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Scope—This toolkit is designed to guide employers through the planning and
implementation processes necessary for complying with and leveraging the
Patient Protection and Affordable Care Act of 2010. This article should be
viewed as a roadmap for moving forward, not as an exhaustive reference. More
detailed answers for questions that may arise in the discussions of the law’s
provisions are available from a number of sources, among them the section of
the SHRM website titled Health Care Reform Resource
Page, which provided much of
the information in this toolkit.
Although the federal government often issues new information and guidance on specifics of the Patient Protection and Affordable Care Act (PPACA)—including information that may revise items discussed in this article—the primary themes and procedures for employers in dealing with the law are likely to remain essentially unchanged.
This article summarizes the PPACA, commonly called the Affordable Care Act (ACA); it explores HR's responsibilities pertaining to the law and notes legal issues arising from it. The article suggests that employers regard the time and effort they spend preparing for the law as an opportunity to re-examine their health coverage and total rewards strategies. Throughout that process they can make sure that their health law compliance decisions are aligned with their organizations' overall goals and purposes.
The article examines in limited detail a number of steps that employers should take in addressing specific provisions of the ACA, and in some instances lays out the possible results of various compliance options. The steps for employers:
The landmark health reform legislation enacted in March 2010 is designed to expand the availability of health insurance, reform the regulation of health coverage and restructure its delivery. As the law's provisions take effect in stages, they will make major changes in health coverage in the United States, whether purchased by individuals or sponsored by employers.
Among the law's various mechanisms for increasing coverage are:
The law also prohibits lifetime limits on coverage and arbitrary cancellations of coverage, and it requires that nondependent children up to age 26 be permitted to stay on a parent's health policy.
In February 2014, the Internal Revenue Service (IRS) and U.S. Department of Treasury announced that the ACA's employer "shared responsibility" mandate, originally set to take effect in January 2014 but subsequently delayed until 2015, will now be phased in so that midsize employers (with the equivalent of 50 to 99 full-time employees) will not be subject to "play-or-pay" penalties until January 2016. Firms with 100 or more full-time equivalent employees (FTEs) will need to insure at least 70 percent of their full-time workers by 2015 and 95 percent by 2016. The mandate does not apply to employers with 49 or fewer FTEs. Employers that fail to meet these requirements and do not offer coverage will have to pay a penalty of $2,000 times the total number of full-time employees minus the first 30 employees if even one employee receives a federal government subsidy and purchases coverage in an exchange.
The employer can be subject to penalties for other reasons as well, such as for offering a health plan that does not meet standards of essential coverage or a plan that is unaffordable because an employee's premium contribution exceeds 9.5 percent of family income. See Patient Protection and Affordable Care Act of 2010 and Key Features of the Affordable Care Act.
In addition to their professional obligations to be informed—and to be able to inform others in their organization—on important workplace circumstances such as provisions of the ACA, human resource leaders and specialists are involved with several reporting requirements under the law.
Employee notification. For example, HR helps in complying with the law's requirement that employees be informed about the employer's health coverage (or lack of it) and about the exchanges—the marketplaces in each state where individuals can buy health insurance. Such notification must also include information on how individuals can use the exchanges.
Summary of benefits and coverage. Another possible task for HR pertains to the requirement that organizations provide a summary of benefits and coverage (SBC) each year. The purpose of the SBC, not to be confused with a summary plan description (SPD) is to make it easy for employees and their family members to compare plans so they can choose among them.
There is also a requirement—possibly involving HR—that W-2 forms include the cost of coverage for employees. Although such reporting is optional for employers that filed fewer than 250 W-2 forms the previous year, the IRS notes that such optional status could be changed in the future. See What to Include or Exclude in PPACA W-2 Reporting.
