By Cynthia Stamer
With the January 1, 2014 implementation of the next wave of the Affordable Care Act (ACA) health care reforms impending and many rules still evolving, most business leaders still are struggling to understand their options and decide if and what health coverage their companies will offer next year.
To finalize choices about whether to “pay or play,” business leaders need sufficient information on the rules to predict the likely costs of “paying” versus “playing” under ACA.
The existing guidance makes it clear while employers generally still retain the option to decide whether to offer health coverage to employees after 2013, a “large employer” runs the risk of being required to pay an “assessed payment” if failing to offer each “full-time employee” an “affordable” opportunity to enroll himself and his children under age 26 in an employer sponsored plan.
The IRS published regulations in January that answer most, but not all, questions about how to calculate the payment an employer will owe if choosing the Pay option in 2014.
The IRS regulations, as proposed, provide a strong roadmap to help employers make a rough, worse case prediction of the payment their business could expect to make if it does not offer sufficient health care coverage. Businesses, however, are rapidly finding most do not have the necessary payroll and other employment data needed to take full advantage of all options available under the IRS regulations to whittle down this potential payment.
The IRS regulations make it clear businesses will need to identify and classify, its “full-time employees” and “full-time equivalent employees” in accordance with a complex series of rules.
Businesses Covered By the IRS Regulations
Specifically, the regulations state a business is covered as a “large employer” if the sum of the “full-time employees” and “full-time equivalent employees” is at least 50 during the preceding calendar year.
In that case, each business must calculate the payment, if any, that the business owes using one of two formulas for each month after December 31, 2013 that:
For this purpose, the regulation states a large employer member is considered to be offering MEC coverage to its full-time employees and their dependents for a calendar month if it offers such coverage to all but five percent (or, if greater, five) of its full-time employees and their dependents.
In general, “affordable” is defined to mean the required employee contribution for self-only coverage under the plan does not exceed 9.5 percent of the modified adjusted gross income of the employee and any members of the employee’s family increased by:
In lieu of determining affordability under this formula, businesses have the option to determine affordability using the “W-2 Wages”, “Rate of Pay,” or “Federal Poverty Line” safe harbors. The most attractive of these safe harbors could allow employers to determine affordability based upon the W-2 wages of the applicable employee for the calendar year (pro rated for employees working less than a full calendar year).
Payment Liability Calculation by Large Employer
If a Large Employer fails to offer sufficient health coverage to trigger the payment rules, each business within the Large Employer control group must separately calculate and pay the applicable payment, if any, due using one of two formulas.
For any month any business within the controlled group does not offer each of its full-time employees and their dependents the opportunity to enroll in a health plan providing minimum essential coverage on every day of the calendar month, the payment will equal the product of:
In contrast, if all controlled group members offer coverage to all full-time employees under a health plan but the health plan either does not provide “minimum essential value” or the required employee contribution exceeds 9.5 percent of the employee’s compensation (“Unaffordable”), the payment will equal the lesser of:
Employee Time & Income Records Key To Penalty Calculations
Although far from perfect, the IRS regulations allow most businesses to predict the payment they could owe if they do not offer this affordable coverage to all full-time employees and their dependents under a health plan. Businesses working to make these projections rapidly will find the quality and availability of their payroll and time records will impact their ability to use the regulations to plan accordingly.
For purposes of determining if the business employs the 50 or more employees, making it a large employer, a “full-time equivalent employee” or “FTE” means a combination of employees, each of whom individually does not work an average of at least 30 hours a week.
When counting each employee’s hours, businesses are generally required to count as an hour of service each hour for which an employee is paid for the performance of duties.
Assuming businesses already keep and maintain good records of hours worked and time off for hourly employees, determining which ongoing hourly workers were hired to work at least 30 hours a week during 2013 could be fairly straight forward. If the business does not reliably track actual hours worked for salaried, commissioned or other non-hourly workers (or time records for hourly workers are less than optimal), the business will need to decide which of the various hourly equivalency options allowed in the IRS regulations will determine hours worked for various classes of workers.
The IRS regulations also may offer other potential opportunities for employers to minimize the number of full-time employees or minimize the number of employees that would count as full-time by how the employer chooses to define the “measurement periods” for classifying workers as full-time, part-time or seasonal.
Accordingly, businesses concerned about projecting and minimizing their costs in light of impending ACA health care reforms should use existing time and other payroll and workforce records to begin making payment projections, as well as working to strengthen payroll and time keeping data collection and retention to support efforts to take advantage of any opportunities to minimize payment or health plan liabilities.
Cynthia Stamer is a board certified labor and employment attorney with more than 24 years of experience in employee benefit, human resources, and health care matters. She practices in Plano.
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