With implementation of insurance exchanges and the employer mandate to provide health insurance or be subject to penalties only months away, Senator Max Baucus, Chairman of the Senate Finance Committee and strong supporter of the health care reform legislation, was quoted on April 17 as saying that he fears people do not understand how the law will work. “I just see a huge train wreck coming down.” Of particular note, Baucus stated “Small businesses have no idea what to do, what to expect.” Hopefully, this article will give employers, especially small business owners, a better idea of what to expect.
Beginning in 2014, employers with at least 50 full-time equivalent employees (FTEs) in the preceding year will be subject to the employer mandate (i.e., provide affordable and comprehensive health insurance to full-time employees or pay penalties). In testing whether an employer has fewer than 50 FTEs and is, therefore, exempt from the employer mandate, consider the following rules: (1) an employee who works 30 or more hours per week is considered full time; (2) hours worked includes hours paid for sick leave, vacation and disability; (3) employers may count the hours actually worked by hourly employees and use an equivalency for non-hourly workers (e.g., 8 hours per day or 40 hours per week); (4) to determine FTEs, part-time employees must included by adding up the total part time hours per month and dividing by 120 (e.g., two employees working 15 hours per week or 60 hours per month = one FTE); (5) employers which are part of a controlled group are aggregated (i.e., not tested separately) and (6) seasonal employees are not counted unless they work more than 120 days per year. These rules place a premium on accurately measuring the hours worked by employees and properly classifying workers as employees versus independent contractors. Workers classified by an employer as independent contractors but found by the IRS to be common law employees are included in the test.
Small businesses which are not subject to the employer mandate may (but are not required to) choose to provide health insurance for their employees. They will be able to shop for coverage in the small business marketplace (i.e., exchanges). As an added incentive to purchase insurance for their employees, very small employers (i.e., with 25 or fewer FTEs and which pay average annual wages of no more than $50,000 per FTE) can qualify for a health insurance tax credit; provided they pay at least 50% of the premiums for their employees at the employee-only coverage rate. The tax credit has been available since 2010 and is based on a sliding scale for up to 35% (increasing to 50% in 2014) of the total premium. For example, employers with 10 or fewer employees with average annual wages of less than $25,000 receive the full 35% credit. The credit phases out gradually for employers with more employees and/or with higher wages. Any premiums which do not qualify for the credit are deductible as a business expense.
Employers which are subject to the employer mandate are required to provide adequate health insurance or pay penalties. The insurance coverage must be (1) affordable and (2) provide minimal value to full-time employees. Insurance coverage need not be provided to part-time employees (i.e., employees working less than 30 hours per week). Health insurance is considered affordable if the employee is not required to pay more than 9.5% of household income for self-only coverage. Because employers generally do not know the household income of their employees, one way to determine whether the coverage is affordable would be to see if the cost of coverage to the employee is less than 9.5% of the wages the employer pays to the employee that year. The coverage is considered to provide minimum value if it pays for at least 60% of covered health care expenses for a typical population. It is expected that the coverage offered in the insurance markets will provide minimum value.
An employer subject to the employer mandate providing coverage that meets the affordability and minimum value requirement will not be subject to a penalty as long as that coverage is provided to at least 95% of its full-time employees. It is critical, however, that the coverage not fall below the 95% threshold or the employer will be potentially liable for a large penalty even if though the employer provides coverage to most of its full-time employees. An employer may be subject to the penalty if at least one of its full-time employees purchases health insurance through an exchange and qualifies for a premium tax credit or cost sharing subsidy in the exchange. The penalty is $2,000 per full-time employee minus 30 (i.e., no penalty on the first 30 employees). If an employer subject to the employer mandate offers insurance coverage to its full-time employees but the affordability or minimum value requirements are not met, the penalty is generally $3,000 per employee receiving the premium tax credit or cost sharing subsidy. For a helpful flow chart for employer penalties use the link below to The Henry J. Kaiser Family Foundation Health Reform Source website http://healthreform.kff.org/the-basics/employer-penalty-flowchart.aspx The website contains a wealth of information relating to health care reform.
Health care reform is a massive undertaking. The rules under health care reform are complicated. The IRS and other federal agencies have expended a tremendous amount of effort in developing regulations and guidance to implement the law. Much is yet to be done and, unless implementation is delayed, time is running out to finalize the rules and educate business owners. Time will tell whether or not the train wreck that Senator Baucus envisions will be avoided.