35% tax rate, $3,077 expense is $256 a month per employee. Non-profits and governmental entities the tax is 0% and the penalties are less impactful. You pay nothing for waivers today, but you still pay a penalty on them tomorrow if you don’t offer a plan. The industries where these can tend to appear are charitable, senior care, etc.
Here is a quick reminder of some PPACA changes that
went into effect in the years 2010-2012:
Dependent children covered to age 26 for medical insurance
Pre-existing conditions limitations removed for children
Group medical insurance tax credit program for employers with 25
or fewer employees with low average incomes
Non-qualified HSA withdrawal tax surcharge increased from 10% to
OTC drugs not eligible for HSA or FSA reimbursement unless
prescribed by a doctor
Lifetime limits removed in medical insurance
W-2s must include the total cost of health insurance in 2012 or 2013
depending on size of the employer (but benefits not taxable)
A few changes take effect in 2013:
FSA limit reduced from unlimited to $2,500, regardless of
plan year. The limit only applies only to employee
2.3% excise tax added to certain durable medical device
The new required document, Summary of Benefits and
Coverage (SBC), actually started on the first medical
insurance renewal after September 23, 2012, but this will
mostly be seen in 2013
Medical expense deduction limit increased from 7.5% of
AGI to 10% for under 65 (for 65+ is remains 7.5% until
Personal taxes in 2013:
For those earning over $200,000 ($250,000 if jointly
filing), there will be a .9% increase in tax for Medicare,
but it is not matched by the employer. The tax is on the
earnings above those limits. The employer must withhold
the tax for earnings over $200,000.
For the same income brackets, there is also a 3.8%
income tax increase on net investment income, with
This talk will focus particularly on the ―Pay or Play,‖ but
here are other changes that will go into effect in 2014 (but
there are no penalties for Pay or Play until 2015, it is
voluntary in 2014):
Pre-existing conditions exclusions will be removed for adults
Remove annual limits on medical insurance
Limit of 90-day waiting period for new employees to become eligible
for medical insurance (60 days in California)
Health benefit exchanges start offering coverage to individuals and
small groups (SHOP)
Minimum essential benefits are required by health insurance
Individual health insurance mandate
Wellness discounts on health premiums could be as high as 30% (or
50% if authorized by the federal government—50% surcharge
approved for smokers but not in California)
U.S. citizens in 2014 who are above a minimum income threshold must do one
of the following to comply with the ―individual mandate‖ to purchase health
insurance. If they do not, they must pay the higher of:
The sum of months without coverage— 1/12 of the greater of:
—a flat dollar amount ($95 in 2014, $325 in 2015, $695 in 2016); OR
—an applicable percentage of income over a minimum threshold (1%
in 2014, 2% in 2015, and 2.5% in 2016)
The child penalty is 50% of the above adult penalty, and there are limits for
families. Some exemptions apply if such coverage is deemed ―unaffordable.‖
PPACA provides that an employer that has 50 or
more employees (full-time and full-time
employee equivalents), which is called a ―large
employer,‖ must provide health coverage, or pay
one of two penalties. This has been delayed
PPACA calls for two possible penalties:
• one for not offering “minimum essential” coverage
• one for offering coverage that is considered
inadequate because it is not “affordable” and/or it
does not provide “minimum value” [$3,000]
Large employer status would be determined by calculating the number
of full-time and full-time equivalent employees for each month, totaling
the monthly numbers and dividing by 12. The proposed process would
o Calculate the number of full-time employees for each month of the prior calendar year
o Calculate the number of FTEs for each month of the prior calendar year (if you get a
fraction, keep the fraction)
o Add the number of FT and FTEs for each month
o Add the 12 monthly totals together
o Divide by 12
If the final result is a fraction, the employer would round down to the
nearest whole employee.
Note: your temporary leased employees are considered employed by
you and not by a leasing company or PEO.
If the result is 50 or more, the employer is a “large employer” and subject to the penalty;
however if the employer only exceeds the 50 FT/FTE threshold for fewer than 120 days
(4 months) of the year and seasonal employees caused it to exceed to 50 threshold, the
seasonal employees can be disregarded when deciding if the employer is large.
