The Affordable Care Act ("ACA") infuses new
complexities into collective bargaining negotiations over health
insurance benefits. In past years, the challenge for many employers
at the bargaining table has been to control escalating health
insurance costs and to shift an increasing share of those costs
onto employees. Those challenges were hard enough. But now, with
the advent of the ACA, employers face entirely new challenges as
they develop their bargaining positions on health benefits. The ACA
forces unionized employers to reassess the health benefits that
they provide employees and determine which employees should be
eligible to receive them. In addition, employers must develop new
strategies for negotiating health benefits, with the goal of
minimizing their exposure to ACA penalties, satisfying the
ACA's coverage and benefit requirements, and preserving
flexibility to make changes to comply with the ACA's complex
and evolving requirements.
These challenges begin with fundamental decisions about the
ACA's employer "play or pay" provision. These
"play or pay" decisions implicate any number of mandatory
bargaining issues, including whether to provide health insurance,
what types and levels of health insurance to provide, how to
address coverage of part-time employees, and how to deal with
employee costs. The ACA's "Cadillac tax" also creates
the potential for new costs that employers will need to take into
account as they consider what health benefits they want to offer.
Regardless of what employers have negotiated into past labor
contracts, the landscape has dramatically changed. Employers need
to take a fresh look at their health insurance provisions and
prepare new strategies for negotiating future contracts in light of
the ACA.
This Commentary gives an overview of the employer play or
pay penalty and the Cadillac tax. It then lays out a variety of
bargaining considerations for employers that flow from these
provisions. Employers will want to have these in mind as they
prepare themselves for negotiations.
The Employer Play or Pay Penalty
Almost half of the American population gets health coverage
through an employer. To keep that coverage in place and keep the
new premium tax credit subsidy created by the ACA focused on those
who do not currently have access to affordable insurance, the ACA
creates adverse consequences for large employers who drop or fail
to offer health coverage to their employees.
The employer play or pay penalty (enacted as section 4980H of the
Internal Revenue Code) goes into effect on January 1, 2015. It
requires large employers to offer health coverage to full-time
employees and their children up to age 26 or risk paying a penalty.
A large employer is an employer with an average of 50 or more
full-time employees or full-time equivalents in the preceding year.
Where an employer is part of a controlled group, all of the
employees of the controlled group are counted for purposes of
determining whether each member of the controlled group is a large
employer.
Large employers will be forced to make a choice: to either
"play" by offering affordable health coverage that
provides minimum value or "pay" by potentially owing a
penalty to the Internal Revenue Service if they fail to offer such
coverage. This "play or pay" scheme, called "shared
responsibility" in the statute, has become known as the
Employer Mandate. Although the Employer Mandate generally will
first be enforced on January 1, 2015, for employers with fiscal
year plans that meet certain requirements, the effective date is
deferred to the start of the plan year during 2015. To
"play" under the Employer Mandate, a large employer must
offer health coverage that is "minimum essential
coverage," is "affordable," and satisfies a
"minimum value" requirement to its full-time employees
and certain of their dependents. "Minimum essential
coverage" is defined in the same way for this penalty as it is
for the individual coverage requirement. It includes coverage under
an employer-sponsored group health plan, whether it be fully
insured or self-insured, but does not include stand-alone dental or
vision coverage, or flexible spending accounts. Coverage is
"affordable" if an employee's required contribution
for the lowest cost self-only coverage option offered by the
employer does not exceed 9.5 percent of the employee's
household income. Coverage provides "minimum value" if
the plan's share of the actuarially projected cost of covered
benefits is at least 60 percent. If a large employer does not
"play" for some or all of its full-time employees, the
employer will have to pay a penalty in two scenarios.
The first scenario occurs when an employer does not offer health
coverage to "substantially all" of its full-time
employees and any one of its full-time employees both enrolls in
health coverage offered through an insurance exchange, which is
also being called a marketplace (an "exchange"), and
receives a premium tax credit. "Substantially all" means
95 percent or more of the full-time employees. (For 2015,
transition relief is provided so that substantially all means 70
percent or more.) In this scenario, the employer will owe a
"no coverage penalty." The no coverage penalty is $2,000
per year (although projected to be $2,120 for 2015 after adjusting
for inflation) for each of the employer's full-time employees
(excluding the first 30). The penalty is actually computed month by
month for each calendar year, taking account of changes in
full-time headcount from month to month and changes in what may be
offered during the calendar year.
