The following column on small business applications of the Affordable Healthcare Act was written by Laura Minzer, Executive Director of the Illinois Chamber Healthcare Council. It has been edited for length.
The Affordable Healthcare Act is perhaps one of the most complex laws of modern legal history, not just because it impacts an already intricate system, but also because it impacts virtually every aspect of our economy, well beyond that of just our health system. While the implementation of the law has been stymied in part by the law's legal and political battles, the pace at which rules, regulations, and guidance released in the wake of the election has picked up at an almost overwhelming pace, indicative of the sheer magnitude of preparing for the new health insurance landscape in 2014 within the time frame now afforded.
The time for collective hand-wringing is over and employers of all sizes must become educated on the key changes that impact them, and what those changes mean to their workforce, their benefits and their bottom line. The following provides a basic summary of that roadmap and key issues for employers in 2013.
As always, this guide should supplement encouraged consultation with professionals, including benefit advisors, tax and legal professionals.
Furthermore, the Illinois Chamber is currently preparing comments on the IRS' recently proposed regulations governing employer shared responsibility under the ACA. If you or your organization is interested in submitting feedback to include in those comments, please send those to Laura Minzer at firstname.lastname@example.org. Comments on the proposed regulations are due by March 18.
Evaluate Your Workforce
The ACA forces employers to look at their workforce differently than they may have been previously accustomed, and how that workforce is structured with respect to full-time, part-time, seasonal and leased employees is extremely critical in 2013.
The ACA treats employers with fewer than 50 employees differently than employers with 50 or more employees, exempting those employers with fewer than 50 from the law's "shared responsibility" provisions that could result in penalties assessed for failing to provide affordable coverage. Determining employer size and application of the shared responsibility provision, however, relies not only on the law's definition of a full-time employee as any employee who averages at least 30 hours per week, but also incorporates part-time employees (those averaging less than 30 hours per week) for headcount purposes.
- Example: Employer X has 35 full-time employees (all average more than 30 hours per week) and 20 part-time employees who all average 24 hours per week (or 96 hours per month). Under the employer size calculation set forth in the law and regulations, Employer X would multiply 20 (number of part-time employees) by 96 (hours worked per month) and divide that number by 120 (days assigned to seasonal workers, which are exempt from the calculation). In this scenario, Employer X ends up with 16 full-time equivalent employees (based on the aforementioned formula) that when added with the 35 full-time employees equals 51 total employees. In this scenario, Employer X is considered an applicable large employer and would be subject to the employer shared responsibility provisions.
Recently proposed regulations released by the IRS also attempt to navigate the determination of full-time employees that must average at least 30 hours per week by offering employers the option to apply a look back period of 12 months (or two consecutive six-month periods) to determine whether or not a specific employee averaged at least 30 hours per week during that look back period. It is extremely important to note that under these IRS proposed regulations, this determination of full-time employees, especially as it relates to coverage obligations in 2014, begins in 2013.
For a more detailed breakdown of the IRS' treatment of this provision, please refer to the IRS' FAQ on Employer Shared Responsibility Provisions under the ACA released late December 2012.
Evaluate Your Benefits
For those employers who have determined that they are considered an applicable large employer (50 or more full-time and full-time equivalent employees), evaluating health benefit offerings is important, because inadequate or lack of coverage could bring exposure to new penalties. Here are some key things to keep in mind for applicable large employers:
- Coverage must be offered to full-time employees and their dependents: While full-time equivalent employees only impact employer size determination and whether or not the employer is subject to the "pay or play" shared responsibility provisions, full-time employees (averaging at least 30 hours) and their dependents must at least have the opportunity to enroll in employer-sponsored health coverage. In the example cited above, Employer X would therefore have to offer coverage to its 35 full-time employees and their dependents (proposed regulations have offered flexibility in this to provide that the offer must be made to at least 95 percent of those full-time employees). The full-time employee may waive that coverage, at which point the employer has fulfilled their obligations under the law, but failure to offer could result in a penalty.
- Coverage must be affordable: Employer-sponsored coverage that is offered to full-time employees and their dependents cannot require the employee's share of the premium to exceed 9.5 percent of household income and must cover at least 60 percent of the medical costs. Recent IRS guidance and proposed regulations have worked to address the household income threshold by offering three different safe harbor approaches that would deem coverage affordable if it did not exceed 9.5 percent of Form W-2 wages, rate of pay for the year, or the Federal Poverty Line. Proposed regulations also clarify that the 9.5 percent affordability threshold is based only on employee-only coverage, so for those employees that are taking advantage of dependent or family coverage, their share of the premium may exceed 9.5 percent, as long as their share of the premium would not have otherwise surpassed that threshold if they selected the employee-only coverage.
