Can Large Employers Handle Healthcare Reform and Mitigate Costs While Maintaining Image?

If you are the CEO, CFO, or COO of a large company you are probably wondering what will be the effect of the Patient Protection and Affordable Care Act (PPACA) on large employers like yourself due to the delayed implementation of the employer responsibility provision. Employers won’t have to worry about compliance with the provision, commonly referred to as “play or pay”, until 2015. Under this particular part of PPACA, large employers with 50 or more employees face penalties if they don’t offer health insurance coverage or if the coverage they offer is insufficient.

Daszkal Bolton would like to make the case that although penalties are being postponed, the financial impact of the PPACA will still be challenging, and there are ways for large employers to take a strategic approach to managing costs that lie ahead associated with healthcare reform.

Though the Obama Administration has postponed the Affordable Care Act (ACA) employer mandate penalties for one year, until 2015, along with a similar delay for information reporting by employers, health insurance issuers and self-funded plan sponsors, don’t hold your breath. The delay does not affect any other provision of the ACA, including individuals’ access to premium tax credits for coverage through an Exchange. The additional year will give employers time to understand the rules, make decisions about providing health coverage, and adapt their reporting systems without worrying about significant penalties. However, it is unclear how the new deadline will impact guidance that has already been issued, such as the transition relief for non-calendar year plans and the optional safe harbor for determining full-time status.

Mitigating benefits costs appears to be a practical solution but employers should avoid just calculating the math and thinking if an idea saves money it must be worth implementing. Employers should consider all potential solutions before making a decision that could diminish their ability to acquire and retain talent, and possibly tarnish their brand image in the marketplace.

Key Point: Large Employers should examine their options for health care insurance from both a cost and a strategic perspective. There are planning and structuring opportunities available that may be better choices than not offering coverage or steps you can take to minimize penalties. Mergers and Acquisitions have all sorts of tax and other implications, as does breaking up a company, and common management issues related to Section 414 need to be tackled. Defined Contribution Plans and Lookback Periods can be considered, as well as self insurance – there is a middle ground!

PPACA Effects!

Employers with 50 or more full time employees (or full-time equivalents) will be considered large employers and must offer health insurance that fits certain affordability and coverage criteria or face a penalty in 2015. This could have an immediate impact on an employer’s cost to provide health insurance because a group of employees who had not opted for insurance coverage before may enroll in the plan and impactclientuploads/stethoscope-squeezing-money.jpg premiums due to pre-existing conditions or high use of care.

Another issue that will cost a large employer a significant amount of money is that the health care law changes the benefit eligibility status for insurance purposes of someone who had been considered a part-timer at 30 hours per week to a full-time employee. These employees will now be eligible for coverage, potentially doubling healthcare costs.

In addition, employers that have 200 or more employees will have to automatically enroll those employees in the company’s health care plan (with an opt-out of course) which might potentially end up tripling healthcare costs.

How to Calculate Risk to Cost?

Some companies have considered limiting their variable hour, or part time, employees, to less than 30 hours per week to reduce the number of employees considered full time. However the definition of “full time equivalents” demands that even the hours of these employees be bundled and taken into consideration. To maintain an adequate workforce, transitioning employees to less than 30 hours per week could require hiring additional employees, or changing existing employees’ workloads and job descriptions to keep up productivity.

However, this is only looking at one aspect. The strategic impact and other aspects are given consideration below.

Should employers not provide coverage?

Let’s say a large employer decides not to offer health insurance and instead pay the $2,000 per employee (minus 30) penalty in 2015, which may seem cheaper. However, the law requires individuals to have insurance regardless of employer coverage, so employees may leave for a competitor that provides it. Those who stay out of necessity may always be looking for another employer that provides coverage, lessening their productivity and loyalty while raising turnover, which is a significant expense.

How can employers that provide insurance cope with rising premiums?

Large employers offering health insurance to a population of purely full-time employees can potentially control premium costs by forming a captive insurance company. This is an insurance company that non-insurance companies with 50 or more full-time employees can start. It is generally owned by the company that forms it and insures a limited population, typically just its own employees.

