Franchises Now Focus on Health Care Reform's Practical Effect

Compounding the problem is the fact that regulations about the employer mandate have not yet been released. “I've been hearing indications that it will be late in 2012, which doesn't give a lot of time for franchisees to make decisions,” said Chally.

Even when the regulations are released, they are likely to produce as many questions as answers, said Judith Thorman, International Franchise Association (“IFA”) senior vice president, government relations and public policy. “The law seems to have been written from the perspective of an employer with a stable workforce who works what we think of as a traditional full-time week of maybe 37.5 hours or 40 hours. But that doesn't reflect how many people work today,” she said. “The result is that the administrative issues are very complex and raise all types of issues for employers.”

While IFA is pursuing both legislative and regulatory solutions to the biggest of the administrative problems (see below), it is hearing from its members that the ruling already is having an impact. “Our members are trying to understand the legislation and how it might affect their plans for growth,” Thorman said. “It's clearly affecting their hiring decisions because the financial impact of the law is a big unknown.”

On the day after the Supreme Court's ruling, IFA held a telephone town hall meeting and polled participants about their concerns. According to IFA, 85% of more than 200 franchise business executives, owners and operators who responded to an online survey said they are less likely to hire workers or expand their business in the wake of the decision.

Complying with the Law

“Franchisors are impacted, but they are also getting questions from their franchisees about how they need to comply with the law. The employer mandate is at the top of the list. It's in their best interest now to move ahead with the analysis,” said Jennifer Kraft, a partner at Seyfarth Shaw LLP (Chicago).

Compliance with the employer mandate starts with a calculation of whether a company is covered. Under ACA, an employer that has 50 or more full-time equivalent employees must either offer an “essential benefits package” to all full-time employees or pay a penalty. (Note that although the calculation of employer coverage uses full-time equivalents, the actual mandate to offer insurance affects only full-time employees.)

“That's where it begins. You add up your full-time employees and the hours of part-timers to see if you hit that threshold of 50 full-time equivalents,” said Kraft. Franchisors need to keep in mind that “full-time” is defined under ACA as 30 hours per week, she added.

In an era in which multi-unit franchise operators have become commonplace, only the smallest operators will be untouched by ACA. “A typical Burger King has 30 full-time equivalent employees. So if you own two Burger King's, you're covered by this law,” said Chally.

CFA has joined with numerous other organizations in the Profit Per Employee Coalition, which argue that the mandate should not be applied based on full'time-equivalent employees, but on profit per employee. “Many franchises, such as quick-serve restaurants, operate with very low margins. They should not be held to the same standard as a law firm or software firm with a similar number of employees but much higher margins,” said Chally.

Companies that are affected can take measures to mitigate the law's impact. Because only full-time employees must be offered health insurance, franchisors or franchisees could redefine jobs so that fewer employees surpass the 30 hours/week threshold in the law. Since an employer will likely be subsidizing a large percentage of each employee's health plan, reducing the number of eligible employees can have a significant financial impact. According to Chally, that's exactly what many franchisees are contemplating. “Some franchises are even discussing if a manager's hours can be cut below 30 per week. That manager might have been receiving benefits, too. It's a shame; hours will be cut, and health care won't be provided by the employer,” she said.

Another option is to pay the penalty for not offering health insurance and let employees obtain their own insurance through exchanges. The penalty for not offering insurance coverage is $2,000 for each full-time employee, minus the first 30 full-time employees in the company. So, a firm with 55 full-timers would be penalized for 25 employees times $2,000, or $50,000. “That penalty still might be cheaper than the company's cost of health insurance,” said Kraft.

That option has the added benefit of simplicity, according to employment attorneys. “The Affordable Care Act, at a very high level, creates an alternative to the employer-based health system,” said Brian Pinheiro, who leads Ballard Spahr LLP's employee benefits and executive compensation group. The problem is no one knows how effective those exchanges will be or even how they will work, he said.

