Affordable Care Act (“ACA”)

The Patient Protection and Affordable Care Act (“ACA”) was enacted in 2010. This act is also known as Obamacare. From its inception, the ACA has been controversial and either praised or scorned by various political parties. The ACA was challenged on numerous constitutional grounds, but was ultimately upheld in a 6 to 3 decision by the United States Supreme Court.[1]

The following are among the better known provisions of the ACA:

• Dependent care extended to the age of 26;
• Insurers may not cancel policies when policy holders become ill;
• Created state health insurance exchanges;
• Prohibits lifetime monetary limits on hospital stays;
• Insurers may not deny coverage to individuals based on pre-existing conditions;
• Created an individual mandate requiring all individuals, with some exceptions, to have health insurance or pay a tax penalty;
• Expanded medicated;
• Provided certain subsidies;
• Established minimum standards for health insurance policies;
• Placed time limits on amount of time employers could require for health insurance eligibility;
• Provided for certain small business tax credits;
• Created penalty for large employers who do not provide health insurance for full-time employees.

A greater explanation on how certain provisions of the ACA affect employers follows.

Coverage

The ACA’s mandate only applies employers that employ an average of 50 or more full-time employees per month for a calendar year; this includes full-time equivalent employees.[2] If the employer is large based on its calculation at the beginning of a calendar year, it will remain large for that entire calendar year.[3] An employer’s number of full-time employees is calculated by adding the employer’s full-time employees to its full-time equivalent employees for each month of the prior calendar year.[4] A full-time employee is defined as an employee who, that averages at least 30 hours a week for a calendar month.[5] Full-time equivalent employees are calculated by taking the aggregate number of hours worked by part-time employees in a month (up to a maximum of 120 hours per employee) and dividing by 120.44.[6] For example, an employer whose part time employees worked 2000 hours in a month would have 17 full-time equivalent employees.[7]

ACA’s Mandate Provisions

            As noted above, a large employer (over 50 full-time employees) must provide minimum essential coverage.[8] The ACA defines “minimum essential coverage meaning any of the following:

(A) Government sponsored programs.–Coverage under–

(i) the Medicare program under part A of title XVIII of the Social Security Act,

(ii) the Medicaid program under title XIX of the Social Security Act,

(iii) the CHIP program under title XXI of the Social Security Act,

(iv) medical coverage under chapter 55 of title 10, United States Code, including coverage under the TRICARE program;

(v) a health care program under chapter 17 or 18 of title 38, United States Code, as determined by the Secretary of Veterans Affairs, in coordination with the Secretary of Health and Human Services and the Secretary,

(vi) a health plan under section 2504(e) of title 22, United States Code (relating to Peace Corps volunteers); or

(vii) the Nonappropriated Fund Health Benefits Program of the Department of Defense, established under section 349 of the National Defense Authorization Act for Fiscal Year 1995 (Public Law 103-337; 10 U.S.C. 1587 note).

(B) Employer-sponsored plan.–Coverage under an eligible employer-sponsored plan.

(C) Plans in the individual market.–Coverage under a health plan offered in the individual market within a State.

(D) Grandfathered health plan.–Coverage under a grandfathered health plan.

(E) Other coverage.–Such other health benefits coverage, such as a State health benefits risk pool, as the Secretary of Health and Human Services, in coordination with the Secretary, recognizes for purposes of this subsection.[9]

The ACA further defines eligible employer-sponsored plan as follows:

The term “eligible employer-sponsored plan” means, with respect to any employee, a group health plan or group health insurance coverage offered by an employer to the employee which is–

(A) a governmental plan (within the meaning of section 2791(d)(8) of the Public Health Service Act), or

(B) any other plan or coverage offered in the small or large group market within a State.

Such term shall include a grandfathered health plan described in paragraph (1)(D) offered in a group market.[10]

Practically, employer sponsored plans must cover at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan; this is known as the minimum value requirement.[11]

The ACA also includes affordability requirements. Employer-provided coverage is considered affordable for an employee if the employee required contribution is no more than 9.69 percent (as adjusted) of that employee’s household income in 2017.[12]

Because employers are not likely to know the household income of their employees, there are three safe harbors that an employer may use to determine affordability for purposes of the employer shared responsibility provisions.  (These safe harbors do not affect whether an employee’s coverage is affordable for purposes of determining the employee’s eligibility for the premium tax credit.)  In general, under these employer shared responsibility affordability safe harbors, employers are allowed to use Form W-2 wages, an employee’s rate of pay, or the federal poverty line, instead of household income in making the affordability determination.[13]

The IRS has provided additional guidance regarding these safe harbors.