Employees who work less than full-time (30 hours per week)
are considered ―full-time equivalent employees‖ when
deciding if the employer has 50 employees. Full-time
equivalent employee numbers would be determined by:
o Using the hours of service each month for each person who
worked an average of less than 30 hours per week during the
• This includes the hours of seasonal employees who averaged less
than 30 hours for that month
o A maximum of 120 hours of service should be considered for any
employee who is not full-time for a month
Counting fractions for each monthly total, but rounding the
total annual number down.
―Seasonal employees‖ would mean retail employees who
work only during holiday seasons and others who perform
work that by its nature is only performed at certain times of
the year (such as harvesting or tax season).
The ―no offer‖ penalty of $2,000 applies if the large employer
does not offer ―minimum essential‖ coverage to a sufficient
number of employees.
o The agencies have said that they do not expect to apply the penalty
to employers who offer coverage to the vast majority of their
employees, but exclude a few for a legitimate business reason or
because of an error; that was later clarified to mean cover at least
95% of eligible employees.
The ―no offer‖ penalty is $166.67 per month ($2,000 per year)
for each full-time employee who is not offered basic medical
coverage. The penalty does not apply to the first 30
employees. The penalty would not apply if the non-offering
employer had no employees who qualified for a premium
tax credit. (Example: 100 eligible employees and no insurance offered= (100-30)*$2,000 =
$140,000. Annual cost of “average” group health insurance in West U.S. [average $469/month] for
100 employees if employer pays 75%= $422,100.)
The ―inadequate coverage‖ penalty of $3,000 applies if the
large employer offers medical coverage, but it is not
―affordable‖ and/or it does not provide ―minimum value.‖
o Under a safe harbor that will be good at least we believe through
2015, coverage is “affordable‖ for purposes of the employer
penalty if the cost of single coverage is less than 9.5% of the
employee’s W-2 income.
o Coverage is ―minimum value‖ if the coverage is expected to pay at
least 60 percent of claims costs.
The penalty is $250 per month ($3,000 per year) for each
full-time employee who:
o Is not offered coverage that is both minimum value and affordable
coverage, and purchases coverage through an exchange, and
o Receives a premium credit subsidy in the exchange (the household
income must be below 400% of federal poverty level to qualify for a
Note that the first 30 employees do count under this
―inadequate coverage‖ penalty. Also, if the first (―no
offer‖) penalty would be less expensive than the second
(―inadequate coverage‖) penalty, the employer would pay
the first penalty. Therefore it would be necessary to run
For purposes of calculating the penalty, although part-
time (less than 30 hour per week) employees count
when deciding if the employer is ―large,‖ no penalty will
be due if coverage is not offered to these employees. A
penalty would be due on seasonal employees while they
are working full-time, if adequate coverage is not offered.
Large Employer – PPACA defines as having at least 50 full
time or full-time equivalent on average over prior calendar
o If (FT employees each month + FTE each month)/12 >= 50,
(fractions round down) then subject to Pay or Play penalty
o Families of companies are added together
Full-Time – if employee works an average of at least 30
hours per week during the month, he/she is considered full
time for that month.
FTE (Full-Time Equivalent) – to calculate the number per
month, divide total hours of service of all part-time employees
by 120. This number (rounded down if a fraction) is added to
the Full Time number to determine total number of Full-Time
Part-Time – works less than 30 hours per week or 130
Seasonal Employees – work either part-time or full-time
hours during a busy season; not specifically defined in
the new notice so will be employer’s good faith
determination at least for 2015.
Variable Hours Employees – hours are uncertain and
not reasonably expected to average 30 hours or more
(includes both those working full time at first but knowing
hours will be reduced later and those ―on-call‖
Common-Law Employee – no set definition but the parameters
hirer has control over how an individual performs a task and
where the tasks are performed;
length of relationship is indefinite;
hirer provides material needed to complete the task;
ability to assign additional tasks;
sets work hours;
payment is made on set schedule of time;
work is part of regular business;
benefits and perks are provided and person is invited to
training is provided;
expenses are reimbursed.
It is expected that current DOL rules for counting hours
for pension plan purposes will be used to count an
employee’s hours of service as a full-time employee or
full-time employee equivalent. Under these rules, a
person is considered to have completed an ―hour of
service‖ with each hour for which he is paid for work,
vacation, holiday, sick time, layoff, jury duty, military
When converting time to a monthly basis, 30 hours per
week would mean 130 hours per calendar month.