Employers have yet another set of options if they offer health coverage that is deemed to be either not affordable or does not meet minimum federal coverage standards. “Affordability” is defined as insurance not exceeding 9.5% of an employee's household income. To meet the affordability limit, an employer might offer a plan with a very high deductible that would be inexpensive, or it might pay a large enough share of the premium so that an employee doesn't exceed the 9.5% threshold. An employer would likely compare the cost of that subsidy with the cost of a penalty ' actually either one of two penalties (employers can select the less costly). The first penalty is the same as the penalty for not offering any insurance. The second is a $3,000 penalty for each full-time employee who goes to a state exchange and gets a subsidy to purchase coverage.

The latter penalty sets up a very Machiavellian calculation. An employer that has a large percentage of young and low-wage, full-time workers, such as a group of quick-serve restaurants, might believe that few employees will have enough income to purchase insurance from the state exchange, even with a state subsidy. This employer might calculate that the $3,000 per employee penalty will not be costly because so few employees will buy insurance, said Kraft.

At the other end of the spectrum are considerations of insurance as a corporate recruiting tool. Jonathan Clark, an employee benefits attorney at Pepper Hamilton LLP, said employers will be reluctant to drop insurance if it leaves them at a competitive disadvantage in attracting or retaining workers. “No one wants to be the first one” to eliminate employee health plans, he said, and he predicted that employers will wait a year or two after the law goes into full effect and assess whether the exchanges are working well.

For publicly traded companies, external pressure from shareholders also may play into the decision, according to Mark D. Nelson, a partner in Drinker Biddle & Reath LLP's labor and employment group. Shareholders might push companies to eliminate health care or scale back their plans. Adding to the pressure to reduce health care coverage is the 40% tax surcharge, the so-called “Cadillac tax,” which will kick in beginning in 2018 for any employers whose premiums exceed $10,200 for a single coverage and $27,500 for a family plan. Employers sensitive to that threshold “are going to have to start looking at that very, very soon,” Nelson said.

Administrative Complexity

Back at the level of nuts-and-bolts compliance, even the basic parameters of the employer mandate will bedevil many employers, according to IFA's Thorman. For example, ACA defines a full-time employee as a person who works 30 hours per week, on average, over the course of a month. For that month, the employee must be offered health coverage, or the penalty kicks in. But many franchises employ people for a large number of hours in one month but a fairly low number of hours over a period of months: hotels, restaurants in vacation areas, or home health care companies, to name a few. “Seasonal employees are often hired by franchises, but it goes beyond that,” said Thorman. “Think about a home health care worker who spends a huge number of hours with a person who is really sick, maybe even sleeping at the person's home. The worker could put in 80 hours or more a week for a few weeks. But then that person might not work for two months when that assignment is finished. Is that a full-time worker?”

IFA has asked the Treasury Department, Labor Department, and the Department of Health and Human Services to change the calculation period for full-time employment in the regulation. “We are proposing that an employee's hours be averaged over three or six months, not just one month, in order to get a true picture of their status,” said Thorman.

Another example is the 9.5% income threshold. ACA requires that an employer offer each employee health insurance that is no more than 9.5% of his or her household income, not personal income or income solely from that employer. “This raises all sorts of issues,” said Thorman. “What about a person who works 35 hours per week at one company and 15 hours at another? Or what employer wants to be in the position of asking an employee about the salary of a spouse or other household member? It's a privacy issue. What if the spouse loses his or her job, and then the insurance plan that was offered by the employer isn't affordable?”

IFA has proposed that the affordability threshold be calculated only on an individual employee's income from the employer that is employing the person full-time. It also has proposed that employers should have a safe harbor if they offer insurance to their employee that is affordable, but later the employee's household circumstances change and the threshold is not met.

When that employee claims to have not been offered insurance or to have been offered insurance that is not affordable, yet another set of issues will arise, Thorman said. “We see complications when the state exchanges have to investigate if the employer did offer insurance to the employee, since it's basically the employer's word against the employee,” she said. “With franchises, it gets more complicated because there might be multiple owners of franchise units in the same state, and we will have to be sure that the right franchise is being penalized.”

Unfortunately, Thorman suspects that many of the problems that IFA and others have pointed out cannot be resolved by the government agencies that are writing the regulations. “We think we will need legislative solutions, and we are pursuing the legislative front aggressively,” she said, including encouraging all IFA members to attend the association's Public Affairs Conference in Washington, DC, in September and join in the Capitol Hill lobbying effort that is part of the event.

