Somehow between years of political pontificating and awaiting court decisions, implementation of major components of the Affordable Care Act (ACA) seemed to be somewhere off in the distant future. But that distant future has drawn near … 2014 is just around the corner, and ACA stands as the law of the land.
Last month, the American Health Lawyers Association hosted “Inquiring Minds Want to Know — How to Plan Now for Healthcare Reform in 2014,” a webinar focused on employers’ options and requirements for their health benefits plan. A trio of health law experts — including Carolyn E. Smith, counsel in the Washington, D.C. office of Alston & Bird, LLP— focused on employer pay-or-play penalties, the advent of Exchanges and premium subsidies, and reform requirements for employer plans effective next year.
As Smith noted, “A year is not much … and the way the timeline is set up, it’s really October for the start of the Exchanges and the enrollment process so it’s really less than a year.” Of course, she noted, most employers have tried to look ahead and make plans. “It’s game-changing rules,” she said of ACA. “It definitely changes the things employers need to consider in making their decision as to the health benefits they provide employees.”
Prior to joining Alston & Bird, Smith was associate deputy chief of staff of the Congressional Joint Committee on Taxation and served as counsel to the members of the staff of the House Ways and Means and Senate Finance Committees for more than two decades. She now focuses her practice on regulatory, compliance and legislative issues related to healthcare, pensions, executive compensation and tax.
Heading into 2014, she said the key issues facing employers are how to structure their benefit plans, who they will cover and what contribution the employer will make toward the cost of that coverage. “Those questions have always been there,” she pointed out. However, Smith continued, “What healthcare reform does is two main things that change the decision-making metrics for employers – 1) the existence of the Exchange and federal subsidies and 2) employer pay-or-play penalties.”
Prior to ACA, the individual health market had not been very well developed so there were limited options for coverage outside of employer-sponsored benefits. Now that the option will exist for employees to be able to purchase coverage, will employers opt out?
Smith said there were originally a lot of predictions that everyone would simply drop coverage and pay penalties. While there is clearly a financial tipping point that employers have to consider, more goes into the decision. Some companies see offering coverage as a competitive advantage to attract high-value employees, many already offer coverage that meets federal requirements and will continue with little change, and coverage decisions may vary for different groups of employees.
“There are pros and cons to any of this, but these are the kinds of things employers are thinking about,” Smith said.
She added that the punitive side of the equation became a little clearer when the proposed rule for employer penalties was released on Dec. 28, 2012 and published in the Federal Register on Jan. 2, 2013 (www.gpo.gov/fdsys/pkg/FR-2013-01-02/pdf/2012-31269.pdf). Additional information on the penalties is also found on the IRS’ ACA site under the heading “Employer Shared Responsibility Payment” (www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions).
“Not all questions are answered, but we do have far more comprehensive guidance than we had previously,” she noted.
The first consideration for any employer is whether or not they will face penalties if they don’t offer coverage. Smith said the law exempts employers with fewer than 50 full-time equivalent employees from the penalty structure. She added the statutory definition of FTE has been set as 30 hours per week. However, Smith noted how that plays out in the real world raises a lot of questions, particularly for companies that have heavy seasonal employees.
One pleasant surprise for large employers is how the penalties will be calculated when a company consists of a number of related companies, a controlled group. In determining whether or not an employer has at least 50 full-time employees, the company is viewed as a whole … a single entity. However, when it comes time to calculate penalties, each controlled group member is viewed separately. The benefit is that a large parent company with a number of subsidiaries would only be assessed penalties on the parts of the business that are not in compliance with ACA as opposed to paying the penalty rate times the total number of employees under the corporate umbrella, Smith explained.
Another concern for companies was that penalties might be imposed across the board if a full-time employee or dependent was inadvertently missed. “The proposed rules have a 5 percent leeway,” said Smith. “If you offer coverage to 95 percent, then no penalty is imposed.”
So what exactly are the penalties? Smith said there are actually two penalties, sometimes referred to as the “A” or “no coverage offered” penalty and the “B” or “non-qualified coverage” penalty. The B penalty is when coverage is offered, but it doesn’t meet minimum standards. “These penalties are mutually exclusive. You’ll never be hit with both for the same employee,” she said.
The first is the $2,000 per all full-time employees assessed to companies required to offer coverage that opt not to do so and is triggered even if one full-time employee receives a subsidy on the Exchange. The B penalty, which is generally lower, is calculated as $3,000 times the number of employees who get a subsidy to purchase insurance on the Exchange, and it cannot exceed what a company would have paid had they been assessed the A penalty. “Even if you offer coverage, you can be subject to this B penalty if coverage doesn't meet the minimum value or isn’t affordable,” said Smith. She added that at a minimum, plans must pay 60 percent of benefits.
One possible corporate strategy might be to offer coverage but at a higher premium to minimize penalty exposure. In this case the company would pay B penalties for those who would qualify for subsidies. Another consideration in this strategy, of course, would be how many employees fall at or below the 400 percent of the federal poverty level threshold that qualifies for subsidies. If a company has a small percentage in this category, this strategy could be financially appealing.
Interestingly, Smith said one factor that might drive employers away from offering corporate coverage is how efficient the state and federal Exchange program turns out to be. “If it works well, then over time employers may shift to Exchange coverage,” she said.
While many are aware of major tenets of the 2014 reforms — no exclusions based on pre-existing conditions, guaranteed renewability, modified community ratings — one added cost has flown under the radar for many. “One of the things we’ve found that has been a sleeper for employers, particularly those with self-funded plans, is this fee called the ‘reinsurance contribution,’” said Smith. Many employers assumed it was only tied to the Exchange. In fact, it applies to almost every health plan.
For three years beginning in 2014, employers will be assessed approximately $63 per member in the health plan. “The money is collected and paid out to insurers covering the individual market. It redistributes risk … paid for by this reinsurance contribution … to help stabilize the individual market,” Smith said. Although employers have submitted comments to HHS opposing the fee, the expectation is that it will remain a requirement.
With the clock ticking, employers must make some quick decisions about benefit packages. Smith noted very small employers would be exempted from the task since they aren’t subject to ACA penalties for failing to provide coverage, and large employers already have many consultants with whom they regularly work to help guide them through the next few months. “The middle-sized employers are going to be the ones who are going to need a little more help now making these financial decisions and running the numbers.”