The agencies are considering several possible methods
of counting hours and have said that they expect that
employers will be able to use different counting methods
for different classes of employees. The proposed
o For employees who are paid hourly, actual hours worked or paid
would need to be used
o For employees who are not paid hourly, alternatives would
• Counting actual hours worked or for which vacation, holiday, etc. are
• Crediting an employee with eight hours of work for each day for
which the person was paid for at least one hour of work, vacation,
• Crediting an employee with 40 hours of work for each week for which
An employer may simply look at its population on a
current, month by month basis if it wishes to. However,
to avoid the complications that may arise if an employee
alternates between working more and less than 30
hours, or to simply reduce calculation frequency, IRS
Notice 2012-58 gives an employer the option of using
longer calculation periods to get a smoother, more
predictable result if it prefers to do that.
If the employer wants to use a smoothing technique,
different processes apply to existing and new
Note that the employer will still have to track the employee’s hours
during the stability period, as that information will be needed to make
the determination for the next standard measurement period.
Instead of tracking time currently, an employer may look
at how many hours the employee averaged during a
look-back period called a ―standard measurement
period.” Once the determination is made whether the
employee worked full-time during the standard
measurement period that determination will apply
throughout the related ―stability period” regardless how
many hours the employee actually works.
Standard Measurement Period – a ―look-back‖ period
of 3-12 months used to track and determine how many
hours an employee worked on average during this time
o The employer must choose a start date for the standard
measurement period. It can be Jan. 1, the first day of the benefit
period, a date near the start of open enrollment, or any other
date the employer chooses
Stability Period – period for which the employee is
considered Full-Time or not Full-Time and must be:
o At least as long as, but not longer than, Standard Measurement
Period if the employee is Full-Time
o At least 6 months if the employee is Full-Time but not more than
Employers may use different standard
measurement and stability periods and period
start dates for these classes of employees:
o Collectively bargained and non-collectively bargained
o Hourly and salaried
o Employees of different entities
o Employees located in different states
To avoid penalties, a new employee who is reasonably expected to
work 30 or more hours per week must be offered coverage following
satisfaction of the eligibility waiting period. Under PPACA, the
waiting period generally cannot be more than 90 days—not first of
the month following 90 days. No pay or play penalty will be owed
during the waiting period if the employee is offered coverage that
would be effective on or before the end of the permissible waiting
period. (For group plans domiciled in California for employers with 2-
50 employees, the waiting period will be 60 days by State law—not
first of month following 60 days.)
Note: IRS Note 2012-59 and March 2013 proposed regulations
provide for an alternate option to require the employee to have
worked cumulatively up to 1,200 hours before being eligible for
coverage (which is up to 40 weeks), but a large group employer in a
Pay or Play situation could still be penalized for not offering
coverage after 90 days; thus the 1,200 hour option appears to
mostly apply to small employers. For California employers that is
At least for 2015, employers who hire seasonal or variable hours employees
have significant flexibility in determining whether the new employee is full-time.
Employers in this situation may elect to use an ―initial measurement period‖ to
determine whether the employee is full-time during a subsequent stability
period. Additionally, no penalty is due during this initial measurement period,
even if it is ultimately determined the employee averaged 30+ hours and was
therefore a full-time employee during this time. Note that this method may
only be used when the employer truly expects the employee’s hours to
fluctuate or the employee is a seasonal employee.
―Seasonal employee‖ is not defined in the new notice and at least for 2015, an
employer’s good faith determination that an employee is seasonal will be
honored. Usually, seasonal employment means employment for a limited
period to perform a specific function, such as retail during holiday seasons, tax
preparation during tax season, or agriculture during harvesting season.
