Health Care Reform: Key Definitions Every Employer Must Know
Although the original January 2014 deadline for employer mandate provisions has been pushed back a year, many HR managers are still wondering how the Affordable Care Act (also referred to as “ObamaCare”) will impact their company.
The law requires large employers to offer affordable and adequate health care insurance coverage to their full-time employees or pay a penalty. Although there has been much media coverage of both the positives and negatives of the ACA, there are still loads of questions swirling around how the federal government will define a “large employer” or “full-time employee.”
A recent HR Professionals Magazine article “How the Affordable Care Act Impacts Employers” identifies and defines the key terminology included in the act as well as some examples of how it will affect your business and employees.
Large Employers: The Act defines a “large employer” as an employer with at least 50 or more full-time employees or full-time equivalent employees on business days during the preceding calendar year. Temporary employees assigned to an employer by a temporary employment agency are counted as employees of the temporary agency for purposes of determining “large employer” status under the Act. Additionally, there is an exception to the 50 full-time employee requirement. If an employer’s workforce is greater than the 50-employee threshold during 120 days or less in the preceding calendar year and the excess employees were “seasonal” workers, then the employer is not a “large employer.”
Full-Time Employees: A “full-time employee” is someone who generally works 30 or more hours per week or 130 or more hours per month. In order to calculate whether employees are “full-time” under the Act, an employer must adopt a standard measuring period (3-12 months) and average its employees’ hours for that period. Once a determination is made, there is a stability period where each employee is treated as full-time/part-time based on the measuring period calculation. The stability period must be at least 6 months and cannot be shorter than the chosen measuring period.
Full-Time Equivalents: Part-time employees (i.e., employees who generally work less than 30 hours per week) also must be taken into consideration to determine full-time equivalent employees for purposes of the 50-employee threshold for large-employer status under the Act. Although part-time employees must be included in this calculation, “large employers” do not incur a penalty for failure to provide health insurance to such part-time employees. An employer takes the total number of hours worked in a month by part-time employees and divides that total by 120, yielding the total number of full-time equivalent employees for the month.
Play-or-Pay Penalties
The two types of penalties under the Act’s play-or-pay provisions are as follows:
Penalty for Not Offering Coverage: Under the Act, an employer who chooses not to offer insurance coverage must pay a penalty if at least one of its full-time employees receives a premium credit or subsidy and uses the credit or subsidy to obtain insurance through a public insurance exchange created by the Act. The exchanges are virtual insurance marketplaces maintained in each state by that state or the federal government where health insurance providers compete for customers. The formula for the annual penalty is $2,000 multiplied by the number of full-time employees minus 30.
Application of No-Coverage Penalty Across Tax Control Groups: For control groups, the 30 full-time employee reduction is allocated proportionally across the member companies.
Penalty for Failure to Offer Affordable or Adequate Coverage: A large employer is subject to a $3,000 penalty for each employee who is offered coverage that is not “affordable” or is not “adequate” and receives a premium credit to obtain insurance through an exchange. This penalty cannot exceed the maximum no-coverage penalty assessable against an employer under the formula discussed above.
Affordable Coverage: Insurance is “affordable” when the cost of coverage for the individual employee does not exceed 9.5% of the employee’s household income. Regulations allow employers to use an employee’s W-2 wages to calculate affordability.
Adequate Coverage: Adequate coverage means that an employer’s health insurance provides “minimum value.” “Minimum value” is insurance that pays for at least 60% of covered health care expenses. According to the IRS, by 2015, employers must also provide coverage for dependants of full-time employees up to age 26, but not for spouses.
Temporary Employees: Temporary employees who have worked “full-time” for the same assigned large employer for up to twelve months must be offered affordable and adequate coverage by the assigned employer.