- Employee eligibility for premium assistance/cost-sharing subsidies triggers the penalty: Failure to offer affordable coverage does not automatically result in a penalty assessment, but it does open up the possibility of full-time employees seeking out coverage options on the new health insurance exchange; coverage options that may qualify them for premium assistance and/or cost-sharing subsidies. Premium assistance is available to those individuals and families at or below 400 percent of the federal poverty level (FPL) and who do not otherwise have access to affordable employer-sponsored coverage. The exchange's process for determining eligibility for the premium assistance is fairly straightforward when it comes to an individual's household income, but it is enormously complex and disjointed when it comes to verifying access to affordable employer-sponsored coverage. This is namely due to the fact that the federal government has yet to build a seamless system that can verify all of this information in real-time, which makes it all the more critical for employers to do their homework, not only assessing the affordability of their coverage, but also assessing the average wage base of the workforce. Employers who support a lower-income wage base, for example, could be at higher risk for penalty assessments if coverage is not affordable or not offered at all.
The penalty treatments under the law vary in terms of whether the applicable large employer offers coverage, but fails to meet the affordability guidelines outlined in the law and regulations, or if the applicable large employer simply does not offer group-sponsored coverage.
For employers that miss the mark on affordability, the penalty assessed equals $2,000 per employee per year, if at least one full-time employee accepts premium assistance to purchase coverage on the health insurance exchange. For employers that choose not to "play," the penalty assessed equals $3,000 per employee per year, again, if at least one full-time employee accepts premium assistance to purchase coverage on the health insurance exchange. In both cases, the penalty is assessed on all full-time employees after the first 30.
While employers with fewer than 50 full-time equivalent employees have a great deal more flexibility when it comes to their health benefits decisions, it is important to remember that the ACA still requires all individuals to purchase health insurance in 2014 just as insurers are no longer allowed to prohibit coverage on the basis of a pre-existing condition. This means that a small employer's employees will still have a responsibility to secure coverage for themselves and their families whether or not the employer offers group-sponsored coverage. New coverage options, however, will become available for these small employers beginning later this year; options that are discussed in the following section.
The New World of Coverage
As employers use this year to assess their workforce and health coverage decisions moving forward, insurers, providers, state and federal regulatory agencies, and other members of the healthcare community are busy preparing for the new world of health insurance; most notably the arrival of the new health insurance exchange that will kick open its doors on Oct. 1.
When coverage begins on the new health insurance exchanges in 2014, just 19 states (including D.C., and Utah and Massachusetts, both of which had an exchange in place prior to the enactment of the ACA) will manage and operate their own state-level exchange. For the rest of the states, management of the exchange will either be shared between the state and the federal government (as in the case of Illinois) or turned over entirely to the federal government.
Regardless of who manages the exchange, the bottom line for consumers and small employers in Illinois is that beginning Oct. 1 they will have the opportunity to enroll in individual/family coverage or purchase small group coverage on the exchange. Conceptually, the exchange is akin to a virtual shopping mall for health insurance that allows consumers and small employers to shop and compare health insurance plans and products from one access point. The law already requires insurers to simplify coverage explanations in order to assist consumers in the comparison of and navigation of health insurance options and further provides for in-person assistance/"Navigators" to help guide consumers through a process that can be daunting and extraordinarily complex—especially to those who may have little to no personal experience with health insurance.
While eligibility for individual and family coverage on the exchange is not limited in any way, those individuals whose household income is at or below 400 percent of the federal poverty level are eligible for premium assistance and cost-sharing subsidies (as outlined previously) to help cover the costs of buying health insurance in this market. This assistance is not available to individuals and families who opt to purchase coverage on the private non-exchange market, including a private health insurance exchange.
In Illinois, small employers with fewer than 50 full-time equivalent employees will have the opportunity to purchase group coverage on the small group market of the exchange, otherwise known as SHOP. Beginning in 2016, employers with fewer than 100 employees will also be eligible to purchase coverage on the SHOP. Federal regulations have given some flexibility to small employers to allow them to purchase group coverage along a "metal coverage level" (defined by percentage of healthcare costs covered by the plan) and allow employees to select a plan in that level that best meets their needs, or purchase coverage in the more traditional way of selecting a single group plan.
Small employers that support 25 employees or less with an average annual wage base of less than $50,000 may also be eligible for a tax credit to assist in the purchase of coverage on the SHOP exchange IF the employer already provides group-sponsored coverage AND covers at least half of the premium. The small employer tax credit was actually one of the first provisions of the ACA to take effect, but beginning in 2014, that tax credit only applies to the purchase of coverage on the exchange, increasing in value from 35 percent to 50 percent of the employer's contribution. The tax credit, however, is only authorized through 2016.
