Under the Patient Protection and Affordable Care Act (“PPACA”), an employer that employs an average of at least 50 full-time and full-time equivalent employees (a “Large Employer”) during 2013 may be subject to a penalty in 2014 if the Large Employer fails to offer “minimum essential coverage” to all but 5 percent (or, if greater, five) of its full-time employees (“No Coverage Penalty”). If the Large Employer does offer such coverage and avoids the No Coverage Penalty, the Large Employer may still be subject to another penalty if such coverage is not “affordable” or does not provide “minimum value” (“Inadequate Coverage Penalty”) (together, the “Penalties”).
The No Coverage Penalty is $2,000 per year for each FTE (after subtracting 30 FTEs), even including FTEs who are offered coverage. The Inadequate Coverage Penalty is $3,000 per year for each FTE who receives Government Assistance, although the total Inadequate Coverage Penalty cannot be more than $2,000 times the total number of FTEs in excess of 30.
To avoid the No Coverage Penalty, a Large Employer must offer “minimum essential coverage” to essentially all FTEs and their dependents. To avoid the Inadequate Coverage Penalty, the minimum essential coverage must also be “affordable” and provide “minimum value.” Regulations under PPACA have been released that provide guidance to determine whether an employer will be subject to the Penalties. The following are key steps to designing a group health plan that avoids the Penalties.
1. Determine Large Employer Status Each Year
- Count the FTEs and full-time equivalent employees (“FTEEs”) for 2013 who work for the employer or any member of the employer’s controlled group of companies.
“FTE” means an average of at least 30 hours of service per week or 130 hours per month:
- Count all paid hours, including vacation, disability, and paid leaves of absence; and
- For non-hourly employees, use actual hours worked or the days- or weeks-worked equivalency.
- The number of FTEEs is determined by adding the hours of all non-FTEs for the month and dividing by 120.
- Exception applies if Large Employer status is solely due to employment of seasonal workers for no more than 120 days or 4 months per year.
2. Identify FTEs Who Must Be Offered Coverage to Avoid the No Coverage Penalty
- The No Coverage Penalty is determined on a monthly basis.
- Optional look-back measurement period for ongoing employees.
- Optional measurement period for newly hired “variable hour” and “seasonal” employees.
- Must also offer coverage to biological, adopted, step and foster children below age 26.
3. Determine Employee Contribution Required to Avoid the Inadequate Coverage Penalty
- Employee contribution for self-only coverage cannot be more than 9.5 percent of the FTE’s household income.
Consider which safe harbor to use to determine affordability:
- Form W-2 Safe Harbor;
- Rate of Pay Safe Harbor; or
- Federal Poverty Line Safe Harbor.
- Note: Future guidance may also impose an “affordability” requirement on dependent coverage.
4. Design Coverage to Ensure “Minimum Value” Provided to Avoid the Inadequate Coverage Penalty
- Plan must pay at least 60 percent of the cost of benefits.
Consider which method to use to determine “minimum value”:
- Minimum value calculator;
- Design-based safe harbor checklist; or
- Certification by actuary.
5. Determine whether to Utilize Transition Relief Available for 2014
- Non-calendar year plans (“Fiscal Year Plans”) may avoid the Penalties prior to the start of the 2014 plan year if certain requirements are met.
- Fiscal Year Plan sponsors may amend their cafeteria plans to allow employees a one-time election during the plan year starting in 2013 to add or drop coverage without requiring the employee to have a change in status event.
- If dependent coverage was not offered under the employer’s plan in 2013, it must be offered in 2015.
- For 2014 only, an employer can take into account the likelihood of an employee terminating employment before the end of an initial measurement period to classify such employee as a new variable hour employee.
- For 2014 only, an employer can have a 6-month look-back measurement period to determine FTEs beginning no later than July 1, 2013, and a corresponding 12-month stability period for 2014. This is an exception to the general rule that a stability period must be at least as long as the corresponding measurement period (such as 12 months).
6. Additional Considerations for Plan Drafting
To avoid the Penalties, employers must ensure that their health plan documents and summary plan descriptions accurately reflect the eligibility requirements for FTEs and other employee classifications. One simple compliance feature is to adopt a wrap-plan document that contains the required eligibility provisions.