The IRS recently released new proposed regulations to implement the Shared Responsibility or “Play or Pay” provisions of Health Care Reform. The proposed regulations provide a wealth of detail on key issues required to implement the law. This article suggests some practical approaches an employer can take to avoid penalties or reduce them to a manageable risk.
Basics of statutory requirements
The law requires employers with more than 50 full-time equivalent (FTE) employees to provide affordable health care coverage. If an employer fails to offer health coverage to all full-time employees and any full-time employee buys subsidized coverage through an exchange, the employer pays a penalty (“No-Coverage Penalty”) of $2,000 ($166.66 per month) for each full-time employee, but there is no penalty for the first 30 full-time employees. If the employer offers coverage but it is not affordable or does not meet “minimum value” test, the employer pays a penalty (“Unaffordable Coverage Penalty”) of $3,000 ($250 per month) for each full-time employee who buys subsidized coverage through an exchange. An employer’s total potential penalty cannot exceed the “No-Coverage Penalty.”
The regulations provide detail on practically every word of the preceding sentences, including how to count full-time employees, whether coverage is offered to all employees, whether it is affordable, and so on. A full analysis of the applicability of the rules to a particular employer can be very complex. However, there are some basic concepts and strategies that employers can use to get a handle on their responsibilities and exposure to potential penalties.
Basic concepts for planning
Full-Time Employee. A full-time employee is an individual who works on average 30 hours per week (or 130 hours per month). There are alternative methods and safe harbors for exactly counting full-time employees in the regulations, but a practical strategy relies on taking a conservative, over-inclusive approach.
Only Full-Time Employees are counted for penalties. Although the hours for part-time employees are counted to determine if an employer is a “large employer” and therefore subject to the “Play or Pay” Rules, penalties are only calculated based on full-time employees. There are no penalties calculated based on part-time employees.
Penalty Triggers. Penalties under the “Play or Pay” rules are only triggered against an employer when a full-time employee purchases subsidized coverage through an Exchange.
Full-Time Employees and their dependents must be offered coverage. Coverage must be offered to full-time employees and their dependents (but not spouses) to avoid penalties. There is never a requirement to offer health plan coverage to part-time employees.
Large Employer. A large-employer is an entity that employs at least 50 full-time equivalent employees in the prior calendar year.
Planning strategies for small employers
The popular media have focused on reports of small employers attempting to stay below 50 employees to avoid the Play or Pay requirements. But, because the 50-employee limit is based on full-time equivalents, all the hours of all employees (including part-time employees) are considered in determining whether an employer meets the “Play or Pay” threshold. Some small employers may find tracking and controlling the hours of all employees burdensome. In times of growth small employers may find themselves inadvertently subject to the rules. With proper planning and a good strategy in hand, health care reform should not constrain the overall growth of an employer.
One strategy to avoid triggering penalties under health care reform is for a small business to plan to stay below 30 full-time employees. The business can then use part-time employees or contingent employees if needed to expand. With only 30 full-time employees, even if the hours of part-time employees result in the employer crossing the 50 FTE limit, this strategy allows the employer to avoid both types of penalties. If the employer offers no medical coverage, it will not incur the $2,000 per employee No Coverage Penalty, because the first 30 full-time employees are free from the penalty. And if the employer offers “unaffordable” coverage, no penalty will apply because the Unaffordable Coverage Penalty cannot be more than the No Coverage Penalty.
Example 1: Company has 20 full-time (FT) employees and 60 .5 full-time equivalents (FTEs), for a total of 50 FTE employees. The company does not offer an employer sponsored health plan to 95% of FT employees and their dependents. Assume 1 FT employee enrolls in subsidized coverage for year. The results are:
- Company is a large employer (50 FTE employees)
- No Coverage Penalty = $2,000 x (20-30) = 0
- If Company offered coverage to FT employees at their expense, Unaffordable Coverage Penalty is lesser of (1 x $3,000) or 0 = 0.
