Aligning with the Affordable Care Act’s employer mandate
INSIGHT ARTICLE |
After what can be charitably described as a rocky start, the Affordable Care Act (also known more formally as the Patient Protection and Affordable Care Act or, simply, the ACA) has been able to achieve many of the goals the Obama administration set for it. At least 13.4 million Americans are now insured; insurance companies cannot deny coverage based on pre-existing conditions; children up to age 26 can be covered by their parent’s plan. Indirectly, the ACA is said to be one factor attributed to the slowdown in the rate of increase in health care costs and health insurance premium prices.1
Now, after a year’s postponement, the ACA employer mandate is in effect. Although no employer is required to offer coverage, the mandate dictates that employers with 50 or more full-time employees (FTEs) offer minimum essential coverage that is adequate and affordable to all full-time employees and their dependent children or be subject to penalties.
At a RSM CFO Club meeting in Chicago, it was noted that employers subject to the employer-shared responsibility rules need to understand their roles under the ACA, the penalties for noncompliance and the methods for acting in accordance with ACA policies that meet the needs of all stakeholders.
Due to concerns regarding the complexity of the ACA’s requirements, penalties associated with noncompliance were postponed until 2015.
Regarding coverage, employers are divided into three categories:
- 25 or fewer FTEs These companies may be eligible for tax credit. The maximum credit will be equal to 50 percent of the premiums paid by the employer, but phases out beginning with those companies with more than 10 FTEs and average wages of $25,000.
- 26-49 FTEs These companies are not eligible for tax credit nor are they subject to penalties.
- 50 or more FTEs Applicable large employers (ALEs) are subject to employer-shared responsibility rules, that is, the “play or pay” mandate.
As noted by the IRS, the vast majority of employers will fall below the threshold number of employees and, therefore, will not be subject to the employer-shared responsibility provisions.2 For the third category, the threshold for FTEs can be 100 in 2015 only if there has no material reduction in health coverage since February 2014, and the company’s employee head count and hours not reduced to avoid the 100-FTE threshold. A snapshot of any six consecutive months in 2014 can be used to determine the number of FTEs.
How employers are responding
How have employers adjusted to the ACA mandates?
The 2014 RSM Manufacturing & Distribution Monitor survey reported that companies are focusing their attention on how to lower the premiums that they and their workforces will pay. About half of the companies in the survey are implementing incentive programs to promote healthier lifestyles or are adopting wellness programs.3 At the root is a desire to get employees to be proactively responsible for their own health. Yet companies also believe these programs can help reduce health care costs. This might not be the case.
A study by the Rand Corporation4 found that wellness programs are most effective when targeted specifically at disease management. These types of programs can account for nearly 90 percent of any employer’s average health care cost savings gained through these programs; those programs that focused on lifestyle management account for significantly lower average savings per employee.
Surprisingly, not all dependents are eligible for coverage; these may include ex-spouses or adult children over age 26, for example. On average, management can expect to find roughly 5-7 percent of dependents ineligible—about 40 percent of ineligible dependents are spouses. A Dependent Eligibility Verification audit, as the name implies, can help ensure covered dependents are eligible.
It may come as a surprise to employers and employees that the ACA does not mandate coverage for current spouses. With the average annual cost per spouse totaling just over $6,200, management may see it as a fiduciary duty to drop coverage for spouses. These savings may be especially attractive if the company’s coverage is fully or partially self-funded. Such was the case at UPS, when health coverage for 15,000 employee spouses was dropped in an effort to save an estimated $60 million. Yet the potential savings should be considered against the possible backlash from employees if coverage is dropped.
The creation of exchanges has some employers dropping coverage, especially if their plans do not meet the tougher new standards.5 Many companies are quietly getting rid of retiree health insurance coverage. By 2018, it is expected that 9 million people will have their employers drop coverage.
Many employers align their plans with the public exchange plan tiered options. Often, employers find that they are able to offer lower-cost options that are commonly taken in exchange plans.
Rewarding or penalizing tobacco use is quite common among employers and it is easy to understand why: Tobacco users typically have 30-40 percent higher annual health care costs than non-tobacco users. Employee surcharges can be as high as 50 percent if tobacco is the only surcharge imposed. Policies requiring tobacco users to self-identify, however, can be difficult to enforce.
Notably, employers are not actually required to provide coverage. This technicality, however, is overshadowed by the penalties associated with not offering adequate, affordable coverage.
If they do not offer minimum essential coverage that is adequate and affordable to all full-time employees and their dependent children, ALEs are subject to penalties that could be substantial.