Other coverage changes that take effect this year and in 2014 that will impact employers directly and indirectly include:
- Essential Health Benefits: Insurers are required to cover an array of essential health benefits that were outlined in the law and further defined by the state recently. All fully-insured plans offered both inside and outside the exchange will have to comply with this benefit package for 2014 and 2015, which must be actuarially equivalent to the value of a small group plan (referred to as the "benchmark plan") selected by the state. In addition to providing for a comprehensive portfolio of benefits, insurers are also prohibited from imposing any annual dollar limits on any essential health benefit.
- Standardized Coverage Levels: The ACA also requires insurers to package their plans in a way that complies with one of four coverage levels identified by different metals: bronze (the leanest), silver, gold, or platinum (the richest). Each coverage tier equates to a value of healthcare costs covered and also imposes certain limits on cost-sharing for individuals and families. These coverage levels will apply to fully-insured plans offered both on and off the exchange.
- Wellness Incentives: Beginning in 2014, employers can increase the maximum amount of a reward under their health insurance plan for certain wellness activities from 20 percent to 30 percent, and up to 50 percent for tobacco-cessation programs. Federal regulatory agencies recently released proposed regulations on this provision that are expected to be finalized soon. For employers with rich benefit plans (value exceeds $10,200 for self-only and $27,500 for a family), the enhanced incentive should be of particular note because of the 40 percent excise tax imposed on those plans beginning in 2018. Employers seeking to avoid this "Cadillac tax" will need to reduce risk now and one of the best ways to do this is to implement/enhance programs that improve the health profile of their employee population.
- Flexible Spending Account (FSA) Contribution Limits: For employers who currently utilize an FSA, beginning this year, the law limits employer contributions to no more than $2,500. Dependent FSA contribution limits still remain at $5,000 per year.
- New Health Insurance Rating Limitations: In addition to the requirement that insurers guarantee coverage to all individuals (regardless of a pre-existing condition), insurers are also prohibited from rating individuals on anything but age, tobacco-use, geography, and family size (for purposes of family coverage). The ACA further limits these rating practices to prohibit insurers from charging older individuals three times more than what they would otherwise charge a younger adult and a tobacco-user cannot be charged more than five times that of a non-tobacco user; a requirement that may inflate premiums for younger, healthier individuals while reducing premiums for older individuals and those suffering from chronic conditions.
New Administrative and Reporting Requirements
The law's changes impact more than just employer health benefits and coverage decisions, but also impose some rather significant administrative requirements on employers, including new reporting requirements to the IRS and the US Department of Labor. The most significant of these requirements include:
- W-2 Reporting of Coverage: Employers who issued 250 or more W-2s in the 2012 tax year will need to include the total cost of employer-sponsored health coverage on each employee's W-2 in 2013. The cost of coverage includes both employer and employee contributions (if applicable) and is reported for information purposes only. The IRS had previously indicated that this reporting requirement will likely expand to employers who issued fewer than 250 W-2s in the 2013 tax year (reportable in 2014), but has not yet issued any follow-up guidance on that.
- Employee Notification of the Exchange: The ACA requires employers of all sizes to provide written notice to all existing employees and new hires of the availability of the exchange, including the services provided by that exchange and the potential availability of premium assistance and cost-sharing subsidies. For applicable large employers subject to the employer shared responsibility provisions, the notice must also include acknowledgement of their obligations to offer affordable coverage and the options available to full-time employees if they fail to do so. Employers were initially required to provide for this written notice to employees no later than March 1, but the U.S. Department of Health and Human Services recently delayed the written notification requirement until later this summer. (The Department will also be responsible for issuing a model notice).
- Department of Labor Audit for Compliance: The Department of Labor will begin auditing employer group health plans for compliance with the ACA, beginning this year. Employers should be prepared to maintain and turn over all communications and related materials that document compliance with the law.
The ACA also required all employers with more than 200 employees to automatically enroll their employees in coverage beginning in 2014; however, federal regulatory agencies have delayed implementation of this requirement indefinitely.
The preparation for the ACA in 2014 is undoubtedly a daunting task complete with an unprecedented level of coordination required between all of the key stakeholders, the federal government and the states. While it still remains to be seen how and if all the chips fall into place the way they were intended under the ACA (a proposition that already appears doubtful in light of varied state responses to the implementation of key provisions, including the health insurance exchanges and more recently, Medicaid expansion), the success of the health reform law ultimately rises and falls on how consumers and employers respond to the new marketplace and all of the changes.
Employers should not forgo any opportunity to strengthen communication with all of their employees beyond just those written notices and basic communication requirements set forth by the ACA. Even for those employers that choose not to offer group-sponsored coverage, they can still serve as a source of information to help guide their employees through their own benefit decisions; decisions that are likely to be just as overwhelming and might otherwise prove a distraction from daily performance and productivity.
For more information about the Illinois Chamber's Healthcare Council, contact Laura Minzer, executive director, at 217-522-5512.