April 11, 2013 -
Before January 1, 2014, employers with 50 or more “full-time equivalent” employees will have to decide whether to begin, or continue, to offer health insurance to their employees or whether to pay the penalties that will be imposed under the Patient Protection and Affordable Care Act, more commonly known as Obamacare. It may be helpful to sum up the dilemma some employers will face when making the decision and to suggest some potential solutions.
Starting January 1, 2014, employers with 50 or more “full-time equivalent” employees may be subject to non-deductible taxes unless they offer “minimum essential coverage” to at least 95% of their “full-time” employees. Full-time employees include those who work an average of 30 or more hours a week. “Minimum essential coverage” will generally include a group health insurance plan. Employers who do not offer such coverage will have to pay a $2,000 non-deductible tax for nearly every full-time employee (the first 30 employees are excluded) if any employee receives subsidized health insurance coverage from a state exchange.
Even if employers offer such coverage to at least 95% of their full-time employees, employers could be subject to non-deductible taxes if the coverage is not “affordable” for a particular employee or if the coverage does not provide “minimum value.” “Affordable” means that an employee does not have to pay more than 9.5% of the employee’s household income for single coverage under the employer’s plan. “Minimum value” means that the plan pays at least 60% of the plan’s total allowed costs as determined by the federal government. Employers who offer such coverage that is affordable and that provides minimum value will not face any penalty. However, employers who offer coverage that is not affordable or that does not provide minimum value will have to pay a penalty if any employee obtains subsidized coverage from a state exchange. The penalty will be $3,000 (increasing each calendar year after 2014 based on inflation in insurance premiums) annually for each full-time employee receiving subsidized coverage from a state exchange up to a maximum of $2,000 for each full time employee over 30 employees.
After 2014, employers with 50 or more “full-time equivalent” employees will have to offer the same coverage to the employees’ dependents as well in order to avoid or minimize the non-deductible taxes.
One possible solution is to offer a health insurance option that satisfies “minimum essential coverage” requirements and to offer other health care options so that employees can find an affordable coverage option or can purchase a greater level of coverage if they want. Doing so will allow employers to avoid penalties so long as at least one coverage option constitutes “minimum essential coverage,” which is “affordable” and provides “minimum value,” even if their employees do not sign up.
Even if employers offer affordable coverage, however, many employees may continue to decline company-offered insurance, either because they have coverage through Medicaid or a family member, or because they elect to pay the penalty for not having health insurance. The individual penalty for 2014 will be as low as $95, which is much less than most employees will be required to pay for coverage through company-sponsored plans. However, the individual penalties for being uninsured increase to at least $325 in 2015 and $695 in 2016 (and could be more depending on the individual’s income) and these higher penalties may cause more employees to accept employer-offered coverage in later years.
A second option for employers is to terminate their healthcare plans altogether and pay the penalty. When Obamacare was initially passed, there were some large corporations who evaluated the costs of paying the penalties versus continuing to provide health coverage to their employees and their studies indicated substantial savings from terminating their health plans and paying the penalties.
An example of why dropping coverage might be a viable option for some companies is the story of one employer who reports that it spends about $140,000 a year on insurance premiums to cover 25 managerial positions, but that under Obamacare he will be required to offer insurance to all of his 100 full-time employees starting in January. Doing so could increase his premiums to over $500,000 a year, exceeding his current profit. This employer believes that if he drops insurance entirely, he would pay a penalty of about $144,000 a year, about the same as his current cost (although the penalty is not tax deductible whereas the insurance premiums are). Obviously dropping coverage will not be good for employee relations. In order to counter this, an employer who chooses to drop all insurance coverage could make the decision more palatable to employees by explaining to employees that they may get better and cheaper coverage through the exchange than what the employer can offer and by paying employees more cash to help offset the cost for them to purchase insurance on their own.
A third option being considered by some employers is reducing the number of full-time employees, and converting more workers to part-time, since there will not be a tax assessed for failing to provide coverage to part-time employees. As discussed above, Obamacare defines a “full-time” employee as one who works or is paid for thirty or more hours per week on average, as determined on a monthly basis. Many employers have publicly announced plans to do this, in whole or in part, including a number of companies such as Darden, CKE Restaurants, Pillar Hotels and Resorts, and AAA Parking.
Since the requirement to provide coverage and the penalties for not doing so only apply to employers with 50 or more full-time equivalent employees, some companies have discussed whether it would be possible to set up several corporate entities all having fewer than 50 employees. The answer is no, this strategy will not work, since Obamacare’s mandate applies to affiliated companies.
Other employers may consider simply sub-contracting more work, thus avoiding the penalty provisions. However, in many instances, the contractor will also be subject to the Obamacare provisions, thus raising the contractor’s costs which the contractor will likely try to pass on to the employer. On the other hand, if the contractor has less than fifty employees, then this strategy could work.
Some employers also are paying close attention to a lawsuit filed by the State of Oklahoma that challenges the federal government’s authority to impose employer penalties. The lawsuit is based in part on the fact that most states, including Oklahoma, have decided not to establish state-run exchanges. Oklahoma asserts that, according to the law, the employer penalties apply only if the employee obtains subsidized coverage from a state-run exchange. In other words, if the federal government establishes or runs the exchange in a state, the employer penalties will not apply. Oklahoma claims that, contrary to the plain language of the statute, the IRS has issued rules saying that it will treat a federal-run exchange the same as a state-run exchange. This interpretation means that, if an employee obtains coverage in a federal-run exchange, the IRS may go after the employer for employer penalties. Oklahoma’s lawsuit challenges the IRS rule, and other lawsuits from employers may follow in 2014 when the penalties go into effect. If the courts rule that the IRS exceeded its authority, then employers who operate only in states that have federal-run exchanges will not be subject to the employer penalties.
According to the National Conference of State Legislatures, seventeen states and the District of Columbia received conditional approval from HHS for their exchanges. Mississippi's insurance commissioner applied for a state exchange, but did not receive HHS approval. Seven states are planning to pursue a state/federal partnership where the states run the consumer assistance and/or plan management function of the exchange. Every other state will default to the federally-facilitated exchange.
Whatever strategy employers choose to use, the time is near and it is critical that employers immediately review the requirements and study their options. In doing so it is worth noting that the average annual premiums for employer-sponsored health insurance in 2012 were $5,615 for single coverage and $15,745 for family coverage, according to the Kaiser Family Foundation.