Health Insurance Mandate for Employers

According to Whitehouse.gov, “Small businesses are the backbone of our economy, but high health care costs and declining coverage have hindered small business owners and their employees. Over the past decade, average annual family premiums for workers at small firms increased by 123 percent, from $5,700 in 1999 to $12,700 in 2009, while the percentage of small firms offering coverage fell from 65 to 59 percent. The Affordable Care Act will provide enormous benefits to the millions of small business owners and the tens of millions of small business employees by expanding coverage options, increasing purchasing power, lowering costs and giving consumers, not insurance companies, control over their own health care.

Currently, small businesses face not only premiums 18 percent higher than large businesses pay, but also face higher administrative costs to set up and maintain a health plan. The premiums they pay have up to three times as much administrative cost built into them as plans in the large group market. They are also at a disadvantage in negotiating with insurance companies because they lack bargaining power.

The Affordable Care Act will change this dynamic. Starting in 2014, small businesses with up to 100 employees will have access to state-based Small Business Health Options Program (SHOP) Exchanges, which will expand their purchasing power. The Congressional Budget Office (CBO) stated, Exchanges will reduce costs and increase competitive pressure on insurers, driving down premiums by up to 4 percent for small businesses. In 2014, the Affordable Care Act ends the discriminatory insurance industry practices of jacking up premiums by up to 200 percent because an employee got sick or older, or because the business hired a woman. In many cases, women can be charged higher premiums than men, simply because of their gender. It will also reduce “job lock” – the fear of switching jobs or starting a small business due to concerns over losing health coverage – by guaranteeing access to coverage for all Americans. This will encourage more people to launch their own small businesses, or join existing small employers.” Without a doubt, these are noble goals and if accomplished, will bring health care to more people.

According to Treasury.gov, “Approximately 96 percent of employers are small businesses (5.8 million of the 6 million businesses in the nation) and have fewer than 50 workers and are exempt from the employer responsibility provisions.

It is estimated these smaller firms employ nearly 34 million workers. Whitehouse.gov states, “More than 96 percent of firms with 50 or more employees already offer health insurance to their workers.” Nearly two-thirds of Americans with health coverage have employer-sponsored health insurance – approximately 171 million people. According to RAND Corporation, “From September 2013 to mid-March 2014 a net 9.3 million Americans gained health coverage. The majority of the gains during this period came from employer-sponsored coverage: 8.2 million people enrolled in employer plans rather than purchasing individual coverage in an exchange. These new enrollees include individuals who previously declined employers’ offers of insurance but are responding to the individual mandate to obtain coverage or face a tax penalty. Only 1.4 million were newly insured by exchange plans.”

So they already comply with the employer responsibility requirements and don’t have to change anything. In fact many of the smaller businesses with less than 50 FTEs offer health insurance options to their employees.

The Small Business Administration (SBA) defines a small business as one with less than 500 employees (www.sba.gov/content/small-business-size-standards) versus the ACA definition of less than 50 employees.

According to SBA, small businesses make up 99.7 percent of U.S. employer firms and 49.2 percent of private-sector employment. In 2010 there were 27.9 million small businesses, and 18,500 firms with 500 employees or more. However, over three-quarters of small businesses were non-employers.

71 percent of firms that employ 10 to 24 workers offered health insurance coverage in 2011. In contrast, only 48 percent of firms employing three to nine workers offered coverage in 2011.

Health insurance is a significant portion of employee compensation. According to the National Center for Policy Analysis (NCPA), which is a 501(c)(3) nonprofit, nonpartisan public policy research organization, established in 1983, “Health benefits are a significant expense for U.S. employers and a substantial portion of workers’ total compensation. The Congressional Budget Office (CBO) estimates the required coverage for an individual will cost $5,800 a year or more in 2016 – the equivalent of an additional $3 an hour “minimum health wage.” Family coverage could cost more than twice that amount. For instance, the cost of employee health benefits averages $2.70 per hour, according to the Bureau of Labor Statistics, representing 8.5 percent of private industry workers’ total compensation. The Kaiser Family Foundation’s annual survey of employer health benefits found the average cost of an employee family plan was $16,351 in 2013.”

