ACA prep: Now, this year and in 2014
Original article from http://ebn.benefitnews.com
By Robert J. Lowe
The Patient Protection and Affordable Care Act includes many requirements applicable to employer group health plans. Some of these requirements are already effective but some of the most significant requirements will become effective in 2014. Employers should now be considering what they need to do to comply with ACA requirements that will become effective in 2014.
ACA provisions that are already effective
Employer group health plan should already be complying with the following requirements that are already effective:
- Coverage for young adults to age 26
- Deletion of lifetime and annual dollar limits
- Limits on pre-existing condition exclusions and rescission of coverage
- Medical loss ratio rebates paid by insurance companies
- Summary of benefits and coverage provided to participants explaining the terms of the plan
- W-2 reporting of cost of coverage
- $2,500 limit on health care flexible spending accounts
In addition, plans that do not have “grandfathered” status under ACA, as a result of changes to the plans adopted since enactment of the Act, are already subject to the following rules:
- Modified claims and appeals rules including external review requirements
- No cost preventative care
- Non-discrimination rules for insured plans (although these rules are not being enforced currently pending release of regulations)
What happens in 2014
Effective in 2014, employers that are treated as “applicable large employers” under ACA will have to comply with one of the central requirements of the Act, the requirement to offer employees health plan coverage that complies with ACA requirements or otherwise become subject to penalties under the Internal Revenue Code, referred to as “assessable payments.”
Assessable payment rules
There are two types of assessable payment under ACA.
Under one type of assessable payment, if an “applicable large employer” offers health coverage to all employees who work 30 or more hours a week and their dependents but the coverage does not qualify as “minimum essential coverage” or the employer offers coverage that is not “affordable” or does not provide “minimum value” and at least one employee enrolls in a plan offered through a state health insurance exchange for which a premium tax credit or cost sharing reduction is allowed, then the employer subject to “assessable payment” of up to $3,000 for each affected employee per year.
Compliance is determined on a monthly basis with a $250 assessable payment (one-twelfth of $3,000) due for each month for which the affected employee is entitled to a premium tax credit or cost sharing reduction as a result of the purchase of coverage on the exchange. Not all employees will be eligible for the premium tax credit or cost sharing for purchase of this insurance. Only employees earning less than four times the federal poverty limit will be entitled to these benefits. However, employers will not have to make this determination. If the IRS determines that the employee is entitled to these benefits, it will issue the assessment to the employer. This assessable payment is determined only with respect to those employees who purchase the insurance on the exchange and are eligible for the premium tax assistance or cost sharing.
Another type of assessable payment applies if the applicable large employer fails to offer minimum essential coverage at all to 95 percent of its employees who work 30 or more hours per week and their dependents, regardless of whether it is “affordable” or provides “minimum value” and at least one employee purchases coverage through a state health insurance exchange for which a premium tax credit or cost sharing reduction is allowed. Under these rules, the employer can be assessed a penalty equal to $2,000 per year, but multiplied by the number of full time employees employed by the employer reduced by 30.
Who is an “applicable large employer”
As in initial matter, it will be very important for each employer to determine if it is an “applicable large employer.” For this purpose, an employer is an “applicable large employer” if the employer employed an average of at least 50 full-time employees on business days during the preceding calendar year. The parent-subsidiary and brother-sister controlled group rules of the Internal Revenue Code apply in making this determination. Thus, for example, in determining whether the 50-employee test has been met, all subsidiaries that are at least 80 percent owned directly or indirectly, by the parent corporation will be treated as a single employer with the parent corporation. Also, two part-time employees who work an average of at least 15 hours a week are considered a single full time employee for purposes of making this determination.
There is an exception to the definition of “applicable large employer” for employers whose work force exceeded 50 full time employees only because of “seasonal workers” employed for 120 or fewer days during calendar year.
The determination for a particular calendar year is based on the employer’s average number of employees during the prior calendar year using the entire prior year for that purpose. However, for 2014 only there is a special transitional rule that allows an employer to determine if it is an applicable large employer using any period of six consecutive calendar months during calendar year 2013 rather than using the entire year.
What is affordable coverage
If the employer determines that it is an applicable large employer, it will also be necessary to determine if the coverage it is offering is “affordable.” If the coverage is not affordable, and an employee obtains coverage on an exchange for which it obtains a premium tax credit or cost sharing benefit, the employer will be liable for an assessable payment for that employee.