The second scenario occurs when an employer does offer health
coverage to its employees, but such coverage is deemed inadequate
for Employer Mandate purposes, either because it is not
"affordable," does not provide at least "minimum
value," or the employer offers coverage to substantially all
(but not all) of its full-time employees and one or more of its
full-time employees both enrolls in exchange coverage and receives
an exchange subsidy. In this second scenario, the employer will owe
an "inadequate coverage penalty." The inadequate coverage
penalty is $3,000 per person (projected to be $3,180 in 2015 after
adjusting for inflation) and is calculated not based on the
employer's total number of full-time employees but based on
each full-time employee who receives a premium tax credit.
(Furthermore, the penalty is capped each month by the maximum
potential "no coverage penalty" discussed above). Again,
the penalty is actually computed month by month, taking account of
changes in who is a full-time employee and who is receiving the
premium credit in a given month.
Exchange subsidies will not be available to any employee whose
employer offers the employee affordable coverage that provides
minimum value. Thus, by "playing" for employees who would
otherwise be eligible for an exchange subsidy, employers can ensure
they are not subject to any penalty, even if they don't
"play" for all employees. However, employers will want to
take care to avoid any impermissible discrimination in setting
rules for eligibility.
Who is a Full-Time Employee? Managing compliance
for an employer depends on being able to identify who is a
full-time employee. For purposes of the play or pay penalty, an
employee is full-time if he works an average of 30 hours per week
or 130 hours per month. An employer may use one of two available
methods to determine whether an employee is full time: the monthly
measurement method, which depends on an employee's actual hours
of service, and the look-back measurement method, which depends on
measuring an employee's hours of service over a measurement
period of anywhere from three to 12 months, determining whether the
employee is full-time based on the hours of service in that period,
and then labeling the employee as full-time or part-time for a
subsequent stability period based on the results in the measurement
period. Under either method, the employer must track hours of
service, which are defined as hours for which an employee is paid,
or entitled to payment, including vacation, holidays, illness,
incapacity, and military duty.
Is Coverage Affordable? Under the statute,
coverage is affordable if the employee's share for self-only
coverage under the lowest cost employer-sponsored health plan is no
more than 9.5 percent of the employee's household income.
Employers do not know their employees' household incomes,
making it impossible to know whether they are offering affordable
coverage. In response to this dilemma, the Treasury regulations
provide employers with three safe harbors they may use to determine
whether the coverage they offer is affordable. Employer coverage is
considered affordable for purposes of the employer play or pay
penalty if the employee's share for self-only coverage under
the lowest cost employer-sponsored health plan is (i) no more than
9.5 percent of the wages shown on Box 1 of the employee's W-2;
(ii) no more than 9.5 percent of the employee's wages if the
employee were assumed to work 30 hours per week at the applicable
rate of pay; and (iii) no more than 9.5 percent of the amount that
is 100 percent of the federal poverty level.
Multiemployer Plans. Employers who have unionized
employees can know whether the employees are offered coverage if it
is provided through a single employer plan with terms of
eligibility that the employer negotiates. However, an employer may
not know whether any particular employee will be offered coverage
if it is provided through a multiemployer plan to which the
employer contributes. Furthermore, even if the multiemployer plan
does offer coverage to the employee, the employer itself is not
offering the coverage. Treasury and IRS have addressed each of
these issues in the final regulations implementing the employer
play or pay penalty. First, the final regulations offer interim
relief in the preamble to employers that are required to make
contributions to multiemployer plans under their collective
bargaining agreements. As long as the multiemployer plan offers
coverage that is affordable and provides minimum value and is
offered to the children of individuals who are otherwise eligible,
the employer will not be penalized, regardless of whether the
employer's employee is in fact eligible for the coverage under
the multiemployer plan. The interim relief will remain in effect
until at least six months after superseding guidance is published.
Second, the Treasury regulations implementing the play or pay
penalty provide that coverage offered by a multiemployer plan to
which the employer contributes that is affordable and provides
minimum value is considered coverage offered "on behalf
of" the employer. Employers may use the same safe harbors that
are available for coverage they offer themselves in determining
whether the multiemployer plan's coverage is affordable.