Another potential solution is to form a private exchange, which may be complementary to forming a captive insurance company, in that the entity forming it creates its own marketplace, which means it may qualify as providing insurance with a defined contribution that may help control costs.

Use the Lookback Period Where Applicable to Reduce Your Number of FTEs.

Specifically, employers have the option to use a “lookback” measurement period of between 3 and 12 months to determine whether new variable-hour employees or seasonal employees are full-time employees, without being subject to a payment under section 4980H. The stability period for such employees would be the same as for ongoing employees. An employee would be considered a variable-hour employee “if, based on the facts and circumstances at the date the employee begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week.”

Be Safe! Use One of Three Affordability Safe Harbors.

If an employer covered by the Affordable Care Act play-or-pay requirements decides to play by providing health insurance coverage, it could still be hit with penalties in 2015 if the coverage is “unaffordable.” Coverage is unaffordable if one or more of the employer’s full-time employees receives a premium tax credit because he or she has to pay more than 9.5% of his or her household income for the employer provided coverage.

Because employers have no way of knowing their employees’ household income, the IRS has created safe harbors for avoiding the possibility of penalties for providing unaffordable coverage. The affordability safe harbors apply only for purposes of determining whether an employer is subject to penalties. The safe harbors do not affect an employee’s eligibility for a premium tax credit, which will continue to be based on the cost of employer-sponsored coverage relative to an employee’s household income.

The safe harbors are all optional. An employer may choose to use one or more of these safe harbors for all its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.

In prior guidance, the IRS recognized an “affordability safe harbor” for employers whose lowest-cost self-only coverage that provides minimum value is offered to employees at a contribution rate that does not exceed 9.5% of an employee’s W-2 wages for the calendar year. In other words, coverage that meets this test will be deemed affordable for the employee and his or her dependents, regardless of the actual cost to the employee of dependent coverage. The proposed regulation contains several caveats to this safe harbor; most notably, that the safe harbor shall only apply if the employee’s required contribution toward the cost of coverage remains consistent during the calendar year (or plan year). Thus, mid-year adjustments to employee contribution rates will result in the loss of the safe harbor.

The regulations also recognize two new affordability safe harbors that may benefit some large employers: (a) a “rate of pay” safe harbor (applicable where an employee’s required monthly contribution for the lowest-cost self-only coverage does not exceed 9.5% of his or her approximate monthly earnings, but only if the employee’s wage/salary rate is not reduced during the calendar year); and (b) a “Federal poverty line” safe harbor (applicable where an employee’s required contribution for the lowest-cost self-only coverage does not exceed 9.5% of a monthly amount determined as the Federal poverty line for a single individual for the applicable year, divided by 12).

Consider Defined-Contribution Plans to Reduce Exposure to Healthcare Costs

Defined Contribution Healthcare is an employer funding strategythat seeks to fully or partially limit (i.e., “define”) an employer’s cost for delivering health insurance to employees. Intel and Michelin are among a growing group of large companies that are building their own clinics and developing their own health care relationships to grapple with the costs of health care reform. However, not all large employers are inclined or able to make such a multi–million dollar investment. More than likely we will begin to see a shift in health insurance in the U.S. with defined-contribution plans gradually taking over the market, shifting the residual risk of incurring high health-care costs from employers to workers.

The market today is dominated by “defined-benefit” plans, under which companies determine a set of health insurance benefits that are provided for employees. These will gradually be replaced by defined-contribution plans, under which companies pay a fixed amount, and employees use the money to buy or help pay for insurance they choose themselves. This encourages participants to be price-sensitive and educated consumers of health care, while at the same time increases flexibility and choice for participants. These are often consumer-driven plans and are partnered with HSA’s (Heath Savings Account). The recent enactment of the PPACA may accelerate the shift.

