|February 10, 2014|
Previously published on February 2014
Employee Benefits & Executive Compensation
Several media outlets, including the New York Times editorial page, have chimed in on Target Corporation’s (the large retailer) decision to exclude part-time employees from coverage under Target’s health plan. According to the Times, Target’s plan has historically covered employees who average 21 to 30 hours per week. We are not privy to Target’s internal deliberations on this issue, but the decision process was likely a case study in how ObamaCare works for employers of any size. In particular, such a decision is driven by the cornerstones of ObamaCare: the employer “shared responsibility” payments regime; the generous federal tax subsidies available for those individuals who purchase health insurance through a state exchange; and the “individual mandate.”
For several years, we have urged employers to undertake the quantitative analysis necessary to determine how to address their potential liabilities under the excise tax of section 4980H of the Internal Revenue Code, euphemistically called “Shared Responsibility” Payments. Some of the pressure was deferred when the Obama administration delayed enforcement of section 4980H until 2015 (it was originally scheduled to take effect this year). But the time has certainly come for each employer that has not already done so, to move ahead briskly with the decision-making process. Note, however, that the regulations under section 4980H are still merely proposed. Final regulations are expected soon.
The centerpiece of ObamaCare for employers is the “Shared Responsibility Payment” regime, under which employers with at least 50 full-time equivalent employees must pay an annual excise tax of up to $3,000 per full-time employee if any full-time employee or dependent of a full-time employee qualifies for and uses a federal premium tax subsidy to purchase health insurance through a state health care exchange. A “full-time employee” is any employee who averages at least 30 hours per week.
Premium tax subsidies are available for anyone whose household income is between 100% and 400% of the federal poverty level and who is not eligible for employer coverage that is both “affordable” and provides “minimum value.” (Presumably, individuals and families whose household income is under the federal poverty level are eligible for Medicaid.) The federal poverty level for a household of four for 2014 is almost $24,000, and four times that is just short of $96,000. Clearly, then, the subsidy is available to a lot of people, and employers should consider it likely that, if the employer does not offer qualifying coverage to all full-time employees, at least one full-time employee will purchase health insurance through a state exchange and use a premium tax credit to do so. Conversely, the subsidy is not available for an individual who is eligible for employer coverage that is both “affordable” and provides “minimum value” even if the individual decides not to enroll in the employer’s plan.
The rules for the “individual mandate” are somewhat similar. Individuals must be covered by “minimum essential coverage” through the government, their employers, or individually purchased contracts, in order to avoid the individual excise tax that was famously upheld by the U.S. Supreme Court in 2012.
With that as scant background, Target may have considered the following in its decision-making process:
- The exclusion of employees who work less than 30 hours per week does not result in any ObamaCare excise taxes. The excise taxes potentially arise only if a full-time employee is not covered. Viewed solely from this perspective, excluding such employees might have been a relatively easy decision.
- The exclusion of employees who work less than 30 hours per week may have freed up funds to allow Target to offer coverage to full-time employees that is both “affordable” and provides “minimum value” if it previously did not. Under ObamaCare, “affordable” means that the employee’s premium is not more than 9.5% of the employee’s household income. “Minimum value” means that the employer’s/insurer’s share of costs under the plan, on an actuarial basis, is at least 60% of total costs paid by the plan.
- Since part-time employees are no longer eligible for employer-provided coverage, they may be able to use the generous federal tax subsidies to purchase health insurance through a state exchange. Target’s analysis may have concluded that such subsidies are more valuable than the subsidies provided by Target, resulting in a win-win for the part-time employees and Target (but a loss for the taxpayers).
News reports indicate that Target is not moving full-time employees from full-time to part-time, but we are aware of many other employers with large, usually low-paid workforces, that are considering such a move, particularly for employees who hover around the 30 hours per week mark.
We are further aware of employers who are considering terminating plans altogether or excluding groups of full-time employees, based on analyses that conclude that the excise tax is more cost-effective to the employer than providing coverage. An employer considering such a decision should take into account the competitive landscape for employees, the Internal Revenue Code’s current anti-discrimination rules, and the more stringent anti-discrimination rules that will be promulgated under ObamaCare.