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The Patient Protection and Affordable Care Act (the “ACA”) adds a new Section 4980H to the Internal Revenue Code of 1986 which requires employers to offer health coverage to their employees (aka the “Employer Mandate”). The following Q&As are designed to deal with commonly asked questions. These Q&As are based on proposed regulations and final regulations, when issued, may change the requirements.
Question 1: What Is the Employer Mandate?
On January 1, 2014, the Employer Mandate will requiring large employers to offer health coverage to full-time employees and their children up to age 26 or risk paying a penalty. These employers will be forced to make a choice:
This “play or pay” system has become known as the Employer Mandate. The January 1, 2014 effective date is deferred for employers with fiscal year plans that meet certain requirements.
Only “large employers” are required to comply with this mandate. Generally speaking, “large employers” are those that had an average of 50 or more full-time or full-time equivalent employees on business days during the preceding year. “Full-time employees” include all employees who work at least 30 hours on average each week. The number of “full-time equivalent employees” is determined by combining the hours worked by all non-full-time employees.
To “play” under the Employer Mandate, a large employer must offer health coverage that is:
This includes coverage under an employer-sponsored group health plan, whether it be fully insured or self-insured, but does not include stand-alone dental or vision coverage, or flexible spending accounts (FSA).
Coverage is considered “affordable” if an employee’s required contribution for the lowest-cost self-only coverage option does not exceed 9.5% of the employee’s household income. Coverage provides “minimum value” if the plan’s share of the actuarially projected cost of covered benefits is at least 60%.
If a large employer does not “play” for some or all of its full-time employees, the employer will have to pay a penalty, as shown in following two scenarios.
Scenario #1- An employer does not offer health coverage to “substantially all” of its full-time employees and any one of its full-time employees both enrolls in health coverage offered through a State Insurance Exchange, which is also being called a Marketplace (aka an “Exchange”), and receives a premium tax credit or a cost-sharing subsidy (aka “Exchange subsidy”).
In this scenario, the employer will owe a “no coverage penalty.” The no coverage penalty is $2,000 per year (adjusted for inflation) for each of the employer’s full-time employees (excluding the first 30). This is the penalty that an employer should be prepared to pay if it is contemplating not offering group health coverage to its employees.
Scenario #2- An employer does provide health coverage to its employees, but such coverage is deemed inadequate for Employer Mandate purposes, either because it is not “affordable,” does not provide at least “minimum value,” or the employer offers coverage to substantially all (but not all) of its full-time employees and one or more of its full-time employees both enrolls in Exchange coverage and receives an Exchange subsidy.
In this second scenario, the employer will owe an “inadequate coverage penalty.” The inadequate coverage penalty is $3,000 per person and is calculated, based not on the employer’s total number of full-time employees, but only on each full-time employee who receives an Exchange subsidy. The penalty is capped each month by the maximum potential “no coverage penalty” discussed above.
Because Exchange subsidies are available only to individuals with household incomes of at least 100% and up to 400% of the federal poverty line (in 2013, a maximum of $44,680 for an individual and $92,200 for a family of four), employers that pay relatively high wages may not be at risk for the penalty, even if they fail to provide coverage that satisfies the affordability and minimum value requirements.
Exchange subsidies are also not available to individuals who are eligible for Medicaid, so some employers may be partially immune to the penalty with respect to their low-wage employees, particularly in states that elect the Medicaid expansion. Medicaid eligibility is based on household income. It may be difficult for an employer to assume its low-paid employees will be eligible for Medicaid and not eligible for Exchange subsidies as an employee’s household may have more income than just the wages they collect from the employer. But for employers with low-wage workforces, examination of the extent to which the workforce is Medicaid eligible may be worth exploring.
Exchange subsidies will also not be available to any employee whose employer offers the employee affordable coverage that provides minimum value. Thus, by “playing” for employees who would otherwise be eligible for an Exchange subsidy, employers can ensure they are not subject to any penalty, even if they don’t “play” for all employees.
The new healthcare reform law includes a number of new taxes and fees which are rarely mentioned by the law’s supporters. On December 5, the IRS announced final regulations governing new fees on health insurers and employer sponsors of self-insured health plans, designed to fund the “Patient Centered Outcomes Research Trust”. This Trust finances an “Institute” tasked with “advancing the quality and relevance of evidence medicine through the synthesis and dissemination of comparative clinical effectiveness research findings”.
Since insurers must pay the fee with respect to insured plans, the following discussion will center on obligations of self-funded plan sponsors. For calendar year plans, the first payment is due July 31, 2013. Employers sponsoring self-insured plans need to be aware of these issues now since 2012 plan data will be necessary to calculate the fee owing in 2013.
The regulations describe how the new fee is calculated and paid by sponsors of self-insured plans for plan years ending on or after Oct 1, 2012 and before Oct 1, 2019, when the fee is scheduled to expire. The fee is based on the number of lives covered by the plan, which means the sponsor pays on the basis of participants (including COBRA recipients), as well as covered spouses, dependents and other beneficiaries.
Since the fee affects all plans with plan years ending on and after Oct 1, 2012, it is required for most plans this year, including all calendar year plans. For plan years ending before Oct 1, 2013 (for most plans, the current plan year), the fee is $1 times the average number of lives covered by the plan.
For plan years ending on and after Oct 13, 2013, the fee is $2 per average number of lives, and for years ending after Oct 13, 2014, the fee will increase based on the projected per capita amount of national health expenditures. Fees are due no later than July 31 of the year following the last day of the plan year. For calendar year plans, that means the first fee is due July 31, 2013.
For more detailed information, please review the full alert on Fisher & Phillips LLP website.