Urgent Health Care Reform Update

This summary of the key changes that became effective in 2013 and become effective in 2014 was provided by Brown & Brown. It is based upon federal regulations and other guidance published as of February 12, 2014.

Health Care Reform:  What Employers Need to Know

Laura I. Fanuele

Senior Vice President - Employee Benefits

Brown & Brown Benefit Advisors

5 Regent St. STE 523

Livingston, NJ 07039

Congress enacted the Patient Protection and Affordable Care Act in March 2010, overhauling the United States health care system. The law is also referred to as PPACA, the ACA, the Affordable Care Act and Health Care Reform. For employers, the new law represents the most significant changes to their health benefit plan since the passage of ERISA.

Many provisions of Health Care Reform are already in effect. The purpose of this bulletin is to summarize key changes that became effective in 2013 and become effective in 2014. It is based upon federal regulations and other guidance published as of February 12, 2014.

Plan Changes

Employers will be required to make several changes to their health plans for 2013 and 2014 to comply with Health Care Reform. The changes include the following: 

1. Medical FSAs

a. Limit on Contributions For plan years beginning in 2013, a participant is not permitted to contribute more than $2,500 to his or her medical flexible spending account (FSA) under an employer’s Section 125 cafeteria plan. An employer is required to amend its Section 125 plan to include this limit no later than December 31, 2014.

b. Optional Medical FSA Carryover Beginning as early as the 2013 plan year, an employer can amend its Section 125 plan to allow an employee to carryover up to $500 of his or her unused medical FSA balance for reimbursement in the following plan year. This optional provision is an alternative to the 2½ month grace period rule for medical FSAs. An employer can offer one provision or the other but not both. Like the 2½ month grace period, the $500 carryover rule creates complexity for employees enrolling in a high deductible health plan (HDHP) with an HSA. Employers offering an HDHP with an HSA need to design the 2½ month grace period or $500 carryover in a way to ensure employees will still be HSA eligible.

c. Eligibility of Part-Timers Beginning in 2014, only employees who are eligible for the employer’s group health plan should be allowed to participate in the medical FSA. If an employee (e.g., a part-timer) is allowed to participate in the medical FSA but not the employer’s group health plan, the medical FSA will not be an “excepted benefit.” Excepted benefits that aren’t grandfathered under Health Care Reform must offer first-dollar preventive care. Since medical FSAs typically aren’t employer-funded, this creates a seemingly impossible compliance requirement.

2. Health Reimbursement Arrangements (“HRAs”)

HRAs reimburse employees for uninsured health expenses up to an annual dollar limit. These dollar limits will be considered to violate the prohibition on annual limits under Health Care Reform effective as of plan years beginning in 2014 unless the HRA:

a. Is a retiree only HRA;

b. Is “integrated” with the employer’s group health plan; or

c. Restricts reimbursement only to certain dental and/or vision expenses.

Employers must affirmatively amend their HRA plans to establish qualification under one of these exceptions.

3. Pre-Existing Condition Exclusions/Certificates of Creditable Coverage

Employer group health plans can no longer impose a pre-existing condition exclusion with respect to any participant as of the first day of the 2014 plan year. Plans have been required to issue terminating participants a HIPAA certificate of creditable coverage to demonstrate prior coverage to offset any pre-existing condition exclusion in the next plan in which the individual enrolls. Because pre-existing condition exclusions will no longer be permitted, HIPAA certificates of creditable coverage are no longer necessary and are not required to be issued after December 31, 2014.

4. Waiting Period

For plan years beginning in 2014, health plans may not impose a waiting period of longer than 90 days for newly-eligible full-time employees. Because coverage must be effective no later than the employee’s 91st day of employment, a plan provision which permits a full-time employee to become a participant in the health plan on the first day of the month after 90 days of employment will not comply.

5. Cap on Maximum Out-of-Pocket Limits

For plan years beginning in 2014, the maximum out-of-pocket limits on medical and prescription drug expenses for all non-grandfathered plans cannot exceed the maximum out-of-pocket limits for HDHPs offered in connection with an HSA. The new out-of-pocket limits must consider deductibles, copays and coinsurance. For 2014, the limits are $6,350 for single coverage and $12,700 for two-person or family coverage.

