Affordable Care Act Impacts on Group Health Plans

This article provides an overview of the Summary of Benefits & Coverage (SBC) disclosure and employer-shared responsibility mandate implemented under the Affordable Care Act. Information on SBC compliance and your firm's exposure to the shared-responsibility rules follows.

Know Your SBCs

A new SBC should have been included in your firm's open enrollment packets this fall. (Most calendar-year group health plans began distributing SBCs during the fall, 2012, open enrollment period. Non-calendar year group health plans must have begun providing SBCs during the first open enrollment period beginning on or after Sept. 23, 2012.) Required under the Affordable Care Act, the new SBC disclosure's appearance must comply with stringent formatting and content requirements, and be distributed in accordance with regulatory requirements. See joint regulations issued by the United States Treasury, Department of Labor, and Department of Health & Human Services at 26 CFR ' 54.9815-2715; 29 CFR ' 2590.715-2715; 45 CFR ' 147.200. The plan or insurer's failure to provide timely and compliant SBCs could result in penalties as high as $1,000 per recipient. Penalties will not be assessed during the first year, provided group health plans and insurers work diligently and in good faith in providing SBCs that conform to regulatory content, appearance and distribution requirements. The following provides an overview of SBC content and delivery requirements.

SBC Requirements

The SBC is intended to communicate coverage and cost-sharing terms for a group health plan's major medical options (e.g., PPO, HMO, high deductible health plan [HDHP], etc. ). Fully insured group health plan administrators share responsibility with the insurer for SBC appearance and distribution compliance. (If the group health plan is self-funded, the plan administrator is normally responsible for SBC compliance.) Therefore, it is essential that your firm's plan administrator review insurance and third-party service provider contracts to ensure that SBC responsibilities are clearly delegated and potential penalties are covered by appropriate providers. Joint regulations issued place SBC compliance responsibilities on the group health plan's plan administrator. For most companies the plan administrator is the firm or company sponsoring the plan. For purposes of this article, the law firm is considered the group health plan's administrator

Group health plans and insurers must prepare and distribute SBCs for each major medical benefit option (e.g., PPO, HMO, HDHP, etc.). SBCs are not required for a group health plan's stand-alone dental or vision coverage. SBC content must include the coverage and cost-sharing information specified under the joint regulations and Department of Labor (DOL) SBC samples available at www.dol.gov/ebsa/healthreform. SBC information for medical coverage options with health savings account, health reimbursement arrangement and health flexible spending account components may incorporate that information into a single SBC, provided the SBC's appearance and content remain understandable. Furthermore, a benefit option's coverage tier and cost-sharing options (e.g., single, employee plus child, family and medical coverage with electable deductible or cost-sharing options) may be incorporated into the same SBC, as long as its appearance and content remain understandable.

SBC Distribution Requirements

The Insurer's SBC Responsibility To the Group Health Plan

There are primarily four instances when an insurer is required to provide SBCs to a group health plan. A group health plan must receive SBCs from the insurer after application for coverage is received, but no later than seven business days after receipt (54 CFR ' 9815-2715(a)(1)(i); ' 29 CFR ' 2590.715-2715(a)(1)(i); 45 CFR ' 147.200(a)(1)(i)). If benefits change between the date of application and the date of coverage, the insurer must provide a new SBC to the plan by the first day of coverage. Insurers must also provide SBCs to group health plans upon request or policy renewal. If the plan renews by written or electronic application, the SBC must be provided upon application. In the event renewal is automatic, the insurer must provide the SBCs to the plan 30 days before the beginning of the new plan or policy year. If the plan does not renew the policy at least 30 days before the coverage's effective date, the insurer must provide requisite SBCs to the plan as soon as practicable, but in no event later than seven business days after the policy's renewal.

An insurer may provide the SBC by Internet posting, provided the URL is timely provided to the plan by e-card or postcard, and the insurer continues to provide written copies free of charge upon request.