IRS reporting. Another potential new task for HR centers on collecting information for reports to the IRS (these reports are named for revenue requirement sections in the Internal Revenue Code (Title 26)—§6055 and §6056). The first year for gathering information for this mandate has been pushed to 2015, meaning the first §6055 and §6056 reporting will not happen until 2016. The regulations under §6055 provide further guidance on the information reporting requirements for health coverage providers. Employers that are health coverage providers (for example, employers with self-insured health plans) may also be interested in reviewing the IRS questions and answers regarding information reporting requirements for certain large employers.
Technically, §6055 reporting is done by any entity that provides minimum essential health coverage, such as an insurance company or an employer that self-insures. Section 6056 reporting applies only to large employers. The IRS is evaluating whether the two reporting mechanisms can be combined to avoid duplication. See Guidance Issued for Determining Health Plans' Minimum Value.
Opponents of the ACA have made numerous attempts in the courts and in the Congress to overturn, scale back or defund the law. An examination of the legal arguments or the politics of the law are, however, beyond the scope of this article. Though efforts to undo the ACA are continuing, the law's implementation processes are continuing as well, and employers should be preparing their organizations and their health benefit provisions according to the timeline set forth in the law.
Business Case for Aligning Health Benefits with Organizational Strategy
For many employers that offer employee benefits, it may have been a long time since they have considered the role that such benefits, particularly health coverage, play in their organizations' total rewards strategy. And it may have been quite a while since they have assessed the impact that health benefits have on their employee recruitment and retention. The ACA now gives them a context for making those evaluations.
Moreover, the law also gives employers that have not offered health benefits a chance to examine basic questions such as whether they will now offer benefits, which employees would be eligible for them and how rich the benefits would be.
As with any total rewards initiative, including health benefits, assessments and planning should not be done in a vacuum. Strategic questions that employers should address at the outset include:
Once the employer has defined the applicable strategies, all planning and initiatives should be aligned with those strategies. For instance, the decision on whether to continue to offer affordable health coverage to full-time employees or to pay a penalty for not doing so should be viewed through the lens of the decision's likely impact on the organization's total rewards strategy and the ability to recruit and retain employees. If an organization drops health coverage and encourages employees to purchase insurance through an exchange, will it be able to find and keep the employees necessary to achieve its strategic goals and objectives? And what—if anything—would be offered to employees to replace the value of the health benefits? The impact of dropping health coverage would likely depend on the employer's industry, workforce size and geographic region. See Kushner: Let Strategy Guide Health Benefits.
Steps for Achieving a Workable Strategy
Since its enactment in 2010, the ACA has presented employers with a number of questions they must ask and facts they must determine about their workforces, about whatever health coverage they may offer employees, and about their choices for dealing with the terms of the health reform law in the coming years. Although several provisions of the law have been in effect for two years or longer, several major decisions about coverage lie immediately ahead for many employers. Breaking compliance down into a series of steps can help employers begin to address those decisions.
Determine if the plan is "grandfathered"
An employer-sponsored health plan in effect on March 23, 2010—the date that the ACA was signed into law—was "grandfathered," which, with certain exceptions, permits the plan to avoid or delay compliance with some of the law's administrative requirements and coverage mandates.
How does the PPACA affect What are grandfathered plans under the PPACA?
Beware These Triggers for Losing Grandfathered Status
FAQs About the Affordable Care Act Implementation Part II
The items most affected by having or not having grandfathered status are the insured nondiscrimination rules (currently delayed) and the small-employer minimum design requirements. However, many plans are already likely to be in compliance with the nondiscrimination rules, and many insured health plans have already implemented the minimum design and preventive-benefits provisions across health plan options—regardless of grandfathered status. See How does the Patient Protection and Affordable Care Act (PPACA) affect nondiscrimination rules for group health plans? and Nondiscrimination Rules for Health Plans Loom Ahead.
Under the grandfather provision and the Obama administration's final interim regulations, issued in June 2010, employers can maintain many of their current health-care coverage provisions if, among other things, they do not change insurance carriers, reduce benefits, or significantly raise co-payment charges or deductibles.