The Cadillac Tax
In addition to the penalty associated with whether health
coverage is offered and to whom, the ACA imposes new taxes and fees
on employers that will affect bargaining over health benefits. Some
of these new costs, such as the Patient-Centered Outcomes Research
Institute Fee and the Transitional Reinsurance Program applicable
to plan issuers and sponsors, are already effective or will be in
2014. Starting in 2018, the ACA imposes another new tax, often
called the "Cadillac tax." It is a nondeductible 40
percent excise tax on any excess in the cost of employer-sponsored
health care coverage provided to an enrollee over specified dollar
thresholds. For purposes of the Cadillac tax, employer-sponsored
coverage includes major medical coverage and pharmaceutical
coverage but excludes separate dental and vision plans. Where an
enrollee participates in more than one type of employer-sponsored
coverage, the cost of those plans is aggregated for purposes of
calculating the Cadillac tax. As employers prepare for labor
contract negotiations, they need a strategy for bargaining over
health benefits with the looming Cadillac tax in mind.
Insurance companies are liable for the excise tax for insured
plans. Plan administrators—who may be the employers
themselves—are liable for the excise tax for self-insured
plans. Employers are likely to bear the cost regardless of who is
liable for paying the tax because insurers or outside plan
administrators are highly likely to pass along the costs imposed by
the excise tax to the employer sponsors of the plan through higher
rates and fees. Employers will also face administrative costs
because the plan sponsor (usually, the employer) is responsible for
calculating the excess benefit subject to the tax and allocating
the excess among the insurers and plan administrators. Employers
are subject to penalties if they fail to make these computations
accurately. Given all this, employers and insurers have a
significant incentive to keep the costs of employer-sponsored
health plans below the trigger point for the excise tax.
All employer-sponsored health care plans are potentially subject
to the excise tax; there is no exception for plans negotiated as
part of a collective bargaining agreement. In fact, unionized
employers must address the excise tax earlier than nonunion
employers. While nonunion employers may have the flexibility to
adjust benefits anywhere between now and 2018 to get the cost below
the threshold and avoid the excise tax (even though waiting may be
inadvisable), unionized employers need to address the potential
excise tax in their upcoming rounds of bargaining in order to
ensure that the contractual changes necessary to avoid the excise
tax are in place before 2018.
The excise tax is expected to have the most significant impact on
the type of rich health care plans that labor unions have fought to
obtain and protect over the years. Even though the government has
yet to issue regulations giving specific details on how to compute
the cost of coverage, employers can project the problem they will
be facing by using their COBRA premiums, which must be computed to
reflect the cost of coverage. The ACA imposes the tax on the
portion of the annual value of health plan costs for employees that
exceed in 2018 the following amounts: $10,200 for single coverage
and $27,500 for family coverage, with higher amounts for certain
retirees and employees in high-risk professions. These thresholds
for 2018 will increase if the cost of coverage in a specified
option in the Federal Employee Health Benefits Program goes up by
more than 55 percent between 2010 and 2018.
In the meantime, the thresholds are a valuable point of reference.
According to the Kaiser Family Foundation annual survey, the
average annual premium cost in 2012 for single coverage at
employers with at least some unionized workers was $5,734 per year
(or $4,466 below the threshold) and $16,073 for family coverage (or
$11,427 below the threshold). These average amounts, which remain
significantly below the trigger for the excise tax, are somewhat
misleading, due to the tremendous variation in the costs of health
benefit programs across the country. Employers in the Northeast and
West often pay significantly more for health care plans than
employers in the South. In addition, employers in certain
industries, such as health care and in the public sector, usually
pay health benefit costs that are significantly above the average.
In fact, for certain unionized employers, the current cost of
health benefits already exceeds the value that would trigger the
excise tax in 2018. Based on a study conducted by SEIU regarding
the likely application of the excise tax on the most commonly
offered health plans among its represented members, eight out of 14
health plans are expected to trigger the excise tax in 2018.
