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The Affordable Care Act (ACA)

Frequently Asked Questions (FAQ's)

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (PPACA), or what's commonly called the Affordable Care Act (ACA), into law. On June 28, 2012, the United States Supreme Court upheld the law and on November 6, 2012, President Obama won re-election, reducing the chance that the law would either be reversed or sharply curtailed by a new administration. The ACA poses a variety of questions to employers who sponsor group health plans. This e-alert is intended to answer some of the more frequently asked questions (FAQs).

Q: What do we need to do, and by when?

A: Broadly speaking, it is important to understand your options and obligations under the new law and what your employees will be asking you regarding their options and obligations. While many employers have stated their intention to stop providing health insurance to employees (i.e., “let them go on the exchange and we will pay the penalty”), only a careful analysis of your workforce, finances, and business model (together with your insurance agent, attorney, and/or accountant) can get you to the right answer for your business. The following are some considerations.

Q: What determines whether we will be required to pay a penalty?

A: Only large employers (those with 50 or more full-time equivalent employees) are subject to a penalty, and only if (a) one of their employees receives a premium credit through a health insurance exchange; or (b) the employer doesn’t provide health insurance at all.

Q: Why would one of our employees receive a premium credit through a health insurance exchange?

A: Employees who are eligible for employer-sponsored health coverage may apply for a premium credit when their employer coverage does not provide a “minimum value.” That is, the employee’s share of the cost of benefits provided under the plan exceeds 40% of costs; or if premiums exceed 9.5% of the employee’s household income.

Q: What is the employer penalty?

A: There are two potential penalties:

  1. The penalty should an employee of yours receive a premium credit through a health insurance exchange.
  2. If you have more than 50 full-time equivalent employees AND offer minimum essential health insurance coverage AND you have at least one employee who received a premium credit through an exchange, you will be charged a monthly fee equivalent to the lesser of 1/12 x $2,000 (the initial penalty amount) x (number of full-time employees – 30) OR 1/12 x $3,000 x (number of full time employees who receive credits for exchange coverage).

  3. The penalty for not providing health insurance at all.
  4. If you have more than 50 full time equivalent employees AND if you do not offer minimum essential health insurance coverage AND if you have at least one employee who received a premium credit through an exchange, the penalty is as follows: a monthly fee of 1/12 x $2,000 x (number of full-time employees - 30). If the penalties go up (as some predict they will), or your employee population grows, you might reconsider your decision to just pay the penalty. In other words, run financial models before cancelling health insurance for employees altogether.

    ACA diagram

    See Employer Penalties for more information.

    Some calculations:

    • You have 50 employees and do not offer coverage, and one or more full-time employees receive credits through a health insurance exchange. The penalty calculation is (50-30) x 1/12 x $2,000= $3,333.33/mo.
    • You have 100 part-time employees (15 hours per week) and 30 full-time employees (30+hours per week); mathematically, you have 80 full-time equivalent employees. One or more employees received a premium credit through the health insurance exchange, but the penalty is assessed against the number of full-time employees: (30-30) x 1/12 x $2,000=0.
    • You have 50 full-time employees and offer health insurance coverage, but five full-time employees received premium credits through a health insurance exchange. The penalty is the lesser of the following: (50-30) x 1/12 x $2,000= $3,333.33/mo.; or 5 x 1/12 x $3,000=$1,250/mo.

    Q: How do we determine if we have 50 full-time employees? Can we get around some of these requirements by making full-time employees part-time?

    A: Yes you can make full-time employees part-time (anything less than 30 hours per week) and avoid penalties, but only under these conditions:

    • Current full-time employees must continue to work as full-time employees and receive benefits during two time periods: a “Standard Measurement” period and a “Stability” period.
      • The “Standard Measurement Period” is a period of three to twelve months (as determined by the employer) that is used to determine the standard hours for its employees.
      • The “Stability Period” is a period of at least six consecutive months following the “Standard Measurement Period.”
    • Part-time employees need not be provided health insurance coverage, or coverage may be phased out without penalty after the “Standard Measurement” and “Stability” periods set forth above. Beware, however, of discrimination. Under the new legislation, plans may not discriminate in favor of highly compensated employees (those employees who are either shareholders owning more than 10% of the company, or among the highest paid 25% in the company's workforce). In addition, you should continue to consider issues relative to recruitment and retention of a skilled workforce (e.g. morale, compensation, etc.).

    Q: What is a health insurance exchange?

    A: In early 2014, individuals will be able to receive health insurance through an “exchange.” These exchanges will be created by the states. If a state does not create an exchange, the federal government will establish and administer an exchange for the residents of that state.

