When the Affordable Care Act jumped its big legal hurdle in the U.S. Supreme Court, remember how the simple term “play or pay” was used to describe the decision making process of offering benefits (play) or not offering benefits (pay)? The choice for companies with 50 or more full time employees or full time equivalents (FTE) was either to offer health benefits to employees or pay a penalty to the IRS if you don’t offer those benefits.
Jump forward and today “play” is now known as “Employer Shared Responsibility,” and comes with a mandate on the benefits you must provide, called essential benefits, and “pay” is the penalty paid to the IRS, called the “Employer Shared Responsibility Payment.”
Attorney Cindy Stamer. Managing Partner of Solutions Lawyer, began the Enlightened Speaker Series event in Dallas by laying the foundation of what employers need to do.
“The big picture begins with the most important part: Know your employees and their classifications,” stated Stamer. Employer Shared Responsibility provisions kick in when a company has 50 full-time equivalent (FTE) employees, which means they can be full time, part time, contract labor, salaried, hourly, or seasonal . . . and that full-time job (or equivalent) is a 30 hour work week. Stamer emphasized that employers need to be honest and count every hour to determine how many FTE employees go into the count – the test of being an employee means you have the right to hire or fire or direct that employee.
Stamer said a common misconception among employers is paying for employee health coverage by giving employees pre-tax dollars to pay their premium and sending them to buy their own policies on the exchanges. “The IRS has said, no, no and heck no,” emphasized Stamer.
When putting together a benefit plan, there are mandates for “essential benefits” that have to go into every plan. And while there is a bit more flexibility in self-insured plans versus fully insured plans in what must be included, “If your plan doesn’t provide sufficiently broad coverage and you are a large employer, you may have to pay an extra $250 per month per employee,” warned Stamer.
The next basic is to update the health plan documents and claims procedures with precise language. While the first level of claims administration continues to be done in the traditional way by the insurer, with the ACA, if there’s a medical necessity, the claim could go to an independent review organization. The review board will decide if the decision for care was appropriate under the terms of your plan.
Because eligibility reporting is done electronically, the data must be protected because it falls under the privacy rules of HIPPA, so be sure employee data is collected digitally and can be sent via a secure connection to the IRS.
Lastly, Stamer spoke about the culture of wellness within an organization. “If the CEO walks, everybody else walks . . . take the candy bars out of the machines.”
Pre-tax, Post-tax & Premium Tax
Becky Parker, Health Reform Director at independent insurance broker MHBT, shared more detail about employers attempting to pay for employee health care benefits with pre-tax dollars . . . don’t.
“If you are giving your employees pre-tax money and they go out to buy insurance on the individual exchange or outside of your group health plan, you can incur a $100 per day penalty in a year, per employee,” emphasized Parker. That penalty could equal over $36,000, per person. Parker said there are companies still saying this can be done by calling it a different name and she warned of the expensive consequences.
Giving dollars to employees on a post-tax basis can be done with a pay raise, but there are cautions with this strategy, too, said Parker. “You should not condition giving additional money, even on post-tax dollars, on whether your employee goes to get insurance.” Why? If a raise is given to Employee A to pay for insurance but not to Employee B who does not buy insurance, it could be a form of discrimination.
Next, Parker reviewed premium tax credits – oftentimes called subsidies – here’s how those work. Sometimes individuals can get a much better deal by buying insurance outside of the company plan and getting a premium tax credit from the IRS in the insurance marketplace.
Parker explained that premium tax credits are based on the structure of the company benefit plan and on employee household income and cited this example. “If I’m a Texas employee and single with an income of $23,000 and I’m 27 years old, I qualify for a premium tax credit that makes my premium $52 per month.” If the payroll deduction for that employee is more than $52 per month, that employee may be done a disservice by having them on the company plan when they can get their individual premium cheaper in the individual marketplace.” For a 50 year old in the same income bracket, that premium could be $2 per month with a high deductible plan.
“Paying the penalty might be the right way to go in helping your employees,” said Parker, with a reminder that large employers need to have minimum value coverage and premiums that are affordable for employees in order to stay out of the penalties. “That could mean you need to give pay raises to make those premiums affordable, so be considerate of your bottom line as well as your employees best interest,” said Parker.