A consumer-driven health plan typically has higher deductibles and co-payments than a traditional plan, and typically provides generous insurance for catastrophic cases. PPACA should cause large employers to consider changing their benefit offerings rather than dropping coverage altogether as the health insurance exchanges develop. If most large employers retain their health plans, the state insurance exchanges created will make the basic idea of a defined-contribution health plan more prevalent, and if defined-contribution plans that are sufficiently generous count as employer-based coverage (as is generally expected) the trend toward such plans should accelerate.

Since defined contribution is a funding strategy as opposed to a health care option, there are broad financial considerations rather than specific underwriting requirements. Additionally, significant and formal tax changes that promote tax favored employee and employer funding of health care exchanges will have to occur to create an environment that promotes its growth.

Private health insurance exchanges have attracted increased attention, especially from employers who are considering new health care strategies based on a defined contribution approach. Specifically, this new strategy leverages the private market-place through private exchanges as opposed to the ACA Exchanges, which are currently not open to large employers (this may change, stay tuned). It is also generally combined with an employer using a defined contribution approach to fund the purchase of a health plan.

Once you know the new rules and possible penalties, what do you do next?

If you are a large employer still contemplating dropping your employer-sponsored plans and opting instead to just pay the penalties, we suggest first taking a closer look at the after-tax cost of what you are currently paying.It is important to note that the Employer Shared Responsibility penalties are NOT tax-deductible; but employer healthcare costs ARE. This means that in any comparison of healthcare costs to penalty costs, you need to look at the after-tax dollars spent.

For example, assume XYZ Inc. currently pays $306,000 for their employer-sponsored plan. If the company decides to not offer the coverage and has at least one employee receive a premium tax credit from an Exchange, they will pay the non-deductible penalty of $180,000. On the surface, the penalty amount of $180,000 sounds much better than the insurance cost of $306,000; that is, until you look at the after-tax cost. Assuming a tax rate of 42% (max could be near 45%), the after-tax cost of the employer sponsored plan is only $177,480 ($306,000 x 58%); an amount that is very close to the penalty.

Looking at it from another perspective, instead of paying an IRS penalty amount of $180,000, XYZ Inc. could offer an employer-sponsored healthcare plan costing $310,345 ($180,000/.58) on a pre-tax basis for the same amount after-tax. In the end, it may make sense for a large employer that has not offered a plan in the past to offer one now.

If a large employer decides to provide a sponsored healthcare plan but does not feel that it can meet the minimum value or affordability requirement for all employees, it will need to weigh the cost of paying a $3,000 non-deductible penalty for any employee receiving a premium tax credit against the tax-deductible increase in costs to get the plan up to minimum value and affordability requirements. In this case, paying the $3,000 penalty for just a few employees receiving a tax credit may or may not outweigh increased employer plan costs.

Impact on Large Employers with Unique Workforce Issues: Premiums vs Penalties?

The effects of the ACA on large employers will vary depending on particular workforce characteristics. A majority of large employers currently offer coverage that meets minimum affordability standards to all of their employees, so they will be subject to few ACA penalties. Many large employers also offer coverage to their retirees.

Large employers most likely to be subject to penalties or increased costs resulting from provisions in the ACA are those that:

· Currently purchase insurance where their rates are based on their own healthcare claims experience

· Offer high cost coverage

· Have high concentrations of low income workers

· Cover only a portion of their workforce

Some large employers—especially those with low-wage workers—might conclude it would be best to drop employer-sponsored coverage in favor of helping employees get individual, subsidized coverage through individual health insurance exchanges. However, insurers may develop new, targeted insurance products to respond to the 9.5% affordability threshold provision in the law, or design benefit packages to encourage employers to retain employer-sponsored coverage. Large employers should consult with their insurance carriers and health benefits advisors before making final decisions on coverage.

The financial penalties large employers will face if they drop coverage are only part of the financial equation they must take into account in determining whether or not to continue offering health benefits. If they drop coverage in favor of having employees purchase coverage through an exchange, employers will almost certainly be expected to raise wages to enable employees to afford that coverage. The wage adjustment plus the penalty could, in fact, be more expensive for large employers than continuing to provide coverage.

