By reelecting President Obama and leaving the Democrats in control of the U.S. Senate, the voters essentially guaranteed the survival of the Affordable Care Act (now known by both opponents and proponents as “Obamacare”). As a result, employers who might have been hoping for a different result on Election Day will have a great deal of work to do in a relatively short period of time if they are to avoid the stiff monetary penalties embedded in the law.
Actions to Be Taken by 2013
Although Obamacare’s most sweeping changes – the individual coverage mandate, the implementation of state-wide health insurance exchanges, and the employer “pay or play” penalties – do not take effect until January 1, 2014, many employer mandates are already effective. Those will now remain in place.
Moreover, a significant number of Obamacare provisions are scheduled to take effect over the course of 2013. Thus, if they have not already done so, employers should take immediate steps to comply with the following Obamacare mandates. (Throughout this article, hyperlinks relate to earlier articles providing additional detail on the applicable topic.)
- Women’s Preventive Health Care. All employer health plans that have not retained their “grandfathered” status must cover eight different categories of “women’s preventive health care services.” These must be covered on a first-dollar basis, beginning with the first plan year that commences after August 1, 2012. One of these eight categories is contraceptive services. Although churches whose tenets are opposed to contraception are exempt from this specific requirement, the exemption is quite narrow. A somewhat larger group of non-profit employers have been given one additional year to comply, but no such relief has been afforded for-profit employers. At least two federal trial courts have granted preliminary injunctions requested by for-profit employers whose owners object to this contraception mandate on religious grounds. As of yet, no appellate court has ruled on such an injunction request.
- Annual Limit on Essential Health Benefits. Consistent with the phased elimination of annual limits on “essential health benefits,” any such limit during a plan year beginning after September 23, 2012, must be no lower than $2,000,000. This is up from a $1,250,000 minimum during the prior year. Although we are still awaiting regulatory guidance as to what is included in the phrase “essential health benefits,” the statute makes clear that this phrase applies quite broadly.
- Summary of Benefits and Coverage. Effective for open enrollment periods beginning on or after September 23, 2012 – or for plan years beginning on or after that same date – all employer health plans must provide a “summary of benefits and coverage” (or “SBC”) to all plan participants, as well as to all employees who are eligible to participate.
- Notice of Material Modifications. Once a plan becomes subject to the SBC requirement, it must also issue a “notice of material modifications” each time a mid-year change in the plan’s provisions renders the SBC inaccurate. This notice must be issued at least 60 days before the change takes effect.
- $2,500 Cap on FSA Deferrals. For plan years beginning in 2013, each employee’s contributions to a health flexible spending account must be limited to $2,500. Although this cap does not apply to any employer “flex credits” that might be allocated to an FSA, any “cashable” flex credits (i.e., those that an employee may elect to receive in cash) must be treated as employee contributions for this purpose. The deadline for amending an FSA to reflect this limit is not until December 31, 2014, but employees must be informed of this limit before the 2013 plan year begins.
- Additional Medicare Tax Withholding. Starting in 2013, employers must withhold an additional 0.9% Medicare tax from any employee’s compensation in excess of $200,000. This is in addition to the regular 1.45% Medicare tax. This additional Medicare tax does not apply to an employer’s share of Medicare.
- W-2 Reporting of Health Care Coverage. IRS Forms W-2 issued for 2012 (during January of 2013) must report the value of any health coverage provided to each employee, regardless of who pays the premium for that coverage. Until further notice, however, this requirement does not apply to any employer that issued fewer than 250 W-2s during the prior calendar year. This chart indicates the types of health coverage that must be reported for this purpose, as well as those types that either should not be reported or for which reporting is currently optional.
- Notice of Exchange Availability. By March 1, 2013, all employers (regardless of their size or grandfathered status) must provide a notice to their employees concerning the availability of health coverage through the state-wide exchanges that are to be created under Obamacare. This notice must also explain that, depending on the employee’s household income, a federal income tax credit might be available to help pay the premiums for such coverage. Although it is likely that a model notice will be available for this purpose, no such model has yet been issued.
- Taxation of Retiree Drug Subsidy. Under current law, employers that provide retirees with prescription drug coverage that is generous enough to qualify for a federal tax subsidy may deduct all of their prescription drug expenses – including those attributable to this non-taxable subsidy. Beginning in 2013, however, this generous tax treatment will be eliminated. Effectively, employers will then be taxed on the subsidy amount. (Of course, tax-exempt employers will remain exempt from all federal income taxes.)
- Comparative Effectiveness Fee. For the seven plan years ending after September 30, 2012, but on or before September 30, 2019, all employer health plans will be required to pay an annual fee to help support “patient centered outcomes research.” The goal of this Obamacare provision is to improve the quality of health care, thereby ultimately reducing the cost of such care. For the first year, this “comparative effectiveness fee” is $1 per covered life. The fee doubles to $2 per covered life the second year, and is then adjusted for inflation during its final five years. The first such fee is due by July 31, 2013.
