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Large Employers and the Affordable Care Act

June 25, 2013

If you are considered a large employer your business should know big changes are in store for 2014.

Big changes will hit business in 2014. Starting on January 1, 2014, employers with at least 50 full-time equivalent (FTE) employees must offer all full-time employees an “affordable” health plan that meets a “minimum value” standard. See our prior blog for the calculation to determine full-time equivalent employee.

If your company is near or above the 50 FTE employee threshold, get prepared by running the numbers on your workforce to see where you stand (i.e. small employer or large employer). Remember, you may need to combine employees for businesses under “common control” (explained here). Also, calculations are based on your workforce numbers for the previous year, meaning 2013. So, start your calculations now to see where you stand – this is a monthly calculation.

Large employers can face two types of penalties: (1) if they fail to offer minimum essential coverage to at least 95% of their full-time employees (and their dependents), or (2) if they offer a plan but the plan is not “affordable” or does not meet a “minimum value” standard.

Penalties are triggered for large employers if one or more full-time employees use a federal premium tax credit or cost-sharing reduction to buy insurance through a public exchange either because they do not have access to coverage through their employer, or because it is not affordable, or it does not provide minimum value (explained below).

Premium tax credits are government subsidies aimed at reducing premium costs for lower-to middle-income individuals who buy health plans on exchanges. Household income limitations apply to qualify.

Cost sharing reductions are government subsidies to help limit out-of-pocket costs and other cost-sharing amounts (i.e. deductibles and co-payments) for people who purchase health plans on exchanges. Household income limitations apply to qualify.

Does your plan provide minimum value? To provide minimum value, an employer’s plan must pay for at least 60% of total allowed costs by the plan. Your health insurance broker or agent can help you determine if you are in compliance.

Is your plan affordable?

If full-time employees working for a large employer are asked to pay more than 9.5% of their household income for coverage, the employer’s health plan is not considered affordable for that employee. Note, the affordability test applies to the employer’s lowest-cost health plan, not all health plans offered.

Since employers don’t necessarily know their employee’s household income, there are wage-based tests that can also determine the plan’s affordability. So far, there are three safe harbors.

  1. W-2 safe harbor
  2. Rate-of-pay safe harbor
  3. Federal poverty level safe harbor

The safe harbors apply a percentage to either the taxable wages, hourly pay, or a multiple of the published poverty level. We will explain this in detail during our webinars on June 26 & 27.

So how much are the penalties?

Generally, if minimum essential coverage is not offered to at least 95% of full-time employees (and dependents), and any full-time employee uses a premium tax credit or cost-sharing reduction through an exchange (defined above), the penalty is a $2,000 annual penalty multiplied by the total number of full-time employees, minus the first 30 full-time employees (reference Section 4980H(a)).

Also, if coverage is provided but one or more full-time employees receives federal subsidies to buy coverage through an exchange because (1) the employer’s coverage wasn’t affordable, (2) the coverage didn’t provide minimum value, or (3) the employee was among the 5% of full-time employees not offered coverage, a penalty will apply. This penalty is an annual $3,000 penalty for each full-time employee who receives the federal premium tax credit or cost-sharing reduction on an exchange. The penalty is calculated each month ($250/month) and cannot exceed the penalty that would be paid for not offering coverage at all.

Many factors will affect the decision of employers on whether to pay the penalty or offer the appropriate coverage (i.e. pay or play), which includes the role that offering benefits has in recruiting and retaining employees. Tax considerations also need to be noted as health benefits are tax-deductible for employers, and currently, employees do not pay income or payroll taxes on health benefits. Employer penalties, on the other hand, are not tax-deductible.

Learn more about the Affordable Care Act:

Watch the Large Employers and the Affordable Care Act webinar recording

The Business Side of the Affordable Care Act
Determining if You are a Large or Small Employer Under the Affordable Care Act
Small Employers and the Affordable Care Act

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