The Affordable Care Act
Larger employers face health insurance requirements under Affordable Care Act while small businesses see more options
The Patient Protection and Affordable Care Act, commonly known as "Obamacare" or just the Affordable Care Act (ACA), requires all Americans, with some exceptions, to carry health insurance.
In October 2013, individuals began enrolling in health insurance plans through state or federal online exchanges, called "Health Insurance Marketplaces." The ACA, however, also imposed new health insurance requirements on small businesses, those with 49 or fewer employees, and larger companies with 50 or more workers.
Enterprises of all sizes must inform employees about their health insurance coverage options, but otherwise the healthcare reform law varies in its requirements. Small businesses are not required to offer health insurance to their employees, but could receive tax incentives if they do. Large employers are required to offer employees health insurance and that coverage must meet certain minimum requirements. If large employers don't follow the new regulations, they face penalties in the thousands of dollars per employee.
While these rules will likely change over the years, as of October 2013, employers large and small should be aware of the following ACA requirements taking effect in the near future.
Notification required for all
Beginning in October 2013, small and large employers needed to provide notification to their employees about their healthcare coverage options or information about the Health Insurance Marketplaces. Small businesses, in particular, should have let employees know that they may be eligible for a tax credit on their premiums if they purchase coverage through an online exchange. All employers must advise employees that if they purchase a plan through the exchange, they may lose the employer contribution to the health insurance plan offered, if there is one available.
This notice applies to all current employees and each new employee after October 1, 2013, regardless of employer health insurance status or if the workers are part-time or full-time. Employers who do and do not offer a health plan can download one of two sample notices they may use to comply with this rule on the U.S. Small Business Administration (SBA) web site.
Small Business online exchange option
Starting in 2014, employers with up to 50 employees can access the online federal health insurance exchange through the Small Business Health Options Program (SHOP). According to the SBA, small businesses pay, on average, 18% more than larger companies for health insurance because of administrative costs. The SHOP will offer small employers increased purchasing power to obtain health coverage at a lower cost because their risk will be pooled among businesses nationwide, according to the SBA. This program will be rolled out to employers with up to 100 employees in 2016.
Tax credits for small businesses
Smaller companies with 25 or fewer employees may be eligible for tax credits on their health insurance premiums. These credits, which actually began in 2010, will be expanded in 2014 and after. To qualify, small businesses must have average annual wages below $50,000 and must currently pay at least half of the cost of their employee's health insurance premiums.
Through 2013, eligible employers can receive a tax credit of up to 35% of the their contribution toward insurance premiums, while tax-exempt small businesses may receive 25% of the employer's contribution.
From 2014 and after, eligible companies that purchase insurance through the SHOP exchange may receive a tax credit of up to 50% (35% for tax-exempt businesses) of their contribution toward their employees' insurance premiums. These employers may take the tax credit for up to two years and the incentives will vary depending on the size of the workforce and average wages.
Larger employers face penalties for noncompliance
Larger employers, those with 50 or more full-time equivalent (30+ hours per week) employees, face potential "play or pay" penalties under the ACA if they do not offer health insurance coverage or the health plans offered do not meet certain benefit and affordability minimums. If an employee earns more than 400% of the federal poverty level (approximately $46,000 in 2013), is enrolled in an employer's health plan, or is eligible for Medicaid, then he or she would not be able to receive a tax credit in the online Marketplace, so the employer would not be penalized.
Employers are not required to report if they are meeting the coverage requirements until 2015 thanks to a one-year reporting delay that was approved in July 2013. They are, however, encouraged to maintain or expand coverage starting as soon as possible to meet the requirements. When the mandate takes effect, penalties could be assessed for any of the following:
No coverage — Large employers are required to offer to at least 95% of their full-time employees (and their dependents) "minimal essential" health benefit coverage or pay a penalty if any full-time employee receives a federal subsidy to purchase insurance through a state or federal health exchange.
The employer may face a tax penalty of $2,000 x the total number of full-time employees (minus the first 30) if at least one full-time equivalent is receiving a premium assistance tax credit.
Limited coverage — The employer-sponsored health insurance must offer a minimum value, according to the ACA, by covering at least 60 percent of the in-network healthcare costs for the covered employee. The U.S. Department of Health and Human Services and the Internal Revenue Service offer calculators on their web sites for determining a health plan's value.
Unaffordable coverage — Employees' premium costs for the employer's least expensive individual health plan cannot exceed 9.5% of their household income or the employee may be eligible for a premium tax credit to purchase online Marketplace coverage.
If a large employer offers unaffordable coverage or it does not provide minimum value, the company may face a tax of either $3,000 x the number of full-time employees receiving a premium assistance tax credit or $2,000 x the total number of full-time employees, whichever is less.
Counting full-time equivalent employee
For some larger companies, calculating the number of full-time equivalent employees may be challenging if the workforce fluctuates during the year. A full-time equivalent employee, under the ACA, is defined as an employee who works on average 30 hours per week, per month or 130 hours of service per calendar month.
To establish an accurate employee count, for each calendar month of the preceding calendar year, employers should:
- Count the number of full-time employees (including seasonal employees) who work on average 30 hours per week per month.
- Calculate the number of full-time equivalent employees by adding the number of hours worked by non-full-time employees (including seasonal employees) and dividing by 120.
- Add the number of full-time employees and full-time equivalents calculated in steps 1 and 2 for each of the 12 months in the preceding calendar year.
- Add the monthly totals and divide by 12. If the average exceeds 50 full-time equivalents, determine whether the seasonal employee exception applies.
The seasonal employee exception applies to employers whose workforce exceeds 50 full-time employees for fewer than 120 days or four calendar months during a calendar year. The 120 days or four calendar months are not required to be consecutive. If the employees in excess of 50 who were employed during that period were seasonal employees, then the exception applies.
Other fees and considerations
- Fees. The ACA also includes two fees that all employers who offer health insurance will be required to pay—the Patient-Centered Outcomes Research Institute (PCORI) fee and the transitional reinsurance tax. The PCORI fee is $1 per person covered under the employer's health insurance (including dependents) and will go toward comparative effectiveness research to improve healthcare quality. The transitional reinsurance tax, which was created to help stabilize premiums in the early years of healthcare reform, will cost approximately $63 a year per person, but that rate may vary slightly and will end in 2016.
- Waiting period limited. The ACA also limited the amount of time to 90 days that employees have to wait before they can enroll in their employer's health plan, beginning January 1, 2014.
- Wellness programs rewarded. Employers that include wellness and tobacco cessation programs in their health insurance benefits may be entitled to incentives under the ACA. Starting January 1, 2014, the maximum reward to employers using a wellness program will increase from 20 to 30 percent of the cost of health coverage, depending on the program and its rules. The maximum reward for programs designed to prevent or reduce tobacco use will be as much as 50 percent.
Run the numbers
Offering health insurance as an employee benefit is attractive to job candidates and encourages employee loyalty. Large employers that do not currently offer a health plan, however, need to carefully analyze their current expenses to determine how extending health insurance will affect their bottom line versus paying the ACA's tax penalties.The fees are costly, but so is offering health insurance to employees. In 2013, employers will pay on average $11,786 in premium contributions per worker with family health coverage, according to the Kaiser Family Foundation and the Health Research & Educational Trust.
As employers large and small enter the healthcare reform era, they face new responsibilities and regulations regarding health insurance. Consulting with their current employee benefits broker is a good start, as is calling in a human resources specialist, if necessary. In the end, a little preparation now will protect your business from tax penalties in the years ahead.