Get Ready

The bottom line is that franchisors and franchisees need to get busy, despite uncertainty. Even though many of the regulations are not yet being finalized, new insurance programs are not yet available, and the possibility exists that the law could be changed legislatively after the 2012 presidential election, the law is moving ahead.

“It takes some time to do the analysis [about offering insurance to employees] and to get an insurance plan in place,” said Kraft. “We recommend making the decision by mid-2013 so that the company is ready at the start of 2014. We expect to see insurance companies offering more high-deductible plans that will help employers meet the affordability test. And we might see employers paying a higher percentage of the premium in order to get under that 9.5% affordability limit.”

Furthermore, some aspects of the law that affect employers will go into effect beginning in 2013, and Kraft has been working with clients to make sure they comply with those regulations. For example, W-2 tax forms issued in 2013 that report on employee income for 2012 must show the value of health care benefits received by each employee. In addition, beginning next year, employers also must provide new enrollees with a summary of benefits and coverage explanation in plain English, with examples of common benefits scenarios. The summary must indicate whether the plan provides the federal standard for minimum essential coverage and whether the plan pays less than 60% of the total cost of benefits provided under the plan.

Meanwhile, the employer mandate looms not too far in the future. While Congress considers changes to the law, Thorman hopes that the employer mandate will at least be delayed or phased-in with a grace period in which fines will not be levied for firms that have not complied.

Kevin Adler is FBLA associate editor, and he can be reached at [email protected]. Some of the information in this article was developed by ALM reporters Jenna Greene, Zack Needles and Gina Passarella for other ALM publications.

Now that the U.S. Supreme Court has given a green light to implementation of the Patient Protection and Affordable Care Act (“ACA”), franchisors and franchisees are assessing how the law will affect their businesses. A requirement to offer insurance coverage to all full-time employees beginning in 2014 is the biggest concern, but employment attorneys say that franchises also must be prepared to meet new reporting rules that will be in effect sooner.

Years of litigation about ACA created uncertainty about what would be required, and that had led to delays in developing solutions by the business community and state insurance exchanges. In that sense, the Court's decision might be a positive development. “It alleviates an incredible amount of anxiety ' that had left the system in a total state of uncertainty,” said Stephen Weiner, who chairs the health law practice at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. “Fundamentally, for people in the field who are not political ideologues, it's a relief to be able to move forward understanding what the ground rules will be.”

If only it was that simple, according to Misty Chally, executive director of the Coalition of Franchisee Associations (“CFA”). “Our members are absolutely, completely confused. They are more scared than ever about what will happen in 2014″ when enforcement of the ACA begins, she said.

Compounding the problem is the fact that regulations about the employer mandate have not yet been released. “I've been hearing indications that it will be late in 2012, which doesn't give a lot of time for franchisees to make decisions,” said Chally.

Even when the regulations are released, they are likely to produce as many questions as answers, said Judith Thorman, International Franchise Association (“IFA”) senior vice president, government relations and public policy. “The law seems to have been written from the perspective of an employer with a stable workforce who works what we think of as a traditional full-time week of maybe 37.5 hours or 40 hours. But that doesn't reflect how many people work today,” she said. “The result is that the administrative issues are very complex and raise all types of issues for employers.”

While IFA is pursuing both legislative and regulatory solutions to the biggest of the administrative problems (see below), it is hearing from its members that the ruling already is having an impact. “Our members are trying to understand the legislation and how it might affect their plans for growth,” Thorman said. “It's clearly affecting their hiring decisions because the financial impact of the law is a big unknown.”

On the day after the Supreme Court's ruling, IFA held a telephone town hall meeting and polled participants about their concerns. According to IFA, 85% of more than 200 franchise business executives, owners and operators who responded to an online survey said they are less likely to hire workers or expand their business in the wake of the decision.

Complying with the Law

“Franchisors are impacted, but they are also getting questions from their franchisees about how they need to comply with the law. The employer mandate is at the top of the list. It's in their best interest now to move ahead with the analysis,” said Jennifer Kraft, a partner at Seyfarth Shaw LLP (Chicago).