Insurers and Group Health Plan SBC Distribution Rules

As previously mentioned, group health plans and insurers hold mutual responsibility for providing timely and compliant SBCs to requisite individuals. Under DOL guidance, a group health plan may contractually delegate SBC obligations to the insurer. However, plan administrators remain responsible for seeing that SBC contractual obligations are appropriately performed and known failures are corrected. Information regarding the group health plan and insurer's SBC distribution requirements during open enrollment, renewal, and other intervals follows.

Commencing with the first open enrollment period beginning on or after Sept. 23, 2012, plan administrators and insurers must include SBCs with written enrollment materials distributed to eligible employees. (“Eligible employee” means any employee or former employee who is eligible to elect coverage during the open enrollment period. COBRA-qualified beneficiaries, who are eligible to elect new coverage during the group health plan's open enrollment period, must also receive SBCs with any distributed written or electronic application materials.) If a group health plan does not otherwise distribute written enrollment materials, SBCs must be provided by the first day the employee is eligible to enroll in coverage. If employees are eligible to select from more than one group health plan medical option, SBCs must be provided for each option the individual is eligible to enroll in under the plan. If the group health plan modifies coverage during the open enrollment period, in a manner which changes SBC content, new SBCs must be provided to the eligible employees and covered dependents (not sharing the same address) no later than the first day of coverage.

Thereafter, SBCs must be provided to eligible employees when any group health plan written or electronic renewal materials are distributed. In the event renewal is automatic, SBCs must be distributed to plan participants and covered dependents for the medical option in which they are currently enrolled. Separate SBCs must be sent to participants and covered dependents not sharing the same address. If the group health plan fails to renew its insurance policy at least 30 days before coverage commences, SBCs need to be sent to participants and covered dependents not sharing the same address as soon as practicable, but no later than seven business days after issuance of the new policy.

In addition, SBCs must be distributed upon request. HIPAA special enrollees must receive requisite SBCs no later than 90 days after the start of coverage. If material changes are made to a group health plan's coverage during the plan year, at a time not otherwise connected to the plan's open enrollment or renewal period, the plan administrator or insurer must provide a new disclosure, referred to as the Notice of Modification, or in the alternative, a new SBC, to covered participants and dependents (not sharing the same address), at least 60 days before the change takes effect (emphasis added).

Finally, plan administrators and insurers may also post SBCs via Internet posting (including on the Department of Health and Human Service's web portal) for electronic access, as long as e-cards or postcards are sent to the appropriate eligible employees, current participants, and covered dependents not sharing the same address, and paper copies remain available upon request. SBCs may be e-mailed to participants and dependents covered under the plan, if DOL electronic disclosure regulations are followed, which provide a safe harbor primarily requiring that covered employees have access to computers as part of their daily duties or the covered individual agrees to electronic delivery.

Employer Shared Responsibility Mandate: 'Pay or Play' Rules

Beginning Jan. 1, 2014, the Affordable Care Act employer shared responsibility provisions take effect. Under the statute, “applicable large employers” must offer “minimum essential coverage” to ALL full-time employees and dependents. Failure to do so will result in stiff penalties. Moreover, if considered an “applicable large employer,” a firm's failure to offer ALL its full-time employees affordable “minimum essential coverage” providing minimum essential value (emphasis added), will also result in stiff penalties. A firm must consider both full-time employees and full-time equivalents when evaluating whether it is an “applicable large employer,” and thus subject to the mandate. A firm's misclassification of common law employees as independent contractors could also subject the firm to employer shared responsibility mandates and penalties. The following provides a brief summary of the “applicable large employer” rules, employer shared responsbility mandates and applicable penalties.

