The Final Countdown

The Exchange mandate is designed to provide a means, outside of employer-sponsored group health plans, for individuals to purchase affordable healthcare coverage, while the shared responsibility provisions require that large employers (as defined below) provide healthcare coverage that meets certain requirements.

Healthcare Exchanges

A large employer (defined as an employer with at least 50 full-time employees) will be penalized if at least one full-time employee receives a premium assistance tax credit for purchasing health coverage through an Exchange. An Exchange is a new government or not-for-profit organization that the Act requires be established in each state by Jan. 1, 2014, to create a more competitive market for the purchase of health insurance. Each state may create its own Exchange(s), participate in a multi-state exchange, or opt to have the federal government operate the Exchange in the state. An Exchange will offer a choice of different health plans provided by private insurers that will meet certain coverage and pricing requirements, as well as offer four standardized tiers of coverage to consumers (bronze, silver, gold and platinum).

In 2014, Exchange coverage must be made available to individuals buying insurance on their own and small businesses with less than 100 employees, although states have the option to include larger employers in the Exchange as well in 2014. Exchange coverage is not required to be offered to larger employers until 2017.

Shared Responsibility

Effective Jan. 1, 2014, large employers that do not offer substantially all full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored group health plan may be penalized. The penalty is triggered if at least one full-time employee receives premium tax credits or a cost-sharing reduction for health insurance coverage through an Exchange. The penalty is $2,000 for each full-time employee (after subtracting 30) and is calculated on a monthly basis (i.e., $166.67 per month).

In addition, employers that offer substantially all full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored group health plan but have at least one full-time employee receive premium tax credits or a cost-sharing reduction for Exchange coverage (because the employer coverage does not provide minimum value or is unaffordable under the Act), are required to pay the lesser of a $3,000 annual excise tax penalty for each full-time employee receiving the credit (calculated on a monthly basis) or $2,000 per employee for each full-time employee (after subtracting 30).

For purposes of the Act, a full-time employee is an employee who works an average of 30 hours of service or more per week with respect to any month.

What Employers Need to Do In 2013

Determine Full-Time Employee Count

In order to be subject to the shared responsibility rules, an employer must employ at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50 full-time employees. For example, 45 full-time employees employed 30 or more hours per week on average and 10 half-time employees employed 15 hours per week on average would be equivalent to 50 full-time employees. Employees will determine each year, based on their current number of employees, whether they will be considered a large employer for the next year. Therefore, in order to know whether an employer is a large employer in 2014, it will need to know whether it has at least 50 full-time equivalent employees for 2013.

The proposed regulations on the shared responsibility provisions allow employers to use any six-consecutive month period in 2013 to measure whether it has 50 full-time equivalent employees. For example, an employer could use the six-consecutive month period from Jan.1, 2013, through June 30, 2013, and then have the remainder of 2013 to analyze the results. This would allow the employer to then make an informed decision of whether it needs to offer a plan to its employees. If the offering of such a plan is required, then the failure to offer such a plan would subject the employer to the $2,000 per full-time employee penalty.

Employers should note that the $2,000 penalty applies to each full-time employee. Therefore, using the example above, an employer with 45 full-time employees and 10 half-time employees would be subject to a potential annual penalty of $30,000, which is $2,000 multiplied by the 15 full-time employees that remain after subtracting 30.

These same issues will need to be considered by employers that clearly exceed the 50 full-time employee threshold. They will need to examine the potential liability if minimum essential coverage were not to be offered. For example, an employer with 3,000 full-time employees would be subject to a potential annual penalty of $5,940,000, which is $2,000 multiplied by 2,970. This penalty would need to be considered in light of the amount that the employer is spending to offer minimum essential coverage to its employees.

Ensure Minimum Essential Coverage Is Affordable

Even where an employer offers minimum essential coverage, it should ensure that such coverage is affordable. Generally, if the employee's required contribution toward the cost of self-only coverage does not exceed 9.5% of his or her household income, the coverage is considered affordable for purposes of the Act.

The above affordability determination is dependent on an employer knowing each employee's household income, which is not realistic. As a result, multiple safe harbors were established in the proposed regulations; they include: 1) the required employee contribution for self-only coverage for the lowest cost option that provides minimum value must not exceed 9.5% of the employee's Form W-2 wages for that calendar year; 2) the employer may take the hourly rate of pay for each hourly employee who is eligible, multiply that by 130 and determine affordability based on the monthly wage ' with affordable coverage being no more than 9.5% of the monthly wage; and 3) the self-only cost of coverage does not exceed 9.5% of the most recently published federal poverty level for a single individual.

