Breaking Down The Insurance Requirements In Health Care Reform

By Nicole Fallon

The Patient Protection and Affordable Care Act (commonly referred to as the health reform act) contains many changes to how we access, deliver, and pay for health care in this country. At its core is the requirement that every U.S. citizen have affordable Affordable: Coverage where the employee contribution is less than 9.5 percent of household income. health care coverage beginning in 2014. This impacts all of us, as individuals and employers, and it is generating a multitude of questions. While rules and regulations will be issued in the coming months explaining specifically how these provisions will be implemented, here are some of the basic requirements.

Individual mandate for health care coverage

Beginning in calendar year 2014, individuals will be responsible for obtaining “minimum essential coverage” for themselves and their dependents, or pay a penalty. This can be met in any of the following ways:

Individuals whose employers don’t offer minimum essential coverage and whose household incomes are 133–400 percent of the federal poverty level Federal poverty level (FPL): For an individual 133% = $14,404 400% = $43,320 Family of four 133% = $29,326 400% = $88,200 (FPL) will qualify for federal subsidies Federal subsidies: Generally, individuals will be eligible for subsides in the form of premium tax credits and cost sharing assistance if their household income is 100–400 percent FPL, and their share of employer-offered coverage (if applicable) exceeds 9.5 percent of their household income. Most individuals between 100–133 percent of FPL will be eligible for Medicaid and as such, ineligible for these subsidies. to help them pay their insurance premiums or cost sharing obligations (e.g., co-insurance or co-payments) under a plan they purchase through a state exchange.

Individuals who do not obtain or retain qualifying health care coverage will be required to pay a penalty as part of their income tax returns. In 2014, the penalty is $95 or 1 percent of the individual’s income, whichever is greater. By 2016, it increases to $695 or 2.5 percent of income. For families, the maximum penalty is three times the per-person flat-dollar penalty. The penalty for dependent children without coverage is half the cost of the individual flat-dollar penalty (e.g., $47.50 in 2014).

Employers are not mandated to cover employees

Although it mandates individuals be covered, the new law does not require employers to offer health insurance coverage to their employees. However, for “large employers” (those with 50 or more full-time equivalents [FTEs] FTE = FT employees + FT equivalents: FT employee: Works an average of 30 or more hours per week. FT equivalent: Hours worked in a month by all PT employees divided by 120. ), the law imposes a nondeductible penalty if any of their full-time employees qualify for and receive federal subsidies.

There is no penalty for employers who have fewer than 50 FTEs. But in order to encourage small employers to provide insurance coverage to their employees, small business tax credits are available to help offset the employer contribution toward employee premiums.

Calculating the employer penalty

The large employer penalty is assessed differently depending upon whether an employer offers minimum essential coverage or not.

Large employers not offering coverage

In general, large employers who do not offer coverage will pay a penalty if one or more of their full-time employees are eligible for federal subsidies. The calculation:


Penalty = $2,000 annually (paid in monthly increments) x [total number of full-time employees – first 30 full-time employees]


Example: Annual Penalty for Employers Not Offering Coverage
Scenario 1 No full-time employees eligible for subsidies No penalty imposed
Scenario 2 Employer with 100 full-time employees, 20 of whom are eligible for subsidies Penalty = $2,000 x (100 full-time employees – 30) = $140,000
Large employers offering sponsored health coverage

Large employers who offer employer-sponsored health coverage (meeting the definition of minimum essential coverage Minimum essential coverage in relation to employer-sponsored health care coverage: Coverage that is “affordable,” offers the required essential health benefits, and pays at least 60 percent of the total allowed costs of the plan benefits (or actuarial value). ) to their employees and have one or more employees eligible for federal subsidies will pay the lesser of:


$2,000 x (total number of full-time employees – first 30 full-time employees) or $3,000 x (number of full-time employees eligible for federal subsidies)


Example: Annual Penalty for Employers Offering Coverage
Scenario 1 Employer with 130 full-time employees of which 75 are subsidy-eligible. Employer does not contribute toward coverage, thus no free choice vouchers. Penalty calculation the lesser the of:$2,000 x (130 full-time employees – 30) = $200,000 or $3,000 x (75 employees eligible for subsidies) = $225,000

Penalty = $200,000

Scenario 2 Employer with 155 full-time employees offers and contributes $200 per month towards employee health coverage premiums.

  • 100 full-time employees are covered by the employer plan
  • 25 full-time employees are subsidy eligible
  • 30 are eligible for free choice vouchers
Penalty calculation is lesser of:$2,000 x (155 – 30) = $250,000 or $3,000 x 25 = $75,000

Penalty = $75,000

Employer contribution for employees covered by employer plan = ($200/month x 12) x 100 = $240,000

Employer penalty for employees eligible for federal subsidies = $3,000/year x 25 = $75,000

Employer cost for free choice vouchers = ($200/month x 12) x 30 = $72,000

Total employer health benefit cost = $240,000 + $75,000 + $72,000 = $387,000

Free choice vouchers alternative

All employers, regardless of the number of employees, who offer minimum essential coverage and make a contribution toward that coverage, must also provide “free choice vouchers” to employees who meet all of the following criteria:

  • Household income is less than 400 percent FPL;
  • Employee contribution for coverage under the employer plan is between 8 and 9.8 percent of their household income; and
  • Employee and their family, if applicable, are not enrolled in the employer plan.

Free choice vouchers are basically the monthly equivalent of the largest contribution amount the employer would have paid were the employee enrolled in the employer-sponsored health plan. Employees can use these vouchers to buy coverage through the state exchange. These employees are not eligible for federal subsidies; therefore, they are not counted in the calculation of any penalty the employer might have to pay.

­Bottom line: should employers offer health coverage?

The reform law adds a new set of considerations to a business’s decisio­n-making process around offering employee health benefits: Employers will need to estimate and plan for the potential costs they could incur for offering and contributing to health insurance coverage, including outlays for free choice vouchers, if applicable.

They must also consider the penalty for low-income workers who will be eligible for federal subsidies. This will be difficult since employers have no way of knowing what their employees’ household incomes are or how many people are in their household. While businesses will want to determine if the coverage they offer meets the definition of minimum essential coverage, this will be impossible, because the only factor they can control is assuring the plan benefits they offer have at least a 60 percent actuarial value. Employers have no way of knowing if their plan is “affordable” for their employees, because they won’t know their household incomes. Given this conundrum, employers will be unable to take action to reduce or eliminate risk of penalty.

Although these requirements don’t take effect until January 1, 2014, employers understandably want to get a handle on the implications for their business now. Whether or not they decide to continue offering health insurance will be solely a financial decision for some, but for others, it will be a mixture of their mission, the cost, and their ability to hire and retain staff. Unfortunately, many questions remain about how these provisions will be implemented. In the coming months, it will be critical for employers to stay abreast of and provide input on the regulations for implementing these provisions, in hopes that they have enough information