6. Nondiscrimination Rules

For many years, the Internal Revenue Code has imposed nondiscrimination rules on self-insured health plans which prohibit discrimination in favor of the highly compensated with respect to eligibility, benefits and required contributions. Health Care Reform extends the nondiscrimination rules to non-grandfathered, fully-insured plans. These rules were initially set to take effect during 2011, but the IRS has not yet published regulations regarding the new requirements. So the effective date of the new nondiscrimination rules for non-grandfathered, fully-insured plans has been delayed until plan years beginning after regulations are published.

7. Automatic Enrollment

Employers with more than 200 full-time employees will be required to automatically enroll newly-eligible individuals and reenroll existing employees. No regulations have been issued regarding this requirement. The requirement will not take effect until after the regulations are issued.

New Participant Notices

Health Care Reform requires employers to provide additional notices to participants in their health plans. These notices include the following:

1. Summary of Benefits and Coverage

The purpose of the Summary of Benefits and Coverage (SBC) is to provide information in a prescribed format to participants so they can easily compare the information with other plans for which they are eligible, including coverage available on an exchange. The SBC was originally required during 2012, and must be updated annually. The SBC must be provided to a new participant upon initial eligibility, to all participants at open enrollment, and to a participant upon request.

2. Notice of Exchange Availability

By October 1, 2013, employers were required to provide current employees with a notice regarding the availability of the exchanges. New hires after October 1, 2013 must be provided with the notice within 14 days of their start date. This notice must include information regarding the premium credits and cost sharing subsidies available to low income individuals if they enroll in coverage on an exchange. The DOL published model notices during May 2013.

Additional Reporting Requirements

Employers have new reporting requirements to governmental agencies under Health Care Reform. These requirements include the following:

1. Individual Mandate Reporting

Insurers of fully-insured group health plans and plan sponsors of self-funded group health plans must report information about what months employees and their dependents are enrolled in the plan. This reporting will help the IRS administer the individual mandate penalty and it applies to all employers, not just large employers. Reporting is optional for 2014 and is required for 2015. It applies on an annual basis. So, for 2015, information must be reported to the IRS by February 28, 2016 (or March 31, 2016 if filed electronically). The same information must also be reported to employees by January 31, 2016.

2. Pay or Play Reporting

This reporting requirement only applies to large employers with 50 or more full-time employees and is intended to help the IRS administer the employer pay or play penalty. Again, information must be furnished to both the IRS and employees including certain information about the employer, certification that the employer offers employees and their dependents the opportunity to enroll in minimum essential coverage, the months coverage was available, the employee’s premium share for self-only coverage in the lowest cost plan providing minimum value, the number of full-time employees for each month and certain information about the employees. The reporting deadlines are the same as with respect to the reporting in connection with the individual mandate penalty. The IRS has recognized that this creates some duplicative reporting requirements. As a result, large employers may furnish one combined statement to employees for both reporting requirements and the IRS has requested comments on how to consolidate these two reporting requirements to the IRS for large employers.

New Taxes and Fees

Health Care Reform imposes a series of new taxes and fees on individuals and plans. Here is a summary:

 

1. Increased Medicare Taxes

Beginning in 2013, an employer is required to withhold additional Medicare taxes in the amount of 0.9% of the amounts paid to an employee in excess of $200,000 during a year. The new withholding obligation is “triggered” when the employee’s income from that employer exceeds $200,000. However, the employer is not required to pay additional Medicare taxes.

 

2. PCORI Fee

For plan years ending on or after October 1, 2012 (and before October 1, 2019), a fee will be assessed to finance comparative clinical effectiveness research through the Patient-Centered Outcomes Research Institute (PCORI). The amount of the fee is based upon the average number of covered lives (including both employees and dependents) under a health plan during the plan year.

