FAQ: Key Components of the Federal Patient Protection and Affordable Care Act All Employers Should Know

FAQ: Key Components of the Federal Patient Protection and Affordable Care Act All Employers Should Know https://wahospitality.org/wp-content/uploads/2011/07/hc-reform-273.jpg

The federal Patient Protection and Affordable Care Act (ACA) includes several components that apply to employers.  Key among these are the employer responsibility, affordability and nondiscrimination components.  Employers should also be aware of upcoming reporting requirements, and the availability of state-based health exchanges as well.

The following are Frequently Asked Questions on items of interest to employers:

Employer Responsibility

Which employers will face penalties for not providing health care coverage?

Employers with more than 50 full-time equivalent employees will be assessed an IRS penalty if:

  • The employer chooses not to provide health care coverage to full-time employees; and
  • A full-time employee applies for and receives a federal subsidy to purchase health care coverage in a state health exchange

How much is the penalty?

Employers not providing coverage will be assessed a penalty of $2,000 per full-time employee minus the first 30 full-time employees.

EX 1: An employer with 112 FTEs, but only 67 full-time employees, chooses not to provide coverage and one of their full-time employees applies for and receives a federal subsidy to purchase coverage in the exchange.  The employer will pay $2,000(67-30) = $74,000 in 2014

EX 2: An employer with 72 FTEs but only 26 full-time employees, chooses not to provide coverage and one of their full-time employees applies for and receives a federal subsidy to purchase coverage in the exchange.  The employer will pay $2,000(26-30) = $0.  This employer even though they are an applicable large employer based on size, will not pay a penalty given the allowable set-aside for the first 30 full-time employees.

When will penalties begin?

Eligible employers will be subject to the potential penalties beginning in 2014.  The IRS has not yet issued rules identifying whether the penalty will be applied immediately upon notification that an eligible employee has accessed a federal subsidy or whether it will be payable along with quarterly or annual taxes.  Additional rules will be released in the next few months addressing this issue.

Who is considered a full-time employee?

Full-time employees include those employees working 30 or more hours per week.

How do I know whether I may be required to either provide health care coverage or pay the penalty?  How do I determine my employer size?

Size matters.  Any employer that has 50 or more FTEs (full-time equivalencies, not just full-time employees) will be subject to this requirement.  Take the following steps to determine your overall employer size:

  1. Total the number of employees working 30 or more hours per week
  2. Total the number of hours worked by all other employees in a four-week month, and divide the total hours by 120
  3. Add the total from step 2 to the total in step 1 above – this will equal the total number of FTEs you employ

What if I have more than one business?

It is possible you will have to aggregate employees from all of your businesses in order to determine your employer size.  Common control provisions, not individual business identification numbers, determine whether you must aggregate all employees.  Common control will apply when an individual or group of up to five individuals owns more than 80% of two or more businesses.  If common control applies, follow the steps identified above including all employees in the commonly controlled businesses in the calculations.

Affordability

I provide health care coverage to my employees – am I still subject to a penalty?

Currently there are two penalties a large employer, those with more than 50 full-time equivalent employees, could receive.  The first penalty is for not providing coverage to full-time employees (employers are not required to provide coverage to part-time employees).   A second penalty will apply if an employer provides coverage but the amount the employer asks the full-time employee to contribute to the premium exceeds 9.5% of that employee’s income.

How much is the penalty?

The affordability penalty is $3,000 for each full-time employee that goes to the exchange and is awarded a federal subsidy based on the affordability requirement.

What strategies can I use to set employee premium contributions so I do not run afoul of the affordability requirement?

Recent rules by the federal departments of Labor and Health and Human Services, recommend three strategies an employer could use to establish employee premium contributions that will garner safe harbor status from the affordability penalty in 2014:

