President Obama signed the Patient Protection and Affordable Care Act in March 2010 (ACA). The goal of the plan is to significantly increase the number of individuals who have medical insurance.
Three Big Ideas
Although some provisions of the ACA are in place (such as the requirement to extend coverage to children up to age 26), 2014 brings significant additional changes. The following briefly discusses three big ideas of the ACA - the Individual Mandate, the Employer Mandate, and Exchanges.
Individual Mandate to have Medical Insurance
Beginning January 1, 2014, individuals must enroll in a medical insurance plan or be subject to financial penalty. This mandate to enroll is not limited to adults; children must also have coverage. Medical insurance will continue to be available through employer-sponsored plans (when offered), through Medicare/Medicaid, or through the purchase of individual plans. Individual plans will now also be offered through insurance Exchanges.
The penalty for failing to have insurance is either a flat dollar amount per person ($95 in 2014, $325 in 2015, increasing over the years) or a percentage of household income (1% in 2014, 2% in 2015, increasing over the years), whichever is more. This percentage is capped.
There are limited exemptions from this medical insurance requirement; individuals who fit the following categories (as defined by the ACA) are exempt from the mandate.
- Individuals with a religious exemption
- Incarcerated individuals
- Individuals who cannot afford coverage based on specific formulas
- Members of Indian tribes
- Individuals who are uninsured for short coverage gaps of less than three months
- Individuals residing outside of the U.S.
Employer Mandate to Provide Medical Insurance
To support the goal of more insured individuals, the ACA encourages employers to offer medical insurance to employees. Beginning January 1, 2014, employers with 50 or more full-time employees must offer medical insurance to full-time employees (and their dependents) that provides minimum value and is affordable, or the employer will face financial penalties. The underlined terms are discussed in more detail below.
50 or more full-time employees: Employers with an “average of 50 or more full-time employees on business days in the prior calendar year” are considered Large Employers subject to this mandate to offer insurance. While the threshold sounds straightforward, be certain to consider the following.
- Full-time employees and the hours of part-time employees are included in the calculation.
- An employee is considered full-time if the employee works at least an average of 30 hours per week or 130 hours in a calendar month.
- The hours of part-time employees are aggregated in a month and then divided by 120 (4 weeks x 30 hours per week). This equals the number of part-time employees to be added to the full-time employee group.
- There is a limited exception for seasonal employees if they work for 120 days or fewer in a calendar year.
- Employees who work outside the U.S. are not included in the calculations.
- Employers within the same controlled group are treated as a single employer for this calculation.
- The determination is made retrospectively (e.g. employees are counted in 2013 to
determine Large Employer Status for 2014.) A transition rule allows employers to
choose any period of six consecutive months in 2013 to determine status for 2014.
Minimum Value: To avoid a penalty, the medical plan offered by an employer must provide coverage with an actuarial value of at least 60%. In other words, the employee will not have to pay for more than 40% of the costs of benefits under the plan. This calculation focuses on four core benefits 1) physician care; 2) hospital and emergency room care; 3) pharmacy benefits; and 4) lab/imaging services.
Employers can determine if a plan provides minimum value through one of the following methods although, hopefully, the carrier or broker will know the answer.
- Use the Minimum Value Calculator, which will be developed by the IRS and HHS.
- Receive certification by an actuary.
- Use a safe harbor checklist, which lists the four core benefits and the minimum cost-sharing levels an employer can use to reach a 60% actuarial value. This checklist is usable only by those plans that cover all of the core benefits.
Affordable: A plan is affordable if the employee cost for employee-only coverage is less than or equal to 9.5% of the employee’s household income for the tax year. (Note: Since employers do not often know household income, the calculation is less than or equal to 9.5% of each employee’s W-2 earnings.) This requirement can cause significant calculation concerns in some circumstances - for example, employees who work inconsistent hours. Please note: Employers do not have to pay for dependent coverage but must offer the chance for dependents to enroll.
Employer Financial Penalties: Large Employers must be aware of two penalties:
- Failing to Offer Coverage: If employees and their dependents are not given the opportunity to enroll in an employer-sponsored plan (that meets the requirements of minimum value and affordability) for any month and a full-time employee enrolls in subsidized coverage through the Exchange, then a monthly penalty is assessed to the employer. (The penalty equals $2,000 times the number of full-time employees minus the first 30 divided by 12.)
- Offered Plan not Adequate: If the offered plan does not meet the minimum value and affordability requirements, a monthly penalty applies. (The penalty equals $3,000 times the number of full-time employees who apply for and receive subsidized coverage through the Exchange divided by 12.)
Exchanges are a mechanism through which insurers will offer small employers and individuals the ability to purchase health insurance. A small employer is defined by the ACA as an employer with 100 or fewer FTEs, although until 2016 states can limit purchases to employers with 50 or fewer FTEs. Starting in 2017, states may open the Exchanges to employers of 100 or more employees.
While many states are relying on the federal government’s upcoming Exchange, others are creating their own - including Washington, Oregon, and California. All Exchanges are expected to have plan options available October 1, 2013 with coverage beginning January 1, 2014. Please note employers are not required to purchase insurance through the Exchanges.
Exchanges are designed to accomplish the following:
- Facilitate the purchase of a choice of plans, expected to fall into four categories (Bronze, Silver, Gold, and Platinum, a.k.a. the “metal” plans) in addition to a catastrophic plan.
- Determine if an individual is eligible to purchase coverage through the Exchange.
- Determine if the plan offered to an individual by his/her employer is unaffordable.
- Provide certification of any exemption from the individual coverage mandate.
- Notify employers if the coverage they offer does not meet the minimums and if employees qualify for subsidies. (Subsidies are credits available to individuals who qualify for the assistance and purchase coverage through an Exchange. The subsidy assists the individual but is provided to carriers.)
- Determine tax credits and cost-sharing reductions when applicable.
This document is, of course, just an overview of some of the main parts and principles of the ACA that impact employers. As you might guess, the ACA is a complex and still evolving piece of legislation. Human Resource professionals should be considered part of your team as you navigate this new program and the impacts to your organization.
If you need further assistance on this or any other Human Resource issue, call on Personnel Management Systems.
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