The PCORI fee for the first plan year is $1 per covered life. The fee increases to $2 per covered life for the next plan year and will be subsequently increased based upon increases in national health spending. If the employer’s plan is fully-insured, the fee is payable by the insurer. If the employer’s plan is self-funded, the fee is payable by the employer.  

For self-funded plans, the fee is reported on IRS Form 720 and is paid by July 31 of the calendar year immediately following the last day of the plan year for which the fee is owed. As a result, an employer with a calendar year plan was required to pay its first PCORI fee by July 31, 2013. On the other hand, if the employer’s first plan year ending on or after October 1, 2012 ended on May 31, 2013, the first PCORI fee must be paid by July 31, 2014.

 

3. Temporary Reinsurance Program

A new fee is imposed on group health plans that provide major medical coverage. The purpose of the fee is to fund reinsurance for insurers in the individual market. This fee is imposed during 2014, 2015 and 2016. The goal is to raise $25 billion.

The fee is front-end loaded. It will raise $12 billion during 2014, $8 billion in 2015 and $5 billion in 2016.

 

For 2014 the fee is $63 per covered person (employees and dependents). For 2015 it will be $44 per covered person. The fee for 2016 is expected to be lower. This fee applies on a calendar year basis even if the plan has a different plan year.

If the employer’s plan is fully-insured, the fee is paid by the insurer. If the employer’s plan is self-insured, the fee is imposed on the plan. It is likely that the fee payable by a self-insured plan will be sent in by the third party administrator of the plan.

 

Health Care Exchanges

One of the key components of Health Care Reform is the establishment of exchanges to help individuals and small groups shop for health coverage in a more efficient and comprehensive manner. It was anticipated that each state would have its own exchange, but most states have declined to establish an exchange. So the federal government has established and will operate the exchanges for these states. The exchanges began operation during the Fall of 2013 with coverage available as of January 1, 2014.

Health Care Reform also provides that low income individuals will receive premium credits to reduce their cost of purchasing health insurance on the exchange. For this purpose, a premium credit is available if the individual’s household income is between 100% and 400% of the federal poverty level. Not surprisingly, the amount of the premium credit decreases as the household income increases.

 

Health Care Reform also provides for the expansion of individuals eligible to receive free Medicaid coverage. At the current time, the eligibility requirements vary by state but generally, certain individuals with household income of up to 100% of the federal poverty level are eligible for Medicaid. Health Care Reform would have increased this eligibility to all individuals with household income of up to 138% of the federal poverty level. An individual who receives Medicaid coverage does not need to purchase health coverage on an exchange in order to avoid the individual mandate penalty.

 

But based upon the U.S. Supreme Court case during June 2012, states are not required to expand Medicaid. For states where Medicaid is not expanded, more individuals will be eligible for the premium credit on the exchange. This potentially exposes employers to larger play or pay penalties.

 

Individual Mandate

A second important component of Health Care Reform is the individual mandate. An individual must obtain health insurance with minimum essential coverage or pay a penalty. This health insurance can be provided through Medicaid, Medicare, other public programs (for example, CHIP or Tricare), the exchange or an employer plan.

 

The penalty is the greater of a flat dollar amount or a percentage of the household income:

 

• The flat dollar amount is $95 for 2014, $325 for 2015 and $695 for 2016. For later years, the flat dollar amount will be increased for changes in the cost of living.

 

• The percentage of household income is 1% for 2014, 2% for 2015 and 2.5% for 2016 and later years.

 

Employer Mandate - Play or Pay

A third key component of Health Care Reform is the employer mandate. Under this mandate, large employers will be required to offer health care coverage to full-time employees and their dependents or pay a penalty. The penalty was set to take effect in 2014 but the IRS pushed back the effective date to 2015.

 

1. Play or Pay Rules Only Apply to Large Employers

Health Care Reform imposes the “play or pay” rules on a “large employer” - an employer that averages at least 50 full-time employees.

 

• This determination is made separately for each year based upon the average number of full-time employees during the prior year.

 

• For this purpose, full-time means at least 30 hours a week.