Bargaining Considerations
The ACA adds new consequences to some fundamental decisions
about providing employee health coverage, directly affecting
bargaining strategies. While providing health insurance benefits to
unionized employees has been a fundamental term of most labor
contracts for decades, the ACA forces employers to reconsider and
readjust their arrangements if they want to avoid penalties and
account for new costs imposed under the law. The threshold
questions that employers must answer include:
The "Play Or Pay" Decision. Whether to
offer health coverage or drop health coverage for employees and
their dependents is a complicated economic, practical, and policy
decision that unionized employers must make, taking into account
the economic impact of that decision, the structure of their health
benefit programs (e.g., existing coverage of union and non-union
employees under the same plans), the employers' bargaining
leverage, and the effect of the decision on employee morale,
recruitment, and retention. In making the economic analysis of the
ACA's penalties and costs for bargaining purposes, employers
should:
- Evaluate the costs of continuing coverage versus the costs of dropping coverage for employees, including all employees averaging 30 or more hours a week. Employers that drop coverage may face a substantial penalty under the ACA. If the employees who both work full-time (i.e., on average 30 hours per week or 130 hours per month) and are not offered health coverage constitute more than 5 percent of the employer's work force, the employer is subject to the "no coverage penalty" equal to $2,000 multiplied by the number of the employer's full-time employees (less the first 30) if any full-time employee enrolls in health coverage through an exchange and receives a premium tax credit.
- Evaluate the costs of making coverage "affordable" for lower-wage employees. In many instances, to make coverage affordable and avoid penalties under the ACA, employers may have to bear a significant part of the coverage costs for their lower-wage employees.
- Evaluate the costs of making the ACA's required changes in health plans. Employers need to account for the cost of making changes to comply with ACA rules for group health plans. These changes affect the design of the plan. Many, such as the requirement to cover children up to age 26, have been in effect since 2010. For 2014, changes newly in effect include review of annual dollar limits on benefits in light of recent guidance defining essential health benefits that cannot have annual limits, the maximum 90-day waiting period for coverage, and the cap on out-of-pocket maximums.
- Consider the cost of providing coverage to children and providing (or not providing) coverage to spouses. The ACA as implemented by the Treasury regulations does not require employers to provide coverage for spouses and does not penalize employers for excluding spouses from coverage, so employers will need to evaluate the potential savings from excluding spouses from eligibility for health coverage. The ACA, however, treats children differently: employers face a penalty under the ACA if they do not offer coverage to their full-time employees' children, including adult children up to age 26.
- Consider the added cost of the ACA's various fees. Self-insured employers will owe a "transitional reinsurance fee" in 2015, 2016, and 2017; for the first year, the fee is at the rate of $63 per covered life. For the second year, the fee is at the rate of $44 per covered life. In addition, for a single-employer plan, the employer must pay a "patient-centered outcomes research institute fee," which is $2 per covered life payable in the years 2014–2020.
Coverage Levels and Plan Design. Employers who
decide, for economic and other reasons, to "play" and
offer health insurance to employees must determine the level of
benefits that they want to offer their union-covered employees.
Employers need to meet the "minimum value" threshold to
avoid ACA penalties but also should stay under the cost threshold
to avoid triggering the Cadillac tax in the future. For many large
employers, given the complexity of the ACA and its penalties, what
the employer plans to provide all employees, whether unionized or
not, on a company-wide basis will drive its proposals on benefit
levels at the bargaining table, which makes preserving the right to
make company-wide plan design changes a high priority. Some
considerations include:
- Consider using the minimum value standard and the Cadillac plan threshold as points of reference for the overall richness of the proposed plan. Many if not most existing employer health plans generously exceed the "minimum value" standard (i.e., the standard that requires that the plan's share of the actuarially projected cost of covered benefits is at least 60 percent). On the other end of the spectrum, however, some employer plans, if not trimmed, risk triggering the Cadillac tax given their current cost and historic rate of growth. While unions may resist efforts to curtail employee benefits in the near term, employers should consider the leverage that avoiding the Cadillac tax provides at the bargaining table. Failure to address this problem could result in diverting economic resources to substantial taxes in 2018 that could otherwise be added to the economic package at the bargaining table or used for other business purposes.
- Consider using one of the essential health benefits package benchmarks (e.g., the federal employee plan) as a point of reference for what benefits the employer will cover. Under the ACA, all qualified health plans offered through the state exchanges must offer the essential health benefits package, and each state has a benchmark plan that is used to define the package of benefits. While employers are not required to offer an essential health benefits package in their group health plans, they need to be familiar with at least one benchmark plan for purposes of ensuring they do not impose impermissible annual limits on benefits. Employers can evaluate any benefits that unions may demand against one or more state benchmark plans, since those plans set the standard for comprehensive sound coverage that an individual is guaranteed to be able to purchase on the exchanges. The comparison gives employers an opportunity to identify particular benefit requests as exceeding a norm and either reject them or bargain for concessions in other areas in return for providing them.