Employers should ensure during 2013 that the minimum essential coverage they will offer in 2014 is affordable. Once confirmed, the employer will not be subject to the potential $3,000 annual penalty for any full-time employee that receives premium assistance tax credits or a cost-sharing reduction for Exchange coverage. If the employer discovers that its coverage is not affordable, then it should attempt to design its plan for 2014 to fit within one of the safe harbors outlined above.

Assure Minimum Essential Coverage to 'Substantially All' Full-Time Employees

In order to avoid the potential penalties associated with the shared responsibility provisions, employers must not only ensure that they offer minimum essential coverage that is affordable, but they must also ensure that such coverage is offered to “substantially all” of its full-time employees. The proposed regulations provide that this “substantially all” requirement is met if coverage is offered to 95% of full-time employees and their dependents (or, if greater, to five employees).

The failure to offer coverage to the remaining 5% of full-time employees need not be inadvertent. The employer could design its coverage to exclude such employees and their dependents. However, if any of those employees who are not offered coverage receive premium assistance tax credits or cost-sharing assistance for coverage purchased through an Exchange, the employer will be required to pay an annual penalty of $3,000 per employee who receives such premium assistance tax credit or cost-sharing assistance.

Employers should ensure that the “substantially all” standard is met. This requirement only relates to full-time employees; and therefore, any part-time or half-time employees are not considered in this determination. Plan design changes regarding eligibility may be required if coverage is extended to reach the substantially all requirement or if coverage is restricted to the 95% threshold.

Educate Employees

Employers should not wait until Jan. 1, 2014, to begin discussing these issues with employees. While employees need not be made aware of the intricate details an employer is considering with respect to the issues outlined above in terms of affordability or meeting the “substantially all” requirements, employees should be made aware of the options that they will face, beginning on Jan. 1, 2014.

Specifically, employees should be made aware of the pending establishment of the Exchanges at the state level and of their ability to purchase coverage through an Exchange (as opposed to through the employer). The Act will also require the employer to an actual notice of availability of the Exchanges; however, employers are not required to do so until final regulations regarding the notice are issued.

Conclusion

The majority of the changes initiated by the Act have been addressed as they arose ' such as the Form W-2 reporting requirements beginning in 2013 and the various insurance market changes that took place in the years following passage of the Act. However, the shared responsibility provisions, in conjunction with the introduction of Exchanges, present unique challenges and require significant planning ahead of the Jan. 1, 2014, effective date. This planning will require the interaction of a company's leadership, human resources department, outside consultants and employee benefits counsel. As a result, planning for these issues should commence immediately, to the extent that it has not already.

A broad overview of the shared responsibility rules in conjunction with the new Exchange requirements leads to a few key takeaways ' the 50 full-time employee threshold, the potential $2,000 and $3,000 annual penalties, among them.

However, as this article has demonstrated, significant and complex layers underneath each of those issues should be considered. These considerations will take a number of forms ' some are business decisions that the employer must make and some are legal requirements that require compliance.

As the calendars begin their inevitable turn to 2014, employers should be ready to confront the shared responsibility requirements of the Act and understand the impact that the new Exchanges will have on the current healthcare offerings. With advance planning throughout 2013, this issue can be resolved and employers can then begin focusing on the next wave of challenges that the Act's provisions will bring.

Timothy B. Collins and Amanda E. Layton are attorneys in Duane Morris LLP's Employment, Labor, Benefits and Immigration Practice Group in its Philadelphia office. Note: This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the authors and do not necessarily reflect the views of the authors' law firm or its individual partners.

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When the Patient Protection and Affordable Care Act (the Act) was enacted on March 23, 2010, it featured myriad new requirements for both employers and employer-sponsored group health plans. Employers began to implement these requirements in 2010, while keeping sight of the mandates that would become effective in later years. Indeed, one of the most popular components of any article addressing the Act was a timeline outlining the various effective dates for key provisions of the Act. To date, the provisions of the Act highlighted in these timelines have brought many changes; however, the year 2014 ushers in the most significant changes to date: the implementation of Health Benefit Exchanges (Exchanges) and employer “shared responsibility” provisions.

