The following blog posting was contributed by William E. Allison, Jr., Partner, Benefits Design Group, Inc. For the purposes of this discussion, the premise assumes that employers qualify as a large employer as defined by the ACA and are subject to all the provisions and penalties associated with the Act.
On July 2, 2013, the Obama Administration announced that it would postpone the implementation of two key components of the Affordable Care Act (ACA) that were set to start at the beginning of 2014. The two provisions relate to the “shared responsibility” penalties, sometimes referred to as “play or pay” provision, and the reporting requirements necessary for the government to determine if employers provide affordable, minimum health coverage to their full-time employees. The implementation of these two points was delayed until 2015. These provisions have again been postponed until 2016 for employers with 50-99 full-time or full-time equivalent (FTE) employees.
Prior to the decision to delay implementation employers were starting to rush to understand the provisions and to cope with the potential penalties. However, the postponement allowed employers to delay their plans and to analyze the results of the opening of the Health Insurance Marketplace. Now that the first open enrollment period has been completed and individuals are debating the success or lack of success, two things have become apparent. The Affordable Care Act will continue and 2015 is coming quickly.
Potential Employer Penalties
The IRS has been tasked by the Obama Administration with the responsibility of enforcing the provisions of the act and to enforce the penalties and fines generated by the ACA. It’s estimated that these penalties/fines could amount to $69 Billion. It’s been reported that the IRS is hiring thousands of new agents to help enforce these provisions.
Large employers potentially face specific non-compliance penalties as the result of the Act from several areas:
- Health Coverage
- Penalties assessed for the failure of a large employer to offer a health plan that provides minimum essential coverage (MEC)
- Penalties assessed for the failure of a large employer to offer a health plan that is both affordable and offers minimum value health coverage (MVC)
- Failure of large employers to properly comply with the vast number of reports and guidelines of the Act to both the government and employees on a timely and accurate basis
MEC Penalty: The ACA requires that employers offer a MEC health plan to 95 percent or more of its FTE employees or be subject to a penalty of $2,000 per FTE employee, less 30. This can be a very substantial penalty to an employer. For example, if an employer has 1,000 FTE employees, the penalty would be $1,940,000 ($2,000 x 970).
Affordable/Minimum Value Penalty: Large employers that provide MEC plans must also offer a health plan that is both affordable and offers minimum value or be subject to a fine. In order to meet these provisions,
- The employee premium contribution for single coverage cannot exceed 9.5 percent of the employee’s annual income and
- The employer plan must cover at least 60 percent of healthcare expenses.
penalty for each employee receiving a subsidy.
Reporting and Guidelines
The ACA has a number of reports and notices that need to be sent to either the government and/or employees on a timely basis in order to avoid non-compliance penalties. Some reporting is already required and other reporting starts in 2016 for 2015 calendar year plans. As mentioned earlier, the ACA is partially funded by penalties and fines leveled against companies and individuals. The penalties are not inexpensive and the IRS has built its agent force to enforce these guidelines.
On March 5, 2014, the IRS issued final regulations concerning the new reporting requirements enacted under the ACA for insurers and self-funded plans. The ACA added sections 6055 and 6056 to the Internal Revenue Code (IRC). Together, these sections outline the reporting requirements, including the processes and data to be supplied by insurers and self-funded plans.
Section 6055 of the IRC, sometimes referred to as “Individual Mandate Reporting”, requires health insurers and employers sponsoring self-funded group health plans to annually report to the IRS and to individuals covered under a plan whether the coverage qualifies as a MEC plan under the ACA and the months in which the individual was enrolled. This report will be used to determine when the individual mandate penalty might apply and help the IRS enforce the provision.
Section 6056 requires large employers to report certain information to the IRS and to individual employees. The report to the IRS, referred to as “play-or-pay” reporting, will include information about compliance with the employers shared responsibility provisions of the ACA. The reporting requirement to FTE employees is to assist the employee in determining whether they can claim a premium tax credit for a given month of the calendar year.
