In my last blog post, I discussed a recent loss by the EEOC in its efforts to limit the ability of employers to require employees to complete health risk assessments (HRAs) or biometric screenings in order to enroll in the employer’s health plan. I said that I would discuss an Affordable Care Act (ACA) reason why employers should think twice before adopting that approach.
Under the ACA, applicable large employers (ALEs) – those with at least 50 full-time equivalent employees – must offer health plan coverage to employees or can be liable for a penalty if they fail to do so. If the employer offers coverage to at least 95% of its full-time workforce, then the employer will pay a penalty of $3,240 (for 2016, indexed annually) for each employee who obtains subsidized coverage on a health care exchange. If the employer fails to offer coverage to at least 95% of its full-time workforce, then the employer will pay a penalty of $2,160 (for 2016, indexed annually) multiplied by all its full-time employees – even those who have been offered coverage – if at least one employee obtains subsidized coverage on the exchange. Although the second penalty is smaller per employee, the cost is much more significant because it applies with respect to all full-time employees. Employers particularly want to avoid this penalty, sometimes called the “(a)” penalty because it is imposed under Section 4980H(a) of the Internal Revenue Code. The other penalty, the $3,240 penalty, is called the “(b)” penalty because it is imposed under Section 4980H(b) of the Internal Revenue Code.
An employee who enrolls in the employer’s plan is not eligible for subsidized coverage on the exchange. In addition, an employee who does not enroll in the employer’s plan but who is offered affordable, minimum value coverage is also not eligible for subsidized coverage on the exchange. Coverage is “affordable” if the least expensive employee-only coverage offered does not exceed 9.66 % (for 2016, indexed annually) of the employee’s household income.
The IRS has taken the position that for affordability purposes, only tobacco incentives or penalties can be taken into account in determining the cost of coverage that the employer offers. Regardless of whether an employee qualifies for a wellness incentive, the employee is treated as not qualifying for any incentive other than one granted in connection with tobacco cessation. All employees are treated as qualifying for that incentive.
If an employee is not permitted to enroll in a plan for failure to complete an HRA or biometric screening, it is not clear that the IRS will treat that employee as having had an offer of coverage for purposes of the 4980H penalties. This is because the penalty – non-enrollment – is not related to tobacco use or cessation so under the standard rules, employees would be treated as not qualifying for the incentive (i.e., enrollment). If the employee is treated as not qualifying for the incentive – enrollment – then if any employee obtains subsidized coverage on the exchange, the employer is likely to be exposed to penalties. If the IRS views the forced HRA and biometric screening as causing coverage not to be “offered” for ACA purposes, that may result in a failure to offer coverage to at least 95% of the employer’s full-time workforce. In that case, the employer’s exposure will be to the full (a) penalty, rather than to the smaller (b) penalty relating only to the employee who received the subsidized coverage. Thus, even if the EEOC is unable to require that an employer make HRAs and biometric screenings optional for enrollment, the ACA penalties may discourage employers from adopting that approach – depending on the position the IRS takes with respect to those penalties.