Preparing for the Affordable Care Act
After more than a year of negotiations and debate, President Obama signed the hotly contested Patient Protection and Affordable Care Act into law in 2010. At this point, only some portions of the PPACA have taken effect; but more changes are on the way, with most coming into play by 2014.
Often referred to as simply the Affordable Care Act, the PPACA affects not only individuals, but companies as well, and its treatment of small and large businesses differs in some respects.
Small business provisions
According to the U.S. government, the cost of individual health care for small businesses is 18 percent more, on average, than for larger employers. The PPACA includes several provisions designed to help level the playing field for qualified small employers offering health insurance, including a tax credit, access to the Affordable Insurance Exchange and the Early Retiree Reinsurance Program.
The tax credit is designed to lessen the cost of providing health insurance for small businesses. It is available to companies with up to 25 employees that pay average annual wages below $50,000, as well as at least half of employee health insurance premiums. A tax credit of up to 35 percent is currently available and will increase up to 50 percent in 2014. (See www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit-for-Small-Employers.)
Beginning in 2014, the Affordable Insurance Exchange also will available to small businesses looking to lessen the cost of providing health care. Employers that generally have less than 100 employees will have access to the exchange, which is a new marketplace that will allow individuals and qualifying small businesses to compare plans, receive answers to questions about healthcare plans and determine whether a business is eligible for tax credits. On a side note, members of Congress will obtain their insurance through the exchange program. (See www.healthcare.gov/law/features/choices/exchanges/index.html.)
For small businesses offering plans to retirees between the ages of 55 and 64, the Early Retiree Reinsurance Program lowers the cost of premiums for employees and reduces employer health care costs. Congress appropriated $5 billion to pay claims under this program. Unfortunately, due to depletion of funding, the Department of Health and Human Services stopped taking applications for the program on May 5, 2011.
Large employer rule changes
The PPACA does not provide the same breaks to large businesses as it does to small businesses. It details new rules for large businesses, including automatic enrollment of full-time employees in healthcare plans and Employer Shared Responsibility payments.
Anticipated to begin in 2014, companies with more than 200 full-time employees will be required to automatically enroll new full-time employees in their healthcare plans, subject to legally permitted waiting periods such as the 90-day period discussed later in this article. They also will be required to keep all current full-time employees on a plan. Because enrollment will be automatic, the employer will have to provide the new employee with notice and the opportunity to opt-out of coverage. The automatic enrollment provisions are found in Section 18 of the Fair Labor Standards Act, but it is important to note that employers do not need to follow them until the Department of Labor issues final regulations under FLSA.
The Employer Shared Responsibility requirements are in Section 4980H of the Internal Revenue Code (see 26 U.S.C. § 4980). It states that large employers with 50 or more full-time employees―defined as working an average of 30 or more hours per week―may be subject to an assessable payment if any full-time employee receives an applicable premium tax credit or cost-sharing reduction payment. This may occur when the employer does not offer full-time employees and their dependents the chance to enroll in minimum essential coverage under an employer-sponsored plan, or when an employer offers such a plan, but the plan is unaffordable relative to the employee's household income or does not provide minimum value. The purpose of the payment is to recover from the employer the credit provided to the employee. In Notice 2011-36, the IRS states that it anticipates 130 hours of work in a calendar month will be treated as 30 hours of work per week.
The monthly assessable payment for large employers that offer no insurance coverage will be $166.67 multiplied by the number of full-time employees, but excluding the first 30 full-time employees. For example, an employer offering no insurance coverage with 50 full-time employees will pay $3,333.40 per month or $40,000.80 per year.
The monthly assessable payment for large employers that offer coverage that is unaffordable relative to employees’ household income or does not provide minimum value will be $250 per month multiplied by the number of full-time employees who receive a premium tax credit or cost-sharing reduction from an Affordable Insurance Exchange. The payment is capped so that an employer will not pay more than what its assessable payment would be if it provided no coverage to employees. Understanding that it will be difficult for employers to make a month-to-month determination as to whether insurance is affordable to a particular employee, the Internal Revenue Service recently issued IRS Notice 2012-58, which in part details an “affordability safe harbor” program for employers that allows them to use an employee’s W-2 instead of the employee’s household income to determine whether coverage offered by the employer is affordable. (See www.irs.gov/pub/irs-drop/n-12-58.pdf.)
In Notice 2011-36, the Treasury and IRS state their intention to issue guidance on how to determine if an ongoing employee falls within the definition of "full-time," allowing employers to use a "look-back/stability period safe harbor" period of not more than 12 months. The safe harbor would allow an employer use a “measurement period” to determine whether an employee is full-time, by looking back over at least the last three months and up to the last 12 months at how many times over that period the employee worked an average of 30 hours per week. (See www.irs.gov/pub/irs-drop/n-12-36.pdf.)
Notice 2012-58 essentially adopts the guidance in Notice 2011-36 but redefines several terms. “Measurement period” was renamed “standard measurement period” to distinguish it from “initial measurement period,” which applies to newly hired employees. An “ongoing employee” is an employee who has been employed by the employer for at least one full standard measurement period.
Notice 2012-58 also offers instructions on the how to determine if a new hire is a full-time employee under Section 4890H. If at the time of hire it cannot be reasonably determined whether the employee will be full-time, the employee is a “variable hour employee.” Whether the employee is ultimately labeled as a full- or part-time employee will depend on the “initial measurement period” set by the employer. The initial measurement period must between three and 12 months. At the end of the initial measurement period, if the new employee is determined not to be a full-time employee, the employer may treat the employee as a part-time employee during the “stability” period following the initial measurement period. The stability period can be no more than one month longer than the initial measurement period and cannot exceed the remainder of the standard measurement period plus any associated administrative period for new employees.
Other central provisions affect small and large businesses alike. The Public Health Service Act Section 2708 provides that a group health plan or group health insurance issuer providing coverage in connection with group health plans can apply no more than a 90-day waiting period before an individual is eligible for covered benefits under the plan. The IRS, the Labor Department and the Department of Health & Human Services recently issued substantially similar notices regarding the 90-day waiting period, which will apply to plans beginning on or after January 1, 2014. (See www.irs.gov/pub/irs-drop/n-12-59.pdf.)
Section 2708 does not distinguish between full-time and part-time employees; however, the law does not require a small business to offer coverage to its employees nor does it require a large business to offer coverage to part-time employees. It simply provides a limitation on the number of days an otherwise eligible employee or dependent has to wait before coverage is effective.
Notice 2012-59 also addresses the waiting period for a new employee, when at the time of hire, it is unknown whether the employee will work the necessary number of hours to qualify for coverage. Employers may take a “reasonable” period of time to make the determination and can elect to the measurement period defined in IRS Code Section 4890H, regardless of whether or not the employer is a large employer subject to the other provisions of that section.
Although the implementation dates for all of the rules under the PPACA have not yet hit, many of the law’s provisions are in effect. While this article summarizes some of the requirements of the new law, it does not provide detailed explanations of every provision. Read the accompanying sidebar for additional resources on the subject.