As Affordable Care Act Mandates Roll Out, Employers Need to Get Their Houses in Order

As Affordable Care Act Mandates Roll Out, Employers Need to Get Their Houses in Order

A LexisNexis® Webinar Report Edited by Susan Winchurch, J.D.

As the changes implemented by the Affordable Care Act (“ACA”) roll out in 2013 and 2014, employers must get a handle on their workplaces, who is an “employee,” and whether the number and type of employees puts them in the ambit of ACA reforms. These efforts must be cross-functional, and involve human resources, benefits, payroll and in-house legal. As the political dust drifts away and the shared responsibility mandate of the ACA emerges from the political ether and crystalizes into corporate practice and policy, employers who fail to analyze these issues proactively may get caught under the wheels as the reforms roll forward.

LexisNexis® assembled three experts on March 6, 2013, to lead a Webinar focusing on the imminent ACA-driven challenges. Texas attorney Cynthia Marcotte Stamer, managing shareholder of Cynthia Marcotte Stamer, P.C., teamed up with L. Stephen Bowers of Cozen O’Connor’s Philadelphia office, and Mark W. Pawlak, Revlon’s Vice President, Law, and Deputy Chief Compliance Officer, to lead a discussion on the ACA, employer and employee classifications, possible penalties and new reporting requirements. Editor’s Note: You can still hear the entire LexisNexis® Webinar as it was recorded by registering HERE.

The ACA is grounded on shared responsibility, with a mandate for federal and state exchanges to act as clearinghouses for individuals and small companies to obtain coverage. Individuals, under Internal Revenue Code (IRC) Section 36(B), must obtain “minimum essential coverage,” through the exchanges, a grandfathered health plan or otherwise. Employers face shared responsibility under the “pay or play” rules of IRC Section 4980H.Employers must offer minimum essential coverage for their full-time employees if at least one employee is eligible for a premium credit or subsidy, Stamer explained. “Either the employer can offer a plan that meets these requirements or they have to make a payment,” she said.

Does the Law Cover You? Start by Counting Heads

An employer first must determine whether it is a “large employer,” based on number of employees. Determination of “employee” status is based on the “common-law standard” in 26 C.F.R. §31.3401(c)-1(b), and does not include: a leased employee, as defined in IRC Section 414(n)(2), a sole proprietor, a partner in a partnership, or a 2% S corporation shareholder, Stamer said. Thus, “small or entrepreneurial employers really need to make determination” of worker classifications.

Because Section 4980H applies to “large employers,” the head count is pivotal. First, the employer must identify all “common-law employees,” regardless of hours worked, including seasonal employees. The formula is total full-time employees who work, on average, 30 hours per week, for each calendar month in the preceding calendar year, plus “full-time equivalent” employees (calculated by the total hours worked by all non-full-time employees divided by 120). And if the sum is greater than or equal to 50, the employer is a “large employer” and needs to examine whether the law’s narrow exceptions for seasonal workers apply. Calculations are based on the prior year’s employment, Stamer explained. If a company didn’t exist in the prior year, the company will become a large employer for the current year if it is reasonably expected to employ an average of at least 50 full-time employees, she said.

Calculate the Penalties: How Big is the Stick?

Bowers tackled the “bad news”—consequences of a violation. While the Supreme Court has characterized the penalty as a “tax,” Bowers referred to it as a “stick.” And how big the stick is will depend on facts and circumstances.

He suggested that employers take a careful, but pragmatic approach when considering the possibility of penalties for non-compliance. “You can find out that even though we are clearly within the ambit of law, the penalty may be minimal or non-existent depending on the structure of your company and your employment status,” he noted, adding that the analysis is valuable even for so-called “large employers” for purposes of the ACA.

But employers may be surprised at their susceptibility to penalties. An employer faces a penalty if it has at least one full-time employee enrolled in a qualified health plan and receiving an applicable premium tax credit or cost-sharing reduction under the ACA, he said, or a “subsidized employee.”

And the amount of subsidy given to lower-paid employees extends beyond the lowest-paid rank and file, but is anywhere from 100 to 400 times the poverty level. “You need to do specific calculation to determine which employees are likely or possible to receive a subsidy,” he cautioned. “If any of them goes to an exchange, receives a credit, does not enroll in your plan or your plan doesn’t qualify, you could be hit with a penalty.”

To pass muster, a plan must:

1. Be “generally available”—meaning it is offered to 95% of full-time employees and non-spousal dependents;

2. Be affordable—meaning employees cannot be required to pay more than 9.5% of their overall household income; and

3. Provide coverage with an actuarially tested “minimum value.” Plans are given a “metallic ranking” of bronze, silver, gold or platinum, with bronze being the lowest acceptable level.

Employers should review with counsel which benefits are excluded from scrutiny. Those may include accident or disability insurance, limited scope vision or dental coverage, specific disease coverage, or Medicare supplement coverage offered under a separate policy.