 

• The number of full-time employees is based upon the number of full-time employees plus full-time equivalent employees (FTEs).

 

• To convert the number of part-time employees to FTEs, determine the total hours worked during each month of the prior year by the employees who average less than 30 hours per week during the month and divide by 120. (In determining the total hours of these part-time employees, the employer cannot count more than 120 hours in a month for any employee.) After making this calculation, add the sum of full-time employees and FTEs for each month, and then divide by 12 to determine the average for the prior year. If companies are under common ownership, they are treated as a single employer for purposes of determining whether there are 50 FTEs. So an employer cannot avoid the rules by dividing its company into multiple companies.

 

2. Key Transition Rules

First, there is a special transition rule that applies for determining whether an employer is a “large employer” for 2015. An employer may determine whether it is a large employer for 2015 based upon the average number of FTEs during a six-month period during 2014 (for example, January 2014 through June 2014), instead of the entire calendar year. By using this shorter period to determine whether the employer is a large employer, an employer that is subject to the play or pay rules has more time to bring its plan into compliance with Health Care Reform by the start of 2015.

Second, the pay or play penalty will not apply until the first day of an employer’s 2016 plan year for employers with an average of 50 - 99 full-time employees and FTEs in 2014 (the six-month consecutive period discussed above may be used to calculate this average), if the employer satisfies certain conditions, including maintaining its workforce size and maintaining the existing level of any health coverage.

 

3. The Potential Tax Penalties

Health Care Reform has two separate penalties that may apply to a large employer under the play or pay rules:

 

• The $2,000 Penalty The first penalty is a tax equal to $2,000 multiplied by the employer’s full-time employees (less the first 30 full-time employees). For example, if this penalty applies and the employer has 200 full-time employees, the tax is equal to $2,000 x 170 employees (200 - 30 = 170), or $340,000. This penalty applies if two requirements are satisfied:

 

 The employer fails to offer health coverage to substantially all (at least 95%) of the employer’s full-time employees, and

 

 The employer has at least one full-time employee who enrolls in health insurance coverage through an exchange and receives a premium credit.

This penalty is typically thought to be limited to employers who choose to “pay” instead of “play.” But, because coverage must be offered to 95% of the employer’s full-time employees to avoid the penalty, an employer will need to be very careful to identify all its full-time employees. Otherwise, the employer is at risk for a substantial tax penalty.

Here are some other important rules relating to this tax penalty:

 

 For the initial year (2015), two important modifications have been made to the $2,000 penalty. The first is that the penalty can be avoided if the employer offers coverage to 70% (rather than at least 95%) of its full-time employees. Second, if an employer is subject to the penalty, it may calculate the total penalty amount by disregarding its first 80 full-time employees (rather than its first 30 full-time employees). After the 2015 plan year these transition rules no longer apply.

 

 Health coverage must also be offered to the employee’s dependent children (natural born and adopted) at least through the end of the month the child attains age 26. This requirement will not apply in 2015 provided the employer is taking steps to arrange for such coverage by 2016.

 

 If there is more than one company under common ownership, the tax penalties are determined separately for each company. However, in calculating the $2,000 penalty, the 30 employees (80 for 2015) that are subtracted in calculating the penalty are allocated among the companies that are commonly owned in proportion to the number of their full-time employees. Each company is not permitted to subtract 30 employees (80 for 2015) in calculating the penalty.

 

• The $3,000 Penalty The second penalty is a tax equal to $3,000 multiplied by the number of an employer’s full-time employees who enroll in health insurance coverage through an exchange and receive a premium credit. This penalty applies if:

 

 The employer’s plan doesn’t provide minimum value. This occurs if the plan pays less than 60% of the total allowed cost of benefits provided under the plan; or

 

 The employer’s plan isn’t affordable to the employee. For this purpose, a plan is not affordable if the cost of employee-only coverage is more than 9.5% of the employee’s household income.