Jan. 1, 2014, has been one of the most anticipated dates under the Act due to the material changes that both mandates may bring to employer-sponsored healthcare coverage. This date is misleading, however, if employers believe that it means that they do not have to begin planning for compliance until the start of next year. Following the publication of proposed regulations on employer shared responsibility provisions by the Treasury Department and the Internal Revenue Service on Jan. 2, 2013, it is apparent that employers should begin focusing on these provisions now.

Background

The Exchange mandate is designed to provide a means, outside of employer-sponsored group health plans, for individuals to purchase affordable healthcare coverage, while the shared responsibility provisions require that large employers (as defined below) provide healthcare coverage that meets certain requirements.

Healthcare Exchanges

A large employer (defined as an employer with at least 50 full-time employees) will be penalized if at least one full-time employee receives a premium assistance tax credit for purchasing health coverage through an Exchange. An Exchange is a new government or not-for-profit organization that the Act requires be established in each state by Jan. 1, 2014, to create a more competitive market for the purchase of health insurance. Each state may create its own Exchange(s), participate in a multi-state exchange, or opt to have the federal government operate the Exchange in the state. An Exchange will offer a choice of different health plans provided by private insurers that will meet certain coverage and pricing requirements, as well as offer four standardized tiers of coverage to consumers (bronze, silver, gold and platinum).

In 2014, Exchange coverage must be made available to individuals buying insurance on their own and small businesses with less than 100 employees, although states have the option to include larger employers in the Exchange as well in 2014. Exchange coverage is not required to be offered to larger employers until 2017.

Shared Responsibility

Effective Jan. 1, 2014, large employers that do not offer substantially all full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored group health plan may be penalized. The penalty is triggered if at least one full-time employee receives premium tax credits or a cost-sharing reduction for health insurance coverage through an Exchange. The penalty is $2,000 for each full-time employee (after subtracting 30) and is calculated on a monthly basis (i.e., $166.67 per month).

In addition, employers that offer substantially all full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored group health plan but have at least one full-time employee receive premium tax credits or a cost-sharing reduction for Exchange coverage (because the employer coverage does not provide minimum value or is unaffordable under the Act), are required to pay the lesser of a $3,000 annual excise tax penalty for each full-time employee receiving the credit (calculated on a monthly basis) or $2,000 per employee for each full-time employee (after subtracting 30).

For purposes of the Act, a full-time employee is an employee who works an average of 30 hours of service or more per week with respect to any month.

What Employers Need to Do In 2013

Determine Full-Time Employee Count

In order to be subject to the shared responsibility rules, an employer must employ at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50 full-time employees. For example, 45 full-time employees employed 30 or more hours per week on average and 10 half-time employees employed 15 hours per week on average would be equivalent to 50 full-time employees. Employees will determine each year, based on their current number of employees, whether they will be considered a large employer for the next year. Therefore, in order to know whether an employer is a large employer in 2014, it will need to know whether it has at least 50 full-time equivalent employees for 2013.

The proposed regulations on the shared responsibility provisions allow employers to use any six-consecutive month period in 2013 to measure whether it has 50 full-time equivalent employees. For example, an employer could use the six-consecutive month period from Jan.1, 2013, through June 30, 2013, and then have the remainder of 2013 to analyze the results. This would allow the employer to then make an informed decision of whether it needs to offer a plan to its employees. If the offering of such a plan is required, then the failure to offer such a plan would subject the employer to the $2,000 per full-time employee penalty.

Employers should note that the $2,000 penalty applies to each full-time employee. Therefore, using the example above, an employer with 45 full-time employees and 10 half-time employees would be subject to a potential annual penalty of $30,000, which is $2,000 multiplied by the 15 full-time employees that remain after subtracting 30.

These same issues will need to be considered by employers that clearly exceed the 50 full-time employee threshold. They will need to examine the potential liability if minimum essential coverage were not to be offered. For example, an employer with 3,000 full-time employees would be subject to a potential annual penalty of $5,940,000, which is $2,000 multiplied by 2,970. This penalty would need to be considered in light of the amount that the employer is spending to offer minimum essential coverage to its employees.