A large employer that does not offer coverage may incur a penalty of $2,000 per full-time employee (less 30) per year, while an employer who offers coverage, but has an employee who receives a subsidy, may incur a penalty equal to the lesser of $3,000 per employee receiving the subsidy, or $2,000 per full-time employee per year.

But the panel cautioned employers against allowing the ACA’s focus on numbers to drive the organizational model. “This is where you hear press about employers cutting people back to part time, because they are trying to minimize their penalty,” Bowers said. “In my opinion, any employer that does that will regret it because of the massive restructuring that will be required.”

Pawlak agreed. “What we have determined is that you can’t drive your organizational model due to these potential penalties or taxes,” he said.

Pawlak, Stamer and Bowers agreed that tracking hours and employee classifications is critical. “Know your workforce. Think about who your common-law employees are and how they are classified,” Pawlak urged.

Employers need to be sure that their employee classifications make sense. For example, the hours counted for an hourly employee should correspond to the hours counted for wage and hour law purposes. Employers will need to examine all policies affecting employee hours—including paid and unpaid time off, leave policies and snow days. Payroll and benefits staff will need to work closely with in-house and outside counsel in making the correct determinations.

“This is an example of where in house counsel is going to need to facilitate a discussion in the business with the right people to make sure that they understand these concepts, and how can we use these things to our advantage and what are we going to do with the risk that this poses to our business,” Pawlak said.

Classifications have to be reasonable and applied consistently. Generally, “full time” is a common- law employee who was employed, on average, at least 30 hours of service per week, per month. There are nuances to this rule; for example, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, provided the employer applies this equivalency rule on a reasonable and consistent basis. One hour of service for one applicable large employer member is treated as an hour of service for all other applicable large employer members for all periods during which the applicable large employer members are part of the same group. The rules set who is an employee as of a fixed measurement date, for a period known as the “stability period.”

“I can’t stress enough really scoping this out as a cross-functional project, because there’s going to be unintended consequences with just about every decision-point the group is going to make,” Pawlak said, noting that “there is no substitute” for having all the right players—human resources, benefits and payroll—to examine these issues.

Unintended Consequences and New Reporting Rules

The panel also highlighted some additional required reporting and disclosure issues and some of the “unintended consequences” of the law.

For example, Bowers explained, “fully insured health plans” (those that cede risk to an insurer) must report a cost breakdown known as the “medical loss ratio”—essentially, a limitation on the amount of profit that can be derived from an insurance contract based on premium vs. actual costs. When the employer pays the premium, even if the employee pays a portion, insurers will report the breakdown to the employer, and money is returned to the employee. Once the employer has the money in hand, Bowers noted, “it has the Brewster’s Millions problem” and needs to distribute the money appropriately. Some plans may provide guidance in their plan documents, Bowers said, but the majority of plans don’t. Employers may refund the money to employees in various ways, including a break from payments or “premium holiday.” But, he said, if the employer receives a refund greater than three months of premium, it may end up with a prohibited transaction under the Employee Retirement Income Security Act (ERISA) because of a quirky interplay between the ERISA trust requirements, the Internal Revenue Code rules governing cafeteria plans, and the reporting rule in the ACA.

ACA also requires a “mini” summary plan description, or “mini-SPD,” which is a notice to employees supplementing the plan’s Summary Plan Description. No more than four pages long, the mini-SPD describes coverage, co-pays, exclusions and the like, and allows an employee to compare and contrast options.

Employers are now required to disclose the value of health coverage on W-2 forms, an informational disclosure that the panel characterized as “relatively positive” because it is a way to tell employees about the value of the health coverage that they are receiving.

Effective March 2013, employers are required to provide guidance on utilizing the exchanges.

And employers will have to certify to the Internal Revenue Service in a publicly disclosable document that their plans provide minimum essential coverage. Company officers who sign the certification will need to be educated about what it means, Pawlak said.

Finally, some plans may be grandfathered, provided:

•The have continuously existed since March 23, 2010;

•They continuously exist for as long as grandfathered status is claimed;

•At least one individual was enrolled on March 23, 2010 for as long as the plan maintains grandfathered status;

•The plan does not experience any “disqualifying material change.”

•Certain disclosure requirements are met; and

•Required documentation is maintained dating back to March 22, 2010.

“If you don’t have copies of all your plan documents in a notebook on your desk you are probably at risk,” Stamer warned.

Key Takeaways:

1. Employers must know their workforces and worker classifications. An employer may or may not be subject to the ACA based on the number of employees and how they are deployed; i.e., seasonal or part-time status.

2. Understand the “shared responsibility” mandate and make an assessment of whether it makes sense to “pay or play.”

3. Use counsel and human resources professionals wisely. As employers commence the analysis of relevant issues under the ACA, they should assemble their in-house teams immediately, and keep human resources, benefits, payroll and legal personnel in the communication chain to ensure a seamless transition under the ACA.

4. Involve outside counsel at all levels of the analysis to assist in an understanding of the ACA’s complex structure, rules and reporting requirements.

Disclaimer: The views and opinions expressed in this article are those of the individual sources referenced and do not reflect the views, opinions or policies of the organizations the sources represent.