◦ Because an employer doesn’t know an employee’s household income, the regulations provide three safe harbors that can be used to determine whether a plan is affordable. The three safe harbors are based on the employee’s Box 1 W-2 wages, the employee’s rate of pay and the federal poverty line for households with one individual. The affordability test is satisfied if the employee’s required contribution for single coverage under the least expensive medical option the employer offers providing minimum value does not exceed 9.5% of the safe harbor amount.

◦ The safe harbor that may be most helpful to employers is based upon the employee’s rate of pay at the beginning of the year. The monthly premium is affordable if it does not exceed 9.5% of the employee’s hourly rate of pay at the beginning of the year multiplied by 130. If the

employee’s hourly rate is reduced, the rate of pay safe harbor is applied separately to each calendar month based on the employee’s rate of pay for that month. The rate of pay safe harbor is not available with respect to salaried employees for any year during which their salary is reduced.

◦ There are special rules for wellness incentives. A premium surcharge for tobacco users is disregarded in determining whether coverage is affordable, but premium surcharges for other wellness reasons (for example, BMI, cholesterol or blood pressure) are counted.

The $3,000 penalty also could apply if the full-time employee isn’t offered coverage under the employer’s plan and instead enrolls in health insurance coverage through an exchange and receives a premium credit. This could occur, for example, if the full-time employee was part of the less than 5% of full-time employees who are not offered coverage (less than 30% for 2015).

Although $3,000 is more than $2,000, this tax is likely to be smaller because it only applies based upon the number of the employer’s full-time employees who purchase health insurance coverage through the exchange and receive a premium credit. It is not based upon the total number of the employer’s full-time employees, as is the situation for the $2,000 tax.

 

4. Identifying Full-Time Employees

For purposes of the play or pay rules, an employee is full-time if the employee averages 30 or more hours of service per week. An “hour of service” includes all hours for which an employee is paid (not the actual number of hours worked by the employee). Hours of service must also be credited for unpaid leave periods due to FMLA, USERRA or jury duty (or those periods must be disregarded in determining the employee’s average weekly hours). IRS regulations treat 130 hours of service during a month as the equivalent of 30 hours of service per week.

 

• Newly-hired Full-Time Employees In many situations, an employer can readily determine whether a new employee is full-time. If the employer reasonably expects the new employee to work an average of 30 hours per week, the employee should be treated as full-time. The employer can then avoid any play or pay penalty for the new full-time employee by offering health coverage within three months after the employee begins employment.

 

• Newly-hired Variable Hours or Seasonal Employees The determination of whether an employee is full-time may be more difficult if the employee works variable hours or is seasonal. If the employer cannot reasonably determine when the employee is hired whether the employee will average 30 hours of service per week, the employer may use a safe harbor approach to determine whether the employee is, in fact, a full-time employee under the Health Care Reform standard. An employee will be considered seasonal for this purpose if he or she works in a position for which the customary annual employment period is six months or less, with the employment period beginning at approximately the same time each year.

• Initial Measurement Period for Variable Hours, Part-time and Seasonal Employees Under this safe harbor, the employer can determine whether a newly-hired variable hours, part-time or seasonal employee averages at least 30 hours of service per week during a “measurement period” that lasts from 3 to 12 months (as determined by the employer). If the employee averages at least 30 hours of service per week during the measurement period, the employee is then treated as a full-time employee for a subsequent period of time called the “stability period.” The stability period must be a period of 6 to 12 months after the initial measurement period. However, the stability period can’t be shorter than the measurement period.

 

Further, the employer is permitted to have an administrative period between the measurement period and stability period. The purpose of the administrative period is to determine whether the employee satisfied the requirements to be a full-time employee and, if so, to offer coverage to the employee that will become effective at the beginning of the stability period.  On the other hand, if the variable hours or seasonal employee does not average at least 30 hours of service per week during the measurement period, the employer is not required to offer health coverage to the employee during the stability period. This rule applies even if the employee subsequently changes status and becomes full-time during the stability period.   For example, assume an employee is hired on May 15, 2014 and the employer cannot reasonably determine at that time whether the employee is likely to average 30 hours of service per week. The employer could use a measurement period for this new variable hours employee from May 15, 2014 through May 14, 2015. If the employee averaged at least 30 hours of service per week during this measurement period, the employee would be eligible for health coverage for the stability period from July 1, 2015 through June 30, 2016. (The period from May 15, 2015 through June 30, 2015 is the administrative period.) However, if the employee did not average at least 30 hours of service per week during the May 15, 2014 through May 14, 2015 measurement period, the employer would not be required to offer health coverage to the employee during the July 1, 2015 through June 30, 2016 stability period.