The federal tax code is also relevant to the decision, as it provides significant tax advantages to large employers for offering insurance coverage instead of additional wages. Since employer contributions for insurance are not taxed, it would cost an employer $1.38 to raise the after-tax wages of an employee by $1 (assuming a 20 percent marginal tax and standard payroll tax rates). In contrast, it only costs $1 to offer another $1 in additional insurance coverage.

Several considerations may complicate an employer’s decision to pay or play.

The deductibility issue may matter only if a firm actually pays corporate tax, at most, the penalty could raise the cost to $2,700 per worker. The penalty is indexed to average premium growth but could still be much lower than the cost of operating a plan. If the employer dropped its plan, Some of the employer’s savings could be “cashed out”—returned to the workers in the form of higher wages or other benefits. Even if the employer returned its initial savings in full, it would gain in the long run because wages or other benefit costs are unlikely to rise as rapidly as health plan costs.

While higher-income employees cur­rently benefit from the exclusion of employer-provided health ben­efits from taxable income, they would receive little or no premium tax credit if they were thrown into the individual market. Even though the employer could cash out the health benefit, the wage increase would be taxable, so that workers would see a net decrease in total compensation. The employer could “gross up” compensa­tion—pay even more than the previous health benefit contribution to help the employee pay income and Social Security/Medicare payroll taxes—but grossing up could considerably increase the employer’s total costs.In addition, it is not certain that the work­ers could find comparable coverage in the individual exchange for the price the employer was paying for the group plan; exchange plans will often have higher administrative costs, and the pool of exchange enrollees may be higher-risk.

The trade-offs for large employers will depend largely on their mix of high-wage and low-wage workers. For example a large restau­rant that has been covering management but not its kitchen or wait staff might be expected to drop its plan. A professional services firm with a higher propor­tion of high-paid workers might retain its plan because the cash-out needed to maintain the higher-paid workers’ current total compensa­tion level would be greater than the cost of the health plan.

Can large employers somehow beat the system, retaining coverage for their higher-income workers while pushing the subsidy-eligible workers into the individual market? There are certainly options to consider. Some employee hours could be reduced below the 30-hour full-time threshold (but remember FTEs), some jobs could be outsourced. The restructuring of a company into separate high-wage and low-wage firms or several firms with fewer than 50 employees is not permissible, as we pointed out, the ACA retains existing rules in the tax code that require aggregation of related organizations.

Consider, as previously mentioned, in addition to ACA provisions affecting the bottom line cost of coverage, there are other factors that influence the decision to offer coverage to employees. These include the attractiveness of insurance to workers and the tax advantages of offering insurance. Offering coverage remains an effective strategy to attract and retain talented workers; employer-sponsored coverage can bind employees to their employers and minimize lost productivity due to illness. Employers whose health plans offer effective wellness programs might con­tinue those plans because they expect offsetting savings in the form of improved productivity, decreased absenteeism, and so on.

Considering Self-insurance?

Employers have always had a choice between buying a group plan from a health insurer or self-insuring—paying claims directly, usu­ally relying on a third-party administrator that processes claims and performs other management tasks. Self-insured plans are typically less costly than comparable insured coverage because of their lower administrative costs and exemption from state mandatory benefit laws, premium taxes, or other regulation. Typically, large employers have been more likely to self- insure because they have large enough pools of participants and command enough resources to carry the insurance risk.

The ACA contains several provisions that will strengthen the incen­tives for some employers to self-insure as of 2014. Two may be especially important.

First, plans sold by insurers in the individual and group markets will have to provide standardized benefits. These will cover a set of “essential” services to be defined by HHS, and will pay on average a specified percentage of total allowed costs for those services—ranging from 60% for a “bronze” plan to 90% for a “platinum” plan. Self-insured plans will define their own benefit packages. To avoid the play-or-pay penalty, the plan will have to pay at least 60% of the costs for whatever services are included. But the employer decides what these services are (except for required preventive services).

