The Affordable Care Act and Your Responsibilities as an Employer

In the wake of President Obama's re-election, it looks like "Obamacare" isn't going away. Employers with at least 50 full-time equivalent employees will face penalties beginning in 2014 if they don't provide a minimum standard of health insurance. As that deadline approaches, the government is offering guidance on such basic questions as the meaning of "full-time," hoping to discourage employers from dodging the law's requirements preemptively.

If you are scrambling to come to terms with the 2010 Patient Protection and Affordable Care Act (ACA), you are in good company. A poll of human resource managers by the Corporate Synergies Group immediately following the election found that around 20 percent reported they need to "speed up implementation" of required compliance with the law, and another 16 percent said they "don't know where to go from here."

Under the ACA, employers with 50 or more employees will be subject to an "assessable payment" (i.e. the "pay or play" tax) if they don't meet the law's requirements beginning in 2014. Specifically, employers must provide "minimum essential coverage" to full time employees (FTEs) and their dependents. The coverage must be deemed affordable and provide adequate "value."

Defining "Affordable"

What's "affordable?" The IRS has provided a "safe harbor" definition as limiting employees' contributions towards the cost to 9.5 percent or less of their W-2 wages. As for "value," the federal government is working on various methods of defining it. But if the benefit employers pay provides at least 60 percent of the value of total coverage, that might do the trick.

Battles have been raging over the specific components of health benefits meeting the "minimum required coverage" test. But for now, the law firm Drinker Biddle is telling its clients in a recent report that "most employer-sponsored group health major medical coverage will meet this broad definition." In other words, employers can outsource that concern to the health plans that will be competing for their business, including those offering basic plans through health care exchanges.

The IRS' latest detailed ACA guidance on the meaning of "full-time equivalent" requires a bit of explanation. It was offered, IRS states, "to encourage employers to continue providing and potentially to expand coverage by permitting employers to adopt reasonable procedures to determine which employees are full-time."
The simple answer to who is a full-time is this: an employee who works on average at least 30 hours a week or 130 hours a month. But, the devil may be in the details.

90-Day Exclusion Limit

One safe harbor says that employers can hold off on offering health benefits to newly hired FTEs for up to 90 days. But what if it is unclear during those 90 days whether a new hire ultimately will work full-time? In that scenario, the plan "may take a reasonable period of time to determine whether the employee meets the plan's eligibility condition," according to Drinker Biddle.

Safe harbors for the definition of FTE status for ongoing employees are more intricate. But in general, according to Drinker Biddle, you need to review the number of hours an employee worked during a "standard measurement period" to determine whether that employee will be deemed full-time for a future "stability period." The "standard measurement period" has to be "a period of time of 3-12 consecutive calendar months, as chosen by the employer," the firm states.

And the "stability period" (during which the employee deemed to be a FTE under the "stability period test") must be at least as long as the greater of these two options: six months, or the standard measurement period. Thus even if you test an employee's FTE status using only a three-month "look back" period, and that employee did work full time during that period, the employee must be assumed to be full-time for purposes of health benefit eligibility for the next six months.

The safe harbor plot thickens for new seasonal employees and variable hour workers. While the rules are similar to those for ongoing employees, they take into account "that there is no historical point of reference for a particular employee." In some cases, and until the government provides further guidance, "employers are permitted to use a reasonable, good faith interpretation of 'seasonal employee,'" according to Drinker Biddle.

The Cost of Non-Compliance

And the consequences of a failure to cover FTEs in 2014? That varies according to whether no coverage is provided at all, or whether the coverage is deemed "unaffordable." The "no coverage" penalty -- levied even if only one FTE doesn't receive coverage, generally equals $2,000 multiplied by the number of your total FTEs, minus 30. That means, for example, that if you have 55 FTEs and at least one of them doesn't receive coverage, your penalty would be 55 minus 30 equals 25 times $2,000 equals $50,000.

The penalty for providing "unaffordable" coverage or coverage that flunks the value test is levied if at least one employee opts to receive premium assistance (via tax subsidies provided by the ACA) to buy health coverage through a health exchange. Eligibility definitions are still being worked out; most employers will have employees who meet that test. The penalty: $3,000 for every employee receiving premium assistance. (However, the total penalty cannot exceed the amount used to set the "no coverage" fine).

The bottom line for employers now, Drinker Biddle is advising its clients, is that you need to:

• Eliminate any waiting periods for health benefit eligibility that exceed 90 days,
• Determine which employees meet the FTE definitions,
• Analyze all the costs, both in dollars and employee relations terms, of continuing to cover them (or beginning to), and
• Evaluate current employment classifications to figure out "whether business needs can be met by reclassifying some employees," and the business impacts of not providing health coverage to those employees.

The information above should help clear up the mystery of the road ahead somewhat. But again, rest assured you are not alone in wondering what the future holds. As deadlines draw closer, the government will issue more and more guidance to help ensure you understand your obligations under the Patient Protection and Affordable Care Act.