As health care costs continue to rise, however, employers that sponsor grandfathered health plans may conclude that they have to offset at least some of the increases by significantly raising employees' co-payments or deductibles or by reducing benefits; such actions would cause their plans to lose grandfathered status. See More Drop Grandfathered Status to Control Costs.
Determine if the organization is subject to the employer mandate
A key component—and a key cause of confusion—within the ACA is the employer mandate, which requires employers with 50 or more full-time or FTE employees to offer full-time employees affordable, "minimum essential" health coverage or face penalties for failing to do so.
Calculating whether an organization has 50 or more full-time employees (those regularly scheduled to work an average of 30 or more hours per week) or FTE employees can be relatively easy for organizations that fall well above or well below the 50 threshold. For organizations close to the 50 mark, however, the calculation can be complicated.
Similarly, deciding whether to offer health coverage can be relatively easy for employers with substantially more than 50 full-time or FTE employees; the financial penalties for employers that decide not to offer coverage when they are required to do so are straightforward. And because employers with fewer than 50 full-time or FTE employees do not face penalties for not offering employees health coverage, their decision on whether to offer coverage can be relatively easy, focusing on the costs and organizational benefits of coverage.
Calculating whether an organization is subject to the employer mandate should be done monthly, and a record of such calculations should be maintained. Here are the steps:
Online calculators are found under the Tools section of the Health Care Reform webpage.
Determine whether to "play or pay"
By performing the calculations—on a regular and defined basis—to determine if an organization has 50 or more FTEs, an employer determines if it is required to offer full-time employees health insurance that meets the ACA's standards for affordability and essential coverage.
If the answer is no—that is, the organization has fewer than 50 FTEs—there is no legal obligation to offer health coverage of any kind to any employees. Nonetheless, many small organizations that are not obliged to offer health coverage may do so anyway, perhaps as a recruiting and retention strategy. Those employers should bear in mind that other aspects of the health reform law may apply to the coverage they offer.
If the answer is yes—there are 50 or more FTEs—the employer must decide whether to offer full-time employees affordable, essential coverage (the "play" option) or to decline to offer such coverage and thereby incur federal penalties (the "pay" option). Such decisions by an employer should be aligned with the organization's total rewards strategy. The decisions should be considered, for example, in the light of how they would help advance the employer's recruitment and retention efforts—its means of getting the right employees in the door and keeping them there. Enforcement of this employer mandate for large employers took effect Jan. 1, 2015.
Decision to "play." If an organization subject to the employer mandate decides to "play"—to offer health coverage to full-time employees—the coverage must meet the health law's standards of affordability and minimums of essential coverage; otherwise, the employer could be liable for federal penalties. The subjects of affordability and essential coverage are discussed in separate sections below.
Decision to "pay." If an organization that is subject to the employer mandate decides to "pay"—that is, not to offer coverage and thereby incur federal penalties—the employer will be subject in the given year to a penalty of $2,000 multiplied by the total number of the organization's full-time employees—minus the first 30 full-time employees—if even one full-time employee receives a tax credit to purchase coverage through a state insurance exchange.
If in a given year a large employer does offer health coverage to full-time employees, but the coverage is deemed unaffordable or does not meet the standards of minimum essential health coverage or minimum actuarial value, then the employer is subject to the lesser of two potential penalties: $2,000 multiplied by the total number of full-time employees, minus the first 30 employees, or $3,000 multiplied by the number of full-time employees who receive a premium tax credit at a state insurance exchange.
An employer's decision about whether to offer health coverage or instead pay penalties might seem to be a simple weighing of the costs of each option. Paying penalties would generally be less costly than subsidizing health coverage. But in fact the decision is more complicated than a comparison of dollar outlays. The employer's calculations should include an analysis of the effects that not offering coverage could or would have on the organization's total rewards and HR strategies and on its overall goals. See Making the "Play or Pay" Decision and Should Employers Pay or Play Under the PPACA? Factors to Consider.
