We asked Derek Flynn, shareholder and member of the Employment and Litigation Section at Munsch Hardt Kopf & Harr, P.C., to shed some additional light on providing employee health insurance coverage under the Affordable Care Act. In addition to his guest post below, Munsch Hardt Kopf & Harr, P.C. is hosting a November 18 luncheon panel “Affordable Care Act: Hurry Up and Wait” in downtown Austin. See the flyer below for more information.
The ACA has passed and even stood up to some U.S. Supreme Court scrutiny but, given the current turmoil, especially with the individual mandate, things are still very much up in the air. While the penalties for not adopting ACA have been delayed until 2015 (and who knows what else may change in that time), it is wise to have a basic understanding of how they will be applied. At least as it stands today.
To Cover or Not to Cover
If you have over 50 full-time employees, the first question you may ask is: Should we continue to provide health insurance to those full-time employees?
If no, under the ACA you owe a $2000 penalty (to be indexed to the rise of health insurance costs annually starting after 2014) for each full-time employee (minus your first thirty employees). Basically, if you have one hundred full-time employees and you do not provide insurance, it is calculated like this: 100 – 30 = 70; 70 x 2k is $140,000. This penalty is triggered when at least one employee gets a tax credit or government assistance in obtaining health care.
If yes, the ACA will be surprisingly more burdensome, as the next question you may want to examine is whether the insurance is “affordable” and “adequate.”
Affordable? Affordable is defined as costing no more than 9.5 percent of the employee’s household income. Household income includes not only the employee’s earnings (wages, tips and other compensation), but also the earnings of the spouse and dependents living in the same household who are required to file an income tax return. The earnings include foreign income as well as tax-exempt interest. The big problem is, most employers won’t have access to the information on an employee’s household income and it would likely be a violation of numerous laws to require employees to produce it. As such, the regulations have created three safe harbors for employers: (1) employers meet the affordable test if the insurance costs less than 9.5 percent of the employee’s W-2 wages for that year; (2) if it’s 9.5 percent of an employee’s hourly wages multiplied by 130; and (3) if the insurance costs are less than 9.5 percent of the federal poverty level for one person.
Adequate? A plan is adequate if the plan’s actuarial value, the share of the total allowed costs that the plan is expected to cover, is at least 60 percent. In addition, the insurance provided must cover dependents (under age 26) but is not required to cover the employee’s spouse.
What’s the Penalty? For each employee who isn’t being provided affordable and adequate coverage and receives a credit/assistance from the federal government to purchase health insurance the employer—is subject to a $3,000 penalty (adjusted annually similar to the 2k penalty above) per employee who is receiving government assistance for purchasing health care. This penalty is waived if the employer is providing affordable and adequate health insurance to 95 percent of its employees. This 95 percent test is created by regulation, not in the statute.
The Department of Labor will require employers to provide employees written notice of (1) the existence of an exchange, including services and contact information; (2) the employee’s potential eligibility for premium credits and subsidies for health care; and (3) the employee’s potential loss of any employer contribution if the employee purchases a plan through an exchange. Beginning in 2014, large employers will have reporting requirements regarding their full-time employees to the Department of Labor, including name, address, EIN, whether adequate and affordable insurance is provided, etc., and then there is the IRS reporting.
That all being said, it is important to have a relationship with a law firm that is keeping up to date on all aspects of the Act. Find one that does extensive work for businesses that are the same size as yours. They should provide summary plan descriptions (SPDs) for health plans to their clients – and actually draft the SPDs and provide the required notices. At Munsch Hardt Kopf & Harr, P.C. we also conduct audits and reviews of policies and procedures.