'Applicable Large Employers' Determinations

The “applicable large employer” determination is based on the average number of full-time employees and full-time equivalents, including fractions, employed by the firm in each of the preceding 12 calendar months. (Total full-time employee and full-time equivalents must be determined each month, totaled and divided by 12 to determine whether an employer is an “applicable large employer.”) A series of IRS notices provide proposals for classifying full-time and full-time equivalents. Some proposals offered under IRS notices may be relied on as guidance for the period specified within the notice. (See, e.g., IRS Notices 2012-58 and 2012-59)). Firms employing an average of 50 or more full-time employees and/or full-time equivalents (FTEs) during the preceding 12-month calendar year (e.g., 2013) are “applicable large employers” and thus are subject to coverage and affordability mandates. For purposes of the “applicable large employer” determinations, trades or businesses under common control are treated as a single employer. The Internal Revenue Code's attribution rules apply, so employees of related parties (e.g., law firms owned separately by a husband and wife) are treated as a single employer for purposes of “applicable large employer” calculations. Furthermore, under the rules, a full-time employee is one who works an average of 30 or more hours per week. Hourly calculations are based on hours paid or the hours an employee is entitled to payment (e.g., vacation, sick, holiday, and jury duty services, etc.). Current guidance also proposes that a full-time salaried employee working 130 hours or more during the month be considered full-time.

In addition to full-time employees, FTEs must be taken into account for purposes of determining whether the employer is an “applicable large employer.” The FTE calculation is based on total aggregate hours worked by part-time employees (individuals working less than 30 hours per week) during the month divided by 120. The IRS currently proposes the use of one of three methods for
calculating total monthly hours worked by non-hourly part-time employees. The proposed methods include: 1) actual hours worked; 2) days-worked equivalency method (eight hours for each day); or 3) weeks worked equivalency (40 hours per week) method. Employers may vary the methods used among classes of employees and calendar years. [NOTE: Part-time employees are 'counted' only when making "applicable large employer" determinations. The Act does not require that part-time employees be offered health coverage.]

For purposes of making “applicable large employer” determinations, hours worked by seasonal workers and independent contractors (currently) are excluded from the calculations, regardless of full-time or part-time status. Seasonal workers are those employees performing services on a seasonal basis, as defined by the Secretary of Labor (including individuals defined under 29 CFR ' 500.20(s)(l)) and retail workers employed exclusively during holiday seasons), limited to a four-month period. (Code ' 4980H(c)(2)(B)(ii); IRS Notice 2011-36). Firms utilizing contract attorneys should carefully evaluate whether individuals are properly classified as an independent contractors, applying traditional common law tests. Failure to properly classify these and other individuals could result in the firm unknowingly becoming subject to employer shared responsibility mandates.

The Full-Time Employee (and Dependents) Coverage Mandate

The first employer shared responsibility penalty arises when an “applicable large employer” fails to offer ALL of its full-time employees and dependents the opportunity to enroll in a group health plan providing “minimum essential coverage.” (New employees expected to work an average of 30 or more hours must be offered coverage within 90 calendar days of starting employment. If, however, the employee's schedule is reasonably expected to vary such that he/she may average less than 30 hours per week, then the employer may use IRS safe harbors to determine whether and when to treat such individuasl as full-time. (IRS Notice 2012-58). Rules proposed under IRS Notice 2012-58 may currently be relied on through the end of 2014. Stand-alone dental or vision coverage is not subject to employer shared responsibility rules. Guidance on what constitutes “minimum essential coverage” is expected at a later date. An “applicable large employer” incurs coverage penalties if one or more of its full-time employees seeks coverage on the state exchange and is eligible to receive a premium credit. Individuals purchasing health coverage through a state exchange are eligible for a premium credit if the household income is 100% (or 130%, if the state has expanded its Medicaid-eligibility pursuant to the Affordable Care Act) to 400% of the federal poverty level. The coverage failure requires that either: 1) the employee was not offered the opportunity to enroll in the employer's plan; or 2) the coverage offered did not provide “minimum essential coverage.” The penalty is calculated based on the total number of full-time employees (greater than 30) multiplied by $2,000, and divided by 1/12, for each month the employer fails to offer the full-time employee coverage under its group health plan or the firm fails to provide “minimum essential coverage” through its group health plan.