Both sections 6055 and 6056 were initially required under the ACA to correspond to the 2014 calendar year plans. However, the effective date was delayed last year. The first report filing is due in the first quarter of 2016 which will report on coverage provided in 2015. Please note that employers with 50-99 FTEs are not subject to the play-or-pay provisions for 2015 but employers are still subject to section 6056 reporting for 2015. Employers with fewer than 50 FTEs do not have to comply with 6056 reporting requirements.
Tips to Compliance and Avoiding Penalties
In the above information, I have tried to outline some of the potential pitfalls and penalties to large employers due to the requirements of the Affordable Care Act. However, there are many more provisions that you need to be aware of and develop a game plan to deal with situations.
Below are some actions you should consider in dealing with the provisions and consequences of the ACA:
- Work closely with someone who knows the provisions of the ACA and listen to their advice. If your current broker is not up to date on the provisions, has not talked to you in great detail about the ACA, and has not made concise recommendations, seriously consider replacing him/her. All of these items should have occurred months ago.
- Reacquaint yourself with your employees. By this I mean update all of your personnel records to obtain certain information about your employees that will allow you to make intelligent decisions about your benefit plans and contribution levels. Examples of information you need would be:
- Marital Status
- Number of Children
- Does the spouse work? For whom?
- Does the spouse's employer offer a medial plan?
- Are family members covered under another Major medical plan?
The answers you obtain will help you formulate the provisions of your medical plans and to better understand your liabilities. Your company may want to accept some potential liability as long as you know the extent of the liability.
- If you do not have a Benefit Administration system, you should seriously consider getting one as soon as possible. A Benefit Administration system that is fully integrated with payroll, human resources, time and attendance, insurance providers, and insurance administrators is going to be of upmost importance in dealing with the reporting and recordkeeping requirements of the ACA. A fully integrated system will be able to pull information from all of these sources quicker and more accurately than trying to accumulate information manually or with an older outdated system.
The system will also help you manage benefit eligibility dates, enrollment deadlines, Enrollment options, open enrollment periods, full-time employee status, manage W-2 reporting and the look-back periods on variable hours employees. Many of these items are reflected in the data needs for ACA reporting.
- DO NOT consider paying the $2,000 penalty without serious consideration and great thought. Although the penalty is probably much less costly than the cost of providing a group health insurance program, it is probably not the best idea for the company. First of all, the $2,000 penalty is not deductible to the company and must be paid with after-tax dollars. Secondly, Employers need to realize that there are many other less expensive solutions to this potential penalty that should be explored.
Savings Tip - The ACA indicates that the Employer needs to “offer” a MEC plan. It does not require that an Employer pay for or even contribute to the cost of a MEC plan. Therefore, an Employer can offer a fully contributory (employee paid) MEC plan to its full-time equivalent employees for a very nominal cost (probably an administrative and broker cost to cover the cost of doing business). By just offering a MEC plan, employers satisfy 100% of their liability under the ACA, completely eliminating the $2,000 penalty potential.
Self-funded MEC plans are available in the marketplace at a cost less than $100 per employee per month from many sources.
- If you have a segment of FTE employees that are currently unbenefited or not eligible under a Company group health program, don’t panic because you’re worried about the potential penalties. There are many things that can be done to help limit your liability.
Important items you need to be aware of and items that can be incorporated in the plan design to help limit your exposure are:
- You are only liable for the $3,000 penalty if your subsidy-eligible employee actually enrolls in a health exchange plan.
- If your FTE employee is eligible for Medicaid, he is not eligible for a subsidy
- If your FTE employee is married and is eligible for a qualified health plan through the spouse’s health plan, the employee is not eligible for a subsidy
- To eliminate the potential $3,000 penalty, you need to offer a plan that is both affordable and offers MVC. Remember, you only have to offer a qualified plan; employees do not have to participate.
- While presenting a plan to employees that is basically unattractive, you can also offer other non-qualified plans that may be more attractive to employees.
The intent of this white paper is to present some ideas and areas of thought that will get employers thinking about the ACA and to take action. The provisions and penalties are real and will start impacting large employers very shortly. In fact, they are already affecting employers who may not realize it. Do not allow that to happen to you. Act now and get a handle on your liability and what needs to be done to limit this exposure.
BlueFinHR can help you with all of the items addressed in this piece. If you would like to discuss any of these points or how we can assist you, please contact us.