Employer Mandate – Obamacare

Most business owners these days are scratching their heads wondering about the “employer mandate” component to Obamacare – or the Affordable Health Care Act (ACA). While there are lots of descriptions available that talk in broad terms the requirements of the ACA, there are few posts that give the specifics behind the four key definitions that everyone is concerned about:

  • Applicable Large Employer
  • Minimum Essential Coverage
  • Affordable
  • Minimum Value

The purpose of this post is to discuss the key definitions related to

Applicable Large Employer

The ACA defines an Applicable Large Employer as one which employed an average of at least 50 full-time employees on business days in the previous calendar year. A full-time employee is one who worked an average of 30 hours/week. To determine the number of full-time equivalent employees the employer has each month, the hours of part-time employees for the month are aggregated and divided by 120. An employer will not be subject to the “play or pay” rule if, in the prior year, the employer’s workforce exceeded 50 full-time employees for less than 120 days, and the employees in excess of 50 during that maximum 120-day period were seasonal workers.

If you are an applicable large employer you have to offer coverage that meets the requirements below to at least 95% of your full time workforce. It doesn’t matter if they take it or not, you just have to offer it. The penalties are assessed if you have employees that go to a health care exchange to buy coverage and receive a credit due to their income levels. The penalties are as follows:

  1. You Do Not Offer Coverage – penalty is $166 per month, or $2,000 per year X all full time employees, with a credit for 30 employees. So – if you have 50 employees, the penalty is 20 X $2,000.
  2. You Offer Coverage That Is Not Affordable or Valuable – penalty is $3,000 per year X the number of employees that received coverage through an exchange. So – if you have 50 employees, 40 that take the coverage you offer, and 2 that buy coverage from an exchange, and eight that just don’t do anything, you are only penalized on the 2.

Minimal Essential Coverage

Minimal Essential Coverage is not entirely well defined yet but includes group health plans sponsored by employers. For now, offering coverage to your employees, including sponsored self insurance, retiree, or COBRA, is sufficient. Coverage must include employees and their dependents, but not spouses or domestic partners.

Affordable

Affordability depends on how much employees must pay for coverage. The affordability requirement technically applies only to full-time employees with a household income that is less than 400 percent of the federal poverty line. Coverage is affordable for an employee if his or her share of the cost of coverage – (which are just the insurance premiums at this point) does not exceed 9.5 percent of the employee’s household income. While there is no way to know how much your employee’s household income actually is, there is a safe harbor test that you can use by testing against the employee’s W-2 wages. Someone making $25,000 a year then should not have to pay more than $25,000 X 9.5%, or $2,375 ($198 / month) in premium. Right now, the federal poverty line is $11,490 and goes up around $4,000 for each additional member of the household. 400% of the federal poverty line is $45,960.

Minimum Value

Coverage has minimum value if it pays at least 60 % of the projected cost of covered services – which means that for $100 of care, the insurance company should cover $60 and the employee will cover $40. The Department of Treasury has issued preliminary proposals regarding whether coverage has minimum value, including an actuarial value calculator and design-based safe harbors. Designing benefits for 2014 in a manner that will clearly avoid the tax will be somewhat difficult until final guidance is issued. While some plans today do not meet the minimum value tests, consensus is that insurance providers will just stop offering plans that are out of compliance. Right now, examples of the safe harbors are as follows:

Safe

Harbors

Deductible

Cost-Sharing

Out-of-Pocket Maximum

Plan #1

$3,500 integrated medical and drug deductible 80% $6,000 maximum OOP
Plan #2 $4,500 integrated medical and drug deductible 70% $6,400 maximum OOP & $500 ER contribution to an H.S.A.
Plan #3 $3,500 medical deductible & $0 drug deductible 60% for medical & 75% for drug expenses; drug co-pays of $10/$20/$50 for the first, second & third Rx drug tiers, and 75% coinsurance for specialty drugs $6,400 maximum OOP

The IRS will soon require employers to submit verification of its size and provision if health coverage (if necessary) to determine compliance with the ACA. You must be meticulous in keeping records from this point forward.

So – what do you do now?

  1. Evaluate your current coverage to see if it meets the safe harbor tests for minimum value – if it doesn’t, check with your insurance carrier to understand the difference in premium to get to a safe harbor plan
  2. Evaluate whether or not your current employee obligation for single cover premiums meets the affordability requirement
  3. Run the potential ‘cost to you’ should your participation rate increase to 95% of your employee base

If you find that the cost is too much to bear, you may find that you might be offering coverage that both exceed the minimum value and affordability requirements. Look into controlling costs by changing these elements of your plan design.

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  1. […] source of relief – to many business owners. If you have been following our series of blogs on the Act, or attended our recent seminar, you know that, prior to this week’s announcement, large […]

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