 

• Ongoing Employees While only new hires who are part-time, variable hours or seasonal can be subject to a measurement period when they are hired before being offered health coverage, all ongoing employees, including full-timers, can be subject to a measurement period to maintain eligibility on an ongoing basis. For example, if an employer’s health plan operates on a calendar year basis, the employer could use the period from October 15 through the following October 14 as a measurement period that can be used to determine whether all employees are full-time. If the employee is full-time during the measurement period, the employee would be offered health insurance coverage as of January 1, for the next plan year. But if the employee did not average 30 hours of service per week during the measurement period, the employee would be ineligible for health coverage during the next plan year. This cycle repeats annually.

 

5. Transition Rule for Determining Full-Time Employees

The measurement period and stability period rules for ongoing employees create time constraints for employers that want to use a 12-month stability period for 2015 because the measurement period must then also be 12 months. So the final regulations permit a special transition rule for the 2015 stability period. An employer may use a measurement period that is shorter than 12 months if the following requirements are satisfied:

 

• The measurement period must be at least six months; and

 

• The measurement period must begin no later than July 1, 2014 and end no earlier than 90 days before the first day of the 2015 stability period.

For example, a calendar year plan could have a measurement period from May 1, 2014 through October 31, 2014 and then use the 2015 calendar year as the stability period. However, for subsequent plan years a 12-month measurement period would be required.

 

6. Transition Rule for Fiscal Year Plans

Although the play or pay rules generally are effective January 1, 2015, the final regulations provide a delayed effective date for an employer with a non-calendar year plan that was in effect on December 27, 2012 and has not been subsequently amended to delay the start of the plan year until later in the calendar year. No penalty will be owed until the first day of the 2015 plan year for an employee who was eligible to participate in the plan under its terms as in effect as of February 9, 2014 (regardless of whether the employee actually enrolled).  However, if the employer doesn’t offer group health coverage to all employees working at least 30 hours per week, the above transitional may not apply to those ineligible employees who will be considered full-time under the pay or play penalty. As a result, there are two additional transition rules providing a delayed effective date until the first day of the employer’s 2015 plan year:

 

• First, the postponed effective date is available for all employees provided that at least one-quarter of all of the employer’s employees were covered under the employer’s non-calendar year plan as of a date chosen by the employer during the 12 months ending on February 9, 2014, or least one-third of all of the employer’s employees were offered coverage under the employer’s non-calendar year plan during the most recent open enrollment period that ended before February 9, 2014.

 

• Second, transition relief is available for all full-time employees if the employer either had, as of any date it selects during the 12 months ending on February 9, 2014, at least one-third of its full-time employees covered under its non-calendar year plan or offered coverage to at least one-half of its full-time employees during the most recent open enrollment period that ended before February 9, 2014.

 

7. Other New Rules Added by the Final Regulations

The final regulations regarding the pay or play issued in February 2014 also address the following issues:

 

• In general, no employee may be excluded in applying the pay or play rules. However, employees whose compensation is from sources outside the U.S. may be disregarded, regardless of the employee’s citizenship. On the other hand, employees that are holders of an H-2A or H-2B visa must be considered and cannot be disregarded. Similarly, students working as an intern or extern or for an educational institution cannot be disregarded. However, with respect to students, if they are working in a federal work study program or another similar program of a state or other governmental entity, those hours will not be counted for purposes of the pay or play.

