred to it as "a sledgehammer" because of its potential size and scope.
In addition, there is the “b” penalty, which is $3,000 per year times the number of full-time employees who obtain a premium tax credit/subsidy on health insurance exchanges because the employer’s coverage was not deemed "affordable" or failed to meet “minimum-value” requirements as defined by regulation (triggered when an employee's premiums for the lowest-cost-available self-only coverage exceed 9.5 percent of the employee's W-2 taxable income, for instance, or policies that fail to cover 60 percent of an employee's total out-of-pocket health care costs). Wofford called this more limited penalty "a tack hammer."
Beginning in 2016 (for plan year 2015), "every employer has to report to the IRS who you are covering and what that coverage is. Federal subsidies for employees who purchase policies on the exchanges will be based on the information you report and could trigger penalty assessments against you," Wofford noted.
But a point to keep in mind: "Some employers may be able to absorb the risk of the ‘b’ penalty, since it's not assessed based on the number of total employees, only per specific employees who go to exchanges and receive federal subsidies for coverage," Wofford said. And while employers may be liable for “b” penalties for employees who purchase exchange coverage, "you won't be paying their premiums, so there is some cost savings there."
How realistic is it to expect that these penalties will actually be assessed, given the problems and delays experienced by the ACA's public health insurance exchanges to date? "We don't know," Wofford admitted, but she noted that there is potentially great financial risk for those banking on a future delay that doesn't come about.
Both the "a" coverage penalty and the "b" affordability and minimum-value penalty are dependent on calculating who is a full-time employee, Wofford said. Employees cannot be shifted from full-time to part-time status in order to avoid the penalties; there must be a bona fide business reason for a change in hours or the employer could face potential claims under ERISA Section 510 (which bars employers from taking adverse employment action to avoid providing benefits). Contending that employee hours were cut because the cost of providing the workers with health care that meets the ACA's coverage requirements would otherwise be prohibitive is a "circular argument," Wofford said, and is likely to trigger litigation.
Another point to remember: The ACA provides the option of a "look-back" period for calculating employee hours. That period can be three to 12 months, with those working more than 30 hours per week (130 hours per month) considered full time. For large employers that must provide ACA-compliant coverage to all full-time employees in 2015, the look-back period must be implemented in 2014.
For calculating full-time status, the ACA provides for the use of a:
- Look-back measurement period – No longer than 12 months and no shorter than three consecutive months to determine if an employee has full-time status and is eligible for health care coverage.
- Administrative period – Up to 90 days for employer to calculate and notify employees of full-time status, enroll/disenroll employees and carry out similar administrative tasks.
- Stability period – Once employees are notified of their full-time status, they will be considered full-time for a stability period that can be no less than six and no more than 12 months (and not longer than the measurement period, except in this first year), regardless of hours worked during this time. At the end of the stability period, the employer may again measure the employee’s status.
The rules differ for new employees and ongoing employees, and between the initial measurement period and ongoing employee measurement period, as described in Treasury Notice 2012-58.
"How you schedule hours this year will determine if an employee is considered full time next year," Wofford said. Often, however, line supervisors schedule their employees' hours and don't consult with HR first. Without a policy in place to limit the hours of those workers the business wants to keep part time, employees could cross the 30-hour threshold after three months. If that happens, and an employee seeks and receives subsidized coverage through a public exchange, the employer would face Wofford's "sledgehammer" penalty.
Similarly, misclassifying employees as independent contractors also can now trigger ACA penalties. "Pull out your independent contractor agreements and verify that the factors for IC status are being met," she recommended. Another option: using staffing agencies that provide health coverage that meets affordability and minimum-value requirements.
"HR must take the lead and train supervisors on scheduling hours and the proper measurement of hours," Wofford stressed. "If you don't take more control and penalties are assessed, you'll be the ones who have to explain why to your CEO." That's a conversation you don't want to have.
If supervisors feel that there is a business necessity for more hours from part-time employees, "HR should know about it so that an offer of health coverage can be made" and penalties avoided, Wofford advised.
Stephen Miller, CEBS, is an online editor/manager for SHRM.