- No coverage penalty: Also known as the “sledgehammer” penalty. Penalties kick in if an ALE fails to offer coverage to at least 95 percent (70 percent in 2015 only) of its full-time employees (FTEs) and their dependents and at least one full-time employee purchases subsidized health insurance marketplace coverage.
- Penalty: $2,000 per month per FTE (minus 30).
- Coverage penalty: Also known as the “tack hammer” penalty. Penalties kick in if coverage is either not affordable or not adequate, or is not offered to all full-time employees.
- Penalty: $3,000 per year for each full-time employee who purchases subsidized marketplace coverage
Penalties are subject to an annual cost-of-living adjustment and are not tax-deductable.
Like any first-year project, the error rate can be high for both employers and the IRS. So it is critical for companies to respond promptly to any issues raised by the IRS. Without timely attention, there is the potential for companies to be assessed inappropriate penalties.
Starting in 2018, the ACA will impose a 40 percent excise tax on the annual value of health plan coverage that exceeds $10,200 for single coverage or $27,500 for family (a.k.a., the “Cadillac” plans). For example, if a company has 500 covered employees and the value of single coverage is $11,200 (or $1,000 over the tax threshold), the company’s annual excise tax will be $200,000. If health care inflation averages 8 percent per year, the excise tax is projected to hit more than 60 percent of employers in 2018.
It is in the interest of both employers and their employees to design compensation and benefits packages that are tax-efficient. This could mean updating a plan’s design or making other changes to control costs. Or companies could make health benefits less “rich” in exchange for enhancements in wages and other benefits.
Companies are planning to implement a number of strategies and services designed to keep costs low and employees healthy. A survey by Towers Watson6 notes that 85 percent of employers are offering coaching to promote healthy lifestyles. Many are offering telemedicine, that is, consultations with doctors over the phone or online. These plans are designed to reduce costly and unnecessary emergency room visits by providing convenient access to an affordable option. When nearly half of the visits to the emergency room overall are not classified as urgent, telemedicine could potentially cut the costs of such non-emergency consultations significantly.
Nearly all companies (85 percent) now offer or are planning to offer consumer-directed health plans (CDHP). These plans include high deductibles and personal health accounts and could result in the savings of billions of dollars in health care costs annually, according to the Rand Corporation. The caveat, however, is that the higher upfront costs could also result in fewer preventive measures being taken by patients and lower health care quality, generally.7
What companies should do now
First, management should conduct a “play or pay” analysis to determine if the company meets the threshold for the employer mandate. Reviews of hours associated with variable-hour employees, as well as the types and numbers of plans being offered, could help identify areas for modifications or consideration of alternative plan options. Management should also develop an in-depth understanding of the reporting and notification requirements of the ACA, as well. In a changing landscape, these reviews of benefits should be performed regularly.
The language of the Affordable Care Act
Following are definitions of common terms used in the ACA:
Adequate: Coverage that provides at least 60 percent of actuarial value
Affordable: Employee share of premium for lowest-cost employee, where coverage does not exceed a threshold based on criteria set by employee’s compensation
Applicable large employer (ALE): Employed an average of at least 50 FTEs during the preceding calendar year
Consumer-directed health plan: Plans characterized by high deductibles and personal health accounts
Exchanges: Internet-based marketplaces through which individuals and small employers may purchase health insurance coverage
Full-time employee (FTE): An employee who is employed an average of at least 30 hours of service per week (130 hours of service per month) with an employer
For Information your business needs to know about the ACA, go to RSM’s Affordable Care Act resource center.
This article is based on discussions and presentations shared at a CFO Club Chicago meeting. Many thanks to the contributors: Thomas G. Hancuch, a shareholder at Vedder Price; Bill O’Malley, a director with RSM’s Washington National Tax practice; and Ben Wagner, senior vice president at Lockton Companies.
- Rattner, S. “For Tens of Millions, Obamacare Is Working” The New York Times (Feb. 21, 2015)
- irs.gov, “Employer Shared Responsibility Provisions”
- 2014 RSM Manufacturing & Distribution Monitor report
- Caloyeras, J et al, “Managing Manifest Diseases, but Not Health Risks, Saved PepsiCo Money Over Seven Years,” (Health Affairs, v. 33, no. 1, Jan. 2014), p. 124-131
- Rattner, S. 2015
- 2014 NBGH/Towers Watson Employer Survey on Purchasing Value in Health Care
- “Expanding Consumer-Directed Health Plans Could Help Cut Overall Health Care Spending,” Rand Corporation, May 7, 2012