On Your Mark…Get Set…Wait…?
The much discussed employer mandate provision of the Patient Protection and Affordable Care Act (the Act), also known as Obamacare, requiring ‘large employers’ to provide full-time employees with affordable minimum essential healthcare has been delayed until 2015. Previously under the Act, 'large employers' were required to comply with these requirements by 2014 or pay potentially steep penalties. Many sources cite the delay in implementation to the simple fact the Act is complex, the government isn’t ready to effectively administer it and businesses need additional time to ensure compliance.
This provides employers an extra year to plan for the changes that compliance with the Act may cause. Businesses, however, are encouraged to continue to consider the Act’s applicability due to its complexity. The first consideration should be determining ‘large employer’ status. 'Large employer' status is determined by the number of full-time equivalent employees a business employs. Note that full-time equivalent employees are not the same as full-time employees. Full-time equivalents are the unit of measurement the Act uses to determine if a business is considered a 'large employer.' Full-time equivalent employees are measured by those who work an average of over thirty hours a week in a month, plus the total monthly amount of part-time employee hours divided by 120. For example, if a business employs 10 employees an average of at least thirty hours a week in a calendar month and employs another 75 employees an average of twenty hours a week for a total of eighty hours a month the business will have 60 full-time equivalent employees while having only 10 full-time employees. (75 employees x 80 hours per month = 6,000 total monthly hours/120 = 50 + 10 employees who are full time = 60). Large employer status is measured on a monthly basis making it important for businesses that float around that mark to consistently measure employees and employee hours.
How Does a Business Comply with the Act?
If a business has 50 full-time equivalent employees, they are deemed to be a large employer. Compliance with the Act requires large employers to provide 95% of its full-time employees with affordable minimum essential health insurance coverage (means that the insurance cover at least 60% of essential health benefits. This includes ambulatory services, hospitalization, prescription drug coverage, laboratory services, and preventative care among other services). As mentioned, a full-time employee is defined as an employee who works an average of over 30 hours per week per month. Affordable coverage means that the self-only health insurance premiums passed on to the employee cannot exceed 9.5% of the employee’s annual household income. Determining household income will be a challenge due to the fact employers will not have access to employee’s spouse or dependent income. How does an employer then assure compliance? The Act contains three “safe harbor” provisions which define annual household income as either 9.5% of the federal poverty line, 9.5% of box 1 of the employee’s W-2 or, lastly, 9.5% of the employee’s hourly rate of pay x130 or one month’s salary.
Failure to Comply Results in Harsh Penalties
Every business fears facing non-deductible IRS-imposed penalties – especially when penalties are unexpected. If a large employer fails to comply, the greater of the following two penalties can be expected.
The first is a $3,000 penalty per employee assessed on the entire workforce, less the first thirty employees, caused for a failure to provide insurance to 95% of full-time employees. The second is a $2,000 penalty per employee, assessed on only the employees who receive assistance through the federal exchange, caused by a failure to provide either affordable coverage or cover the 60% of the essential health benefits. The mere fact that the employer does not comply does not trigger either of the penalties. The penalties are only triggered when an employee receives insurance through the exchange due to either the employer not offering insurance or the insurance not being affordable or provide minimum coverage.
Other Key Obamacare Changes
In addition to the employer mandate, the out-of-pocket cost limitation for individual consumers has been delayed. Originally set to take place in 2014, the total out-of-pocket expense for doctor visits and prescription drug coverage, including deductibles and co-payments, was set at $6,350 for individuals and $12,700 for a family. Now, insurance companies can charge up to $6,350 for doctor and hospital visits and an additional $6,350 for prescription drug coverage. Even worse, if your prescription drug coverage didn’t previously have an out-of-pocket limitation it doesn’t have to impose one for 2014. What caused this delay? Federal officials state that many insurance companies and employers who self-insure need additional time to synchronize the information contained in the separate companies that administer the doctor and hospital coverage and prescription drug coverage.
What’s Not Changing
Although the employer mandate and the applicable failure-to-comply penalties are delayed until 2015, the individual mandate is set to take effect for 2014. This requires all individuals who don’t otherwise have health insurance to purchase insurance through either a state or federally run marketplace. The failure-to-comply penalties for individuals for 2014 are $95 per uninsured person or 1% of household income over the tax filing threshold increasing to $695 per uninsured or 2.5% of household income over the tax filing threshold in 2016.
Along with the individual mandate, health insurance companies and companies who self-insure will still be required to pay the Patient-Centered Outcomes Research Institute Fee, or the PCORI Fee. For plan years ending after September 30, 2012, and before October 1, 2013, the fee is $1 per the average number of individuals covered by the plan. Next year, for plan years ending after September 30, 2013 and prior to October 1, 2014, the fee will increase to $2 per the average number of individuals covered by the plan. For plan years ending after October 1, 2014, and prior to October 1, 2019, the fee will be adjusted to reflect inflation. The Institute will use this money it raises to research many phases of the healthcare industry and provide clinical effectiveness research findings in order to assist with health care decisions.
Last year the Supreme Court ruled that states could opt out of the Act’s Medicaid expansion leaving states the decision of whether to participate or not. The Act's Medicaid expansion calls for states to raise Medicaid’s eligibility from 100% of the federal poverty line up 133% of the federal poverty line with the Federal Government reimbursing states for 100% of the increased cost for the first three years and a slightly reduced amount thereafter. As of the end of July, surveys indicated that 19 states will participate in the Act’s increased Medicaid coverage with an additional five states leaning towards participating. As of now, Ohio is leaning towards participating. In July, Governor Kasich indicated that he will do whatever it takes to increase Medicaid expansion but many believe that Ohio lawmakers still oppose the expansion.
There will be some changes that apply to all individuals. First there will be a 0.9% Medicare surtax on all individuals making more than $200,000 per year and married couples who make more than $250,000 annually. Flex spending accounts will be limited to $2,500 of pre-tax contributions and finally, the deduction for qualifying medical expenses increased from 7.5% of adjusted gross income to 10%.
What This Means
If there’s anything to be learned by the delay in the employer mandate, it’s that many businesses will be faced with additional requirements and the challenges that compliance may cause. It’s never too early to discuss your options and how you can best prepare your business for the future.
If you have questions on The Act, employee benefits or any other aspects of business, finance or benefit planning, contact David Silverman, JD or Ted Ginsburg, CPA, JD, any of the professionals in our Employee Benefits Group at 440-449-6800 or visit us at www.skodaminotti.com