―Variable hours employees‖ are those whose hours are variable or are
otherwise uncertain and who are not reasonably expected to average 30 or
more hours per week over the measurement period. This would include both
those expected to work full-time when initially hired but who are expected to
have their hours reduced at some point (such as retail workers hired in
November, and those whose hours vary from week to week such as on-call
Impact of reform is minor
o Plans pass
o Eligibility requirements today already comply
o Positive employee or dependent enrollment reductions occur
It costs more to cancel the plan than keep it
o Penalties are non-tax deductible: $2,000 penalty = $3,077 expense
o Employees are second income to family (high waivers)
The plan costs jump dramatically
o # of those eligible is increasing
o Plans were not bronze level or essential before
o New taxes and fees on top of inflation
Rare: It is better for me and my employees to cancel
o Employer plan today has high medical cost, low wage earners. This
will likely be an employer with under ten employees.
Using the UBA national survey, we can see how the 9.5%
employee cost threshold compares to average costs in the
Western U.S. (Note: use 9.5% of W-2 income, not gross
A New Excise Tax in 2018
o Applies to health plans or self-funded plans and not employers or
o Tax based on premium paid (or equivalent if self-funded)
o Tax (non-deductible) is 40% of the excess over the premium in 2018
of $10,200 single coverage or $27,500 for family (2+) coverage
(higher in some cases for those with retirees or ―high-risk‖ jobs)
o Those premium thresholds increase each year based on a formula
Accumulated Postretirement Benefit Obligation (APBO)
o While 2018 is far away, some believe the Cadillac Tax must be
included now in projecting future retiree health costs
o That is not clear; the tax is not paid by the employer or employee,
and the factors that go into a total health care cost are so varied and
unknown that including the potential Cadillac Tax in the calculation
but excluding other potentially more important changes could be
“Covered California” Exchange
The California Exchange has received from the federal government over $910 million thus far
to get it operational but it must hurry to be ready for employers to be able to notify employees
of the Exchange as mandated by the law. Here’s what is interesting:
There is continued debate about how plans outside of the Exchange will have to conform to
those that are inside the Exchange. How will the rates compare?
Will the Exchange get enough volume to be able to get by with only 3.5% premium
surcharge or will it need more?
Will the State seek to limit the ability of smaller employers to partially self-fund, thus
preventing employers from bypassing the Exchange?
How will the two federal plans that the Obama Administration has said it will offer inside the
Exchange affect the marketplace? This question has largely been ignored.
Covered California has announced the eligible health plans for their small group ―SHOP‖
—Blue Shield of California
—Chinese Community Health Plan
—Sharp Health Plan
—Western Health Advantage
Changes in Rating Formula for Small Group Plans.
Currently small group plans (2-50 eligible employees) may use any of the following factors to
determine a rate: Size, Family Structure, RAF Load or Discount, Gender, Location, Medical
Cost Trend, Industry Load or Discount, Age, Length of Time with Carrier, Taxes and Fees, and
Plan design. (Many health plans are offering to renew current plans in December, 2013,
and thereby delay the changes mentioned her until December, 2014.)
In 2014 the following rules will apply:
Age—one band for under age 20, the rates for each year ages 20-64, then one band for age
65+. The highest cost rate band cannot exceed the lowest cost band by more than a 3:1 ratio.
Family Status—Age rates only, no composite rates. Each dependent (including spouse|DP) will
have own rate but children will be limited to three oldest children under age 21 plan; all children
age 21+ would have their own rate.
Area—19 geographic regions apply in California.
Rates would continue to be affected by Medical Cost Trend, Taxes and Fees, and Plan Design.
If a health plan sells an identical plan inside and outside of Covered California, the rates for
both will have to be the same, even including we understand the 3.5% Covered California
Note: the above rules apply to non-grandfathered plans. There are not many
grandfathered plans left, and it not clear how the health plans will deal with them.
The Small Business Tax Credit will be increased to 50% for coverage that applies and is
purchased through Covered California. The benefit levels will be defined by their ―metallic‖
level, from richest plans to most cut back plans: Platinum, Gold, Silver, and Bronze.
California law will mandate that the waiting period be a maximum of 60 days (not first of the month
following 60 days) starting in the first day of the 2014 plan year. This could mean that many employers
will likely adopt a 30 day wait with coverage the first of the month following.
The maximum deductible will be $2,000 single, $4,000 family (individual policies may have higher
deductibles). The maximum out of pocket limits will include prescription drugs, office visit copays, etc.,
so coverage would be 100% for all covered services once reached.
The Covered California site shows the following examples of how the tax credit could lower the cost of
the member’s health insurance.
