Given the recent U.S. Supreme Court ruling on the Affordable Care Act and the many failed attempts in Congress to repeal it, Quarles & Brady LLP attorney Amy Ciepluch believes the law, often referred to as Obamacare, is not going anywhere.
“I would say that employers can put to rest any hope that the Affordable Care Act will go away,” Ciepluch said. “For the last five years, I've been barraged with the 'Is this going to go away?' 'Will this be repealed?' type questions, and at this point…we should assume it's here to stay and operate based on that assumption.”
With that in mind, area health insurance experts say employers need to be prepared for several key upcoming changes.
Play or pay penalties
Beginning in 2016, employers with 50 to 100 full-time employees and full-time equivalents will be subject to the play or pay penalties if they do not offer “affordable” health coverage to 95 percent of full-time employees and their dependents. Full-time is considered 30 or more hours per week; dependents are children under age 26.
These are the same play or pay penalties that began applying to employers with 100 or more employees at the beginning of 2015, according to Bret McKitrick, vice president and human resources consultant in Associated Financial Group’s Waukesha office. The only difference is this year employers were required to offer health coverage to 70 percent of full-time employees and dependents, instead of 95 percent.
The two types of potential penalties both categories of employers face are a no coverage penalty and an affordability penalty.
The no coverage penalty pertains to employers who do not offer health coverage to a certain percentage of their full-time employees and their dependents.
McKitrick said employers will not automatically be penalized, though, unless a full-time employee who should have been offered coverage purchases individual health insurance from the exchange and receives a premium subsidy tax credit.
If one person who triggers the no coverage penalty exceeds the 70 percent/95 percent threshold, the employer will likely be assessed a no coverage penalty for all of its full-time employees.
The other penalty employers face is the affordability penalty. That penalty may be assessed if an employee is offered coverage that costs the employee more than 9.56 percent of his or her household income, and that employee purchases individual health insurance through the exchange and receives a premium subsidy.
Unlike with the no coverage penalty, however, McKitrick said the employer would only have to pay the affordability penalty for the individual employee who triggered it, rather than all of its full-time employees.
“Hopefully, employers have been planning for a while to either avoid paying the penalties or to consciously know they may be assessed a penalty,” he said. “We don’t want to see an employer unwittingly incur a penalty when they offered coverage, but just didn’t offer coverage to the right people or meet the cost standards set by the IRS.
“While it’s late in the game, employers concerned about meeting their play or pay obligations should talk with their benefits consultants as soon as possible to see where they stand,” he said.
Lastly, it is important to note that the play or pay penalties do not apply to employers with fewer than 50 employees.
“They can still offer coverage, but if they don’t, they won’t be faced with penalties,” McKitrick said.
New reporting requirements
The IRS will assess play or pay penalties based, in part, on the information employers provide in a new set of reporting requirements that health insurance experts warn will not be easy.
According to McKitrick, all employers with 50 or more full-time employees and full-time equivalents must submit two reporting forms (1094-C and 1095-C) for the 2015 calendar year providing information about their full-time employees and whether or not health insurance was offered to them.
The reporting forms will be due early in 2016 for the 2015 calendar year, around W-2 reporting time. Even employers who do not offer health plans must submit a report, McKitrick said.
The 1094-C form is a transmittal form to the IRS that provides, among other things, information about the number of full-time employees employed by the employer each month of the year as compared to total employees, and whether or not any transitional relief for the play or pay penalties provided by the IRS applies.
The other reporting form, 1095-C, is to be submitted to each full-time employee, with a copy provided to the IRS as well. This individual form provides information about whether or not health coverage was offered, the cost of coverage, and the reason why an employer should not be subject to one of the two play or pay penalties.
The problem is that employers have never been required to report this information to the government and many payroll systems are not designed to manage it.
“It creates an administrative nightmare for some employers, especially those who employ a large amount of seasonal or variable hour workers,” McKitrick said.
This is because the information necessary to complete the reports may be housed in payroll software, human resources information systems, insurance carrier data, and timekeeping records.
“It’s more than a notion to think that all of these systems will be able to talk to each other or that the data will easily fit into the reporting molds mandated by the IRS,” he said.
To make matters more complicated, McKitrick said employers with 250 or more employees must use a completely new electronic filing system to submit their reports.
“After one or two years of this, this reporting may be as commonplace as doing a W2,” he said. “But right now it’s really difficult for employers to predict how much time they need to allow for their reporting preparations.”
“It’s huge and really messy,” Ciepluch said of the significant recordkeeping that employers should already be tracking, and of the burden of submitting the report from a technical standpoint.
“We’re seeing a lot of employers right now scrambling to find outside assistance in the form of a third party to compile the information and also a scramble to figure out how to get ready to electronically submit the reports to the IRS,” she said. “It’s a big deal. I sure hope it’s well underway, but I’m getting the sense that there are plenty who are not really ready for this.”
In order to give employers more time to get prepared, the IRS announced on Aug. 7 that it will offer a 30-day extension beyond the March 31, 2016 deadline to submit the 1094-C form. The 1095-C form is still due on the scheduled date of Jan. 31, 2016, with rare exceptions where an extension may be granted.