The three affordability safe harbors are (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor.  An ALE may use one or more of the safe harbors at its option but only if the ALE offers 95 percent of its full-time employees and their dependents the opportunity to enroll in coverage that provides minimum value for the self-only coverage offered to the employee.  An ALE may choose to use one safe harbor for all of its employees or to use different safe harbors for employees in different categories, provided that the categories used are reasonable and the employer uses one safe harbor on a uniform and consistent basis for all employees in a particular category.  If an ALE offers multiple health care coverage options, the affordability test for a particular employee applies to the lowest-cost self-only coverage option that provides minimum value and that is available to that employee.

The Form W-2 wages safe harbor generally is based on the amount of wages paid to the employee that the employer reports in Box 1 of that employee’s Form W-2.  The rate of pay safe harbor generally is based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee, if the rate of pay is decreased (but not if the rate of pay is increased).  The federal poverty line safe harbor generally treats coverage as affordable for a month if the employee required contribution for the month does not exceed 9.5 percent, adjusted annually, of the federal poverty line for a single individual for the applicable calendar year, divided by 12.  The final regulations provide additional information on these affordability safe harbors. [14]

Enforcement

On January 20, 2017, President Trump signed an executive order aimed at minimizing the enforcement of the ACA. In relevant part the Executive Order states:

To the maximum extent permitted by law, the Secretary of Health and Human Services (Secretary) and the heads of all other executive departments and agencies (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications. [15]

Notwithstanding this executive order, for a “large employer,” penalties are triggered for any month that a full-time employee purchases a qualified health plan on an exchange and is paid or entitled to a “premium tax credit” or “cost-sharing reduction”[16] For large employers, penalties under the mandate are real-time, meaning that if any full-time employee is not offered coverage in a month, a penalty could be assessed regardless of whether the employee was full-time in a prior month.[17] Specifically, the regulation provides:

If an applicable large employer member fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for any calendar month, and the applicable large employer member has received a Section 1411 Certification with respect to at least one full-time employee, an assessable payment is imposed. For the calendar month, the applicable large employer member will owe an assessable payment equal to the product of the section 4980H(a)[18] applicable payment amount and the number of full-time employees of the applicable large employer member (other than employees in a limited non-assessment period for certain employees and as adjusted in accordance with paragraph (e) of this section). For purposes of this paragraph (a), an applicable large employer member is treated as offering such coverage to its full-time employees (and their dependents) for a calendar month if, for that month, it offers such coverage to all but five percent (or, if greater, five) of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also offers coverage to that employee’s dependents). For purposes of the preceding sentence, an employee in a limited non-assessment period for certain employees is not included in the calculation.[19]

 

26 CFR 54.4980H-4 provides the following illustrative example,

 

Facts. Applicable large employer member Z and applicable large employer member Y are the two members of an applicable large employer. Applicable large employer member Z employs 40 full-time employees in each calendar month of 2017. Applicable large employer member Y employs 35 full-time employees in each calendar month of 2017. Assume that for 2017, the applicable payment amount for a calendar month is $2,000 divided by 12. Applicable large employer member Z does not sponsor an eligible employer-sponsored plan for any calendar month of 2017, and receives a Section 1411 Certification for 2017 with respect to at least one of its full-time employees. Applicable large employer member Y sponsors an eligible employer-sponsored plan under which all of its full-time employees are eligible for minimum essential coverage.

 

Conclusion. Pursuant to section 4980H(a) and this section, applicable large employer member Z is subject to an assessable payment under section 4980H(a) for 2017 of $48,000, which is equal to 24 × $2,000 (40 full-time employees reduced by 16 (its allocable share of the 30-employee offset ((40/75) × 30 = 16)) and then multiplied by $2,000). Applicable large employer member Y is not subject to an assessable payment under section 4980H(a) for 2017.

[1] There have been numerous attempts to repeal or revise the ACA, as of the date these materials went to the publisher, the ACA was still in effect.

[2] 26 USC §4980H(c)(2)(A)

[3] Id.

[4] Id.

[5] 26 USC § 4980H(c)(2)(D).

[6] 26 U.S.C. § 4980H(c)(2)(E).

[7] 2000/120.44 = 16.60 rounded to the nearest whole employee 17.

[8] 26 USC § 4980H(a).

[9] 26 USC § 5000A

[10] Id.

[11] See Internal Revenue Service, Minimum Value and Affordability, https://www.irs.gov/affordable-care-act/employers/minimum-value-and-affordability

[12] Internal Revenue Service, Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act

[13] Id.

[14] Id.

[15] Whitehouse.gov, Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal, https://www.whitehouse.gov/the-press-office/2017/01/2/executive-order-minimizing-economic-burden-patient-protection-and

[16] 29 USC § 4980H.

[17]

[18] 26 USC § 4980H, “imposed on the employer an assessable payment equal to the product of the applicable payment amount and the number of individuals employed by the employer as full-time employees during such month.”

[19] 26 CFR 54.4980H-4 (emphasis added)