Executive Summary: Earlier this year, the Obama Administration delayed implementation of the employer mandate, a major provision of the 2010 health care reform law (the Affordable Care Act or "ACA"). The delay of the employer mandate, however, did not impact other provisions of the ACA, many of which are going forward as scheduled. Additionally the reprieve may be short-lived because, unless additional guidance is issued, January 1, 2014, will start the clock on determining an employer's size for purposes of the employer mandate, and for determining which employees will be considered full- and part-time for purposes of offering health care coverage.
The Employer Mandate: Generally, the employer mandate requires employers with 50 or more full-time employees to offer health insurance coverage to their full-time employees or face a penalty. Employers must offer "minimum essential health coverage," which provides minimum value and is affordable to substantially all (at least 95%) of the employer's full-time employees. The employer will be assessed a penalty if one or more full-time employees obtains coverage from a state- or federally-run health insurance exchange and is eligible for a subsidy or cost-sharing reduction. Under the ACA, a "full-time" employee is an employee who works 30 hours or more per week or 130 hours or more per month.
Because of the July 2013 delay, employers who fail to offer minimum essential coverage that provides minimum value and is affordable to their full-time employees under the ACA's employer mandate will not be subject to a penalty in 2014.
SHOP Exchanges: For small employers (generally, those with fewer than 50 employees), full implementation of the Small Business Health Insurance Exchanges (SHOP), a featured provision of the state- or federally-run health exchanges, has also been delayed until 2015. Small businesses should be able to participate in a limited operation of SHOP in 2014, but generally will not have access to a variety of health insurance options until 2015. Small employers who employ fewer than 25 employees may still qualify for a tax credit for providing health care in 2014.
The Affordable Care Act in 2014
Despite the delay, many provisions of the ACA are moving forward as scheduled, such as: adopting certain plan design requirements regarding the type of coverage that must be provided (such as women's preventive care and the elimination of pre-existing condition exclusions); implementing a 90-day waiting period; reporting the cost of employer-provided health care coverage on employees' tax forms; and distributing certain notices.
Additionally, starting January 1, 2014, individuals must still obtain coverage under the ACA's individual mandate or pay a penalty. The federal government recently released new regulations clarifying certain aspects of the individual's responsibilities under this mandate. Individuals have until March 31, 2014 to sign up for coverage on the health insurance exchanges to avoid paying a penalty. For 2014, the penalty will be the greater of $95 or 1% of the employee's household income for the year. The employee may also pay a penalty for his spouse and any tax dependents who do not have health insurance coverage.
Moreover, the July 2013 delay did not affect many of the fees imposed by the ACA or the requirement that employers distribute Medical Loss Ratio rebates, if any, to participants shortly after they are received from insurance companies. For more information, please see FordHarrison's Legal Alert, Guidance Released on Delay of "Pay or Play" Penalties Under ACA.
Finally, we expect additional regulations on the employer mandate, nondiscrimination requirements, auto-enrollment, and the Cadillac tax (for generous health plan benefits), among others, which may create additional obligations under the ACA.
Employer Reactions Mixed
Employer reactions have been mixed. Some employers who are already offering health care benefits to employees that meet the standards set forth by the ACA are warming to the new health care reform requirements. Other employers are still drastically changing their approach to health care to cut costs.
For example, some employers plan to trim spousal benefits. Under the employer mandate, large employers generally must offer substantially all of their full-time employees minimum essential health care coverage that provides minimum value and is affordable, as defined by the ACA, or pay a penalty if a full-time employee goes to a health insurance exchange and qualifies for a subsidy. Notably, this coverage must be offered to employees and their dependents, but not spouses.
Other employers are planning to utilize private exchanges. There are several private insurance companies that are planning to offer private exchanges to employers as a lower cost option to employer-sponsored health care coverage. Whether the governmental agencies will release additional guidance on the use of the private exchanges is not yet clear.
Some employers are planning not only to cut their costs, but costs to employees as well, and some employers are exploring a dual-plan approach. Under the ACA, to provide affordable coverage, the employer's plan must provide minimum value and be affordable to the employee. Affordable means that the cost of employee-only coverage is no more than 9.5% of the employee's household income. Even at 9.5%, some employees find premiums for these plans unaffordable. To provide a lower cost option to employees, some employers are exploring whether they can offer a health care plan that meets the requirements of the ACA, as well as a stripped down plan that does not meet all of the ACA requirements, but generally is cheaper to the employee.
Other employers are planning to trim employees to get under the 50-employee large employer threshold, or create new part-time positions to replace full-time positions to reduce the number of employees to whom health care will be provided. However, employers face a number of risks and potential employee challenges in doing so. Careful planning and communication is required.
2015 Planning Opportunities Start January 1, 2014 or Sooner
Despite the delay of the employer mandate, there are at least two planning opportunities for the employer mandate that start much sooner than 2015.
Determining Employer Size: The ACA provides that an employer's status as a large or small employer under the employer mandate is determined by looking to the employer's average size during the full 12 months of the preceding calendar year. Before the delay, the IRS had created a transition rule that permitted employers to look to any consecutive six-month period in 2013 to determine whether they were a large or small employer for 2014. The current employer mandate delay did not delay the transition rule. Accordingly, employers may now have to look to the full 12 months of 2014 to determine whether they are large or small employers.
Measurement Periods for Variable Hour and Seasonal Employees: In addition, IRS guidance allows employers to use measurement periods to measure variable hour and seasonal employees. Generally, if an employer cannot reasonably determine whether an employee will be a full- or part-time employee, or if the employee is a seasonal employee, the employer may use a measurement period of between 3 and 12 months to determine the employee's status. Once the measurement period has run, if the employee is, on average, determined to be full-time, the employer generally must offer that employee health care coverage for a period of time that is not less than the measurement period or at least six months (called the "stability period.") If the employee is, on average, considered to be part-time, the employer is not required to offer the employee health care coverage for a stability period (that is no longer than the preceding measurement period). The IRS rules allow for a gap period (called the "administrative period") of no more than 90 days between the measurement period and the stability period during which time the employer can determine the employee's full- or part-time status, and offer the employee coverage.
Under a 2013 IRS transition rule, employers were able to use a 6-month measurement period in 2013 and still use a full 12-month stability period in 2014. Now, unless other guidance is released, employers that want to use a 12-month stability period in 2015 may need to start measuring variable hour employees as soon as October 1, 2013 if employers also plan to use the full administrative period.
Employers cannot afford to wait until next year to start planning compliance with the ACA. Although the penalties under the employer mandate have been delayed until 2015, employers will still face compliance hurdles in 2014 in implementing the other provisions of the ACA. In addition, because many of the transition rules have not yet been delayed, planning for 2015 starts much sooner than many employers expect.
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