  • Option 1: Take the annual wages of the lowest paid full-time employee and determine at what level the monthly premium contribution would exceed 9.5% of that employee’s income.  To do this they suggest using wages included in Box 1 of the employee’s W-2.
    • EX:  An employer’s lowest paid employee earned $15,000 last year.  9.5% of this employee’s annual salary ($15,000 x.095), yields an annual contribution of $1,425, or a monthly contribution ($1,425/12) of $118 per month.
    • Utilizing this option, an employer could either set a standard premium contribution for all employees that does not exceed the amount derived above (ex. In the example above $118 is the maximum amount allowed so the employer could choose a set amount well below that, such as $110 per month for each employee selecting employee only coverage); or follow the same process for employees in different wage bands, setting the premium rate for each wage band that does not exceed 9.5% of the wages covered by the band (ex.  Wage Band 1, $15,000-$25,000 = $110 per month; Wage Band 2, $26,000-$35,000 = $197 per month; and Wage 3, $36,000-$45,000 = $285 per month).
    • Option 2:  Use the hourly rate paid to the lowest paid employee, find 9.5% of the rate, and multiply that amount by 130 hours as allowed by the federal rule.
      • EX:  The lowest paid employee earns $9.19 per hour.  9.5% of that hourly rate (9.19 x .095) yields $.87 per hour.  This rate multiplied by 130 ($.87 x 130) yields a maximum monthly contribution of $113.
      • Utilizing this method, employers could either establish that all employees will pay the amount derived by the lowest hourly rate, or establish varying premium contributions by following the same process for each hourly rate paid to their employees.
      • Option 3:  Use the predetermined annual earning calculation for individuals at 100% of the Federal Poverty Level to derive the maximum amount a low income employee would be required to contribute to the cost of their coverage.
        • EX:  The annual earnings of an individual at 100% of the Federal Poverty Level is $11,170 per year in 2013.  Calculate 9.5% of those earnings ($11,170 x .095) to yield a maximum annual contribution $1,061 per year or dividing by 12 for a monthly contribution of ($1,061/12), $89 per month.
        • Utilizing this method, employers could either set all employee contribution rates at this level, or vary employee premium contributions by wage using one of the other approaches to determine amounts for all other employees.

Discrimination

How does the law describe “discrimination” as it applies to the offer of health benefits/health care coverage to employees?

Section 2716 of the ACA states the following: “(a) IN GENERAL – the plan sponsor of a group health plan (other than a self-insured plan) may not establish rules relating to the health insurance coverage eligibility (including continued eligibility) of any full-time employee under the terms of the plan that are based on the total hourly or annual salary of the employee or otherwise establish eligibility rules that have the effect of discriminating in favor of higher wage employees.”

What does the description of discrimination mean in plain terms?

The federal Departments of Labor and Health and Human Services are interpreting this section to mean that employers are precluded from: a) offering coverage to only those full-time employees that have hourly wages or annual salaries exceeding a set amount; or b) offering higher wage employees lower premium contributions or richer benefit packages if those same options are not also available to lower wage employees.

Will there be a penalty for violating the non-discrimination requirement?

The stated penalty for violating the non-discrimination requirement is $100 per day per employee impacted by the requirement.  However, no penalties will be issued until the rules are finalized.

W-2 Reporting

When must I start providing information regarding contributions to health care coverage on my employees

W-2s?

Employers issuing 250 or more W-2s for tax year 2012, must include this information on the 2012 W-2s.  All other employers will begin reporting this information during the 2013 tax cycle, on 2013 W-2s.

What information must be included on the W-2?

At this time employers are only required to include the amount paid for major medical health care coverage provided to the specific employee.  Employers may choose to include coverage for standalone dental or vision plans, employer-only contributions to employees’ flexible savings accounts; health reimbursement arrangement contributions; or Archer medical savings account contributions, but are not yet required to do so.

Must I include employee premium contributions as well?

Yes, you must report the aggregate amount of contributions made by both the employer and the employee.

Will the aggregate premium contributions be considered taxable wages for my employees?  No

Will I be taxed on the premium contributions include on the W-2s of my employees?  No

State-based Health Exchange

When will the exchange be available in Washington?

Individuals and small employers will be able to enroll in Washington’s state-based exchange beginning in September 2013.  Coverage will be available beginning in January 2014.

Who can purchase coverage from a state-based health exchange?

Exchange coverage will be available to both individuals and small employers with fewer than 50 employees.  Large employers, those with more than 50 employees, are specifically prohibited from purchasing coverage from the exchange at this time.

Will the exchange be the only place for small employers to buy health care coverage in 2014?

No.  Small employers will have multiple avenues to choose from when determining which health plan to purchase in 2014.  In addition to the exchange, there will still be an active and viable private market from which small employers may still choose coverage.  The same options with regard to coverage from association or membership type plans will also still be available.  Employers should explore coverage offered through entities such as Costco, local chambers of commerce and trade associations.  These options typically offer the most affordable coverage for small employers as they are able to offer less expensive large group rates instead of small group rates.

Donna Steward, President, Kiawe Public Affairs

This publication is intended to inform employers about provisions of the Patient Protection and Affordable Care Act and how those provisions may affect them.  This information should not be construed as legal or tax advice, and readers should not act upon the information contained therein without professional counsel.

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