The Affordable Coverage Mandate

The second employer shared responsibility penalty arises where the employer offers minimum essential coverage to ALL full-time employees and their dependents, but the coverage is either not “affordable” or does not provide “minimum value,” and at least one full-time employee opts to purchase coverage through the state exchange and receives a premium credit. Coverage is not affordable if the employee's cost for employee-only coverage (for the employer's lowest-cost coverage option, providing minimum essential value) exceeds 9.5% of “household income.” A proposed IRS safe-harbor permits employers to use Box 1 of the employee's W-2 wages (instead of household income) for purposes of determining affordability. See IRS Notice 2012-58. The W-2 wage safe harbor may be relied on at least through the end of calendar year 2014. Note that the affordability test applies to the cost of “employee-only coverage.” Currently there is no “affordability” standard for dependent coverage. In the alternative, coverage that does not provide “minimum value” may also subject “applicable large employers” to penalty. For purposes of “minimum value” determinations, the plan's share of total benefit costs under the plan must equal or exceed 60%. (The IRS intends to issue proposed regulations with alternatives and safe harbors for making “minimum value” determinations. IRS Notice 2012-31 proposes three alternatives.)

Where coverage is not affordable or does not provide “minimum value,” an “applicable large employer” pays a penalty for each full-time employee entitled to receive premium credit under a state exchange, who actually purchase health insurance coverage through a state exchange, multiplied by $3,000, then divided by 12 and multiplied by the number of months for which the failure continues to occur and the employee continues to purchase coverage through the state exchange.

Summary

Plan administrators have new obligations under the Affordable Health Care Act that require new SBC disclosures be prepared and distributed according to regulatory requirements. In addition, firms should review and assess whether they are subject to employer shared responsibility rules and penalties. Firms that are subject to these rules should continually monitor coverage and affordability rules under the mandate.

Warren E. Kingsley, a member of this newsletter's Board of Editors, is the Administrative Partner and leads the Employee Benefits Practice at Arnall Golden Gregory LLP, Atlanta. Diane R. Lukin is an attorney resident in the same office.

This article provides an overview of the Summary of Benefits & Coverage (SBC) disclosure and employer-shared responsibility mandate implemented under the Affordable Care Act. Information on SBC compliance and your firm's exposure to the shared-responsibility rules follows.

Know Your SBCs

A new SBC should have been included in your firm's open enrollment packets this fall. (Most calendar-year group health plans began distributing SBCs during the fall, 2012, open enrollment period. Non-calendar year group health plans must have begun providing SBCs during the first open enrollment period beginning on or after Sept. 23, 2012.) Required under the Affordable Care Act, the new SBC disclosure's appearance must comply with stringent formatting and content requirements, and be distributed in accordance with regulatory requirements. See joint regulations issued by the United States Treasury, Department of Labor, and Department of Health & Human Services at 26 CFR ' 54.9815-2715; 29 CFR ' 2590.715-2715; 45 CFR ' 147.200. The plan or insurer's failure to provide timely and compliant SBCs could result in penalties as high as $1,000 per recipient. Penalties will not be assessed during the first year, provided group health plans and insurers work diligently and in good faith in providing SBCs that conform to regulatory content, appearance and distribution requirements. The following provides an overview of SBC content and delivery requirements.

SBC Requirements

The SBC is intended to communicate coverage and cost-sharing terms for a group health plan's major medical options (e.g., PPO, HMO, high deductible health plan [HDHP], etc. ). Fully insured group health plan administrators share responsibility with the insurer for SBC appearance and distribution compliance. (If the group health plan is self-funded, the plan administrator is normally responsible for SBC compliance.) Therefore, it is essential that your firm's plan administrator review insurance and third-party service provider contracts to ensure that SBC responsibilities are clearly delegated and potential penalties are covered by appropriate providers. Joint regulations issued place SBC compliance responsibilities on the group health plan's plan administrator. For most companies the plan administrator is the firm or company sponsoring the plan. For purposes of this article, the law firm is considered the group health plan's administrator

