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The Affordable Care Act: More Time for the Employer Mandate

Written by  Dwaine Sohnholz

ACA
In July, the Department of the Treasury used its administrative authority to grant employers an additional year to implement key elements of the Affordable Care Act (ACA) employer mandate. Essentially, the mandate stipulated that employers of 50 or more full-time equivalent employees must offer affordable health care coverage to full-time employees or pay a penalty. Shared responsibility payments (penalties) and information reporting requirements that were scheduled to become effective on January 1, 2014 have been delayed until January 1, 2015.

That’s a welcome reprieve from demands of looming policy decisions, financial planning, information systems work, and communication hurdles, but it’s only temporary. Most of us can use the time to begin applying new rules this fall and make sure everything goes more smoothly as ACA is phased in. This gives BSCs the opportunity to ensure they are making sound business decisions and that they have the right technology in place in order to ease the burden of managing ACA requirements. When it comes to determining your workforce composition, managing measurement periods, tracking employee benefits eligibility, and reporting this information to the government, spreadsheets aren’t going to cut it. In addition to evaluating your technology needs and choosing a technology partner that can help you meet those needs, there are a number of other decisions you should be making or refining now in order to comply with ACA in the future.

Workforce Composition: What determines full-time employee status?
Large employers in the United States have a new business cost to contend with beginning January 1, 2015, and many are now continuing to work through the “Pay-or-Play” decision process. Under the basic terms of ACA, those businesses must choose to offer affordable, minimum essential health coverage or incur an annual penalty of $166/month per full-time employee (excluding the first 30 FTEs).

So how do you count the employees for whom you will have a shared responsibility for health insurance?

As of this writing, key guidance from the IRS was provided in Notice 2012-58. For ACA, a full-time employee is one who is reasonably expected to work, on average, at least 30 hours per week. This is translated to a monthly threshold of 130 hours (30 hours per week x 52 weeks/12 months= 130). Each employee you hire and designate as full-time counts in this equation to calculate your potential financial responsibility—either as an IRS-assessed penalty or as an employer co-funded insurance premium.

Measurement, Administrative and Stability Period Options
In the Building Service industry, we typically have a significant number of employees that the IRS categorizes as "variable hour employees," where full-time status cannot be determined at the employee's start date. In these cases, employers will be permitted to use a “standard measurement period” of between three and 12 consecutive months to determine whether the employee averaged at least 130 hours per month. If that threshold is satisfied, then the employer will have a cost related to that employee, as either a penalty or shared insurance premium. See example in Figure 1.

Figure 1-
Measurement Period Chosen:
12 months beginning October 15, 203

 

Total Hours

Avg. Hours/Month

Result

Employee A

1505

125.42

Not
Full-Time

Employee B

1645

137.08

Full-Time

 

 During any measurement period that you choose, you'll also have new hires, staff separations, benefit waiting periods, and administrative periods for enrollment. All of these factors should be considered in estimating the financial impact of your pay-or-play decision.Many businesses with employees who work variable schedules are considering choosing the longest measurement period of 12 months to allow the most flexibility in averaging peak workloads with slack times. Employers should select a measurement period with care though, because that decision also has an impact on employers’ financial obligations for the months that follow.

 

 

 

Coverage / Stability Periods

The “stability” (aka coverage) period follows the measurement period. See figure 2 below for an example.

An “Initial Measurement Period” for New Variable Hour Employees

If a new employee is hired as full-time, a group health plan may not use a waiting period that exceeds 90 days (see IRS Notice 2012-59). However, if based on the facts and circumstances at the start date it cannot reasonably be determined whether the new employee is expected to work full-time because the employee’s hours are variable or otherwise uncertain, an initial measurement period of between three and 12 months can be used to determine their status and eligibility for health-coverage benefits.

 

Figure 2

When a measurement period results in an employee status of:

Treatment in that status is for the subsequent stability period of:

Full-Time

At least six months and no shorter than the measurement period

Not full-time

Not longer than the measurement period

 

 

 

 

Employers can choose whether initial measurement begins on an employee’s start date or the first day of the calendar month that follows. Choosing the first day of the month might be easier to administer for large workforces. Otherwise, initial measurement periods could start and end every day of the year.

You can choose an initial measurement period with a different duration than the standard measurement period for ongoing employees, but the stability period for new and ongoing employees must be the same length of time.

Optional Administrative Period
In practice, most employers also need time between measurement and stability periods in order to verify measurement results, notify employees, and offer enrollment options, so an administrative period of up to 90 days is permitted. The administrative period must overlap with the prior stability period in order to prevent gaps in coverage.

See an example of this in Figure 3 below.

07-AffordableCareAct- fig3

Decision steps in this example:

  1. Employer selects standard measurement and stability periods of 12 months in length.
  2. Employer decides on a stability/coverage period that begins on January 1 (the calendar year).
  3. Employer chooses to have an administrative period (of no more than 90 days for ACA compliance).
  4. Employer then decides on a preceding standard measurement period that runs from October 15 of year 1, to October 14 of year 2.
  5. For new employees: Employer decides on initial measurement and stability periods of 12 months and chooses to start initial measurement on each new employee’s start date.
  6. The employer also decides to use a new employee administrative period that will last through the end of the first complete calendar month after the initial measurement period.