Determine if the coverage offered is affordable
As noted above, an employer that is required to offer health coverage and wants to avoid penalties must offer all full-time employees coverage that meets the health reform law's standards for affordability. The concept of affordability is based on the cost of the employee's premium contribution for employee-only coverage under the lowest-cost eligible health plan offered by the employer. The calculation is based on the employee-only rate regardless of whether the employee chooses family coverage or any other tier of coverage. To avoid penalties for offering unaffordable coverage, the employer should make certain that affordability is based on the organization's lowest applicable wage. See What's Affordable Health Insurance Under the ACA?
In general, affordability is calculated to ensure that the employees' cost of employee-only coverage offered by the lowest-cost, eligible health plan does not exceed 9.5 percent of the employees' household income. Of course, there is no way for an employer to determine household income precisely. There are, however, three safe harbors for calculating affordability:
W-2, Box 1 income. Tom works 40 hours per week; his W-2, Box 1 amount is $20,000 per year. Affordable coverage for him would be a premium contribution not exceeding 9.5 percent of his monthly income, or $158 per month for employee-only coverage in the least-expensive eligible health plan.
Rate of pay. Michele makes $8.50 per hour and works 130 hours per month, earning $1,105 per month. Affordable coverage for her would be a contribution not exceeding 9.5 percent of her monthly income, or $105 per month for employee-only coverage in the least-expensive eligible health plan.
Federal poverty level. The third safe harbor is linked to the federal poverty level, which in 2015 is $11,770 per year for a single person. Affordable employee-only coverage would be 9.5 percent of that figure—a contribution of $91 or less per month in the least-expensive eligible health plan.
In those samples, to avoid potential penalties, an employer would want to ensure that for at least the lowest-paid employees the contributions were not greater than $91 per month.
Employers are using various strategies to achieve the affordability level. Some are implementing high-deductible health plans (which offer lower premiums) as an option for all employees. Some employers have designed employee premium contributions based on employees' wages or level in the organization (the more they make, the more they pay in premium contributions).
Determine if the plans offered meet standards of essential health coverage and minimum actuarial value
Employers that have 50 or more FTEs must offer all full-time employees health coverage that not only is affordable but also provides essential care. The requirements for affordability were outlined in the previous section; in this section the focus is on essential health coverage and related concepts such as actuarial value.
Essential health coverage. Essential health coverage under the health-reform law includes the following items:
See HHS Issues Final Rule on Essential Health Benefits, Plan Value and Essential Health Benefits Standards: Ensuring Quality, Affordable Coverage.
Actuarial value. Actuarial value refers to a health plan's average reimbursement level—that is, the percentage of covered expenses that the plan is expected to pay. If a plan's actuarial value is 60 percent, the plan is expected to pay 60 percent of covered expenses, and the plan participant would pay 40 percent.
The ACA created four benefit-level tiers of coverage for the health plans available in the state exchanges. The tiers, defined by the assigned actuarial value based on expected reimbursement levels, are commonly referred to as the "metals" because of the descriptions provided in the law; each of the percentages below is to be read as plus or minus 2 percent:
Insurance carriers and third-party administrators (TPAs) are likely to help employers determine the actuarial value of a health plan. In addition, the U.S. Department of Health and Human Services (HHS) has created an actuarial value (AV) calculator to assist in determining a plan's metal level. Employers must keep in mind that their contributions to employees' health reimbursement arrangements (HRAs) or health savings accounts (HSAs) can have an impact on the value of the underlying health plan.