Ensure Minimum Essential Coverage Is Affordable

Even where an employer offers minimum essential coverage, it should ensure that such coverage is affordable. Generally, if the employee's required contribution toward the cost of self-only coverage does not exceed 9.5% of his or her household income, the coverage is considered affordable for purposes of the Act.

The above affordability determination is dependent on an employer knowing each employee's household income, which is not realistic. As a result, multiple safe harbors were established in the proposed regulations; they include: 1) the required employee contribution for self-only coverage for the lowest cost option that provides minimum value must not exceed 9.5% of the employee's Form W-2 wages for that calendar year; 2) the employer may take the hourly rate of pay for each hourly employee who is eligible, multiply that by 130 and determine affordability based on the monthly wage ' with affordable coverage being no more than 9.5% of the monthly wage; and 3) the self-only cost of coverage does not exceed 9.5% of the most recently published federal poverty level for a single individual.

Employers should ensure during 2013 that the minimum essential coverage they will offer in 2014 is affordable. Once confirmed, the employer will not be subject to the potential $3,000 annual penalty for any full-time employee that receives premium assistance tax credits or a cost-sharing reduction for Exchange coverage. If the employer discovers that its coverage is not affordable, then it should attempt to design its plan for 2014 to fit within one of the safe harbors outlined above.

Assure Minimum Essential Coverage to 'Substantially All' Full-Time Employees

In order to avoid the potential penalties associated with the shared responsibility provisions, employers must not only ensure that they offer minimum essential coverage that is affordable, but they must also ensure that such coverage is offered to “substantially all” of its full-time employees. The proposed regulations provide that this “substantially all” requirement is met if coverage is offered to 95% of full-time employees and their dependents (or, if greater, to five employees).

The failure to offer coverage to the remaining 5% of full-time employees need not be inadvertent. The employer could design its coverage to exclude such employees and their dependents. However, if any of those employees who are not offered coverage receive premium assistance tax credits or cost-sharing assistance for coverage purchased through an Exchange, the employer will be required to pay an annual penalty of $3,000 per employee who receives such premium assistance tax credit or cost-sharing assistance.

Employers should ensure that the “substantially all” standard is met. This requirement only relates to full-time employees; and therefore, any part-time or half-time employees are not considered in this determination. Plan design changes regarding eligibility may be required if coverage is extended to reach the substantially all requirement or if coverage is restricted to the 95% threshold.

Educate Employees

Employers should not wait until Jan. 1, 2014, to begin discussing these issues with employees. While employees need not be made aware of the intricate details an employer is considering with respect to the issues outlined above in terms of affordability or meeting the “substantially all” requirements, employees should be made aware of the options that they will face, beginning on Jan. 1, 2014.

Specifically, employees should be made aware of the pending establishment of the Exchanges at the state level and of their ability to purchase coverage through an Exchange (as opposed to through the employer). The Act will also require the employer to an actual notice of availability of the Exchanges; however, employers are not required to do so until final regulations regarding the notice are issued.

Conclusion

The majority of the changes initiated by the Act have been addressed as they arose ' such as the Form W-2 reporting requirements beginning in 2013 and the various insurance market changes that took place in the years following passage of the Act. However, the shared responsibility provisions, in conjunction with the introduction of Exchanges, present unique challenges and require significant planning ahead of the Jan. 1, 2014, effective date. This planning will require the interaction of a company's leadership, human resources department, outside consultants and employee benefits counsel. As a result, planning for these issues should commence immediately, to the extent that it has not already.

A broad overview of the shared responsibility rules in conjunction with the new Exchange requirements leads to a few key takeaways ' the 50 full-time employee threshold, the potential $2,000 and $3,000 annual penalties, among them.

However, as this article has demonstrated, significant and complex layers underneath each of those issues should be considered. These considerations will take a number of forms ' some are business decisions that the employer must make and some are legal requirements that require compliance.

As the calendars begin their inevitable turn to 2014, employers should be ready to confront the shared responsibility requirements of the Act and understand the impact that the new Exchanges will have on the current healthcare offerings. With advance planning throughout 2013, this issue can be resolved and employers can then begin focusing on the next wave of challenges that the Act's provisions will bring.

Timothy B. Collins and Amanda E. Layton are attorneys in Duane Morris LLP's Employment, Labor, Benefits and Immigration Practice Group in its Philadelphia office. Note: This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the authors and do not necessarily reflect the views of the authors' law firm or its individual partners.

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