Group health plans and insurers must prepare and distribute SBCs for each major medical benefit option (e.g., PPO, HMO, HDHP, etc.). SBCs are not required for a group health plan's stand-alone dental or vision coverage. SBC content must include the coverage and cost-sharing information specified under the joint regulations and Department of Labor (DOL) SBC samples available at www.dol.gov/ebsa/healthreform. SBC information for medical coverage options with health savings account, health reimbursement arrangement and health flexible spending account components may incorporate that information into a single SBC, provided the SBC's appearance and content remain understandable. Furthermore, a benefit option's coverage tier and cost-sharing options (e.g., single, employee plus child, family and medical coverage with electable deductible or cost-sharing options) may be incorporated into the same SBC, as long as its appearance and content remain understandable.

SBC Distribution Requirements

The Insurer's SBC Responsibility To the Group Health Plan

There are primarily four instances when an insurer is required to provide SBCs to a group health plan. A group health plan must receive SBCs from the insurer after application for coverage is received, but no later than seven business days after receipt (54 CFR ' 9815-2715(a)(1)(i); ' 29 CFR ' 2590.715-2715(a)(1)(i); 45 CFR ' 147.200(a)(1)(i)). If benefits change between the date of application and the date of coverage, the insurer must provide a new SBC to the plan by the first day of coverage. Insurers must also provide SBCs to group health plans upon request or policy renewal. If the plan renews by written or electronic application, the SBC must be provided upon application. In the event renewal is automatic, the insurer must provide the SBCs to the plan 30 days before the beginning of the new plan or policy year. If the plan does not renew the policy at least 30 days before the coverage's effective date, the insurer must provide requisite SBCs to the plan as soon as practicable, but in no event later than seven business days after the policy's renewal.

An insurer may provide the SBC by Internet posting, provided the URL is timely provided to the plan by e-card or postcard, and the insurer continues to provide written copies free of charge upon request.

Insurers and Group Health Plan SBC Distribution Rules

As previously mentioned, group health plans and insurers hold mutual responsibility for providing timely and compliant SBCs to requisite individuals. Under DOL guidance, a group health plan may contractually delegate SBC obligations to the insurer. However, plan administrators remain responsible for seeing that SBC contractual obligations are appropriately performed and known failures are corrected. Information regarding the group health plan and insurer's SBC distribution requirements during open enrollment, renewal, and other intervals follows.

Commencing with the first open enrollment period beginning on or after Sept. 23, 2012, plan administrators and insurers must include SBCs with written enrollment materials distributed to eligible employees. (“Eligible employee” means any employee or former employee who is eligible to elect coverage during the open enrollment period. COBRA-qualified beneficiaries, who are eligible to elect new coverage during the group health plan's open enrollment period, must also receive SBCs with any distributed written or electronic application materials.) If a group health plan does not otherwise distribute written enrollment materials, SBCs must be provided by the first day the employee is eligible to enroll in coverage. If employees are eligible to select from more than one group health plan medical option, SBCs must be provided for each option the individual is eligible to enroll in under the plan. If the group health plan modifies coverage during the open enrollment period, in a manner which changes SBC content, new SBCs must be provided to the eligible employees and covered dependents (not sharing the same address) no later than the first day of coverage.

Thereafter, SBCs must be provided to eligible employees when any group health plan written or electronic renewal materials are distributed. In the event renewal is automatic, SBCs must be distributed to plan participants and covered dependents for the medical option in which they are currently enrolled. Separate SBCs must be sent to participants and covered dependents not sharing the same address. If the group health plan fails to renew its insurance policy at least 30 days before coverage commences, SBCs need to be sent to participants and covered dependents not sharing the same address as soon as practicable, but no later than seven business days after issuance of the new policy.

In addition, SBCs must be distributed upon request. HIPAA special enrollees must receive requisite SBCs no later than 90 days after the start of coverage. If material changes are made to a group health plan's coverage during the plan year, at a time not otherwise connected to the plan's open enrollment or renewal period, the plan administrator or insurer must provide a new disclosure, referred to as the Notice of Modification, or in the alternative, a new SBC, to covered participants and dependents (not sharing the same address), at least 60 days before the change takes effect (emphasis added).

