PPACA – PART II : Considering the Impact of Play or Pay
On July 16th, HR Strategies began a quick three part blog series to take a hard look at the health reform in order to provide some clarity and guidance regarding PPACA’s impact on our clients and businesses everywhere. This three part blog series offers analysis and interpretation on the important factors/elements of PPACA, including a timeline of applicable changes.
Considering the impact of “Play or Pay”: By the time certain provisions of PPACA goes into effect, on 1/1/2014, the state sponsored exchanges (health insurance plans offered by the states and funded by Medicaid and employee taxes) may be a strong source of medical plan options for all employees. In theory, the exchanges would provide the employees alternatives in selecting health care plans. However, it is important that the employer calculates the cost to offer group health care or not. If the company is clearly under the 50 employees threshold, as explained in the preceding scenario, the employer is not “obligated” to provide insurance within the “adequate and affordable” requirements of the “Play or Pay” mandate. However, employers who are at or above the threshold must consider the following:
1. Adequate: In general, the actuarial value of coverage provided in the group health plan must pay for a minimum of 60% of the benefit cost. Bear in mind that preventative services must now be covered at a 100% basis; there will be no pre-existing condition limitations and no annual or lifetime maximum benefits on essential benefits. Plans will also have to maintain coverage available to dependents up to age 26, regardless of dependent status. A company may choose to offer higher coverage and charge more for it, yet in order to do so, the minimum coverage option must be provided.
2. Affordable: PPACA requires that the employee contributions towards coverage cost of employer sponsored health insurance cannot exceed 9.5% of the household income. However, the concept of “household income” has yet to be clarified by the IRS and other departments. For example: an employee makes $10.00/hr. for annual gross earnings of $20,800.00/yr. If we take the gross earnings (some experts are inclined to use net earnings, not gross) as listed on box 1 from the W-2, 9.5% of the household income would be $1,976.00. If the cost of employee only coverage is $400.00 per month and the employer pays 80% of the premium, or $320.00, the employee pays the remaining $80.00 per month premium, or 20%; then using the employee contribution/cost per month and gross wages annual calculation, the employee contribution would fall below the 9.5% of household income calculation ($960.00/yr.), satisfying the “affordable” requirement. Again, if we were to assume a net income of approximately 30% less than gross earnings, or $14,560, then the 9.5% of the w2 wages would equal $1,383.20. If the company contributed 50% of the premium, rather than 80%, the employee portion of the premiums would far exceed the 9.5% household income threshold. That means, the plan would not satisfy the “affordability” requirement.
3. “Pay” factor: If we use the latter example, then the group health coverage does not satisfy the “play” requirement, and thus the employer will have to “pay”. Employers will need to evaluate the impact of these penalties, and whether it makes more financial business sense to try to meet the “adequate and affordable” requirements, or simply pay the penalties. An employer will pay an excise tax in each one of the following scenarios:
i. An employer chooses not to offer a group health plan, and at least one full-time employee enrolls in an exchange and receives the premium tax subsidy: The excise tax is applied by full-time employee, not by full-time equivalent. Therefore, the employer will be required to pay $2,000 per full-time employee, excluding the first 30 employees. In the example used to explain eligibility, we identified 35 eligible full time employees. Thus, the employer would have to pay $10,000 in excise tax for the 5 employees after the first 30 are excluded. Keep in mind; however, that the proposed regulations on how to count employees may change.
ii. An employer’s plan is deemed “not affordable” (as shown in (2) above) and one or more employees qualify for Federal subsidy to purchase exchanges: The employer will be required to pay $3,000 per employee who qualifies for a Federal tax subsidy. An employee qualifies for this subsidy if the employee’s annual household income is at or below 400% of the Federal poverty level. To put it in perspective, a family of four whose household income is at or below $88,000/yr. would qualify for Federal subsidy.
Part III of our examination: “Other PPACA Changes and Timeline” will be highlighted this Friday 7/20, be sure to check back for important guidance on what this mandate can mean for your company.