Obamacare: It’s Almost Time to Play or Pay
By Victor Kostro // February 23, 2013
BREVARD COUNTY • MELBOURNE, FLORIDA–On December 28, 2012, the IRS issued its long awaited proposed regulations providing guidance to employers under the employer shared responsibility provisions of the Patient Protection and Affordable Care Act (PPACA), known also as Obamacare. The provisions in the law called the “employer mandate” or “play or pay” rules and obligations will take effect on January 1, 2014, and it’s not too early for both employers and employees to understand the framework and plan accordingly.
Peeling away the onion suggests that the basic premise to understand is that “large” employers must offer “full-time” employees and their dependents, “minimum essential” health insurance coverage or pay a penalty for failing to do so.
Responsibility Hinges On Definition and Number Of FTEs
The PPACA defines a large employer as one that, during a six-month period of the preceding calendar year (2013), employed on average, a minimum of 50 full-time employees. Full time is defined as an employee who was employed for at least 30 hours of service a week, on average, over a one-month period. Calculating the number of employees is complicated by a requirement that an employer factor in, or consider, the number of full-time equivalent employees (FTEs) represented by an employer’s part-time employees (those whose hours of service is less than 30 hours a week, on average).
The number of FTEs an employer has in a month is determined by adding the total hours of service provided by all part time employees, divided by 120 hours. Notice that the term “hours of service” is used instead of “hours worked.” This distinction requires employers to calculate the hours by including paid vacation time, holidays, illness, military duty or other leaves of absence. All periods of paid leave must be taken into consideration when arriving at hours of service. The proposed regulations state that an employer will have satisfied its obligation to offer “minimum essential” coverage to its full-time employees and dependents if it offers coverage to a least 95% of the employees.
‘Minimum Essential’ Coverage
As noted above, employers must offer “minimum essential” coverage to employees and their dependents. The applicable Internal Revenue Code section defines a dependent as a child, under the age of 26. A spouse, for these purposes, is not considered a dependent. Employers who do not presently offer health care coverage for dependents will be granted relief from penalty during any transition period implemented during calendar year 2014, which is necessary to make administrative changes to the employer plan.
Interestingly, the “minimum essential” coverage for an eligible employer-sponsored plan is not defined in the regulations by identifying a set of benefits, features or coverage required, but instead is defined by what is not health insurance coverage. The laundry list of what does not constitute essential coverage includes, but is not limited to, obvious items such as: accident or disability income insurance, automobile medical payment insurance, coverage for on-site medical clinics, limited dental or vision benefits, long-term care insurance, home health care, hospital indemnity insurance, and coverage-only for a specified disease or illness.
Affordable and Provide Minimum Value
Of further note are the requirements that the eligible employer-sponsored plan must be affordable to the employee and provide minimum value. “Unaffordable” for the employee is a plan that requires the employee’s share of the premium to cost more than 9.5% of the employee’s annual household income. And a plan fails to meet the minimum value requirement if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of those costs.
Annual Penalty Up To $3K
Ok, now that the basics have been identified, let’s look at the penalty for an applicable large employer that does not offer affordable coverage to at least 95% of its full-time employees. The annual penalty will be equal to $2,000 for each full-time employee in excess of 30 employees. It is possible for the penalty to climb to $3,000 for any employee that petitions the government and receives a premium tax credit enabling the employee to purchase coverage through the future health insurance exchanges that will pop up in the market place.
It is also important to note that these employer-shared responsibility provisions should not be confused with the “individual mandate” which is the controversial provision being phased in beginning in 2014, but not expected to take full effect until 2016. You may recall that in a 5-4 ruling upholding the constitutionality of PPACA, the Supreme Court held that the individual mandate is not a “penalty,” as the health-care law identified it, but is instead a tax, and therefore a constitutional application of Congress’s taxation power. When the individual mandate or “shared responsibility payment” is fully in place, the amount an individual would owe for not having health insurance is the greater of 2.5 percent of your income or $695. There is currently no means to criminally prosecute those who do not have health insurance and also refuse to pay the shared responsibility payment.
For Employers, What To Do Now?
The recent release of the proposed rules, albeit complex, finally provides some clarity for large employers. We have simply skimmed the basics here. There are many layers of complexity, some flexibility and even a few safe harbors that are too detailed to relay here and should be explored with your legal advisors. At a minimum, employers should determine if they will meet the definition of “large,” and thus be subjected to these rules. Employers should also work with internal or external accountants to calculate whether the existing health plan is “affordable” to the employee and provides “minimum value.” Finally, consider all of the administrative requirements that will be necessary, including amending company plans, in order to be in full compliance with the PPACA, when 2014 arrives, just a short 10 months from now.
ABOUT THE AUTHOR
Victor S. Kostro is an attorney in private practice with the law firm of O’Brien, Riemenschneider & Wattwood, P.A. He has extensive experience as a corporate, transactional, healthcare attorney having served as Associate Corporate Counsel/Corporate Risk Manager for Health First, Inc. In this role, Vic provided representation related to physician employment, practice sales/acquisitions, regulatory and compliance issues, peer review and disciplinary actions, and counseled on issues related to fraud and abuse, anti-kickback laws, Stark, self-referral and the False Claims Act. In addition, Vic managed the entity’s Risk Management Department, which included oversight of all medical negligence and personal injury claims asserted against the entity, its hospitals and physicians. Vic is well versed in medical practice entity formation, and contractual matters, employment, shareholder and partnership agreements, purchase and sale agreements, estate planning and asset protection. Vic holds a Master of Laws in Taxation from the University of Florida.