 

• The hours of service of a bona-fide volunteer will not be counted under the pay or play rules. To qualify, the individual must work as an employee of a governmental entity or a tax-exempt organization and may only receive expense reimbursements or allowances, or reasonable benefits and nominal fees paid for similar services by volunteers.

 

• The IRS recognizes that certain employees are not paid on an hourly or salaried basis and so tracking their hours creates challenges. This includes individuals such as commissioned salespeople, adjunct faculty and on-call employees. Until further guidance is issued, any reasonable method may be used. With respect to adjuncts, the final regulations offer a safe harbor to credit these employees with 2.25 hours of service for each credit hour taught during a week plus credit for additional hours outside the classroom spent performing required duties such as office hours and faculty meetings. For on-call employees, the reasonable method must include each hour for which the on-call employee is paid, each hour for which the on-call employee is required to remain on the employer’s premises and each hour for which the employee’s activities are significantly limited because of being on call.

 

• If an employee has a break in service and returns to work, he or she may not be treated as a new employee unless the break is at least 13 weeks (26 weeks in the case of an employee of an educational institution). There is an alternative break in service rule known as the rule of parity which permits shorter breaks to be disregarded in treating the employee as ongoing rather than newly-hired.

 

• The final regulations did not provide much additional guidance regarding how to treat employees of a temporary staffing agency under the pay or play. However, the final regulations offer a useful tool to large employers who lease full-time employees through a temporary staffing agency. Where the employer retains the right to direct and control the employees, the employees will likely be considered the common-law employees of the client employer as opposed to the temporary staffing agency for purposes of the pay or play. However, if the temporary staffing agency offers the leased employees group health coverage, the offer will be treated as an offer of coverage by the client employer for purposes of avoiding the pay or play penalty. This relief is contingent on the temporary staffing agency charging the client employer a higher fee with respect to leased employees enrolling in its health plan.

 

8. Considerations Before Discontinuing Health Insurance Coverage

Some employers may prefer to “pay” instead of trying to comply with the many new requirements of Health Care Reform. However, before an employer makes this decision, the employer should consider the following:

 

• The pay or play penalty is not tax deductible.

 

• It still is important for an employer to attract and retain good employees. If an employer discontinues health insurance coverage, will the employer pay additional compensation to assist employees in purchasing health insurance coverage on the exchange? If so, here are some issues for the employer to consider:

 

 Any additional compensation must be provided on an after-tax basis. The IRS will not permit employers to reimburse employees for individual exchange coverage on a tax-free basis.

 

 The cost of coverage on the exchange depends on the insured’s age. Will the employer vary the amount based upon the employee’s age?

 

 Will the employer vary the amount depending on whether the employee has a family?

 

 The premium subsidy for purchasing insurance on the exchange depends on the household income and “phases-out” if household income exceeds four times the federal poverty level (the federal poverty level depends on the number of people in the family).

◦ The additional compensation paid to the employee to purchase health insurance coverage will reduce the amount of premium credit available to the employee because the employee’s household income will be larger.

 

◦ The employer’s executives will likely be paying the full cost of coverage on the exchange.

 

• The cost of other pay-related taxes (such as FICA) and pay related benefits (such as disability insurance and life insurance) will increase.

 

• Will the employees be happy with the coverage that is available on the exchange?

 

9. How to Modify an Employer’s Health Plan to Minimize the Risk of Taxes Under the Play or Pay Rules

 

A large employer may want to take action during 2014 to minimize the risk that the play or pay penalties will apply to the employer. Here are some actions that should be considered by the employer:

 

• For 2015, the employer should make sure that coverage is offered to at least 70% of its full-time employees (95% by 2016). If the employer employs variable hour, part-time or seasonal employees, the employer may need to establish measurement periods and stability periods to make sure that health coverage is offered to all full-time employees. The employer should also make sure that no individuals who are providing services to the employer as independent contractors are actually employees.

 

• The employer should make sure that coverage under its health plan is affordable. This is important in avoiding the $3,000 tax, discussed above. Because affordability is based upon the cost of employee-only coverage, an employer may want to consider adding a low cost medical plan option with an affordable single coverage premium tier.