Compliance with the employer mandate starts with a calculation of whether a company is covered. Under ACA, an employer that has 50 or more full-time equivalent employees must either offer an “essential benefits package” to all full-time employees or pay a penalty. (Note that although the calculation of employer coverage uses full-time equivalents, the actual mandate to offer insurance affects only full-time employees.)

“That's where it begins. You add up your full-time employees and the hours of part-timers to see if you hit that threshold of 50 full-time equivalents,” said Kraft. Franchisors need to keep in mind that “full-time” is defined under ACA as 30 hours per week, she added.

In an era in which multi-unit franchise operators have become commonplace, only the smallest operators will be untouched by ACA. “A typical Burger King has 30 full-time equivalent employees. So if you own two Burger King's, you're covered by this law,” said Chally.

CFA has joined with numerous other organizations in the Profit Per Employee Coalition, which argue that the mandate should not be applied based on full'time-equivalent employees, but on profit per employee. “Many franchises, such as quick-serve restaurants, operate with very low margins. They should not be held to the same standard as a law firm or software firm with a similar number of employees but much higher margins,” said Chally.

Companies that are affected can take measures to mitigate the law's impact. Because only full-time employees must be offered health insurance, franchisors or franchisees could redefine jobs so that fewer employees surpass the 30 hours/week threshold in the law. Since an employer will likely be subsidizing a large percentage of each employee's health plan, reducing the number of eligible employees can have a significant financial impact. According to Chally, that's exactly what many franchisees are contemplating. “Some franchises are even discussing if a manager's hours can be cut below 30 per week. That manager might have been receiving benefits, too. It's a shame; hours will be cut, and health care won't be provided by the employer,” she said.

Another option is to pay the penalty for not offering health insurance and let employees obtain their own insurance through exchanges. The penalty for not offering insurance coverage is $2,000 for each full-time employee, minus the first 30 full-time employees in the company. So, a firm with 55 full-timers would be penalized for 25 employees times $2,000, or $50,000. “That penalty still might be cheaper than the company's cost of health insurance,” said Kraft.

That option has the added benefit of simplicity, according to employment attorneys. “The Affordable Care Act, at a very high level, creates an alternative to the employer-based health system,” said Brian Pinheiro, who leads Ballard Spahr LLP's employee benefits and executive compensation group. The problem is no one knows how effective those exchanges will be or even how they will work, he said.

Employers have yet another set of options if they offer health coverage that is deemed to be either not affordable or does not meet minimum federal coverage standards. “Affordability” is defined as insurance not exceeding 9.5% of an employee's household income. To meet the affordability limit, an employer might offer a plan with a very high deductible that would be inexpensive, or it might pay a large enough share of the premium so that an employee doesn't exceed the 9.5% threshold. An employer would likely compare the cost of that subsidy with the cost of a penalty ' actually either one of two penalties (employers can select the less costly). The first penalty is the same as the penalty for not offering any insurance. The second is a $3,000 penalty for each full-time employee who goes to a state exchange and gets a subsidy to purchase coverage.

The latter penalty sets up a very Machiavellian calculation. An employer that has a large percentage of young and low-wage, full-time workers, such as a group of quick-serve restaurants, might believe that few employees will have enough income to purchase insurance from the state exchange, even with a state subsidy. This employer might calculate that the $3,000 per employee penalty will not be costly because so few employees will buy insurance, said Kraft.

At the other end of the spectrum are considerations of insurance as a corporate recruiting tool. Jonathan Clark, an employee benefits attorney at Pepper Hamilton LLP, said employers will be reluctant to drop insurance if it leaves them at a competitive disadvantage in attracting or retaining workers. “No one wants to be the first one” to eliminate employee health plans, he said, and he predicted that employers will wait a year or two after the law goes into full effect and assess whether the exchanges are working well.

For publicly traded companies, external pressure from shareholders also may play into the decision, according to Mark D. Nelson, a partner in Drinker Biddle & Reath LLP's labor and employment group. Shareholders might push companies to eliminate health care or scale back their plans. Adding to the pressure to reduce health care coverage is the 40% tax surcharge, the so-called “Cadillac tax,” which will kick in beginning in 2018 for any employers whose premiums exceed $10,200 for a single coverage and $27,500 for a family plan. Employers sensitive to that threshold “are going to have to start looking at that very, very soon,” Nelson said.