Coverage is affordable if the employee’s required contribution does not exceed 9.5 percent of the employee’s household income for the year. The coverage to which this rule applies is the employee portion of the self-only premium for the employer’s lowest cost coverage that provides minimum value. Thus, the employer can charge higher amounts for spouse or dependent coverage without having the coverage cease to be treated as affordable for this purpose.
The IRS regulations offer a variety of methods for determining the employee’s household income. However, most employers will find it easiest to make this determination using the safe harbor method based on Form W-2 wages as set forth in box 1 of the W-2.
Determining if an employee is full-time
In most cases it will be clear if an employee is a full time employee or not. However, in some cases, it will be difficult for an employer to make this determination.
The basic definition is that a full time employee for this purpose is an employee who is employed on average at least 30 hours of service per week. However, in some cases, the employer will not know in advance if an employee will satisfy that requirement. For this purpose, the IRS proposed regulations provide special rules for “variable hour employees” if it cannot be determined when the employee begins work if the employee is reasonably expected to work 30 hours per week.
Also, under a special transitional rule for calendar year 2014 only, a new employee who is expected to work initially at least 30 hours per week may also be a variable hour employee if, based on the facts and circumstances at the start date, the employee is expected to work 30 or more hours per week but the period of employment at more than 30 hours per week is reasonably expected to be of limited duration and it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week during the entire initial measurement period. However, effective January 1, 2015, such a limited duration employee will have to be treated as a full time employee.
To determine whether coverage is required for these variable hours employees, the IRS provided the option to use a “look back/stability period” safe harbor. Under this approach, the employer “looks back” at a period of three to twelve months to determine if during the measurement period the employee averaged at least 30 hours per week.
If the employee is determined to be full-time during the measurement period, the employee is treated as full-time during a subsequent stability period of six to twelve months, regardless of the number of hours worked during the stability period.
There can also be an “administrative period” of up to 90 days under certain circumstances between the end of the measurement period and the beginning of the stability period.
Variable hour employee examples
These rules can be illustrated by the following example of use of the look-back/stability period rules for ongoing employees:
- Employer uses a look-back period of 12 months ending October 15 and a stability period of the calendar year.
- During the period from October 16, 2012 through October 15, 2013, an employee is tested to determine if he or she satisfies the full-time employee requirements.
If the employee works an average of 30 hours per week during the look back period, the employee would be entitled to coverage effective with the stability period beginning January 1, 2014. Coverage would be available for all of 2014 regardless of hours worked in 2014 as long as the employee remains employed. If, however, the employee does not work an average of 30 hours per week during the look back period, then the employer does not have to treat the employee as a full time employee for the entire stability period of 2014 regardless of the number of hours worked in 2014 and no assessable payment could be due with respect to the employee for that period.
Similar rules are applicable with respect to new employees as illustrated by the following example applicable to use of the look-back/stability period rules for new employees:
- Employer uses a 12-month initial measurement period from date of hire and 12-month stability period.
- Administrative period from end of measurement period to end of first calendar month beginning after the measurement period.
If an employee has a date of hire of February 10, 2013, the measurement period would end twelve months later on February 9, 2014.
If the employee worked an average of 30 hours per week during this measurement period, the employee would be treated as full-time and would be entitled to coverage for the stability period from April 1, 2014 through March 30, 2015. If the employee did not work an average of 30 hours per week during that measurement period, the employee would not be treated as a full time employee during the stability period.
In addition, the employee would have to be tested as an ongoing employee as well. Therefore, using the look-back/stability period rules discussed above for ongoing employees and using the same assumptions as set forth above, then the employee would also have to be tested for the measurement period from October 16, 2013 through October 15, 2014 (applicable to ongoing employees) to determine calendar 2015 coverage. If the employee was treated as a full time employee during the look back period beginning on the date of hire, but not during the look back period beginning October 16, 2013, the employee would be entitled to coverage for the period from April 1, 2014 through March 30, 2015, but would not be treated as a full time employee for the balance of 2015.
Employers who wish to avoid liability under the assessable payment rules that become effective in 2014 should be analyzing their health plans and employee populations to determine if they already comply with the new rules and, if not, what changes they will have to make before January 1, 2014.