When the Affordable Care Act was passed in 2010, the rules requiring employers and individuals to have health insurance or pay a penalty commencing in 2014 may have seemed a long way off. Well 2014 is just around the corner and the laws are about to kick in. Rather than wait a few paragraphs before confusing everyone, why don’t I get right to it?
Large employers are required to offer their employees’ health insurance coverage or risk paying a penalty.
What is a large employer?
It is one that employs at least 50 “employee equivalents”. One way to be an “employee equivalent” is to work at least 30 hours per week. Another way would be to work less than 30 hours per week and be aggregated with others in the same situation. For example, two part timers working 15 hours per week each aggregate into one “employee equivalent”. Add up the number of employee equivalents in your organization. If the number is less than 50 there is no penalty for not offering health insurance and you can stop reading now.
If you are still reading this, your organization needs to offer health insurance or be subject to penalties. These penalties are not called penalties anymore; they have been immortalized by the regulators as “shared responsibility”. Just to make sure that you are still confused, the Supreme Court had already decided that they were not penalties but rather taxes that you pay for not buying something (an un-sales tax) but the regulators liked “shared responsibility” better.
You will need to offer the coverage to full time employees (30 hours per week or more) only. Once you’ve aggregated part timers into “employee equivalents” for determining the abovementioned “over 50 test” you no longer need to consider them and there is no penalty for not covering them.
What kind of coverage must you offer?
In order to avoid penalties, the organization must offer a comprehensive level of benefits to at least 95% of the full time workforce and pay for at least 60% of the actuarially derived cost (with the employee paying no more than 9.5% of the family’s combined W-2 pay). The comprehensive level of benefits is known as “Essential Health Benefits” (“EHB”), the definition of which can vary a bit by State but needless to say covers most everything you’d expect including hospitals, doctors, tests, drugs, etc. for all kinds of care.
If your plan does not meet the 95% test, the EHB test, the 60%/9.5% test, and at least one of your low paid full time employees receives subsidized coverage from an Exchange, your organization will be subject to a penalty based on Calculation Number One.
If your plan meets the 95% test, the EHB test, the 60%/9.5% test, and at least one of your low paid full time employees receives subsidized coverage from an Exchange, your organization will be subject to a penalty based on the lesser of Calculation Number One and Calculation Number Two below.
Calculation Number One: Multiply $2,000 by the total number of employees in excess of 30.
Calculation Number Two: Multiply $3,000 by the number of low paid employees who receive subsidized coverage from the Exchange.
If your plan meets the 95% test, the EHB test, the 60%/9.5% test, and no low paid full time employee receives subsidized coverage from an Exchange, your organization will not be subject to any penalties.
By the way, “low paid” is not so low – in 2014 it is about $88,000 for a family. This will encompass a lot of people. And, an employee that is offered coverage from an employer-based plan that passes all the tests and turns it down is subject to individual penalties but the employer is spared.
Employers are deciding who to cover, what to contribute, or whether to have a plan at all. These deliberations are known as “Pay or Play.” Some employers are considering meeting the requirements of the Act by giving stipends to employees and letting them buy coverage on their own from one of the Exchanges. Others will not offer coverage at all, and pay the penalties. For now, most seem to be content to offer an employer-based plan that complies with the Act and covers all full time employees. There is no right answer. Grahall can help you choose the right path for your organization.
This sidebar is just a brief summary. There is plenty of “fine print” not covered. Contact us to learn more.
Or access the IRS’ Q&A on Employer Shared Responsibility Provisions.