Once the number of full-time employees exceeds 30, the employer can quantify the cost of both penalties on a per-head basis. This allows an employer to quantify its exposure to penalties under health care reform while growing their business.
Example 2: Company has 50 FT employees and offers plan to substantially all full time employees and their dependents, but at their expense. Assume 30 FT employees enroll in subsidized coverage for the year. The Unaffordable Coverage Penalty would be calculated:
- Lesser of 1) the No Coverage penalty of $2,000 x (50-30) = $40,000, or 2) $3,000 x 30 = $90,000
The Employer would owe $40,000. This amount can be compared to the employer’s premium cost to make the coverage affordable.
Strategies for larger employers
Larger employers can also employ strategies to minimize the No Coverage or Unaffordable Coverage Penalties. There are calculators available that can assist an employer who wants to weigh the cost of offering coverage (and other factors such as tax deductions) against the potential penalties. However, there may be simpler strategies available.
An employer can avoid the No Coverage Penalty by offering an employer-sponsored plan to all full-time employees and dependents. For this purpose, the plan does not have to meet minimum value requirements, only the lower threshold of “minimum essential coverage,” nor does it have to be affordable. In fact, an employer could offer only a 100 percent employee-paid policy to all full-time employees and still avoid the onerous No Coverage Penalty.
This strategy of offering coverage mostly at the employees’ expense could however leave the employer exposed to the Unaffordable Coverage Penalty. A full-time employee will qualify for subsidized coverage if his or her household income is under 400 percent of the federal poverty line. In 2013 this means that an individual who makes less than $46,000 or a family of four that has household income of less than $94,000 may qualify for subsidized coverage through an exchange. But if an employer’s full-time employees are mostly well-paid, then few of them will qualify for a subsidy for purchasing through an exchange. Thus the employer would only face penalties for those few full-time employees who actually purchase coverage through an exchange and qualify for a subsidy.
To further limit its exposure to penalties, an employer can offer a “minimum value” plan (meeting at least the “bronze” level coverage in the exchange) to all full-time employees, and pursue a strategy to make it “affordable.” Any employee who is offered affordable, minimum value coverage will not trigger a penalty even if the employee opts to buy coverage through an exchange. The key to this strategy is to make the coverage affordable to as many full-time employees as possible, which requires an employer contribution to the premium. Note: though the coverage must be offered to dependents, the measure of affordability is whether the employee’s cost of employee-only/single coverage is less than 9.5 percent of the employee’s household income. (The employer can rely on safe-harbors, such as the employee’s W-2 income or rate of pay to calculate affordability, since it will not likely know an employee’s household income.)
One approach to making the coverage affordable to as many employees as possible could be adopting a cost-sharing strategy in which the employer pays a larger percentage of premiums for lower-paid employees. Another could be to pay a set percentage of premiums with a floor that assures affordability for all or most lower-paid full-time employees. The cost of such “affordable” coverage is what should be compared to the potential alternative of incurring the Unaffordable Coverage Penalty.
Example 3: Company has 80 FT employees, mostly office staff and supervisors, and 200 part-time employees. It offers a plan to substantially all full time employees and their dependents. Each FT employee is charged 50 percent of the single employee premium, up to a cap of $3,000 for those earning $50,000 or less per year, and 100 percent of the dependent premium. Assume this leaves only 5 FT employees (earning less than about $32,000) who would pay more than 9.5 percent of their income for the single coverage. Those 5 purchase subsidized coverage through the exchange. An additional 10 FT employees also opt to purchase through the exchange because it has more options. The Annual Penalty would be calculated:
- Lesser of 1) $2,000 x (80-30) = $100,000, or 2) $3,000 x 5 = $15,000
The Employer would owe $15,000. This plus the employer cost of the affordable coverage can be compared to the penalties for offering no coverage or unaffordable coverage. Only the 5 FT employees who were offered unaffordable coverage and purchased subsidized coverage through the exchange generate a penalty. The other 10 FT employees were offered affordable coverage based on the single coverage premium, and therefore do not generate a penalty. There is no obligation to provide any coverage to the part-time employees.