Minimum actuarial value. The minimum permissible actuarial value for an eligible employer-sponsored health plan is 60 percent. That is, to avoid penalties for the employer, the plan must pay at least 60 percent of the total expected covered expenses for the year, and thus no more than 40 percent would be paid by the participant in the form of deductibles, co-payments and co-insurance (but not the participant's premium contribution). A tool for determining minimum actuarial value is the minimum value (MV) calculator provided by the HHS and the IRS. Employer contributions to an HRA or an HSA will affect the minimum actuarial value of the health plan. The AV calculator and the MV calculator can be accessed on the HHS website at the following links: The AV Calculator [Excel file] and The MV Calculator [Excel file]. See also Guidance Issued for Determining Health Plans' Minimum Value and Health Care Reform: Actuarial Value: What is the actuarial value of a benefit plan, and how is it determined?
Figure: Common “Metal” Plan Design Examples
CDHP w HRA/HSA
Employee Out-of-Pocket Max
Prescription Drug (brand)
Annual deductibles. Beginning in 2014 for insured health plans in the small-group market (generally under 100 employees), annual deductibles may not exceed $2,000 for employee-only coverage or $4,000 for coverage other than employee-only (such as two-person or family coverage). Employer contributions to an HRA or an HSA may be used to bring a higher deductible down to a level that does not exceed the maximums. In addition, maximums for out-of-pocket expenses are set for all employer plans. The maximums are tied to the statutory limits established each year for qualified high-deductible health plans (HDHPs).
Determine who must be offered coverage
Under the ACA's employer mandate, employers that decide to offer affordable essential health coverage to full-time employees must do so for all employees who are regularly scheduled to work an average of 30 or more hours per week. The determination to offer coverage is straightforward regarding employees who are hired with the expectation that they will work 30 or more hours per week; a group health plan's waiting period for coverage cannot exceed 90 days.
The calculation is more complicated, however, regarding current employees who work "variable hours" or for new employees whose expected hours per week have not been determined or are variable. Following is the process by which an employer can determine who within those categories needs to be offered coverage, or, in other words, who is a full-time employee. The calculation involves three periods, which are defined with guidance from the IRS. See IRS Notice 2012-58.
Here are the periods and the procedures they embody:
Measurement period for ongoing employees. Most employers will likely choose a 12-month measurement period for ongoing employees and will coordinate it with their benefits plan year. This provides a relatively straightforward administrative process for the employer, and it provides an accurate picture of hours worked over a longer period of time. The longer measurement period also provides the employer with the flexibility to avoid providing coverage to variable-hour employees who may leave the employer within the year.
Initial measurement period for variable-hour and new employees. For an ongoing variable-hour employee, the process described above is repeated year after year, following the same measurement, administrative and stability periods. New employees who work variable hours are also subject to a measurement period, administrative period and stability period, but the initial periods are based on the employees' dates of hire before transitioning to the standard periods.
Bob's hire date at Jungle Corp. is May 23, 2014. The employer has a calendar-year benefits plan, and the company's standard measurement and stability periods are based on that 12-month calendar year and plan year. Bob's initial measurement period is 12 months from his date of hire. His hours during that period are recorded. On May 22, 2015, Bob's 12-month measurement period expires; his actual hours are averaged, and on May 23, 2015, Bob's administrative period begins. Bob is found to have worked 30 or more hours per week during the initial measurement period.Bob now begins the 90-calendar-day eligibility period called for in the plan, and on Aug. 20, 2015, Bob becomes eligible for benefits. He remains eligible for benefits for the remainder of Jungle's stability period—until the end of 2015.If it had not been determined that Bob worked 30 or more hours per week during the initial measurement period, he would enter the standard measurement period, counting the hours going back to Jan. 1, 2015.
Bob's hire date at Jungle Corp. is May 23, 2014. The employer has a calendar-year benefits plan, and the company's standard measurement and stability periods are based on that 12-month calendar year and plan year. Bob's initial measurement period is 12 months from his date of hire. His hours during that period are recorded. On May 22, 2015, Bob's 12-month measurement period expires; his actual hours are averaged, and on May 23, 2015, Bob's administrative period begins. Bob is found to have worked 30 or more hours per week during the initial measurement period.
