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March 15 2013

ACA - What Must A Small Employer Do? Part 2 - Mandatory Coverage

By: Timothy J. Tornga

This is a continuation of our effort to help small employers understand what they need to know about the Affordable Care Act (ACA).  Last month, we sent out the following article: ACA - What Must A Small Employer Do? - Part 1 - Issues Affecting Employers of All Sizes.  In this installment, we will discuss changes that the ACA will make in 2014.

Mandatory Coverage

The central feature of ACA begins to apply in 2014 - mandatory coverage.  All individuals must purchase coverage on their own or receive coverage through their employer or some other source.  Applicable large employers (employers with 50 or more full-time employees) must provide coverage to their full-time employees or face significant penalties.  This is known as the employer mandate or "pay or play." 

There are two alternative employer pay or play penalties.  Part A is the requirement that an applicable large employer offer minimum essential coverage to at least 95% of employees working 30 or more hours per week and their dependents.  The "minimum essential coverage" requirement will be satisfied by an employer-sponsored plan offered in the state's large or small group market.  If the employer does not offer this coverage to 95% of its employees and if at least one employee purchases subsidized coverage on the state exchange, then the employer must pay a penalty of $2,000 for each full-time employee in excess of 30 employees. An employer of 100 employees that offers coverage to only 94 employees will owe a Part A penalty for the year of $140,000 ($2,000 x 70 employees) if one or more employees purchase exchange coverage.

The Part B requirement assumes the employer offers coverage to 95% of its employees, but that the coverage is not "affordable" for all employees or does not provide "minimum value."  For this purpose, coverage is "affordable" if the employee must pay no more than 9.5% of household income toward the cost of coverage.  For the present time, this is interpreted to mean less than 9.5% of the employee's W-2 income for single coverage.  "Minimum value" means that the policy or plan provides 60% or more of the cost of average, expected medical costs in the year.  If the employer offers essential benefit coverage to 95% of its employees but it does not meet "affordable" or "minimum value" standards for some of its employees, then the employer must pay a Part B penalty of $3,000 for the year for each employee who is not offered coverage that is affordable and minimum value and who purchases subsidized coverage on the state exchange.  If an employer of 100 employees offers coverage to 95 or more of its employees (but where the coverage is not affordable for 20 employees and 10 of those employees purchase coverage on the exchange), the employer must pay a Part B penalty of $30,000/year ($3,000 x 10 employees).  The alternative penalties are coordinated so that the employer does not pay a Part B penalty that exceeds the $2,000 times the number of its employees.

There are some "relaxations" of the pay-or-play by rules. Coverage must be offered to the employee and nonspouse dependents.  Spouse coverage is not a required offering of the mandate.  The second is that dependent coverage need not be affordable to avoid the Part A or B penalties.  And 2014 is not a "hard" date for the dependent coverage requirement. Employers failing to offer dependent coverage in 2014 must "take steps" in 2014 to come into compliance with this requirement and thereby avoid the penalty in 2014.

The initial response that must be taken by employers of 50 or more employees is to make certain that it is offering coverage (regardless of employee cost) to 95% or more of its full-time employees that meets the minimum essential benefits requirement.  This response avoids the Part A penalty.  The second step is to evaluate whether the coverage is not affordable and/or does not meet the minimum value requirement for some employees.  Then compare the cost of the Part B penalty (and employee relations consequences) with the cost of reducing employee share of the cost or improving the coverage.  Note that in this mandatory coverage section we have assumed that all employees in the examples work on a full-time basis. 

We will discuss the employer mandate in more detail in a later report.

Other ACA News for 2014

In addition to the pay-or-play and individual mandates, several additional ACA changes become effective in 2014. 

  • Employers of 200 or more employees must automatically enroll all employees (subject to opt-out) in the employer health plan.  It is possible that this requirement will be delayed for another year.
  • As mentioned in Part 1, the elimination of annual limits and elimination of pre-existing condition exceptions becomes fully phased in for the 2014 plan year. 
  • New rules for the comprehensiveness of health insurance coverage become effective for the small group market. 
  • Participant cost sharing limitations apply to non-grandfathered plans. (Out-of-pocket expenses may not exceed $6,250 for self-only and $12,500 for family coverage.  Deductibles in small group market policies - marketed to employers of 100 or fewer employees - may not exceed $2,000 for self-only and $4,000 for two or more coverage). 
  • The maximum waiting period for employees meeting the full-time or other eligibility criteria cannot be longer than 90 days.  (First day following completion of 90 days of employment and first day of the month following 60 days of employment meet the requirement, but first day of the month following 90 days of employment fails.)
  • Expanded wellness features with larger consequences for unhealthy behaviors apply.
  • Many changes apply to implement the health exchanges for the individual market (to satisfy the individual mandate).
  • Large employers (more than 50 employees) must pay a penalty if they fail to provide coverage (pay or play).  Small employers escape this penalty.  But if an employer (large or small) offers coverage, it must follow the rules contained in the ACA listed above and those described in Part 1, except as otherwise noted.

There are many penalties that apply for violations of the ACA.  In addition to the pay-or-play penalties, the "standard" penalty for violation of many of the provisions mentioned above and in Part 1 is $100 per person per day ($36,500 per year for each affected person).   This will be subject to self-reporting by filing a new form 8928 with the IRS - a form that even accountants (those that know about it) hate.  There is an escape hatch - from the penalty, not from compliance.  If a failure is due to reasonable cause and not to willful neglect and the failure is corrected within 30 days of when the employer first "knew, or exercising reasonable diligence would have known," the penalty is waived.  This penalty does not apply to employers offering insured coverage only who did not employ an average of more than 50 employees in the preceding calendar year, if the failure is due to the contents of the health insurance contract.  However, most of these rules apply to these smaller employers and ERISA gives employees "private rights of action" to enforce compliance.  And HHS and DOL retain the authority to enforce these requirements.

Next Steps

Later installments will deal with other ACA issues, including the impact that size (number of employees) has on an employer's ACA compliance.  If you would like information on these topics in advance of the next installments or if you have questions about how the ACA will affect your business, call Tim Tornga at 616-632-8090 or one of the labor attorneys of Mika Meyers.