The new employer mandate or “shared responsibility” requirements are one of the most significant provisions under the Affordable Care Act (ACA). Starting in 2014, large employers may be subject to penalties under the “shared responsibility” provision if they do not offer a certain minimum level of affordable coverage. The details of the ACA employer mandate are highly complex and there are many factors to consider for companies that want to maintain compliance and avoid significant penalties.
ACA defines large employers as those that employ at least 50 full-time employees on average during the prior calendar year. A full-time employee is defined as someone who averages at least 30 hours of service per week. This calculation becomes more complex as part-time employees, seasonal employees and new hires factor into the process of determining full-time equivalents. These full-time equivalents (FTEs) are then added together with regular full-time employees to see if a company is considered a large employer.
Employers that qualify as large employers can face two types of penalties. There are two ways to incur the first type of penalty. One is to not offer health coverage at all. The other is to offer coverage to less than 95 percent of full-time employees and have at least one of the full-time employees receive an insurance coverage premium tax credit to help pay for their coverage on a health insurance exchange. In these cases, the penalty is $2,000 times the total number of full-time employees each year – minus the first 30.
The second scenario occurs when an employer offers coverage to 95 percent or more of full-time employees, but at least one full-time employee received an insurance premium tax credit to help pay for his coverage on a health insurance exchange. This can happen because a particular employee was not offered coverage or the coverage offered was unaffordable. The ACA considers health coverage unaffordable when the employee’s contribution is more than 9.5 percent of his household income and the employer does not cover at least 60 percent of the benefit costs. In this scenario, the penalty is assessed by month for each employee who received the premium tax credit. The penalty is the number of subsidized employees multiplied by one-twelfth of $3,000. There is a cap for the penalty (number of full-time employees each month, minus 30, multiplied by one-twelfth of $2,000) to ensure that it doesn’t exceed the penalty the employer would’ve had to pay if he didn’t offer health insurance coverage at all.
The complexity of compliance, potential penalties and increased costs are good reasons for most employers to reevaluate their employee health benefit plans. Employers need to consider a number of questions as part of their evaluation.
One question is whether it is cheaper to pay the penalty or offer the minimum coverage. In some cases, the cost of providing coverage will far outweigh the cost of the penalties for not doing so. In this scenario, it may be better for the employer to let certain employees obtain coverage through the insurance exchanges, giving them better coverage at a lower cost.
Another question is whether employers should offer less coverage. Many employers who continue to offer coverage will exceed the requirement to pay at least 60 percent of the costs of the benefits so they can avoid penalties. They may not want to be too generous with the coverage they provide or they will get hit with the Cadillac Tax. The Cadillac Tax is a 40 percent tax on employers for high-end health benefits they provide that are worth more than $10,200 for individuals or $27,500 for families. This provision does not begin until 2018.
As you can see, the employer mandate or “shared responsibility” provisions of the Affordable Care Act are complex and could have a significant impact on a company’s bottom line.