The Patient Protection and Affordable Care Act (ACA) as amended has an expressed intention of increasing access to health insurance coverage. ACA was originally scripted to require “large employers” to begin offering health insurance to their full-time employees in 2014 but was delayed until 2015 / 2016. ACA’s Employer Shared Responsibility Provision mandates all businesses with 50 or more full-time equivalent employees (FTE) offer minimum health insurance to at least 95 percent of their full-time employees and dependents up to age 26 at an affordable cost to the employee, or pay a penalty.

Under what is known as the “shared responsibility health coverage rules,” large employers are subject to what is referred to as the “employer mandate.” This means an “applicable large employer (ALE)” generally, an employer with at least 50 full-time employees will be required to pay an excise tax if any full-time employee is certified by the government’s health care exchange as having received “health care assistance” (a premium credit). The ALE is required to:

1. Offer health care coverage for all of its full time employees,
2. Offer a policy which provides minimum essential coverage which is 1) Affordable and 2) Provides at least the 10 essential benefits

Employers with 100 or more FTEs and average annual wages above $250,000, are already to the stage they are mandated to offer insurance to at least 70 percent of their full-time employees. They were required to meet this threshold by Jan. 1, 2015. Further they are required to offer coverage to at least 95 percent of their full-time employees by Jan. 1, 2016.

Smaller (large) employers with 50-99 FTE will be required to offer health insurance to their full-time employees by Jan. 1, 2016. ACA does not require employers with 49 or less FTE to offer health insurance to their full-time employees.

One of the first elements which is important for employers to understand about ACA is the definitions of 1) full-time equivalent employees (FTE) which determines when an employer is subject to the provisions of ACA versus 2) full-time employees which are the employees to whom the employer must make the insurance available.

A full-time employee is one who is employed for an average of at least 30 hours per week. [Reg. 54.4980H-1(a)(21)] Further ACA defines a full time employee as one who works 130 hours per month. Stated another way, employees who work at least 30 hours per week, or whose hours of service to the employer equal at least 130 hours a month, for more than 120 days in a year are considered full-time. A large employer must offer affordable health insurance to all of its full time employees.

Full-time Equivalent Employee’s (FTE) is used to determine if an employer must comply with the mandate. FTE is calculated by averaging part-time and full-time hours worked. The number of FTEs determines if the employer is a Large Employer.

How is the number of FTEs determined? This illustration is based on determining the FTE on a monthly basis. First identify all the employees who are full-time employees per the definition above because they average 30 hours per week or they work 130 hours per month. To this number of employees, add up the total hours of service for which the employer pays wages to employees during the month (but not more than 120 hours for any employee), and divide that amount by 120. If the result is not a whole number, round to the next lowest whole number. (If the result is less than one, however, round up to one FTE.) I have an Excel spreadsheet that has this formula built into it that can be used to determine the FTE by month. I believe most employers are going to need to know the FTE count by month as they utilize the Look-Back Measurement Method which is comprised of 1) a measurement period, 2) an administrative period, and 3) stability period. 

The employer will then add the number of full-time employees to the FTE of the part-time employees to determine their overall FTEs to confirm they have more or less than 50 FTEs or over 100 FTEs. Best practices would be to calculate this monthly if the employer falls under the 50 FTE but is close. The employer will want to have the documentation to confirm they were less than 50.

When making the above calculations, include all hours for which the employee is paid not just the actual working hours: This includes sick pay, military duty, vacation, holiday, jury duty, disability leave, etc.

Note the employer takes all the part-time employees into consideration to arrive at their FTEs which determines the employer must offer health insurance. The employer only has to offer the health insurance to those employees meeting the above definition of a full-time employee.