How much difference the benefit rules will make at the outset is unclear. Large employers are exempt even if they buy insurance, and most are probably providing benefits comparable to what is likely to be defined as essential benefits. (Essential benefits are supposed to be equal to the “scope of benefits provided under a typical employer plan,” as determined through a survey of employ­ers of all sizes.) Those whose current plans would meet essential benefit standards could elect self-insurance if they wish to reduce benefits in the future.

Second, if states choose to open the SHOP exchanges to large employer groups, insurers selling to large groups—whether or not through the exchange—would be subject to the same rating re­quirements as insurers operating in the individual and small group markets. Large group rates could vary only by geographic area, family size, age, and tobacco use rather than—as is now common— by claims experience or expected risk levels. Consequently, large employers with low-risk populations could decide to self-insure. Even if states don’t open the exchange to larger groups, there will be incentives for low-risk groups to self-insure.

Before You Re-Structure, Review Common Management Considerations

Only “large employers” are subject to the shared responsibility provisions. Notably, if related companies are deemed a single employer under “control group” tests in Section 414(b), (c), (m) or (o) of the Internal Revenue Code, then they will also be considered a single employer under PPACA and their employees will be combined for purposes of determining large employer status. Each separate company within a control group will be subject to the shared responsibility provisions, and the proposed regulations explain how penalties will be apportioned among them. Thus, coverage under PPACA cannot be avoided by dispersing employees among a number of companies under common control. Businesses with affiliated companies will need to analyze whether their affiliates fall within the same control group when developing a PPACA compliance strategy. Although IRS intent to apply control group tests should not come as a surprise, it will be unwelcome news for some large employers. Other IRC sections provide that an employer includes a predecessor employer and that an employer not in existence during an entire preceding calendar year will be an applicable large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during the current calendar year.

Common Control or Overlapping Ownership Can Change the “Employer” for PPACA Purposes

Let’s explore in more depth how PPACA defines that employer-employee relationship and examine how PPACA identifies the “employer” for a number of regulatory purposes by looking at the circumstances under which commonly-owned or commonly-controlled organizations must be considered a single “employer” for those regulatory purposes.

PPACA provides a variety of challenges and traps for any large employer and the rules are not confined to the for-profit world; many of these same principles apply to non-profit organizations such as hospitals, charities, civic organizations and governmental entities.

Why is Employer Size Important? PPACA anticipates that most employers will participate in the process of offering affordable health care coverage to individuals who need it. Some employers are given incentives to do so. Others are required to do so or pay penalties. Exactly which PPACA rules apply, and how they apply, generally depend on the size of the employer.

· Automatic Enrollment: Large employers (200 or more full-time employees) are now required to automatically enroll full-time employees in one of the employer’s health benefit plans, and when multiple employing organizations are required to be treated as a single “employer,” they can easily become subject to this law.

· Access to Exchanges: Beginning on January 1, 2014, employers with less than 101 employees may begin shopping for health insurance coverage for their employees on the new public health insurance exchanges. Larger employers—those with 101 or more employees—will not have access to the public health insurance exchanges at least until 2017.

Employers that currently assume they soon will be able to look for insured, community-rated coverage on one of the new health insurance exchanges may find that they are ineligible to do so because the existence of related employing organizations make them too “large” to shop there.

· Small Employer Tax Credits: Only available to employers with 25 or fewer full-time equivalent employees. Under the “controlled group” rules, the existence of related employing organizations can cause an employing organization to be ineligible for this tax credit, either by driving up the total number of employees or by increasing the average annual wages (after taking into account the related companies’ employees’ wages).

· Non-Discrimination Rules. PPACA introduced a new non-discrimination rule for insured health plans which applies throughout the entire “controlled group” and penalizes any employer which provides insured coverage which favors “highly compensated employees.” (Before PPACA, only self-insured health plans had to comply with a non-discrimination requirement.) That rule, which has been in effect since September 2010, requires commonly-owned employing organizations that historically have shopped for health insurance separately to coordinate those coverage purchases in order to avoid incurring potentially substantial tax penalties.

