Last week we provided a detailed analysis of the United States Supreme Court's ruling in National Federation of Independent Business et al. v. Sebelius holding that the individual mandate set forth in the Affordable Care Act is constitutional. As a result of the National Federation decision, existing provisions of the Affordable Care Act already in effect remain intact. Moreover, employers, individuals, health plans and others will need to comply with additional health care reform requirements as they become effective. Today and in the coming weeks, we will address important aspects of health care reform and outline what those requirements mean for both employers and employees.
Employer Mandate- Pay or Play.
Almost every individual in the United States will be required to either obtain health coverage through an employer, government assistance program, health care exchange or individual insurance, or pay a penalty tax. In addition to the individual mandate to have health coverage, beginning January 1, 2014, employers will be required to offer their employees health coverage or be subject to a tax penalty. This is called the "pay or play" penalty. Employers must "play" by offering health coverage or "pay" a penalty tax.
Which Employers are Subject to Pay or Play?
Pay or play applies to what the Affordable Care Act considers a "large" employer. For health care reform purposes, a large employer is generally an employer with 50 or more full-time equivalent employees on a typical business day. Employers who meet this employee threshold must provide affordable group health coverage with a minimum value to employees and their families.
What Coverage Must be Offered?
Offering coverage to employees is only part of the determination as to whether a penalty tax will be assessed on the employer. The coverage that is offered must be of minimum value and must be affordable. An employer's group health plan will be considered to provide minimum value if it offers coverage for a certain level of health care expenses. Generally, the employer must pay on average at least 60 percent of health care expenses while the employee pays on average 40 percent of health care expenses (through deductibles and copayments).
It is anticipated that a minimum value calculator will be made available by the government for determining the value of a health plan. The calculator would permit an employer to enter information about the plan’s benefits, coverage, and cost-sharing to determine if it provides minimum value. The data running the calculator would be claims data reflecting typical self-insured employer plans. More guidance is expected on exactly how an employer will determine if its plan provides minimum value.
Not only does the coverage have to provide minimum value, it must also be affordable. Coverage is considered affordable if it costs an employee less than 9.5 percent of the employee's annual household income. Employers obviously have data on the employee's income, but may not have data on household income to be able to make the affordability requirement. This issue has been identified to the Departments responsible for health care reform guidance, and requests have been made to change the affordability calculation to apply to employee income. To date, the household income requirement remains.
What is the Penalty Tax for Not Offering Affordable Coverage or Not "Playing"?
If an employer does not offer coverage to its full-time employees and their dependents, and if one or more full-time employee receives a government subsidy to pay for coverage through a health care exchange, the employer will be subject to a tax penalty. This penalty will generally be $2,000 per full-time employee per year. The first 30 employees are excluded before the penalty applies. If an employer does offer coverage to employees but that coverage is unaffordable and an individual purchases coverage through an exchange, the penalty tax will be the lesser of an annual $3,000 penalty for each full-time employee who gets subsidized coverage through the exchange, or $2,000 per full-time employee.
How Can Coverage be Offered?
Employers will have options for satisfying the pay or play mandate. Some of those options include
1. Employers can continue their existing health plan, assuming it is qualified and affordable. Each employer will have to perform a detailed analysis to determine if existing coverage provides a 60/40 employer/employee coverage split. Employers will also have to analyze benefits offered under the plan to make certain the plan meets the statutorily required minimum value.
2. Employers can change their existing health plan to make it qualified and affordable. It is likely that insurers will be offering new plans to meet health care reform requirements.
3. Employers can stop offering health coverage and pay a penalty. Employers may to do a cost-analysis and determine if it is financially advantageous to forego offering health coverage and instead pay a tax penalty. In addition to a pure financial analysis, employers will likely also want to consider their employee population, employee expectation, and employer desire to provide health coverage to their employees.
4. Employers can stop offering health coverage, pay a tax penalty, but provide money to employees to purchase coverage through an exchange. Employers may wish to forego health coverage, but may not wish to completely wipe their hands of the responsibility to provide health coverage to employees. Toward this end, an employer who discontinues health coverage may want to provide financial assistance to employees to purchase coverage.
5. Small employers with less than 50 employees may wish to offer health coverage to employees through a SHOP exchange. State exchanges will have to have an ability for small employers to offer coverage to their employees beginning in 2014. All employers will be able to purchase coverage through exchanges beginning in 2017.
Employers will have a lot to consider as 2014 approaches. Each employer should take time to analyze its benefit plan offerings and decide, in advance of 2014, the posture the employer wishes to take with respect to health coverage for its employees.