Looking Ahead to 2014
In addition to the “pay or play” provisions summarized below, 2014 will see a few additional Obamacare mandates for employer health plans. These include the following:
- No Pre-Existing Condition Limitations. For the last two years, employer health plans have not been allowed to impose any pre-existing condition exclusion or limitation on coverage for dependent children under age 19. Starting in 2014, this prohibition on pre-existing condition clauses will apply to adults, as well.
- No Annual Limitation on Essential Benefits. The phase-out of permissible annual limitations on “essential health benefits” will become complete as of the first plan year beginning on or after January 1, 2014. From that point forward, no plan – whether grandfathered or not – may impose any annual or lifetime limit on such benefits.
- 90-Day Cap on Eligibility Waiting Periods. Once 2014 arrives, any employer health plan must allow an employee within an eligible classification to become covered under the plan within 90 days after his or her date of hire (or transfer into an eligible classification). This requirement will apply to both large and small employers. For at least 2014, employers with “variable hour” or seasonal employees will be allowed to determine whether those employees meet the “full-time” definition by measuring their average work hours over a period of up to 12 months.
- Coverage of Older Children. Although all employer health plans have already been required to offer coverage to children up to age 26, grandfathered plans have not had to do so if a child was eligible for other employer-sponsored coverage. Starting with the 2014 plan year, however, that partial exemption will be eliminated. So grandfathered plans will no longer be able to exclude coverage for older children on the ground that the child has other coverage available.
Preparing for “Pay or Play”
Although the employer “shared responsibility penalty” does not apply until January 1, 2014, the time to start mapping out a response to the penalty is now. Under this provision of Obamacare – sometimes referred to as “pay or play” – any employer having 50 or more full-time employees (including full-time equivalents) could be subject to substantial tax penalties if it either fails to offer health coverage to substantially all of its full-time employees or offers coverage that fails either an “affordability” or “minimum value” test.
The purpose of this penalty tax is to help defray the cost to the federal government of subsidizing an employee’s purchase of coverage through a state-based insurance exchange. The penalty will therefore apply only if one or more of an employer’s full-time employees actually receives such a tax subsidy.
There are actually two different penalty taxes. If a covered employer fails to offer at least a minimal level of health coverage to substantially all of its full-time employees (and to their dependents) – and if even one such employee receives a tax credit to purchase exchange-based coverage – that employer will owe an annual penalty tax of $2,000 for each full-time employee in excess of 30. For this purpose, “full-time” employees are defined as those who work an average of 30 or more hours per week (or 130 hours per month). Obviously, employers with a large number of full-time employees could owe a substantial tax penalty if they fail to offer any sort of employer health coverage.
A covered employer may avoid this $2,000 per-employee penalty by offering at least a minimal level of coverage to its full-time employees (and their dependents). However, if that coverage is either not “affordable” (because an employee’s share of the premium for employee-only coverage exceeds 9.5% of the employee’s household income) or fails to provide “minimum value” (because the plan is designed to pay less than 60% of all covered expenses), the employer could still owe an excise tax of $3,000 per year for any full-time employee who actually receives the federal tax subsidy to purchase coverage through an exchange. Note that, unlike the $2,000 penalty discussed above, this $3,000 penalty does not apply to any full-time employee who does not obtain the tax subsidy.
Employers with a significant number of employees whose hours vary from week to week, or who work on a seasonal basis, may want to take advantage of recent IRS guidance for determining which of these employees must be considered “full-time.” Using a “measurement period” of up to 12 months, followed by a similar “stability period,” such an employer may be able to defer offering coverage to variable hour or seasonal employees until they have completed more than 12 full months of employment. A similar procedure may then be applied on an ongoing basis, thereby avoiding any penalty tax for seasonal employees who work more than 30 hours per week for only a portion of a year.
Any employer thinking of relying on this recent guidance, however, should start counting their employees’ hours right now. That way, they will have a sufficient record of each employee’s work hours to determine whether the employee must be treated as full-time during January of 2014.
Employers are also considering other alternatives for avoiding these penalty taxes. Some are systematically reducing their employees’ weekly work hours below the 30-hour threshold for full-time status. Whether such an approach will be consistent with profitable business operations will depend on each employer’s unique situation.
Another option, of course, is simply to pay the tax penalties. As between the two different taxes, it seems hard to justify an approach that subjects an employer to a $2,000 tax for each full-time employee. This harsh tax may be avoided simply by offering a minimal level of health coverage to substantially all full-time employees – even if the employees are required to pay the full premium for that coverage. The administrative costs associated with offering employee-pay-all coverage would surely be less than $2,000 per employee per year. Moreover, whereas administrative costs may be deducted when determining an employer’s taxable income, the penalty tax is nondeductible.
The analysis is far more complicated in the case of the second penalty tax. Many employers operate on such a tight margin that they simply cannot afford to offer all of their full-time employees a health plan meeting both the “minimum value” and “affordability” requirements. Those employers will want to compare the bottom-line effects of either (1) offering such coverage, or (2) paying a nondeductible penalty of $3,000 per year for each full-time employee who obtains subsidized coverage through an exchange.
While the overall picture for 2014 remains murky, this much is clear: Now that Obamacare appears to be safely ensconced into law, employers would be well-advised to begin mapping out a strategy for complying with its requirements in as cost-effective a manner as possible.