United States: Pay Or Play: Are Employers Ready For The Insurance Coverage Mandate?

For the first time, beginning January 1, 2014, certain employers must provide health insurance or face hefty fines. Under the Patient Protection and Affordable Care Act (the "Act"), all employers with 50 or more "full-time" employees must offer an "affordable health insurance plan" that provides both "minimum value" and "minimum essential coverage" to at least 95% of their full-time employees and their eligible dependents.

Employees are regarded as "full-time" if they work 30 hours or more per week. Further, part-time employees are counted on a fractional basis to determine if the employer meets the 50-employee threshold (i.e., two part-time employees working 15 hours per week would count as one full-time employee working 30 hours per week). If the employer meets the 50-employee threshold, it faces two options: Play or Pay. In other words, the employer can "play" by offering the required insurance. Otherwise, it can "pay" the penalties for failing to offer the required coverage.

The Play Option:

1. Offer Plan with "Affordable Coverage"

An individual's share of premiums cannot exceed 9.5% of the employee's annual household income

To determine household income, the employer can take advantage of the Form W-2 safe harbor. Under this method, an employer determines affordability by referring to an employee's wages from that employer. Wages for this purpose would be the amount required to be reported in Box 1 of Form W-2.

If multiple options are available, the least expensive option determines Affordability

2. Offer Plan with "Minimum Value"

The plan's share of the total allowed costs of benefits provided is at least 60% of those costs

3. Offer Plan with "Minimum Essential Coverage"

Offer a mainstream plan with substantial benefits, which does not include so-called "mini-med" or restricted benefits plan

4. Scope of Plan Coverage

Plan must offer to cover at least 95% of all full-time employees and their dependents, but not required to offer coverage to spouses

"Dependent" includes children, stepchildren, adopted children and foster children up to age 26

The employer must meet all four criteria to satisfy the play option.

The Pay Option:

1. Employer offers no coverage

Penalty is $2,000 x (# of full-time employees – 30).1 In other words, the first 30 full-time employees are exempt from the penalty.

EXAMPLE – If an employer has 65 employees, the penalty would be $2,000 x (65–30) for a total penalty of $70,000.

2. Employer offers insufficient coverage

Penalty is the lesser of $2,000 x (# of full-time employees – 30) or $3,000 x (# of full-time employees receiving premium tax credits or cost reductions).

The penalty triggers when a full-time employee is offered unaffordable coverage (i.e., employee's share of premium for self-only coverage is > 9.5% of W-2 income), the employee declines the coverage and purchases coverage through a healthcare exchange.

Generally, any full-time employee whose family income is less than 400% of the poverty level (which for a family of four means family income of around $85,000 per year) is eligible for a federal subsidy.

Although the foregoing may appear relatively straightforward, the devil is in the details. For example, how do you determine if a worker typically works 30 hours or more a week if his workload fluctuates? What happens if two or more businesses, each with less than 50 employees, are related by ownership? Do they fall beneath the 50-employee threshold, or are they treated as a single unit for purposes of the 50- employee threshold? What about seasonal employees?

Because of these and various other factors, an assessment of the impact of the Act requires a close examination of each employer's particular facts and circumstances. We encourage all employers to seek legal advice well in advance of the January 1, 2014, commencement date to determine the most cost-effective strategy for their company. Footnotes 1 Although part-time employees are included on a fractional basis to determine if an employer qualifies as a "large employer" under the Act, no penalties assess for part-time employees. For example, an employer with 300 employees all working 15 hours per week would have 150 full-time employees under the Act and would qualify as a large employer. However, even if the employer offered no health plan, it would not be subject to penalties because it does not have any full-time employees. But if the same employer had 150 employees each working 30 hours per week and did not offer coverage, the penalty would be $240,000 ($2,000 x (150 – 30)).

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.

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