Standard Measurement Period

A standard measurement period is a three-six month period where an employer can look back. The employer can choose the length of time. The length of time needs to be consistent with employees in the following categories: salaried and hourly employees; employees of different entities; employees in different states; and collectively bargained and non-collectively bargained employees.

Stability Period

A stability period is a period of time where employees determined to be full-time in the measurement period must be offered insurance. The stability period must be for at least six consecutive calendar months and is no shorter than the Measurement Period.

For New Hires

Generally, an employer must cover new employees within 90 days of hire if they expect the employee to be full-time. An employer can use an Initial Measurement Period that is between three-twelve months.

Administrative Period For New Employees

In addition to the Initial Measurement Period an employer can have an administrative period of up to 90 days before the Stability Period starts.

Under a timeline released by the Department of Treasury and IRS, mid-sized businesses that employ 50 to 99 full-time workers will have another year (to 2016) to provide health insurance coverage to employees. These employers will not face fines for failing to provide coverage to workers until 2016, according to the final rule.

Starting on Jan. 1, 2015, employers with 100 or more full-time (or full-time equivalent) employees that do not offer health insurance to their full-time employees (and dependents), or offer coverage that is not affordable or that does not provide minimum value, may be required to pay an assessment if at least one of their full-time employees receives a premium tax credit to purchase coverage in the new individual Marketplace. Employers with at least 50 but fewer than 100 full-time or full-time equivalent employees will generally have an additional year, until 2016, before these rules apply.

ACA requires health plans to cover a package of “10 essential benefits,” including ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and rehabilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.

Effective for months beginning after Dec. 31, 2014, an employer with 100 or more full-time-equivalent (FTE) employees may be required to pay a penalty if the employer:

1. Does not offer health insurance for all of its full-time employees,
2. Offers minimum essential coverage that is unaffordable, or
3. Offers minimum essential coverage that consists of a plan under which the plan’s share of total allowed cost of benefits is less than 60 percent.

The penalty applies if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing subsidy is allowed or paid to the employee.

Per Reg. 54.4980H-4(b)(1) an employee is offered coverage for a plan year only if he or she has an effective opportunity to elect to enroll in the coverage no less than once during the plan year. It is important that employers document the entire process of when and how they offer health insurance to the eligible employees and if the employee declines the coverage, best practices would be the employer get the employee to sign a statement indicating they are declining coverage.

The other major consideration to employers who are mandated to offer health insurance to their employees is the policy must be affordable. If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5 percent of that employee’s annual household income, the coverage is not considered affordable for that employee. Because employers generally will not know their employees’ household incomes, employers can take advantage of one or more of the three affordability safe harbors set forth in the final regulations based on information the employer will have available, such as the employee’s Form W-2 wages or the employee’s rate of pay. If an employer meets the requirements of any of these safe harbors, the offer of coverage will be deemed affordable for purposes of the Employer Shared Responsibility provisions regardless of whether it was affordable to the employee for purposes of the premium tax credit. The three affordability safe harbors are (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor. These safe harbors are all optional. An employer may use one or more of the safe harbors only if the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that provides minimum value for the self-only coverage offered to the employee.

Delay in Mandate

For employers with 50 to 99 FTE employees, the penalty is effective for months beginning after Dec. 31, 2015.

Penalty Calculation

If an employer does not offer its full-time employees insurance and at least one eligible full-time employee receives a federal credit or subsidy, the employer will pay $2,000 per employee (minus 30 employees). If an employer offers insurance, but at least one employee receives a federal credit or subsidy, the employer pays the lesser of $3,000 per subsidized employee or $2,000 per employee (minus 30 employees).

Exception to the penalty for plan years beginning in 2015 only, the penalty is $2,000 for each full-time employee minus the first 80 employees. For plan years beginning in 2016 and beyond, employers can exclude 30 full-time employees from the penalty calculation.

This article is intended to be an overview. There is much more to know and understand as you work with clients to know when they are a large employer and if they are what coverage must be offered to the employees and when is that policy affordable. Also, please note that this article was written at a time when the ACA is being challenged before the Supreme Court.