    Q: Can we meet our obligation with a High Deductible Health Plan (HDHP)? How about Health Savings Accounts (HSA)?

    A: Yes, provided the HDHP provides “minimum value.”

    HDHP plans are intended to be reserved for catastrophic medical expenses.

    Under the ACA, a qualified health insurance plan must meet “minimum value,” meaning that the medical plan’s share of the total allowed cost of the benefits provided under the plan must exceed 60% of all such costs; or premiums cannot exceed 9.5% of the employee’s household income. If you offer a HDHP and an HSA, any Employer contributions to the HSA would also be taken into account and would help you reach "minimum value."

    Many of these plans operate in conjunction with an HSA, through which employees can cover their out of pocket expenses with pre-tax dollars. Going forward, an HSA can only be offered in conjunction with a qualified HDHP. We can expect to see some administrative rules governing HDHP’s and HSA’s in the near future.

    Q: What is the individual penalty?

    A: Individuals who do not have health insurance coverage will be faced with the following projected penalties:

    • Effective January 2014, individuals will be obligated to pay an annual penalty of the greater of $95 per adult and $47.50 per child (up to a maximum of $285 per family), or 1.0% of household income.
    • Effective January 2015, these annual penalties increase to the greater of $325 per adult and $162.50 per child (up to $975 per family) or 2.0% of household income.
    • Effective January 2016, these penalties increase to the greater of $695 per adult and $347.50 per child (up to $2,085 per family), or 2.5% of household income.

    Q: Do we qualify for a small business tax credit?

    A: This applies to businesses with 25 or fewer employees. Businesses with 10 or fewer employees and average annual wages of less than $25,000.00 qualify for the full credit. For tax years 2010 through 2013, the tax credit is up to 35% of your contribution to the employee’s health care premium (assuming you contribute at least 50% of the total single coverage premium cost). For tax years 2014 and beyond, the tax credit is up to 50% of your contribution toward the employee’s health care premium (assuming you contribute at least 50% of the total single coverage premium cost). The credit is available for two years. Read more here.

    Q: We are reading a lot about “grandfathered” health benefit plans. What is a “grandfathered” health benefit plan, and why is this significant?

    A: Grandfathered plans are the minority. Plans that were in existence prior to the enactment of the ACA are referred to as “grandfathered” plans. New plans and plans which have been materially modified after March 23, 2010 are referred to as “non-grandfathered” plans.

    Examples of materially modified include: changing insurance carriers, changing coinsurance amounts, the greater of an increase in copayments of more than $5 plus the rate of medical inflation or 15% higher than medical inflation, raising a deductible that exceeds the rate of medical inflation by 15%, a decrease in the overall percentage of your portion of the premium costs by more than 5%, elimination of certain benefits specific to certain conditions, if the plan has no annual or lifetime dollar limits and the addition is instituted, if that plan does have annual lifetime dollar limits and the addition of an annual dollar limit is lower than the existing amount, and a reduction in annual dollar limits.

    Some key deadlines:

    Now

    • A Plain Language Summary of Benefits Coverage (“SBC”). A SBC is required for all open enrollment periods beginning after September 23, 2012, and for those who enroll outside the open enrollment period (i.e. new hires, life event changes that allow for enrollment) after September 23, 2012.
    • 60-Days’ Notice of Plan Changes. The ACA requires 60 days’ advance notice by any health plan or issuer of “material modifications” to the plan that are not related to renewal of coverage. This requirement commences at the time that the health plan’s Summary of Benefits Coverage (“SBC”) requirement goes into effect.
    • Preventive Care for Women: Non-grandfathered health plans commencing on or after August 1, 2012, must cover specific preventative care services for women without cost-sharing requirements. Calendar year plans must comply with this rule effective January 1, 2013.

    January 2013

    • $2,500 Limit on Health Flexible Saving Account (FSA) Contributions: For plan years beginning on or after January 1, 2013, The ACA limits salary reduction contributions to a Health Flexible Savings Account to $2,500 per year.
    • W-2 Reporting: If you issue 250 or more W-2 forms, you must report the aggregate cost of employer-sponsored group health coverage on the employee’s W-2 form.

    March 2013

    • Notice of Health Insurance Exchanges: Effective March 1, 2013, you must provide a notice to employees regarding the availability of health insurance exchanges. The United States Department of Health and Human Services intends on providing a standard format notice that may be used for this purpose.

    2013 - On

    • Additional Medicare Tax for High-Wage Workers: In 2013, the hospital insurance tax rate will increase by 0.9% on wages over $200,000 (individual) and $250,000 (married couples filing jointly). Accordingly, you will have to withhold additional amounts from employees earnings over $200,000.

    Where can we learn more?