Finally, plan administrators and insurers may also post SBCs via Internet posting (including on the Department of Health and Human Service's web portal) for electronic access, as long as e-cards or postcards are sent to the appropriate eligible employees, current participants, and covered dependents not sharing the same address, and paper copies remain available upon request. SBCs may be e-mailed to participants and dependents covered under the plan, if DOL electronic disclosure regulations are followed, which provide a safe harbor primarily requiring that covered employees have access to computers as part of their daily duties or the covered individual agrees to electronic delivery.

Employer Shared Responsibility Mandate: 'Pay or Play' Rules

Beginning Jan. 1, 2014, the Affordable Care Act employer shared responsibility provisions take effect. Under the statute, “applicable large employers” must offer “minimum essential coverage” to ALL full-time employees and dependents. Failure to do so will result in stiff penalties. Moreover, if considered an “applicable large employer,” a firm's failure to offer ALL its full-time employees affordable “minimum essential coverage” providing minimum essential value (emphasis added), will also result in stiff penalties. A firm must consider both full-time employees and full-time equivalents when evaluating whether it is an “applicable large employer,” and thus subject to the mandate. A firm's misclassification of common law employees as independent contractors could also subject the firm to employer shared responsibility mandates and penalties. The following provides a brief summary of the “applicable large employer” rules, employer shared responsbility mandates and applicable penalties.

'Applicable Large Employers' Determinations

The “applicable large employer” determination is based on the average number of full-time employees and full-time equivalents, including fractions, employed by the firm in each of the preceding 12 calendar months. (Total full-time employee and full-time equivalents must be determined each month, totaled and divided by 12 to determine whether an employer is an “applicable large employer.”) A series of IRS notices provide proposals for classifying full-time and full-time equivalents. Some proposals offered under IRS notices may be relied on as guidance for the period specified within the notice. (See, e.g., IRS Notices 2012-58 and 2012-59)). Firms employing an average of 50 or more full-time employees and/or full-time equivalents (FTEs) during the preceding 12-month calendar year (e.g., 2013) are “applicable large employers” and thus are subject to coverage and affordability mandates. For purposes of the “applicable large employer” determinations, trades or businesses under common control are treated as a single employer. The Internal Revenue Code's attribution rules apply, so employees of related parties (e.g., law firms owned separately by a husband and wife) are treated as a single employer for purposes of “applicable large employer” calculations. Furthermore, under the rules, a full-time employee is one who works an average of 30 or more hours per week. Hourly calculations are based on hours paid or the hours an employee is entitled to payment (e.g., vacation, sick, holiday, and jury duty services, etc.). Current guidance also proposes that a full-time salaried employee working 130 hours or more during the month be considered full-time.

In addition to full-time employees, FTEs must be taken into account for purposes of determining whether the employer is an “applicable large employer.” The FTE calculation is based on total aggregate hours worked by part-time employees (individuals working less than 30 hours per week) during the month divided by 120. The IRS currently proposes the use of one of three methods for
calculating total monthly hours worked by non-hourly part-time employees. The proposed methods include: 1) actual hours worked; 2) days-worked equivalency method (eight hours for each day); or 3) weeks worked equivalency (40 hours per week) method. Employers may vary the methods used among classes of employees and calendar years. [NOTE: Part-time employees are 'counted' only when making "applicable large employer" determinations. The Act does not require that part-time employees be offered health coverage.]

For purposes of making “applicable large employer” determinations, hours worked by seasonal workers and independent contractors (currently) are excluded from the calculations, regardless of full-time or part-time status. Seasonal workers are those employees performing services on a seasonal basis, as defined by the Secretary of Labor (including individuals defined under 29 CFR ' 500.20(s)(l)) and retail workers employed exclusively during holiday seasons), limited to a four-month period. (Code ' 4980H(c)(2)(B)(ii); IRS Notice 2011-36). Firms utilizing contract attorneys should carefully evaluate whether individuals are properly classified as an independent contractors, applying traditional common law tests. Failure to properly classify these and other individuals could result in the firm unknowingly becoming subject to employer shared responsibility mandates.

