Health Care Reform — The Employer Mandate

Juliana Reno, Esq.
Kutak Rock LLP

The health care reform law does not require any companies to offer a health plan to its employees. However, companies that fail to offer any health coverage, or fail to offer adequate coverage at a reasonable cost, will pay a penalty. We call this the “employer mandate” because most employers must either offer coverage or pay a penalty.

Overview

If your company is subject to the employer mandate, you have three basic options:

• Eliminate penalty cost (in which case the company will pay a lot in premiums).

• Eliminate premium cost (in which case the company will pay the maximum penalty).

• Pay some premium and some penalty.

When you are deciding among these options, it is important to remember that the premiums your company pays are deductible business expenses, but the penalty is nondeductible. It is also important to take more than financial considerations into account. Specifically, you should assess whether the company needs to offer health benefits, and whether it needs to pay some of the premium, in order to recruit and retain quality employees.

Employers Subject To The Mandate

Only large employers — employers with more than 50 full-time-equivalent employees (“FTEs”) — are subject to the mandate. For these purposes, two companies are considered a single “employer” if they are in the same “controlled group” or “affiliated service group.” For example, a parent corporation and its wholly owned subsidiary are considered a single employer.

The statute does not clearly explain how to count FTEs, but the government has provided preliminary, informal guidance. According to the guidance, FTEs are counted by using the following rules:

For each month, identify the employees who average more than 30 hours per week. Each of these is considered a full-time employee and counts as one FTE.

• For each month, add together the hours for the employees who are not full-time employees. Divide by 130. This is the number of additional FTEs for the month.

• For each month, add up all the FTEs.

• If the employer has an average of 50 or more FTEs for the preceding calendar year, the employer is subject to the mandate.

The Maximum Penalty

If an employer does not offer “minimum essential coverage” to at least some full-time employees, the employer will pay the maximum penalty. (As described above, two companies may be considered a single “employer.”) “Minimum essential coverage” means a major medical plan that covers at least 60 percent of the expected claims, determined on an actuarial basis. Your insurer or third-party administrator should be able to tell you whether a plan meets this threshold.

The maximum monthly penalty is calculated as follows:

($2,000/12) x (full-time employees – 30)

Note that this formula counts only full-time employees. Full-time employees are those who average at least 30 hours per week or 130 hours per month. If the company could limit its entire workforce to 29 hours per week, the company would not pay any penalty.

The Alternate Penalty

If an employer offers minimum essential coverage to at least some full-time employees, then the employer pays the lesser of the maximum penalty (above) or the alternate penalty. The alternate monthly penalty is calculated as follows:

($3,000/12) x full-time employees entitled to a credit

Which employees are entitled to a credit? An employee is entitled to a credit if all of the following are true:

• The employee’s share of the pre- mium for employee-only coverage is more than 9.5 percent of the employee’s household income.

• The employee does not enroll in the employer’s plan.

• The employee enrolls in an exchange plan.

• The employee’s household income is less than 400 percent of the federal poverty level.

Companies probably will not know exactly which employees are entitled to a credit. What can you do? There are two strategies. First, you can impose rules that affect whether the employee is entitled to a credit. For example, if you cap an employee’s premium cost at 9.5 percent of wages, the employee will not be entitled to a credit. Second, you can estimate. Depending on how much you know about the demographics of your workforce, you may be able to do this on your own, or you may need to engage specialists to help you with the calculations.

To Do List

Establish a timeline. Start by determining the date on which the company will communicate its 2014 health benefit strategy to employees. If earlier, use the date by which your 2015 budget is due. Work backwards, considering the time needed to take all of the other steps in this list.

Determine the significance of health benefits. Does your company need to offer health benefits to recruit and retain quality employees? Are there other groups — customers, business partners, directors — who have an interest in the coverage the company offers to its employees?

Gather data and crunch numbers. You will need to know the number of full-time equivalent employees. If your company is a large employer, you will need to know the number of full-time employees, as well as the anticipated cost of coverage and how that relates to employee salaries. You need to run some calculations that reflect the three basic options and different assumptions of employee behavior.

Make, implement, and communication the decision. Remember that you may need to change vendors and may need to reprogram your HRIS systems.