At first glance, complying with the above numerical tests and their associated requirements or benefits would seem straightforward. But before an organization can start counting full-time or part-time employees, or calculate full-time equivalents, the organization must determine whose employees must be counted. Under the “controlled group” rules, the employees of the entire controlled group need to be counted. The primary key to determining the organizations that must be included within the controlled group — and thus, be considered part of the same “employer” — accordingly is ownership. And except for the affiliated service group rule, organizations within a controlled group do not need to have the same management, or even operate in the same industry or in the same state.

Closer examination reveals that the term “controlled group” is a bit of a misnomer. Organizations related in a parent-subsidiary relationship (a controlled group of corporations) are to be treated as a single employer under PPACA. That also means that trades or businesses (whether or not corporations, limited liability companies, partnerships or otherwise) which meet a defined level of common ownership (found in the Treasury regulations) also are to be treated as a single “employer” under PPACA — even if the trades or businesses are not linked to each other by direct ownership. (Because this latter rule relies on the presence of common owners rather than a direct ownership link, it also is known as the “brother-sister” rule.)

The “controlled group” rule that comes closest to requiring actual “control” is a third rule, known as the “affiliated service group” rule (Code Section 414(m)). That rule, which applies only to service organizations such as law firms, accounting firms, civic organizations, temporary staffing companies and third party administrators, applies when separate organizations linked by at least some ownership (the statute refers to a 10% threshold) closely collaborate in the services they provide. Whether this third, lesser-known “controlled group” rule will be aggressively enforced under PPACA remains to be seen, but it bears watching — especially by professional service firms inclined to (among other things) purchase better health insurance coverage for those who also own the firm!

Consider the following and how it might relate to your company structure:

A “parent-subsidiary” controlled group exists wherever a parent organization owns 80% or more of the equity in a subsidiary organization. (For corporations, the 80% + test is based on attaining that level of voting power or total value based on all classes of stock; for partnerships, the 80% + test is based on attaining that level of profits interest or capital interest; for trusts and estates, actuarial interests are used.)
A “brother-sister”/common control group exists wherever the same five or fewer persons (counting individuals, estates and trusts as “persons”) (1) collectively own 80% or more of the equity in two separate trades or businesses, and (2) taking into account the level of ownership each of those five persons holds in each of the two organizations (using a lowest common denominator approach) collectively own more than 50% of the equity in both of the trades or businesses.
An “affiliated service group” exists wherever several organizations regularly collaborate in the services they provide to the public (typically, integrated services), and the several organizations are linked by a material level of cross-ownership.

The classic example of a controlled group is a parent-subsidiary controlled group, such as a diversified conglomerate where a “parent” company holds a dominant ownership interest in several subsidiary corporations which operate in various industries. However, a controlled group also can take the form of several different trades or businesses, if those trades or businesses have a small number of common owners and thus operate like a close-knit “family” of companies (which explains the use of the term “brother-sister” to describe the relationship). For example, a small medical supply company owned by the company president and an investor group consisting of four doctors could be part of a controlled group which includes the medical practice those same four doctors co-own, even if the supply company markets and sells its products to hospitals (and not the doctors’ medical practice). How could this occur? Through overlapping ownership! If the company president owns 20% or less of the medical supply company, leaving the four doctors to collectively own 100% of their medical practice and also 80% of the medical supply company, the requisite level of overlapping ownership has been reached.

The controlled group rules are made more difficult to avoid by special operating rules, which are designed to prevent owners of closely-held companies from easily avoiding the controlled group rules. Under those operating rules, an individual’s interest ownership must be attributed to certain family members, which can cause unrelated businesses held by family members or trusts to be caught up under the rules. Similarly, an ownership interest in a corporation or a trade or business which has been transferred to a trusted employee is required to be ignored (for purposes of identifying the common owners) if that employee is required to forfeit that interest, or sell it for a nominal amount, upon termination of employment.