Changing medical landscape in California:
We are seeing limited network plans move into the Northern
California (they have been very common in Southern California).
Covered California could have a dramatic impact on small group
health insurance sales in California in 2014 (2-50 employees in
2014, 2-100 in 2016 and later). Even if coverage is not
purchased through the Exchange, it could greatly affect what is
available in the marketplace. In addition, Covered California
might result in a proliferation of new limited network plans, as
health plans seek to offer their lowest rates and will do so by
offering reduced cost networks.
Will partial self-funding make a strong come back in California
due to PPACA? A proposed bill in Sacramento could effectively
eliminate small group self insurance.
Individual health insurance will be available with no pre-
existing condition exclusion and no medical questions
asked. An open enrollment period will be established so
that someone cannot just wait until becoming sick before
buying the insurance. If purchased through Covered
California, the member could be eligible for a premium
subsidy from the federal government based on the
member’s income as a percentage of Federal Poverty
Level (FPL). The subsidy will not be available is the
member has available at work coverage that is deemed by
the law to be affordable and a qualified plan.
The cost of healthcare in 2014 will be affected by the ACA
in many ways. Here are new taxes under the ACA:
—Patient-Centered Outcomes Research Institute (PCORI): $1.00 PEPY for
2012 plans, changing to $2.00 for 2013 plans.
—Covered California tax for small group health plans in and outside of the
Exchange, set at 3.5% for 2014.
—Health Insurance Tax (does not apply to self-funded plans). This is expected
to collect nationally $8 billion in 2014, but the tax will increase in later years so
that it is expected to collect $14.3 billion by 2018. Blue Shield predicts this will
add 2.3% to health plan rates in 2014.
—Transitional Reinsurance Tax starts in 2014 and is set to end after 2016. The
estimated cost for this is $5.25 each month per covered member. Blue Shield
predicts this will 1.3% of premium. The amount should be less in 2015 and
—Risk Adjustment User Tax applies for those states (not California) where the
federal government operates the Exchange.
In addition to new taxes, 2014 will see significant changes to small
group health plans rates. We saw already the changes to how children
are rated. Here are other changes:
—Age compression: the maximum age rate for the oldest age may not be more than three
times the lowest cost rate. This will raise rates for younger employees and lower rates
somewhat for older employees.
—Increase rates due to the addition of required pediatric oral and vision care.
—Medical inflation continues, but it might be masked temporarily by health plans trying to be
competitive for market share in 2014. Thus we might not know the true cost of ACA provisions
until 2015 or 2016.
—High deductible health plans will be limited to $2,000 in 2014 plan year for Small Group
plans. Thus, the many higher deductible plans that exist today will need to be lowered to
$2,000 at a higher cost.
—Spouses|DPs will have own rate, so no longer going the rate of younger spouse for family
—The desire of health plans to have lowest rates will push reduced ―skinny networks‖ which
might be a good thing for those whose doctors are still part of the network.
—Elimination of Risk Adjustment Factors (RAFs) for non-grandfathered plans. This will yield a
cost increase for those plans that currently have an RAF below 1.00, for example, but those
with an RAF above 1.00 can be helped by that.
The ACA is designed to provide subsidies to those who
earn less than 400% of the federal poverty level and who
do not qualify for federal programs such as Medicare and
Medicaid (Medi-Cal in California). However that does not
apply to those who have available to them group health
coverage that is ―affordable‖ and meets federal
qualifications. However ―affordable‖ only applies to
employees. Thus, if the coverage is affordable to the
employee, that applies to dependents regardless of how
much they have to pay for their coverage. Nonetheless,
employers must notify their employees of the existence of
the Exchange by October 1, 2013.
With the re-election of President Obama, and the
Democrats retaining control of the Senate and the
Republicans retaining control of the House, dramatic
changes in PPACA are not expected. That is not to say,
however, that budget negotiations will not impact the
financing of PPACA.
The past election resulted in a Super Majority for the
Democrats in Sacramento. It remains to be seen whether
that will have a significant impact on healthcare legislation
in California (Single Payer? DOI oversight of rates?
Elimination of self-funding for smaller employers?).
We are also happy to answer any questions on healthcare
Keith McNeil, CLU, CEBS, GBDS
The SSM Group
Novato, CA 94945