The Full-Time Employee (and Dependents) Coverage Mandate

The first employer shared responsibility penalty arises when an “applicable large employer” fails to offer ALL of its full-time employees and dependents the opportunity to enroll in a group health plan providing “minimum essential coverage.” (New employees expected to work an average of 30 or more hours must be offered coverage within 90 calendar days of starting employment. If, however, the employee's schedule is reasonably expected to vary such that he/she may average less than 30 hours per week, then the employer may use IRS safe harbors to determine whether and when to treat such individuasl as full-time. (IRS Notice 2012-58). Rules proposed under IRS Notice 2012-58 may currently be relied on through the end of 2014. Stand-alone dental or vision coverage is not subject to employer shared responsibility rules. Guidance on what constitutes “minimum essential coverage” is expected at a later date. An “applicable large employer” incurs coverage penalties if one or more of its full-time employees seeks coverage on the state exchange and is eligible to receive a premium credit. Individuals purchasing health coverage through a state exchange are eligible for a premium credit if the household income is 100% (or 130%, if the state has expanded its Medicaid-eligibility pursuant to the Affordable Care Act) to 400% of the federal poverty level. The coverage failure requires that either: 1) the employee was not offered the opportunity to enroll in the employer's plan; or 2) the coverage offered did not provide “minimum essential coverage.” The penalty is calculated based on the total number of full-time employees (greater than 30) multiplied by $2,000, and divided by 1/12, for each month the employer fails to offer the full-time employee coverage under its group health plan or the firm fails to provide “minimum essential coverage” through its group health plan.

The Affordable Coverage Mandate

The second employer shared responsibility penalty arises where the employer offers minimum essential coverage to ALL full-time employees and their dependents, but the coverage is either not “affordable” or does not provide “minimum value,” and at least one full-time employee opts to purchase coverage through the state exchange and receives a premium credit. Coverage is not affordable if the employee's cost for employee-only coverage (for the employer's lowest-cost coverage option, providing minimum essential value) exceeds 9.5% of “household income.” A proposed IRS safe-harbor permits employers to use Box 1 of the employee's W-2 wages (instead of household income) for purposes of determining affordability. See IRS Notice 2012-58. The W-2 wage safe harbor may be relied on at least through the end of calendar year 2014. Note that the affordability test applies to the cost of “employee-only coverage.” Currently there is no “affordability” standard for dependent coverage. In the alternative, coverage that does not provide “minimum value” may also subject “applicable large employers” to penalty. For purposes of “minimum value” determinations, the plan's share of total benefit costs under the plan must equal or exceed 60%. (The IRS intends to issue proposed regulations with alternatives and safe harbors for making “minimum value” determinations. IRS Notice 2012-31 proposes three alternatives.)

Where coverage is not affordable or does not provide “minimum value,” an “applicable large employer” pays a penalty for each full-time employee entitled to receive premium credit under a state exchange, who actually purchase health insurance coverage through a state exchange, multiplied by $3,000, then divided by 12 and multiplied by the number of months for which the failure continues to occur and the employee continues to purchase coverage through the state exchange.

Summary

Plan administrators have new obligations under the Affordable Health Care Act that require new SBC disclosures be prepared and distributed according to regulatory requirements. In addition, firms should review and assess whether they are subject to employer shared responsibility rules and penalties. Firms that are subject to these rules should continually monitor coverage and affordability rules under the mandate.

Warren E. Kingsley, a member of this newsletter's Board of Editors, is the Administrative Partner and leads the Employee Benefits Practice at Arnall Golden Gregory LLP, Atlanta. Diane R. Lukin is an attorney resident in the same office.