So what should employers be doing to prepare for 2014? In a nutshell:
- Determine if the requirement to offer affordable health coverage applies. If the answer is yes, then:
- Become knowledgeable about state exchanges.
- Calculate the minimum value of employer-provided coverage.
- Calculate the threshold for exceeding affordable employee contributions to the plan.
- Prepare employee communications about the existence of the exchange.
- Decide whether and how long to offer employer health benefits (pay or play).
Health care reform requires certain employers to offer affordable health care to their employees (play) or to pay an assessment for non-group coverage (pay). Beginning January 1, 2014, employees may choose between employer-sponsored group insurance coverage and coverage available through state exchange marketplaces. While employer-provided group health insurance is likely a more affordable choice for most employees, state exchange plans may appeal to low wage earners who qualify for premium subsidies and/or reduced cost-sharing. An employee who chooses coverage through the state exchange plan will lose the employer contribution that would otherwise apply. The employer is on the hook for a penalty if an employee receives subsidized coverage in the exchange.
The deadline for states to submit an application to run a state-based exchange has come and gone; 18 states and the District of Columbia have either applied or received approval to set up a marketplace exchange. In lieu of a state-run exchange, states can choose to partner with the federal government (i.e., provide administrative services such as consumer assistance while the federal government runs the exchange) or have the federal government fully run their exchange.
So what should employers be doing to prepare for 2014? In a nutshell:
- Determine if the requirement to offer affordable health coverage applies. If the answer is yes, then:
- Become knowledgeable about state exchanges.
- Calculate the minimum value of employer-provided coverage.
- Calculate the threshold for exceeding affordable employee contributions to the plan.
- Prepare employee communications about the existence of the exchange.
- Decide whether and how long to offer employer health benefits (pay or play).
Each of these steps packs a lot of punch, and while the DOL provides guidance to help employers prepare for state exchanges, working through the guidance requires time and effort.
Here’s a quick look at each of these steps.
1. Determine if the requirement to offer affordable health coverage applies.
The affordable coverage requirement applies to employers with 50 or more full-time or full-time equivalent employees (through December 31, 2015; beginning January 1, 2016, the number increases to 100). As a result, determining the number of full-time or full-time equivalent employees is a critical and complicated first step for smaller employers. In the simplest of terms, a full-time employee (FTE) worked an average of 30 hours a week during the previous 12 months (the “look back” period). FTEs must be offered coverage during the stability period. The stability period is the greater of six consecutive months or the length of the measurement period. An employer may rely on safe harbor methods to determine the number of full-time or full-time equivalent employees.
2. Become knowledgeable about state exchanges.
The federal government banked on a greater number of states setting up their own marketplace exchanges than actually happened. The majority of states have not taken any action to set up exchanges. The deadline to choose a partnership exchange is February 15, 2013. States that miss the deadline will default to federal exchanges.
In her December 17, 2012 blog post, Kathleen Sebelius, Secretary of Health and Human Services, acknowledges that some states need more time to run their own marketplaces. But the truth of the matter is that most states want no part of running exchanges. Will the federal government pull it together in time for the October 2013 open enrollment period? The government has about eight months to accomplish what usually takes private employers 12 to 18 months.
Assuming that state marketplace exchanges become reality, employers need to keep tabs on the states in which they operate. Is the state exchange an active purchaser of insurance or a clearinghouse? How is the exchange governed? What benefits are essential? What benefits are state-mandated? How will the exchange handle the issue of adverse selection? What consumer information is available? How will an employer learn if an employee is eligible for a premium tax credit?
The more knowledgeable employers become about state marketplace exchanges, the better equipped they will be to handle the flurry of employee questions that will likely arise as January 1, 2014, approaches.
3. Calculate the minimum value of employer-provided coverage.
Employers need to know how their plans measure against the state exchange plans. State exchange plans will follow the hierarchy of precious metals in terms of the percentage of expected costs the state exchange option will cover:
Bronze: 60%
Silver: 70%
Gold: 80%
Platinum: 90%
Catastrophic (only available to consumers younger than age 30 and people exempt from the requirement to purchase coverage)
The employer-provided group insurance plan must pay at least 60 percent of covered medical expenses. If the employer plan does not do so, the employee is eligible to receive a premium tax credit for an exchange plan, and the employer could be penalized. The IRS provides several methods for calculating minimum value.
4. Calculate the threshold for exceeding affordable employee contributions to the plan.
An employee’s contribution to employer-sponsored health insurance is considered “affordable” if it does not exceed 9.5 percent of his/her household income. If it does, then the employee is eligible for a tax credit and the employer is subject to a penalty for not providing affordable coverage. Since employers have no way of determining an employee’s household income, the IRS offers a safe harbor for substituting W-2 wages to determine affordability.
The Kaiser Family foundation provides an effective flowchart for figuring out minimum value and affordability penalties.
5. Prepare employee communications about the existence of the exchange.
Starting March 1, 2013, employers must provide a written notice to all current employees advising them of the state exchange, including a description of how to contact the exchange for information. The notice must also include information about eligibility for tax credits and cost-sharing reductions if the employer’s plan does not meet the minimum value requirement. Cost-sharing, which limits a person’s out-of-pocket expenses, comes into play if the employee’s income is less than 400 percent of the federal poverty limit. Given that states have until mid-February to decide on either a federal partnership or a federal exchange, and since a model notice does not yet exist, speculation persists that the notice requirement might be pushed out.
6. Decide whether to pay or play.
Determining whether to “pay or play” is like playing Jenga. Steps needed to determine the cost of providing employer-sponsored group health insurance pile on top of each other. The crowning block is the decision to pay or play. And that decision will either rest securely on a foundation of careful calculations or topple due to a weak foundation of inaccurate or incomplete assumptions.
Here are some of the building blocks employers need:
- The gross cost of health care coverage/employee as reported in box 12DD on 2012 W-2s.
- The add-on costs of coverage, like the participant fee to fund the Patient-Centered Outcomes Research Institute that applies for seven years beginning in 2012, and the $63/participant “reinsurance” fee that applies for three years beginning in 2013.
- The projected cost of health care coverage/employee through 2018
- The projected amount, if any that exceeds the 2018 premium value of $10,200 for individual coverage and $27,500 for family coverage.
- The 40 percent excise tax that applies to the benefit amount exceeding the 2018 threshold.
- The minimum value calculation.
- The affordable contribution calculation.
- Tax penalties that result from not meeting the minimum value or affordable coverage amounts.
The question of pay or play challenges employer philosophies about the role and future of employee benefits and the employer/employee “contract.” The answer for many may be “play,” at least until employers get a firm grip of the cost of playing. But as the cost of employer-provided health benefits increases and state marketplace exchanges mature, “pay” may become an attractive alternative.
By: Leanne Fosbre
