Supreme Court Rules on Health Care Reform: What Does This Mean for Employers?

As most people know now, the Patient Protection and Affordable Care Act (“ACA”) survived review by the Supreme Court and was found to be constitutional. As a result, beginning in 2014, virtually all Americans will be required either to obtain health insurance coverage or pay a tax. Along with this individual mandate—the centerpiece of the ACA—comes a host of new requirements for employers that will go into effect over several years. Employers who have adopted a “wait and see” approach, hoping that the Supreme Court would find the law unconstitutional, should not now hang their hopes for repeal on Congress.

Although health care reform is likely to be a work-in-progress for years to come, in the short run, there are several new requirements under the ACA with which employers must grapple over the next 18 months. This discussion is intended to provide an overview of these requirements and the steps that employers should take in order to comply with the requirements.

What to Do Now: Decide Whether to Play or Pay

Effective Jan. 1, 2014, “large employers” must either offer their full-time employees and their eligible dependents “affordable” health plan coverage or pay an annual tax. Starting now, employers should begin to evaluate the overall approach they have taken regarding health care coverage and decide 1) whether or not they will offer their plan to all full-time employees and their eligible dependents; and if yes, 2) whether their plan will be considered affordable under ACA. Here are the steps for this analysis:

1. Determine whether you are a “large employer,” and therefore required to offer health care coverage to your full-time employees and their eligible dependents 

You are a “large employer” if you have 50 or more “full-time” employees in a month. An employer that is sufficiently related by ownership to other entities will be treated as one employer for purposes of determining the number of full-time employees.

• Who is a full-time employee?
  Under the ACA, any employee who works an average of 30 hours a week is a “full time” employee.
• How are part-time employees counted?
  Part-time employee hours are included in calculating how many “full-time” employees an employer employs. The aggregate number of hours of service of employees who are not employed 30 hours a week by an employer in a month must be added together and divided by 120. The product of that calculation is added to the total number of full-time employees for purposes of determining whether an employer employs 50 or more “full-time” employees.

2. Evaluate the participation levels in your current health plan coverage

• Is your health plan available to all of your employees?
  Many employers only provide health care coverage to management employees. If you are one of these employers and also considered a large employer under the ACA, you will need to decide whether to re-design your health plan to offer coverage to all full-time employees (including evaluating the cost of expanding coverage to such employees), or opt out and pay a tax.
• Are your participation rates low?
  Many employers offer health care coverage to all employees, but a large portion of their employees opt out. You should examine your participation rates and evaluate what the rate of participation of full-time employees might be once all individuals are required under ACA to either have health plan coverage or pay a tax. This is important because you may decide that there is a strong business case to opt out and pay the required tax.
  
  Remember, under the ACA, employees as U.S. citizens will be required to either purchase health care coverage or pay a tax. The tax will be calculated based on the individual and all of his or her dependents that do not have health care coverage, so there will be ample incentive for individuals to obtain coverage.

3. Determine whether your health plan is “affordable”

Employers that decide to provide an employer-sponsored group health plan for their full-time employees and eligible dependents, rather than pay a tax, must adopt a health plan that is “affordable.”

• What is an “affordable plan?”
  Coverage provided under a group health plan is considered affordable if either (i) the employee’s share of the cost of the coverage does not exceed 9.5% of the employee’s household income, or (ii) the plan’s share of the actuarial value of covered benefits (i.e., the amount that the plan would pay toward the actuarially projected cost of covered services) is less than 60 percent of the cost of coverage.
• What if your plan is not “affordable?”
  If your plan is not affordable with respect to an employee, that employee may decline the coverage and enroll in a qualified health plan through a state exchange.
  If any such full-time employee does so, you will be subject to a tax. The tax is paid annually and calculated based on the number of your full-time employees that enroll in an exchange plan.

4. What if you opt out?

If you are a large employer and opt not to offer an employer-sponsored group health plan, you will be subject to an annual tax. Currently, the annual tax is equal to $2,000 ($166.67 per month) for each full-time employee. You will not be required to pay the tax for your first 30 full-time employees.

What to Do Now: Bring Your Health Plan into Current Compliance

Many of the new requirements of ACA apply to employer-sponsored group health plans, in some cases regardless of the size of the plan or the employer. If you offer a group health plan, you must prepare to comply with the following requirements:

• Summary of Benefits and Coverage (SBC) – The SBC must be provided to participants at open enrollment effective with open enrollment periods beginning on or after Sept. 23, 2012. (Please see our prior advisory for more information.)
  Action Item: You should work with your insurers and administrators to make sure that their SBCs will be drafted and distributed timely.
• W-2 reporting – Effective for 2012 and later tax years, the value of an employee’s health insurance coverage sponsored by the employer must be included on an employee’s W-2. This new reporting requirement initially applies to W-2s issued in January 2013. It is currently not applicable to employers with fewer than 250 individuals to whom the employer must issue a W-2
  Action Item: You should be developing systems now to track an employee's health benefit coverage elections so the proper information will be disclosed on the W-2s distributed in January 2013. (Please see our prior advisory for more information.)
• Health care flexible spending accounts – The annual health care flexible spending account (FSA) employee pre-tax contributions must be capped at $2,500 per participant for plan years beginning in 2013. (Please see our prior advisory for more information.)
  Action Item: FSA plan documents should be amended to reflect this new limit.
• Premium Tax – Beginning July 31, 2013, insurers and employers will be required to pay a new premium tax to finance comparative clinical effectiveness research based on the number of covered lives in a plan. (Please see our prior advisory for more information.)
  Action Item: You should be developing systems now to make sure that the new taxes are properly and timely paid.
• Payroll Tax – Beginning Jan. 1, 2013, employees with wages in excess of $200,000 (if single) or $250,000 (if married and filing jointly) will be subject to an additional .9% Medicare hospital insurance payroll tax on wages in excess of these thresholds.
  Action Item: You should be working with payroll now to make sure that the new taxes are properly withheld.
• Review health plans to confirm that current requirements of the ACA have been properly implemented
  For an overview of the requirements of the ACA on group health plans, and their effective dates, click here.

The Future

There are still many questions about how the ACA will be implemented. DWT will continue to keep you apprised of new guidance, as it is issued, along with analysis about how you should comply. In addition, during September, DWT will be holding seminars in San Francisco and Los Angeles to discuss the ACA and the latest developments; in November we will be hosting our annual employee benefits seminar in Seattle. Keep an eye out for invitations to these events.