- Consider what additional benefits to offer employees, like dental, vision, disability, and long-term care. The ACA requires employers to provide minimum essential coverage, meaning the core major medical coverage, but they can certainly offer more options. Offering these additional health benefits will not help the employer avoid a play or pay penalty, as they do not count toward the computation of minimum value; nor would they constitute minimum essential coverage if offered by themselves. These types of added benefits may be useful leverage in negotiations, since they do not contribute to the cost of coverage that can trigger the Cadillac tax if they are offered through separate fully insured policies. However, the same is not true for dental and vision coverage that is self-insured. Both employers and unions may see strategic value in negotiating over these added benefits.
- Consider strategies for including wellness programs and related surcharges and incentives, including tobacco surcharges. ACA regulations have reaffirmed that employers may attach economic rewards and penalties to wellness programs without violating the group health plan nondiscrimination rules that originated in HIPAA. Wellness programs can include economic incentives that are based on achieving certain health outcomes, provided that the employer makes a reasonable alternative available. The regulations specifically permit an employer to impose a tobacco surcharge; however, certain state laws may limit an employer's ability to impose a tobacco surcharge. In addition, the EEOC has yet to give clear assurance that wellness program economic incentives are permissible under federal law, including the Americans with Disabilities Act, for wellness programs involving a medical examination or disability-related inquiry. Particularly if an employer is making wellness programs available to non-union employees, the employer will want a strategy for how to handle wellness programs when negotiating over health benefits for union-covered employees.
Part-Time Employees. The ACA's
"full-time employee" definition sweeps in many workers
who have long been considered part-time employees for purposes of
providing health coverage. For those employers that currently
provide insurance only to employees who work 40 hour per week,
their covered populations will expand, potentially dramatically,
when they treat part-time employees averaging 30 hours a week as
full-time employees in order to avoid the ACA play or pay penalty.
Bargaining priorities include:
- Ensuring that part-time employees who meet the ACA's test of "full-time employees" are eligible for coverage.
- Addressing the look-back and stability method for determining who is a full-time employee under the ACA. Employers should preserve the ability to take advantage of this method to determine whether variable-hour employees or seasonal employees are treated as full-time employees, particularly if they do not want to offer coverage to part-time employees or want to offer them different coverage. Employers should consider retaining discretion not only to use the method but also to adjust the length of the measurement periods and stability periods that are used for determining whether an employee is full-time for purposes of the play or pay penalty.
- Preserving the flexibility to modify the definition of who is considered full-time under the ACA, in case there is a legislative change. Bipartisan legislation has been introduced that would raise the full-time standard for purposes of the play or pay penalty from 30 hours per week to 40 hours per week.
Cadillac Tax. It is critical for employers to
assess now whether they are likely to trigger the excise tax, based
on the current costs of their benefit plans as well as the
projected rate of increase for the cost of those plans through
2018. Absent a significant legislative change to the ACA, it is
unlikely that these thresholds for the excise tax will increase
before 2018 other than by the adjustment that corresponds to the
increase in rates for federal employees. After 2018, the dollar
thresholds will be indexed for inflation as follows—for 2019:
the consumer price index, plus one percentage point; for 2020 and
after, by the consumer price index.
Trim Now in Anticipation of Cadillac Tax. Absent
waiver language, employers with open or soon-to-open contracts need
to consider trimming their plans, as necessary, now. Most existing
employer health plans generously exceed the minimum value standard.
Some employer plans, if not trimmed, risk triggering the excise tax
given their current cost and the historic rate of growth of
coverage costs. Unions are likely to resist efforts to curtail
employee benefits in the near term, but unions (one hopes) will
understand that a failure to address the excise tax could divert
resources that otherwise might be available to be added to the
economic package at the bargaining table.
Cost Trigger to Protect Against Cadillac Tax.
Even if employers are able to achieve health plan cost containment
measures during contract negotiations, employers should also seek
to include a provision in their labor contracts that would trigger
cost reductions necessary to avoid the excise tax. The specifics of
this provision would need to be addressed between the parties, such
as the benefits that would be reduced or the process by which the
union and the employer would agree on such changes. Such a
provision would help employers avoid the worst-case scenario
regarding the excise tax, i.e., an obligation to pay a 40 percent
nondeductible tax with no way to avoid it due to restrictions
imposed by the labor contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.