Navigating Obamacare: Charting a Course that is Best for You
Navigating Obamacare: Charting a Course that is Best for You
The Patient Protection and Affordable Care Act (PPACA), more commonly referred to as “Obamacare,” first sailed through the treacherous waters known as the U.S. Congress in March 2010. In July 2012, strong waves and adversarial winds threatened to scuttle its hull on the rocks of the U.S. Supreme Court. Somehow, though many are still left wondering how, it coursed through those rocks with nary a scratch. In one final test, a mutiny against this ship’s captain was proposed last November, but, in the end, it was turned aside. Thus, the PPACA has arrived at our shores, filled with promises, threats and arithmetic that most of us landlubbers can make neither heads nor tails (nor fins) of (speaking of fins, the salmon dinner on the first night of the SBC Legislative Conference was deemed by all to be excellent).
Fortunately, there are plenty of experts out there to help begin to sort it all out. Kimberly Hurst, Senior Vice President and Health Care Strategist for Aon Hewitt, recently spoke to component manufacturers (CMs) attending the SBC Legislative Conference in Washington, DC. Based on her presentation, and several other articles (see links below), gathered here is some helpful information on what you, the employer, can and should do to comply with the next phase of the law when it becomes effective on January 1, 2014.
We’ll begin by helping you figure out whether the law even applies to you. If it does, we’ll explore several options you can and cannot consider in addressing the mandates of the law. Finally, we’ll look at some of Hurst’s suggested next steps.
How Many Employees Do you Have?
The PPACA created a new definition and formula for determining full-time employees (FTEs). An individual is a FTE or full-time equivalent if they work 30 or more hours a week averaged over a month period. An employer can choose the period during 2013 over which this average is calculated, anywhere from three to twelve months.
While this calculation is applied individually for each employee, the time period you choose must be the same for all employees. For this reason, Hurst recommends that CMs pick the entire twelve months. “The longer the period of time, the lower the average number of hours per employee. This is especially true for industries like yours that may have seasonal employment growth.”
Under the definition of “seasonal worker” in the PPACA, the individual or group of individuals must be employed less than 120 days (i.e., all of your seasonal employees were employed during the same 120 day or less period). If they qualify as seasonal, they are excluded from the calculation. However, part-time employees are included in the overall calculation for total FTEs. Confused yet? Here are a few examples that might help clear things up.
Example 1: Take the total number of hours worked by all your employees in May. 50 FTE, averaging six hours per day over the 23 work days in May would equal 6,900 (50 x 6 x 23) hours. If your May employment records near or exceed 6,900 hours, you will likely be considered a large employer under the PPACA.
Example 2: You employed 40 full-time workers (who average 30 hours or 6 hours per day or more) and 16 part-time workers (who average 15 hours per week, or 3 hours per day) in May. Since 138 hours in May counts as one FTE (6 X 23), those part-time workers are equivalent to 10 (20 x 3 x 23) FTE. Under PPACA, you would have employed 50 FTE and would likely be considered a large employer.
Under both of these examples, it becomes a little clearer why it is best to consider the entire 2013 calendar year when you conduct your calculations on total number of employees. With a minimum of 78,000 hours as a guide to being a large employer under PPACA (50 FTE x 30 hours x 52 weeks), subtract individuals who qualified as seasonal and those that were contractual (non-W-2). If you think you will be close to that minimum threshold for 2013, you should begin planning how you will adhere to the requirements of the health care law.
“Most employers don’t have a plan on how they are going to record and measure the number of hours an individual employee averages over the entire year,” said Hurst. “The best thing any employer can do at this point is develop their measurement process and begin using it so they can determine how many FTEs they truly have and which employees are full-time, and which are part-time.”