Applying policy and rules for a new employee:

  1. Employee “A” is hired on May 10, 2013 with a variable hour (not full-time) schedule.
  2. The initial measurement period runs through May 9, 2014.
  3. The initial administrative period ends on June 30, 2014 (the first complete calendar month after the initial measurement perio0d that ended May 9).

If measurement results determine that Employee “A” was full-time:

Insurance coverage will be offered to “A”, and the employee’s election will be for the initial stability period from July 1, 2014 to June 30, 2015, regardless of the hours worked during those months.

If measurement results determine that Employee “A” was not full-time:

Insurance coverage will not be offered.

  1. Employee “A” will also be tested during the first complete standard measurement period available, running from October 15, 2013 to October 14, 2014. Results will determine treatment for the following stability period of January 1 through December 31, 2015.

What happens when there are different results between initial and standard measurement periods since their subsequent stability periods overlap? Results favor the employee.

If Employee “A” met the full-time employee standard during initial measurement, then elected coverage, and fell short of the 130-hour average during the standard measurement period beginning 10/15/13, coverage should be continued through June 30, 2015.

If Employee “A” fell short of the 130-hour average requirement during the initial measurement period, but passed the test during the standard measurement period ending 10/14/14, he/she should be offered coverage for the stability period beginning 1/1/15.

What-If Scenarios & Financial Modeling
After workforce analysis is done and your policy is drafted, using results in what-if scenarios can help make the best and most cost-effective “pay or play” decisions for your company. An example with three different scenarios follows:

Scenario 1
You can simply choose not to offer insurance coverage to full-time employees. Your projected cost for the year 2015 will be determined in January of 2016. It will be calculated using the number of full-timers employed each month of 2015 (minus 30), multiplied by 1/12 of $2000. If you average 500 full-time employees during the year, your total cost will be $940,000. That penalty is not a tax-deductible expense.

To avoid penalties entirely, you can offer “minimum essential coverage” (MEC) that is considered “affordable” for your full-time employees. What constitutes MEC? Read IRS Notice 2012-31 for details. Your insurer will also provide that information, and calculators will be offered by the Department of Health & Human Services to help with this task. What's considered “affordable”? The IRS has proposed three “safe harbors” for determining affordability: The figure is based on 9.5 percent of one of three factors: a) the employee's W-2 wages, b) the employee's hourly rate x 130 hours per month, or c) the federal poverty level for a single individual.

Scenario 2
In this scenario, we'll use a high-deductible plan from our own experience (which we believe meets MEC standards). The total annual cost of this premium is $3,259.20. For an employee earning federal minimum wage of $7.25 per hour, working 130 hours per month ($942.50/month), an “affordable” employee cost share would be up to $89.54 per month (or 9.5 percent of the employee's monthly wages). The employer share of the monthly premium would be $182.06, or $2,184.75 per year per employee. That's just slightly more than the $2,000 annual penalty in scenario No. 1, but this premium expense is tax deductible.

Now you have to consider this: How many of these minimum-wage employees will choose to enroll and deduct nearly $90 from their monthly wage? Which ones will opt-out and buy groceries instead? Let's say 20 percent of a 500-person full-time workforce chooses to participate in the plan (100 people)—the total annual cost would be $218,475.

Scenario 3
In this scenario, let's sweeten the employee deal considered in Scenario No. 2. If we improve employee affordability by reducing their monthly payroll deduction to $40, our employer cost increases to $231.60 per month ($2,779.20 per year). If this incentive doubles the employee participation rate to 40 percent of our 500 person full-time workforce (200 people), the employer annual cost would be $555,840, and again, this expense is tax deductible. That's still only 60 percent of the non-deductible penalty calculated in Scenario No. 1.

What’s Next?

Other ACA provisions and timetables remain in effect, including

  • the October 1 requirement for employers to provide notice of coverage options available in the Marketplace (www.dol.gov/ebsa/consumer_info_health.html )
  • the requirement that waiting periods for coverage be limited to no more than 90 days,
  • the individual mandate, individual penalties, and
  • the availability of subsidies for some of those who purchase coverage through the Marketplace.

The Treasury also expects to publish proposed regulations on detailed employer reporting requirements this summer. So what’s next? First, take a deep breath. Then continue your work to make the best decisions for your company, employees, and clients. Talk to employees and clients. Build your network of professional advisors, insurance providers, and technology partners. We’ll get through this together.

For more information on this topic, visit www.teamsoftware.com/blog/affordable-care-act-pay-or-play-part-2-what-if-scenarios-financial-modeling/

Dwaine Sohnholz is Director of Project Management for TEAM Software Dwaine’s focus on the employer and business impact of the Affordable Care Act began before it was signed into law in 2010. He’s been an advocate and advisor to building service and security contractors in his R&D role at TEAM Software, where he leads the business analysis and project management group and is heading up efforts on ACA-related solution development. Dwaine leverages his 25+ years of experience in financial management, risk assessment, and change management to deliver solutions for today’s increasingly complex business environment. For more information on TEAM Software’s tools and resources, please visit our website at www.teamsoftware.com or 800-500-4499.

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