Consider another example of how the rules might affect you as a large employer: A restaurant chain, currently operating 100 restaurants, is operated by a corporate “parent” entity which employs 100 full-time employees (executives, finance and accounting employees, marketing employees, commissary employees, etc.). To function properly, each restaurant unit needs a staff of 12 full-time employees (managers, a head chef, supervisors, etc.) and 50 part-time employees (shift cooks, waiters, etc.). If ownership of the restaurant chain is structured so that the corporate parent franchises each of the restaurants to separate, independent franchisees, the corporate parent and each restaurant unit is treated as a separate “employer” for PPACA purposes. This may enable many or all of the restaurants to avoid the employer mandate (assuming that most could avoid regularly employing 50 or more full-time employees or full-time equivalent employees by monitoring their part-time employees’ hours), even if the corporate parent must offer affordable health care coverage providing minimum essential health benefits to its 100 full-time employees and their dependents to avoid paying a $140,000 annual non-deductible penalty. Each restaurant unit also may be able to purchase its own community-rated health insurance on one of PPACA’s new health insurance exchanges. Depending on staffing and income levels, it might even be possible for some of the units to qualify for the tax credit available to truly small employers.

Conversely, if the corporate parent owns outright, 99 of the restaurant units, and the one remaining unit is 45% owned by the corporate parent, 45% owned by a local investor and 10% owned by the on-site general manager, the 99 restaurants (but not the independently-owned unit) would be considered to comprise a controlled group along with the corporate parent — and the choice gets much more costly and difficult. Under that scenario, that restaurant chain must choose between offering affordable health care coverage providing minimum essential health benefits to all full-time employees of the 99 restaurants and the corporate parent (1,288 employees) and their respective dependents, or not offer coverage and pay a $2,516,000 annual non-deductible penalty – and risk losing its best people to competitors. And if the chain does offer the coverage, it must automatically enroll full-time employees into its group health care plan as soon as they become eligible. (The remaining unit would not be part of the controlled group, and likely could avoid (among other things) PPACA’s employer mandate.)

A Special Note Regarding Not-For-Profit Entities and Governmental Entities

Non-profit entities also are subject to the controlled group rules — thus potentially causing many non-profits to be subject to more of the new PPACA requirements than they may think. While not all non-profit organizations are capable of being “owned” (typically, non-profit entities do not issue stock or other forms of ownership; they frequently are just controlled by their “members”), that distinction does not matter. Regulations issued under Code Section 414 specifically address how the controlled group rules apply to tax-exempt organizations (with special carve-outs and other rules for churches and church-affiliated organizations) by substituting the right to “control” for ownership, and looking at who has the right to elect or appoint (and remove) the tax-exempt organization’s trustees or directors.

Consider a private university that funds and operates a non-profit small-business incubator being managed by a handful of the university’s professors. The incubator may employ only a small handful of employees, such as a full-time office administrator and a few other staff members, but when that incubator’s staff is added to the university’s total number of employees, all of PPACA’s “large employer” rules kick in: the incubator would be subject to PPACA’s employer mandate requirement, the automatic enrollment rule would apply if the incubator did offer coverage to its full-time employee(s) and their dependents, and the incubator would not be eligible to shop for community-rated coverage on the new health insurance exchanges (at least, not prior to 2017).

These rules also potentially apply to governmental entities. But without further regulatory guidance, it is not clear exactly how the controlled group rules will be made to apply to such governmental entities as municipalities, sewer districts, park districts, villages and townships, many of which even now are considering whether to consolidate or find ways to combine their staffs or enter into shared services arrangements and further blurring the lines of who will function as the “employer”.