Alternatives to Consider
Before launching into some of the alternatives that have been suggested by various experts familiar with the health care law (and its loopholes), it’s important to point out that making long-term business decisions based on regulatory mandates is not optimal. It’s difficult to have confidence in any decision driven solely by governmental requirements because they could change or be repealed with very little notice (this is particularly true for solutions that rely on perceived loopholes or legislative oversight). With that said, here are some options to contemplate as we near January 1, 2014, the deadline when most of the employer-based insurance requirements of the PPACA go into effect.
First of all, breaking your company up into a bunch of smaller companies to avoid the 50 FTE threshold is not an option, based on how the PPACA defines an “employer.” An employer is a company or a group of companies under “common control.” PPAC defines common control as five or less individuals who own at least 80 percent of the companies. This means a CM can’t spin their design department off as a separate company unless they completely give up ownership of that new company. Taking family-run businesses into account, common control is further complicated by what is called “constructive stock” ownership. Essentially, this means that an individual owner can be considered owning the stock of their spouse, parents and offspring.
So while breaking the company apart into a collection of smaller companies may not be a viable way to avoid the law, there are a few options available for CMs to consider. One is to stay small. As long as you stay under the 50 FTE threshold, your small business will not be required to meet any of the mandates of the health care law. This really isn’t a viable, or preferable, approach. Every business wants to grow and expand as it succeeds. Unfortunately, with employers defined as mentioned above, small businesses can’t expand through purchasing other small businesses to get around the law. So purposely staying small is, at best, a short-term solution to allow you time to formulate a strategy on how to incorporate the costs associated with the PPACA into your business operations.
Another option is to use mostly part-time labor. If a vast majority of your employees average less than 30 hours per week during 2013, even if your cumulative employee calculations determines you have the equivalent of 50 or more FTE, adherence to the mandates of the PPACA will have a relatively small impact. This gets to an interesting twist in the law. While you will have to submit to the requirements of the law because you have 50 or more equivalent FTE, you are not required to offer health insurance coverage to part-time employees.
Along these same lines, you can rely partially on non-employer labor. For the past few years, many CMs across the country have relied on contracted labor through temporary employment agencies to meet short-term needs and meet production demand spikes that occur with sporadic large contracts or heavier construction seasons. This approach would allow an employer to come close to the 50 FTE threshold, and then grow beyond it through developing a relationship with a local temp agency to, for example, supply production workers during peak production times.
Consider Not Offering Affordable Insurance
If you find yourself with over 50 FTE, instead of finding ways to restructure your company, you can opt to either offer no insurance coverage at all or offer what is deemed to be inadequate and/or non-“affordable” insurance coverage (see sidebar). Going this route will mean you will have to pay a penalty if at least one of your employees gets a federal subsidy to get insurance through a state exchange. For some, particularly employers in states that don’t have their own exchanges (see map above), not offering adequate or “affordable” insurance may be the best option for both the employer and the employee.
For the employer, if they don’t offer any insurance, they face a fixed-cost fee in the form of a non-deductible excise tax penalty. Starting in 2014, the tax penalty is charged per month and is calculated based on the number of full-time employees, minus the first 30, multiplied by $166.66 ($2,000 per year, divided by 12) each month. For example, an employer with 51 employees will be subject to a penalty of $3,500 per month (51-30 = 21 X $166.66).
Employers who offer insurance coverage that is inadequate or not affordable—but have at least one full-time employee (again, you are not required to offer insurance to a part-time employee) who enters the exchange and receives a federal subsidy to purchase insurance through a state-run exchange—face a viable-cost fee in the form of a non-deductible excise tax penalty. Starting in 2014, the employer will pay the lesser of $250 per month ($3,000 per year, divided by 12) for each employee receiving a subsidy, or $166.66 per month for every full-time employee, minus the first 30.
The benefit of this route is, according to Hurst, “if the state does not have a state-run exchange, the employee cannot receive a federal subsidy, and, therefore, the employer cannot be charged the fee.” For employers operating in states that do have a state exchange, it is presently unclear whether an employer who has less than 30 full-time employees, but has more than 50 equivalent FTE because of their part-time employees, would have to pay a fee because the law excludes the first 30 full-time employees.
