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Five Costly Mistakes to Avoid With Obamacare
The Legal Intelligencer
Organizations large and small are quickly running out of time to ensure that they are compliant with the Patient Protection and Affordable Care Act (PPACA), signed into law in 2010. Also known as the Affordable Care Act (ACA), major portions of the law begin to take effect next year. However, an employer's actions this year will have a significant impact on its ability to comply with the reforms in 2014 and the company's financial liability for noncompliance.
To date, discussion has focused on the topic of employers "playing" (buying health insurance coverage) or "paying" (being assessed the penalty) under the ACA. The majority of employers, which are likely to play, now need to be wary of costly errors that will result in companies playing and paying buying health insurance for their employees and paying the ACA fines.
To understand the common errors, employers must have a basic understanding of the ACA penalties. Those penalties only apply to employers that employ 50 or more full-time employees, which are defined as employees who work 30 or more hours a week or the equivalent when all of the part-time employees' hours are aggregated.
There are two primary penalties, known generally as the "a" and "b" penalties. The "a" penalty applies when the employer fails to offer an appropriate health plan to substantially all of its common-law FT employees and their dependents. The term "substantially all" is generally defined as 95 percent of FT employees. The "a" penalty is calculated as $2,000 times the number of FT employees (minus the first 30 FT employees).
The "b" penalty occurs when the employer offers an appropriate health plan to substantially all of its FT employees and their dependents but the plan is either not affordable or does not meet the minimum value test and an employee goes to a government exchange and receives a subsidy to purchase health insurance. The "b" penalty is the lesser of the "a" penalty or the number of employees who receive a subsidy times $3,000.
1. Failing to Offer Coverage
At first blush, it would seem simplistic to ensure that an employer offers health care coverage to 95 percent of its FT employees. If, however, the employer misses the 95 percent mark even by a fraction of a percentage point the employer will pay the full "a" fine and the cost of the health insurance. Accordingly, employers should not be complacent with respect to the "substantially all" threshold and must be proactive to ensure that they have correctly accounted for all FT common-law employees. Easy employees to miss are those who are misclassified as independent contractors. There is no such creature as the "1099 employee," which is a fiction that places the employer at substantial risk under the ACA, as well as a plethora of employment and tax laws. Other easy-to-miss employees include temporary and certain leased individuals who might qualify as common-law employees. The employer must be precise in its classifications to ensure that it has accounted for all common-law employees and is, in fact, offering health insurance benefits to substantially all of those common-law FT employees. Otherwise, the employer will play and pay.
2. Failing to Offer Coverage
No, this is not a typographical error. The first two mistakes are the same but for very different reasons. Employers need to recognize that the determination of who is or is not a FT employee working 30 hours or more per week is measured right now in 2013 to determine and lock in the individual's FT status in 2014. Employers must have databases and payroll systems that allow them to accurately track, quantify and average hours, particularly if they have a variable-hour workforce. Failure to appropriately implement and conduct a 2013 measurement period and 2014 stability period under the ACA regulations is a potentially catastrophic error, particularly for employers with a significant number of part-time or variable-hour employees.
If the employer inadvertently misclassifies employees as part-time individuals and deems them to be ineligible for employer-sponsored health care insurance when they are actually working 30 or more hours a week, these employees will count as FT employees who weren't covered for purposes of the "substantially all" requirement. If enough of these employees are accidentally excluded from the plan, it could reduce the number of FT employees who are covered below 95 percent and expose the employer to the full "a" penalty. An employer's counting methodologies are critical and those methodologies must be in place now, or the employer risks making mistakes in classifying employees that will cause it to play and pay.
3. Misunderstanding the Term 'Dependents'
Historically, employers have had great latitude in choosing to offer employee-only, employee-plus-spouse and/or f?amily coverage. That flexibility has just evaporated. So have creative tactics such as the "birthday rules." These rules seek to keep children from enrolling in one parent's group health plan and purport to force the child onto the other parent's group health plan depending on which parent has the first birthday during the calendar year or based on some similarly arbitrary date determination. The ACA requires that plans offer (although they do not have to pay for) coverage to dependents. Interestingly, the ACA generally defines dependents as biological, step- and foster children up to age 26, but the reforms do not include spouses. A failure by a plan to offer dependent coverage will result in the employer playing and paying the full "a" penalty. The only exception is some brief transition relief, which will allow the employer to avoid the "a" penalty in 2014 if the health plan historically did not offer any dependent coverage and is diligently moving toward offering dependent coverage.
4. 'B' Penalty Can Apply Despite Offering Coverage
If an employer offers health care insurance that is either not affordable (generally, the employee contribution for employee-only coverage must be less than 9.5 percent of household income or the employee's W-2 wages) or does not meet the minimum value test (generally, the coverage must pay for 60 percent of the costs) and an employee obtains a subsidy from an exchange, the employer will be assessed the "b" penalty. The "b" penalty is equal to $3,000 per year for every employee who obtains a subsidy up to the amount of the "a" penalty that would apply in the absence of any coverage whatsoever. If a sufficient number of employees obtains subsidies, the "b" penalty will eventually equal the "a" penalty and, once again, the employer will play and pay.
5. 'A' and 'B' Penalties are Not the Only Consequences
Employers that are subject to the Employee Retirement Income Security Act and choose to play must document the material terms of the plan that they choose to offer. It is a regular occurrence to find employers that do not have the required plan document or summary plan description (SPD) or that mistakenly think the insurer's booklet on services is sufficient documentation. The U.S. Department of Labor is actively auditing health plans for compliance with the ACA, ERISA and a host of related laws. These audits can be complaint-driven or random. They are a painful and often lengthy process for the unprepared employer that does not have a legally compliant SPD, up-to-date plan documents, good records of participant communications and other important written information about the plan.
Similarly, employers need to be aware that employees can complain to the Occupational Safety and Health Administration and other government agencies if they feel the employer has failed to comply with the ACA. This will trigger an OSHA investigation. This is not an exhaustive list of other penalties and financial pitfalls, but it highlights that the "a" and "b" penalties are not the only ones to be concerned about. The unprepared employer who is playing and who is on the receiving end of an investigation may find itself with fines, attorney fees and related external/internal costs and will surely play and pay.
Complying with the ACA is a complicated process that requires careful planning and assessment. For employers of all sizes, the key is to understand the law and avoid the costliest mistakes so the company either pays or plays, but not both.
Anne Lavelle is a director and attorney in the labor and employment practice group with Cohen & Grigsby in Pittsburgh. Contact her at email@example.com.
This article originally appeared in The Legal Intelligencer.