- Affordable Care Act: Reducing Employee Hours May Increase Litigation Risk
- November 12, 2013 | Author: David J. Ledermann
- Law Firm: Barley Snyder - Lancaster Office
Under the Affordable Care Act’s employer mandate, beginning in 2015, applicable large employers (those having at least 50 full-time equivalent employees) must offer minimum essential health coverage to substantially all full-time employees and their dependents. If employers don’t, they risk a penalty of $2,000, on an annualized basis, multiplied by the total number of the employer’s full-time employees reduced by 30. If an employer that offers minimum essential coverage to substantially all of its full-time employees and their dependents fails to offer coverage that is affordable (i.e., employee premium contributions for self-only coverage do not exceed 9.5% of household income) and provides minimum value (i.e., the plan pays on average at least 60% of the cost of plan benefits), the employer may be liable for an annualized penalty of $3,000 multiplied by the number of its full-time employees that obtain federally subsidized insurance on an exchange. Fundamental to these penalty provisions is the concept of “full-time” employment because even covered employers will not be liable for penalties for employees who are not full-time.
The Affordable Care Act defines a full-time employee as an employee who averages at least 30 hours per week. Because the employer mandate results in penalties only for full-time employees, some employers have considered, or have even begun, restructuring their workforces to reduce their full-time employee count. Employers should be aware, however, this strategy carries the risk that the employer may be deemed in violation of Section 510 of the Employee Retirement Income Security Act of 1974 (“ERISA”). That law makes it unlawful for an employer to take any adverse action against a participant for exercising a right to which the participant is entitled or for the purpose of interfering with the attainment of any right to which the participant may become entitled under an employee benefit plan.
Reducing employee hours to avoid, or to at least minimize, the employer mandate’s impact arguably runs afoul of ERISA Section 510. Courts that have faced the issue, however, have required that a Section 510 claimant show that the employer specifically intended to interfere with the claimant’s benefit plan rights. It remains to be seen whether reducing employee hours to avoid penalties under the Affordable Care Act constitutes an adverse employment decision intended to deprive a participant of a right under the employer’s health plan. Another threshold question concerns whether the affected employee is a plan participant, because Section 510 protects only participants, not necessarily employees who do not participate in the benefit plan. It may also be that reducing existing full-time employees’ hours to less than 30 per week may be more problematic in terms of Section 510 liability than limiting the hours of newly hired employees.
That being said, an employer who guesses wrong faces significant exposure. Potential remedies for ERISA Section 510 violations include back pay to the extent an employee’s compensation suffered because of the reduction in hours, reinstatement to the level of hours the employee previously worked, and the provision of health plan benefits for the period the employee was without coverage under the employer’s plan. Plus, a prevailing party in an ERISA suit is eligible to recover the attorney’s fees expended prosecuting the claim.
Unfortunately, government regulators have not provided clarifying guidance on this issue. Informal comments from the U.S. Department of Labor suggest that agency will issue no guidance regarding whether employer efforts to minimize the mandate’s impact violate Section 510. Moreover, regardless of whether any regulatory guidance on the subject is issued, it is a virtual certainty that the courts will ultimately decide the extent to which employer decisions in response to the employer mandate implicate Section 510 of ERISA.