Employment Law Alert – What Employers Should Know About the Health Care Reform Legislation
by Kara L. Arguello
April 21, 2010
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act. This legislation will affect businesses of all sizes. Companies should immediately analyze the impact health care reform will have, ensure they are complying with the law’s immediate requirements, and initiate long-range planning.
Basic Structure of Health Care Reform Legislation as it relates to Employers
The new legislation creates Insurance Exchanges in each state, to serve as the means by which health insurance providers compete for customers on equal terms. The Exchanges are open to anyone who does not have employer-provided coverage and who wants to purchase a health insurance plan. The Insurance Exchanges are also open to those individuals whose employer-provided coverage is unaffordable. For example, an employee is eligible to purchase coverage through the Exchanges where the employer’s policy covers less than 60% of the cost of coverage, or if the employee pays more than 9.5% of his or her income to obtain that coverage.
The law envisions a sharing of responsibility for health care costs between employers and the federal government. If employers rely on the existence of the Exchanges as a substitute for providing coverage to their employees, the penalties could be severe.
Short-Term and Long-Term Impacts on Employers
Within six months of the bill’s effective date (i.e., before September 23, 2010), insurers have to stop some practices such as setting lifetime limits on coverage, cancelling policyholders who become ill, or denying coverage to children based upon pre-existing conditions. Beginning in 2012, employers will be required to report on W-2 forms the value of health benefits provided to employees in the prior tax year.
Beginning in 2013, families earning $250,000 or more annually will face higher Medicare payroll taxes, and unearned income such as investment income, now exempt from payroll tax, will be subject to a 3.8% levy. Beginning in 2014, insurers cannot deny medical coverage to anyone based on a medical condition, or charge higher premiums because of a person’s gender or health status. Waiting periods for health insurance cannot exceed 90 days starting in 2014. In 2018, insurers will have to pay a 40% excise tax on so-called “Cadillac plans” – plans in which premiums for families are $27,500 per year or more.
The “Employer” Mandate
Beginning in 2014, companies who employ 50 or more employees but do not offer health coverage will have to pay a penalty of $2,000 per full-time employee for all full-time employees in excess of 30 if even one employee receives a federal government subsidy and purchases coverage through an insurance exchange.
For example: If ABC, Inc. employs 60 full-time employees, and does not offer coverage, and even one of its employees purchases insurance through the Exchanges, then ABC, Inc. will face a penalty of $60,000 ($2,000 x 30 employees).
If an employee opts out of an employer plan because coverage is unaffordable, the employer will be penalized. If the plan’s premium exceeds 9.5% of the employee’s family income, the employer must pay a $3,000 penalty for each full-time employee who receives a government subsidy and purchases coverage through an insurance exchange.
For example: Assume that DEF Corporation employs 60 people and 50 of those people earn less than $95,000 annually. DEF Corporation’s health insurance plan costs $10,000 in premium per year. Assuming those 50 employees who earn less than $95,000 per year have no other family income, the premium cost exceeds 9.5% of their income. If all 50 of those employees purchase insurance through the Exchanges, DEF Corporation will be assessed $150,000 in penalties ($3,000 x 50 employees).
Added Requirements for Large Employers
Effective in 2014, companies that employ 200 or more employees will be required to automatically enroll new full-time employees in their health care option with the lowest employee premium. Notice must be given to new employees of the automatic enrollment, and the employees must be given the opportunity to either opt out of coverage or elect a different option from the plans the employer provides. Automatic enrollment may be subject to a waiting period, but that period cannot exceed 90 days.
Impact on Small Businesses
Even employers with fewer than 50 employees are affected by the new legislation. Employers who offer coverage must provide a free choice voucher to employees whose income is less than 500% of the federal poverty level, where the employee’s share of the premium is greater than 8% but less than 9.8% of his income, and who chooses to enroll in a plan through the Exchanges. The voucher must be in an amount equivalent to what the employer would have paid to provide coverage to the employee under the employer’s plan. The employee can then use the voucher to purchase insurance coverage through the exchanges. The employer does not face a penalty if it provides the free choice voucher and the employee receives premium credits in the Exchanges.
Businesses that employ fewer than 100 employees may be eligible for tax credits. Effective immediately, businesses with 10 or fewer full-time employees earning less than $25,000 annually on average will be eligible for a tax credit of up to 35% of the total cost of providing health care coverage to employees (this will increase to 50% in 2014). Also effective immediately, companies with 11-25 full-time employees and an average payroll of up to $50,000 are eligible for partial tax credits on a sliding scale. Eligibility formulas are available online at www.irs.gov.
Beginning in 2011, employers of 200 or more workers must report (1) whether they offer to their full-time employees and dependents the opportunity to enroll in minimum essential coverage under and eligible employer-sponsored plan, (2) the duration of any applicable waiting period, (3) the employer’s share of the total allowed cost option in each of the enrollment categories under the plan, and (4) the number and names of full-time employees receiving coverage.
Effective 2012, all employers are required to report on Form W-2 the value of health care costs given to employees during the prior tax year.
In 2013, employers must notify employees about state health insurance Exchanges, whether the employer’s plan meets minimum coverage requirements, and how to access information about premium subsidies that might be available for Exchange-based coverage.
Actions Companies Should Take Now and Later
Companies should act now to be sure that the coverage they offer meets the standards required effective August 2010, discussed above. Companies should begin to evaluate their average payroll and costs of premiums to determine whether the plans they currently have in place potentially expose them to penalties, and plan to make adjustments if necessary.
In terms of long-term planning, management should designate individuals and/or teams to be responsible for reporting obligations, as well as training Human Resources or other individuals who will be tasked with giving notice and information to employees. Companies should ensure that all relevant documentation is up to date, and consult with accountants and legal counsel to ensure compliance with all legal obligations imposed by the new legislation.
Attorneys in the Berliner Cohen employment group will be pleased to provide further information regarding the matters discussed in this Alert:
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