Administrative Complexity

Back at the level of nuts-and-bolts compliance, even the basic parameters of the employer mandate will bedevil many employers, according to IFA's Thorman. For example, ACA defines a full-time employee as a person who works 30 hours per week, on average, over the course of a month. For that month, the employee must be offered health coverage, or the penalty kicks in. But many franchises employ people for a large number of hours in one month but a fairly low number of hours over a period of months: hotels, restaurants in vacation areas, or home health care companies, to name a few. “Seasonal employees are often hired by franchises, but it goes beyond that,” said Thorman. “Think about a home health care worker who spends a huge number of hours with a person who is really sick, maybe even sleeping at the person's home. The worker could put in 80 hours or more a week for a few weeks. But then that person might not work for two months when that assignment is finished. Is that a full-time worker?”

IFA has asked the Treasury Department, Labor Department, and the Department of Health and Human Services to change the calculation period for full-time employment in the regulation. “We are proposing that an employee's hours be averaged over three or six months, not just one month, in order to get a true picture of their status,” said Thorman.

Another example is the 9.5% income threshold. ACA requires that an employer offer each employee health insurance that is no more than 9.5% of his or her household income, not personal income or income solely from that employer. “This raises all sorts of issues,” said Thorman. “What about a person who works 35 hours per week at one company and 15 hours at another? Or what employer wants to be in the position of asking an employee about the salary of a spouse or other household member? It's a privacy issue. What if the spouse loses his or her job, and then the insurance plan that was offered by the employer isn't affordable?”

IFA has proposed that the affordability threshold be calculated only on an individual employee's income from the employer that is employing the person full-time. It also has proposed that employers should have a safe harbor if they offer insurance to their employee that is affordable, but later the employee's household circumstances change and the threshold is not met.

When that employee claims to have not been offered insurance or to have been offered insurance that is not affordable, yet another set of issues will arise, Thorman said. “We see complications when the state exchanges have to investigate if the employer did offer insurance to the employee, since it's basically the employer's word against the employee,” she said. “With franchises, it gets more complicated because there might be multiple owners of franchise units in the same state, and we will have to be sure that the right franchise is being penalized.”

Unfortunately, Thorman suspects that many of the problems that IFA and others have pointed out cannot be resolved by the government agencies that are writing the regulations. “We think we will need legislative solutions, and we are pursuing the legislative front aggressively,” she said, including encouraging all IFA members to attend the association's Public Affairs Conference in Washington, DC, in September and join in the Capitol Hill lobbying effort that is part of the event.

Get Ready

The bottom line is that franchisors and franchisees need to get busy, despite uncertainty. Even though many of the regulations are not yet being finalized, new insurance programs are not yet available, and the possibility exists that the law could be changed legislatively after the 2012 presidential election, the law is moving ahead.

“It takes some time to do the analysis [about offering insurance to employees] and to get an insurance plan in place,” said Kraft. “We recommend making the decision by mid-2013 so that the company is ready at the start of 2014. We expect to see insurance companies offering more high-deductible plans that will help employers meet the affordability test. And we might see employers paying a higher percentage of the premium in order to get under that 9.5% affordability limit.”

Furthermore, some aspects of the law that affect employers will go into effect beginning in 2013, and Kraft has been working with clients to make sure they comply with those regulations. For example, W-2 tax forms issued in 2013 that report on employee income for 2012 must show the value of health care benefits received by each employee. In addition, beginning next year, employers also must provide new enrollees with a summary of benefits and coverage explanation in plain English, with examples of common benefits scenarios. The summary must indicate whether the plan provides the federal standard for minimum essential coverage and whether the plan pays less than 60% of the total cost of benefits provided under the plan.

Meanwhile, the employer mandate looms not too far in the future. While Congress considers changes to the law, Thorman hopes that the employer mandate will at least be delayed or phased-in with a grace period in which fines will not be levied for firms that have not complied.

Kevin Adler is FBLA associate editor, and he can be reached at [email protected]. Some of the information in this article was developed by ALM reporters Jenna Greene, Zack Needles and Gina Passarella for other ALM publications.