By Alden J. Bianchi, email@example.com
Federal healthcare reform is now the law of the land, and the Federal agencies with principle jurisdiction over the new law as it affects employers -- the IRS, Department of Labor and the Department of Health and Human Service -- are busy issuing rules governing key reforms that will apply to employer-sponsored group health plans in 2011 for calendar year plans. These reforms include further limits on pre-existing conditions, first dollar coverage of preventative care, rules governing payment for emergency care, among (many) others. For the most part, it is the state-licensed insurance carriers that will bear the brunt of complying with this first wave of new rules.
Commencing in 2014, however, the healthcare reform rules governing “employer responsibility” take effect. Unlike the insurance reforms that are getting all the attention currently, the compliance burden and cost of these rules rest squarely with employers. While the employer responsibility rules do not require employers to offer healthcare coverage to employees, the failure to do so can results in costly non-deductible excise tax penalties. These rules are complex; they will affect different employers and business sectors in different ways; and they will not be kind to many retailers.
Sometimes referred to as a “free-rider” surcharge, the employer responsibility rules apply only to “large” employers, i.e., employers with 50 full-time equivalent employees (there is a very limited exemption under which “seasonal” employees are not counted for this purpose). The rules work differently depending on whether an employer offers coverage to all full-time employees. Where an employer fails to offer coverage to all its full-time employees, and where more than 30 employees qualify for low-income health insurance subsidies through state-based insurance exchanges, then the annual penalty of $2,000 (in practice, penalties will be determined and assessed on a monthly basis) multiplied by the number of the employer’s full-time employees in excess of 30, including those who do not qualify for any subsidies. Full-time for this purpose means employees who work 30 or more hours per week.
Where the employer offers coverage to all full time employees, then the penalty is $3,000 multiplied by the number of the employer’s full-time employees who qualify for the subsidy. (However, the penalty under this “coverage” prong can never exceed the penalty that the employer would have paid had it offered no coverage.) There is a further wrinkle. Where the value of the plan coverage dips below a certain level, employees need only establish that their household income is less than 400% of the Federal poverty limit in order to qualify for the subsidy. But where the value of the plan coverage exceeds that threshold, employees must also establish that their premium cost for the employer’s plan exceeds 9.5% of their household income.
These rules have some important implications. First and foremost, industries and sectors that have not traditionally furnished group health plan coverage will be hit the hardest. These include many medium and small retailers, most staffing firms, and more than a few franchise operations. Also hard hit will be companies that have a large cohort of minimum wage or low-income workers, since the employer responsibility penalties are tied to the number of full-time employees who have access to healthcare premium and cost-sharing subsidies by virtue of their income.
Importantly, the employer responsibility rules test coverage under an employer’s plan and the level of benefits that the plan provides. There is no requirement that the employer pay a particular percentage of premium cost. An employer provides coverage to all its full-time employees for purposes of these rules even if the plan is entirely employee paid. As the amount of premium cost to the employees increases, however, so too does the number of employees whose premium cost might exceed 9.5% of household income, thereby increasing penalties in the aggregate. The challenge for employers, then, is to arrive at the right premium balance, i.e., one that reduces overall healthcare plan costs taking penalties into account.
Because the employer responsibility requirements don’t take effect to 2014, the regulators have not yet issued guidance, and they are not likely to do so for some time. In the meantime, employers are starting to consider their alternatives, including whether to abandon health coverage altogether and simply pay the fine. While it’s too soon to say for certain, because there is no minimum employer premium requirement, this approach is not likely to be the optimal choice in most cases. What is clear, however, is that while the compliance calculus differs radically from industry-sector to industry-sector, retailers face some of the biggest challenges.
Alden J. Bianchi is the practice group leader of the Employee Benefits and Executive Compensation practice at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC. He is based in Boston. He can be reached at firstname.lastname@example.org.