“While companies may think they got some relief with the IRS notice, in reality the Jan. 31 reporting is still due in January,” said Jodi Bahl, a principal at Ernst & Young LLP who serves as the central region Affordable Care Act leader. “So it’s really important to think about not only moving toward the reporting on Jan. 31, but stepping back and thinking about the overall big picture of Affordable Care Act compliance.”
According to Bahl, it is important for a variety of company leaders to be involved in Affordable Care Act compliance – not just human resources.
For instance, companies should use the payroll department to do an analysis of their pay codes to determine which types of hours are subject to the Affordable Care Act.
Finance employees ought to gauge potential financial implications, and internal auditing can assess the company’s readiness and focus on how to mitigate the risk to the organization.
“That cross-functional piece is often-times what companies forget,” Bahl said. “The more that companies can focus on the bigger picture, the more likely they are to be in compliance and not have any missteps.”
Another issue employers should be getting ready for is the Cadillac Tax that will take effect in 2018.
The Cadillac Tax is a potential 40 percent excise tax that can apply if the health coverage employers offer to employees is valued at more than a certain amount.
In 2018, Ciepluch said the general annual limit on the cost of health coverage will be $10,200 for single coverage and $27,500 for any coverage beyond single.
If employees are offered coverage that costs them more than those limits, employers will be required to pay 40 percent on the excess amount. So if an employer offers single coverage that costs $12,200 in 2018, the employer would pay 40 percent excise tax on the extra $2,000 for each employee who took that plan.
“Even a couple years ago, a lot of employers, especially larger employers, started running projections on whether their plans would trigger this tax,” Ciepluch said. “For companies that haven’t done that yet, it really is time to figure out if the coverage they’re offering is potentially going to trigger this excise tax.”
Employers will want to avoid the excise tax because not only is it 40 percent, but also it is nondeductible and applies to each employee who is covered under a plan with a cost that triggers the tax.
To prepare for the excise tax, Ciepluch recommends that employers project what the costs may be in 2018 based on past experiences and expected increases. Employers may want to consider using a consultant to help them do this.
She said things such as flexible spending account contributions, health savings account contributions, and health reimbursement contributions should all be taken into account when calculating the cost of health coverage, and employers should, thus, take a look at how employees are utilizing those benefits and decide whether or not to continue offering them.
“Some employers may decide they can’t offer some of those benefits anymore because that may be what is driving it over the annual limit,” Ciepluch said. “There’s a lot to plan for and think about with respect to the Cadillac Tax.”
Another way for employers to control costs is to offer high deductible health coverage, which typically costs less and would be less likely to trigger the tax.
That method, however, is not as practical when it comes to municipalities, school districts, and unions, according to Peter Grimes, the president of aur Health Care Group, a health care consulting company with offices in Shorewood, Brookfield, and Mequon.
“Their plans and benefits are typically negotiated,” he said. “To raise deductibles, which lowers premiums, is not a simple and immediately deployable event. It is part of total compensation; thus, most of these plans continue to have richer benefits.”
At any rate, all the rules and regulations surrounding the Cadillac Tax have not yet been determined, Ciepluch said.
“The question mark hanging over the Cadillac Tax is that the IRS has yet to even propose the regulations on how it will be calculated and how employers are supposed to figure it out,” she said.
As a result, a flurry of activity from the IRS is anticipated in the next two years, and employers will have to react as it develops.
Other aspects to keep in mind
Beginning in 2017, the federal government will no longer be assisting insurance companies with their claims.
The way it stands now, the government will pay most of a $500,000 claim over $70,000, but the insurance company will be responsible for all of it in 2017, according to Grimes.
“So in essence, any and all insurance companies that are still in the health insurance industry will have to take on all that risk in 2017,” he said.
Only major players like Humana/Aetna and Anthem/Wellpoint/Blue Cross Blue Shield/Cigna will likely still exist, Grimes said, which will lead to an increase in rates.
He predicts many companies, mainly those with fewer than 100 employees, will stop offering group health insurance in the next three to five years.
Instead, he asserts companies will offer the Small Business Health Options Program (SHOP) Marketplace that allows employers to select a plan category (Bronze, Silver, Gold or Platinum) and for its employees to choose any plan within it. This option is best for any group smaller than 20 employees, he said.
Grimes said employers may also opt just to contribute to employees’ health savings accounts, or there could be a move to individual policies.
“I think the entire market under 100 employees will be an individual market,” he said. “We’ll all buy health insurance like we do our auto insurance.”
Finally, one last upcoming piece related to the Affordable Care Act that Ciepluch said employers should be aware of is the nondiscrimination rules.
Currently, nondiscrimination rules apply only to self-insured plans, but she said at some unknown point in the future, they will begin applying to insured health plans as well.
The IRS has indefinitely delayed the implementation date, but Ciepluch said when the nondiscrimination rules go into effect, employers will be prevented from offering more favorable benefits to their more highly paid employees.