Parker, who testifies at the Texas Legislature, encouraged change through the political process by being vocal with state and federal officeholders. “Nobody has more impact than you, the business owner, when you talk with your elected officials.” There are three issues Parker sees coming into focus for employers: repealing the employer mandate, affordability of the family rate and limits on the size of employers who can self-fund.
New IRS Reporting Requirements & the Cadillac Tax
This may be the year you add to someone to the accounting department to begin tracking the 2015 data the IRS will need by January 31, 2016.
Scott Gibbs, Senior Vice-President at McGriff, Siebels & Williams, ran down the new reporting requirements for those who provide health coverage. To enforce these new penalties and identify employees who may qualify for a premium subsidy, there are new reports due to the IRS – one is to track the individual mandate and the other is report information about the cost, value and coverage of the health benefits your company offers.
The employer report will share data used to administrate the ACA mandates, such as the large employer shared responsibility penalty and the individual mandate. “You’re going to have to provide to the Federal Government which of your employees are enrolled in the coverage with identifying information, provide what months they were covered, and if you have new employee with only six months of coverage, you’ll have to demonstrate that,” said Gibbs.
The employee version of the report is due at the same time the annual W-2 statements are due.
While the Cadillac tax is on the docket for implementation in 2018 and many doubt it will be implemented, Gibbs said, “It’s out there and we have to drive the bus with the guidelines out there now.” Those guidelines mean a tax will be placed on plans with an annual limit threshold of more than $10,200 for an individual and $27,500 for a family; the company is then responsible for anything above that amount and pays the 40 percent excise tax on any amount over the limit. So, for example, if the per employee cost of the plan is $11,200, there would be a 40 percent excise tax on the additional $1,000 allocation, or $400 in additional taxes.
The Cadillac tax takes into account:
1) Aggregate cost of employee premiums (COBRA equivalents)
2) After-tax premiums and reimbursements from Flexible Spending Accounts, Health Reimbursement Arrangements, and contributions to Health Savings Accounts or medical savings accounts
3) Applies to self-funded and fully insured plans and will be reported on W-2’s
According to industry research, Gibbs said sixty percent of employers surveyed expect to trigger the Cadillac tax if they don’t adjust their plans.
Defined Benefit vs. Defined Contribution
Eric Bassett, Senior Partner & Central Market Leader at Mercer shifted the focus of dealing with the application of the law to a broader strategy for compliance.
Bassett began by sharing background based on research from surveying Mercer’s 2,900 HR leaders who see the upcoming administrative burden as the key concern of implementing the ACA. The other concerns are: the Cadillac tax, higher enrollment, higher costs from providing essential benefits, and lower employee contributions to comply with the affordability requirement. The affordability requirement is likely to apply mostly to the hospitality and retail sectors.
From Bassett’s view there is a strategic initiative companies can take to control costs since today only one in ten companies offers a plan near the ACA minimum. To moderate costs and keep plans compliant Bassett suggests offering a defined contribution instead of a defined benefit. “What we’ve found is that most employees over-insure themselves,” Through a defined contribution strategy – whether a private exchange or a traditional multi-plan offering – Bassett said employers can buy down enrollment costs.
While it’s in its infancy, Bassett sees a groundswell for private exchanges. “A private exchange could be any collective purchasing initiative of multiple employers where the employer still maintains their own plan, but is purchasing jointly with others to lower costs and simplify administration.
Health care today is still like the old pension plans where we guaranteed a certain benefit for our employees . . . the defined benefit. Now, defined contributions in health care are taking that 401K approach replacing pensions,” said Bassett.
Bassett said the role of the employer is to provide the plans and manage them, while the employee acts as a consumer and makes their choices. In that scenario, the employee could spend their defined contribution on the right health plan for them and apply any savings to lower-cost, supplemental benefits like accident insurance.
Based on Mercer’s research, when consumers are given a choice they tend to buy down and right-size their plan. “When we right-size benefits, there’s an average $800 per employee cost reduction,” stated Bassett.
For smaller employers, there are possibilities, said Bassett, “A public exchange is a legitimate opportunity for small businesses and there are organizations that will help facilitate enrollment and provide wrap around benefits.”
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