Bob now begins the 90-calendar-day eligibility period called for in the plan, and on Aug. 20, 2015, Bob becomes eligible for benefits. He remains eligible for benefits for the remainder of Jungle's stability period—until the end of 2015.
If it had not been determined that Bob worked 30 or more hours per week during the initial measurement period, he would enter the standard measurement period, counting the hours going back to Jan. 1, 2015.
Once a new employee has completed an initial measurement period, the employee must be tested for full-time status under the ongoing employee rules for the employer's standard measurement period, regardless of whether the employee was full time during the initial measurement period.
During the measurement periods, the employer would capture and record the actual hours worked by each variable-hour employee. This can be accomplished through timesheets, time and attendance systems or a payroll system. For salaried employees, it can be accomplished by choosing a standard number of hours for each day worked.
Administrative period. Once the actual hours worked have been captured and recorded during the measurement period, the administrative period allows an employer up to 90 days to calculate the average hours worked during the measurement period. For most employers, however, this period will probably be much shorter—from one day to one week. It will likely be coordinated with the employer's open-enrollment period as well.
For employees who are found to be full time (averaged 30 or more hours per week during the measurement period), the standard eligibility period begins. After the eligibility period, the employee is eligible for coverage for the remainder of the stability period.
If it is determined that the employee was not full time during the measurement period, then the process begins again. (See below for more details on initial and ongoing variable-hour employees.)
Stability period. In the stability period, those employees who have been found to be full time must remain eligible for health coverage. This period cannot be less than six months and not more than 12, and it cannot be longer than the measurement period. For many employers, the stability period will be the standard annual benefits plan year. In practice, this means that an employer will measure hours in one plan year, calculate the hours to determine full-time eligibility during open enrollment and then offer coverage during the following plan year. There will be myriad variations on the balance of these periods, but many employers will choose this combination for administrative ease.
PPACA Guidance on Full-Time Employees, 90-Day Waiting Period Limit
IRS Notice 2012-58
Health Care Reform: How do we calculate the average hours worked to determine the number of full-time equivalents under the PPACA?
Keep the Plan Aligned with Strategies
Throughout the entire process, from initial analysis and implementation through ongoing administration of benefits, it is critical to align the strategies and designs of the benefits program to the organization's total rewards strategy to recruit and retain needed talent. Simply complying with the many aspects of the ACA will not be enough. Employers must take this opportunity to leverage their preparedness by aligning everything toward advancement of the organization's strategic goals and objectives.
Develop an Implementation Plan
Once the strategic, qualitative and quantitative analyses are completed, the next step is to review the timeline of the effective dates of various provisions within the ACA, and then to build an implementation plan for each decision. Coupled with the implementation plan is the preparation for rolling out modifications in the organization's health plan design; open-enrollment processes; interaction with plan vendors, such as insurers and TPAs; and reporting requirements involving state and federal agencies.
Develop a Communication Plan
A critical element of an overall implementation plan is the education of the organization's employees about provisions of the ACA. Employees are not relying on news accounts, media commentaries or Internet resources for information or opinions on the law. Instead, they are turning to their employers for answers on how the law will affect them individually, and how their organizations are responding to various provisions. A detailed, informative and—most important—ongoing education and communication plan must be developed and executed so that employees understand the value of the health benefits program and so that the organization derives the positives of its health offerings through increased productivity, reduced absenteeism, and greater engagement and retention within its workforce.
Communicating with Employees About Health Care Benefits Under the Affordable Care Act
Start Communicating About Health Care Changes and
It's Not Too Late
Templates and Tools
Health Care Reform Resource Page
Government Launches ACA Compliance Website for Employers
Some States to Offer 'Employee Choice' for Small Businesses
Health Care: Full-Time vs. Part-Time Workers
Health Care Changes
The Affordable Care Act, Section by Section
The Health Insurance Marketplace
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