For employees who work at a company that either doesn’t offer insurance or offers inadequate and/or non-“affordable” insurance, and their income is less than $88,000 (400 percent of the poverty level), they can qualify for a federal subsidy toward purchasing their own health insurance through a state exchange. This approach allows your employees a wider choice in the insurance coverage they can purchase, so your younger, single employees can choose different coverage than your older or family-oriented employees.
This approach also addresses what is being called the “family glitch” in the law. In 2012, the Kaiser Family Foundation estimated the average employer-provided plan costs about $5,600 for an individual worker, but nearly $15,700 for a family of four. For example, if the employee makes $35,000, the employer must cover the cost of the individual’s insurance premiums over $3,325 ($35,000 x 9.5%). Based on the average plan, the employer would be responsible for approximately $2,275 to purchase insurance only for them.
The glitch comes into play if the employee has a family. Under the PPACA, the employer must offer an insurance plan that covers dependents of employees (up to the age of 26), but not their spouses. For the insurance coverage that includes the dependent, the employer can pass on the entire cost beyond the required $2,275 (9.5 percent of the individual-only plan). Using the Kaiser Family Foundation averages, if the employee has a family of four and wants to cover all of them under his insurance, the employer still only has to contribute $2,275, while the employee would be left having to pay $13,425 out-of-pocket (not to mention the $4,000 deductible as health costs are actually incurred).
Further, without the overhead costs associated with obtaining and maintaining health insurance, employers can pass those savings on to employees through a defined contribution of cash into an HRA (health reimbursement account) or FSA (flexible spending account) to help cover the cost of the premiums they are paying for out of pocket.
“Each employer should begin collecting the necessary information to determine if they have 50 or more full-time equivalent (FTE) employees. If an employer has fewer than 50 full-time employees, the law does not require the employer to offer coverage,” advises Hurst. “Alternatively, if they have 25 or less FTE, whose average salary is less than $50,000, they may qualify for a premium tax credit if they offer their employees adequate and affordable health care coverage.”
Now is the time to think ahead. “Use this opportunity to create a sustainable approach that will not only work well now, but it can work well and adjust to where you want your company to be beyond 2013,” said Hurst. As you review your options, it’s a good idea to bring your employees into the discussion. As with everything else, employee buy-in is critical to success. “Engage employees and their families in context of what they can and want to be able to control,” suggests Hurst. Instead of just communicating changes, get them involved on the front end.
Most importantly, begin working on a plan today. One thing that seems clear is that there is no one-size-fits-all solution for small business. Hopefully, this article has given you a sense for the size and scope of the challenge the PPACA presents to employers, along with a few ideas of how businesses can begin to meet those challenges. There are many aspects of this law that are still unresolved, state exchanges being one of the most prominent. Consequently, SBCA will continue to monitor this law and share information and analysis on how it may affect your business operations.
Sidebar: Inadequate or Non-Affordable Insurance
The PPACA does not explicitly mandate that an employer offer employees health insurance. However, beginning in 2014, employers with at least 50 FTE equivalent employees will face penalties if one or more of their full-time employees obtains a federal tax credit to purchase insurance through a state exchange.
In order to be deemed adequate, an employer-offered insurance plan must provide Minimum Essential Coverage (MEC), in ten categories:
- ambulatory patient services,
- emergency services,
- maternity and newborn care,
- mental health and substance use disorder services, including behavioral health treatment,
- prescription drugs,
- rehabilitative and habilitative services and devices,
- laboratory services,
- preventive and wellness services and chronic disease management, and
- pediatric services, including oral and vision care.
Further, the insurance must cover at least 60 percent of the cost of the benefits.
Recently, the IRS ruled that, in order to be considered affordable, the employee’s share of the self-only insurance premium cost cannot be more that 9.5 percent of the employee’s total compensation as reported in box 1 of their W-2. Further, the plan offered by the employer cannot have a deductible higher than $2,000 per individual or $4,000 per family.