Truth or Consequences

The penalties for noncompliance with the employer mandate can be steep, even though now pushed back to 2015. Employers that do not offer health coverage to all their full-time employees and their respective dependents will pay an assessable penalty if any of their full-time employees applies for and receives a federal premium tax credit in connection with purchasing coverage on a public health insurance exchange. That penalty is equal to $167 per month ($2,000 per year), multiplied by the total number of the employer’s full-time employees, less 30. (However, if the entity is part of a controlled group, this 30 employee reduction will be shared ratably among the controlled groups, so that the offending entity’s penalty is reduced only by a portion of the 30.) And when counting the number of full-time employees an employer has for purposes of calculating the penalty, all full-time employees within the controlled group count (if the employer is part of a controlled group). Additionally, employers that do offer coverage to all their full-time employees and their dependents can still be assessed a penalty if the coverage being offered either is unaffordable, fails to provide minimum essential coverage or fails to provide minimum value, if at least one of their full-time employees receives a federal premium tax credit in connection with purchasing coverage on a public health insurance exchange. That assessable penalty is equal to $250 per month ($3,000 per year) for each full-time employee who actually receives the premium tax credit, or if less, the penalty for failing to offer the coverage at all (i.e., the $2,000/full-time employee penalty described above).

Not only are the penalty amounts for failing to satisfy PPACA’s employer mandate potentially onerous, but it is far from clear exactly who can and will be held liable for paying those penalty amounts. The statute suggests that the penalty falls on the “person” that failed to satisfy the mandate, but exactly who that “person” is (or, could be) is not likely to be known until regulations are issued. There may even be circumstances under which individual officers or directors could be held liable for the indicated penalty. Again, how these penalty provisions will apply — and to whom they will apply — will only be truly known after regulations are issued by the U.S. Treasury Department.

There are other PPACA requirements, each of which can have potentially significant economic consequences for a large employer. Treasury officials have signaled that a violation of the new non-discrimination rules for insured coverage could trigger a penalty of $100 per day for each non-highly compensated employee who receives coverage that is less favorable. And future regulations, to be released by the U.S. Department of Labor regarding PPACA’s automatic enrollment provisions, may impose substantial penalties for noncompliance. Only time will tell whether these penalties will rival in size and importance those slated to be imposed for failing to comply with PPACA’s employer mandate rules, but they clearly are influenced by employer size. As such, they bear watching by any organization whose size may be understated due to a misperception of the controlled group rules.

A Reminder Regarding “Steering”

The Health Choices Commissioner (in coordination with the Secretary of Labor, the Secretary of Health and Human Services, and the Secretary of the Treasury) has authority to set standards for determining whether employers or insurers are undertaking any actions to affect the risk pool within the Health Insurance Exchange by inducing individuals to decline coverage under a qualified health benefits plan (or current employment-based health plan offered by the employer) and instead to enroll in an Exchange-participating health benefits plan. An employer violating such standards shall be treated as not meeting the requirements of this section.

Conclusion

Comprehending all the new rules and regulations will likely be very overwhelming for most large employers, so consider professional assistance from professionals such as your accountant or lawyer in addition to your company’s insurance broker. Benefit advisors can help with plan costs and design, but you need an attorney to advise on structure, labor and ERISA laws, and an accountant to help with cost-to-benefit and cash flow analysis and taxable impact of your options.

Employers will have to balance both strategic and financial factors when making decisions about offering coverage to their employees in the years to come. While the penalties don’t take effect until 2015, it is not too soon for employers to begin the process of considering options and ramifications. Even though the ACA is still under debate in Congress and the courts, planning for the future with their trusted accounting advisors today is a prudent step for large employers and will assure the smoothest possible transition.

The administration will most likely use the additional implementation time to consider ways to simplify the new reporting requirements, discuss the rules with stakeholders, including employers that currently provide health coverage to employees, and then publish proposed rules implementing these provisions later this summer.

The pay or play regulations issued earlier this year left many unanswered questions for employers. Presumably, the additional time will give the IRS and Treasury the opportunity to provide more comprehensive guidance on implementing these requirements.

For assistance, additional information or clarification, please contact Kevin Reynolds, CPA, Partner, at 561-367-1040 or kreynolds@dbllp.com.