- Understanding the Affordable Care Act
- March 28, 2013 | Author: Gerald B. Chattman
- Law Firm: Buckingham, Doolittle & Burroughs, LLC - Cleveland Office
Probably the most discussed and the least understood law to come along in the last 25 years is the Affordable Care Act. Our firm has made a concerted effort not only to understand the law, but also to interpret it for our clients. This brief article is meant merely as a most basic summary of that law with the hope that it will trigger specific questions of application to our clients’ businesses.
I. GENERAL OVERVIEW
The Patient Protection and Affordable Care Act, more commonly referred to as “ObamaCare”, was signed into law on March 23, 2010. Three years later, having survived a constitutional challenge and the recent presidential election, the Affordable Care Act has become the “hot topic” as employers and individuals face the implementation of some of the Act’s most daunting provisions which start January 1, 2014. The Act essentially expands health insurance coverage by: (1) requiring individuals to obtain “minimal essential coverage” for themselves and for their dependents (the “Individual Mandate”), and (2) requiring employers to offer “affordable” health care plans (the “Employer Mandate”). It also requires all states to have a state-specific or the federal health insurance exchange in place in order to make it easier for consumers to compare and purchase coverage. The Act’s Mandates are going to be enforced in a “pay-or-play” manner, where the choice is either to comply with the Mandate or pay a tax penalty.
II. EMPLOYER MANDATE
Beginning in 2014, large employers will be required to offer “minimum essential coverage” that is affordable to full-time employees. Large employers who do not offer health insurance coverage, and even some large employers who do offer coverage (if that coverage is not “affordable”), will have to pay a non-deductible excise tax to the federal government.
A. What Type of Employer Are You?
In order to determine whether an employer qualifies as a “large employer”, i.e. whether an employer is subject to the Act’s Employer Mandate, businesses must determine whether they have 50 or more full-time employees or full-time equivalents. Full-time employees, as defined under the Act, are employees who work 30 or more hours per week.
To calculate the number of employees, a business must add both the full-time employees and the full-time equivalents. Every 120 hours worked per month by part-time employees constitutes one full-time equivalent. Therefore, to calculate the number of full-time equivalents, a business must calculate the total hours per month worked by its part-time employees, and divide by 120.
For example, if an employer has 10 full-time employees (working 30 or more hours per week) and 48 part-time employees (working 24 hours per week):
TOTAL = (number of full-time employees) + (number of full-time equivalents)
= (10) + (total hours worked per month of part-time employees ÷ 120)
= (10) + ( [48 part-time employees x 24 hours/week x 4 weeks/month] ÷ 120)
= (10) + (38.4)
Since 48.4 is less than 50, this particular employer would not be a “large employer” and thus would not be subject to the Employer Mandate.
B. What is Required of an Employer?
Large employers must offer (1) minimum essential coverage that is (2) affordable.
Coverage is affordable for certain employees (those earning less than 400% of the federal poverty level) where the plan has a single employee premium below a cost that would exceed 9.5% of the employee’s household income.
A plan provides minimum essential coverage where the policy pays out at least 60% of the actuarial value of the covered benefits.
C. What is the penalty for non-compliance?
If a large employer does not provide coverage to its full-time employees, then that employer will pay $2,000 per full-time employee (minus the first 30 full-time employees).
If an employer provides coverage to its full-time employees, but the coverage is not deemed “affordable” under the Act, then that employer will pay the lesser of: (1) $2,000 per full-time employee (minus the first 30 full-time employees), or (2) $3,000 per employee receiving a tax credit/subsidy.
For example, if a large employer has 60 full-time employees (working 30 or more hours per week) and 80 part-time employees (working 25 hours per week):
If the employer does not provide coverage to its 60 full-time employees, it will pay a $60,000 penalty.
(60 full-time employees ¿ 30) x $2,000 = $60,000 penalty
If the employer provides coverage to its 60 full-time employees, but that coverage is not “affordable”, and 8 full-time employees receive a tax credit/subsidy, it will pay a $24,000 penalty.
$3,000 x 8 employees receiving tax credit/subsidy = $24,000 penalty
is lesser than
(60 full-time employees ¿ 30) x $2,000 = $60,000 penalty
III. INDIVIDUAL MANDATE
It is also important for employers to understand what is going to be required of each individual employee. Beginning in 2014, most individuals will be required to be enrolled in a health insurance plan that meets certain minimum standards. Those individuals who fail to obtain mandatory coverage will have to pay the following tax penalties:
• In 2014: $95 or up to 1% of income, whichever is greater
• In 2015: $325 or up to 2% of income, whichever is greater
• In 2016: $695 or up to 2.5% of income, whichever is greater
IV. WHAT NEXT?
As is evident from the financial implications, it is critical that employers begin preparing for the effects of the Act now in order to best position themselves for the upcoming changes. 2013 is critical for employers in terms of maximizing their position on critical issues prior to the official implementation of the Employer Mandate in 2014.
The Act contains critical provisions that will impact employers engaged in collective bargaining, employers with seasonal employees and employers using or supplying temporary or leased employees, as well as a host of other special situations.
To date, we have been called on by individual companies to present numerous personalized workshops applying this law to the unique circumstances of each of these companies, both large and small. We sincerely believe that every business will profit from this type of individualized instruction.