Coming to Grips with the Health Benefits 'Pay or Play' Decision


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Human Resource & Payroll Services And Solutions - Houston, Dallas, Austin - Texas Employers subject to the Affordable Care Act's "pay-or-play" provisions that take effect in 2014 will soon be running short on time to decide which path to choose. The choice involves human resource strategy as well as financial considerations. Here's an overview of elements that may guide the decision.

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Coming to Grips with the Health Benefits 'Pay or Play' Decision

  1. 1. Toll Free: 877.880.4477Phone: 281.880.6525www.hrp.netComing to Grips with the Health BenefitsPay or Play Decision
  2. 2. The first question an employer needs to resolve is whether or not it hasenough employees to be subject to the pay-or-play requirement (alsoknown as the employer "shared responsibility" requirement). The simpledefinition -- employers with 50 or more full-time equivalent workers --doesnt provide the full»»»First, "full-time equivalent" (FTE) covers employees who average 30 (not40) hours per week. The time period during which the employee count isdetermined is the prior year -- in other words, 2013, for purposes ofwhether youll face the mandate in 2014.Note: The IRS, recognizing that determining FTE status can becomecomplicated based on timing issues and seasonal work patterns, issuedsome "safe harbor" rules last year to help with the determination. (IRSNotice 2012-58)
  3. 3. Attempting an End-Run?»»Also, the law attempts to discourage employers near to that 50 FTEthreshold to drop below it by cutting back employees hours to less than30 so that they flunk the FTE test. It does so by requiring that you add upall of the hours worked by part-time workers over the course of a month,then dividing that number by 120. The number that results from thatcalculation is added to your FTE total to determine where you are inrelation to the 50 FTE minimum.Note: Even if the calculationdetermines that you are subject tothe pay-or-play requirement, youare not obligated to provide healthbenefits to part-time employees.
  4. 4. Some employers could, in theory, lay off a requisite number of employees tofall below the 50 FTE threshold, and deal with them as independentcontractors. But simply calling a worker an independent contractor doesntnecessarily make him so, of course. Independent contractor status issomewhat subjective and determined by a multi-pronged»» Assuming you are subject to those "shared responsibility" provisions, andeven if you are already providing some level of health benefits, youll need todetermine whether your benefit package provides at least 95 percent of youremployees a benefit package that meets "minimum essential coverage"standards (the fine points remain a work in progress). If the answer is no, andyou dont beef up your benefits, the "pay" requirement kicks in. (This ofcourse would also be true if you didnt offer any health plan.)According to the law firm Lindquist Vennum, in simple terms, the penalty isthe annualized equivalent of $2,000 a year for each full-time employee,minus up to 30 employees, if at least one full-time employee signs up forhealth benefits through a health exchange "and receives a premium taxcredit or cost-sharing reduction from the government."»
  5. 5. Passing the "Value"»»But even if you are providing minimum essential coverage to enoughemployees, another hurdle you have to clear is whether the employeereceives a minimum value for that coverage.That essentially requires that you are paying at least 60 percent of thecost of the benefit. A parallel test is whether the employee cost isdeemed "affordable" to the employee. A "safe harbor" standard iswhether or not it exceeds 9.5 percent of the employees householdincome.
  6. 6. If either the "value" test or the affordability test is not met, somethingcalled a "Subsection (b) penalty" kicks in. It is calculated as $250 permonth for each FTE employee who enrolls in a health exchange and iseligible, based on income, to receive federal tax credits.www.hrp.netEligibility for tax credit and subsidies ends at 400 percent of the U.S.official poverty level. Eligibility starts once an individual, who does nothave access to a qualified affordable plan through employment, isdeemed to be able to afford insurance with an exchange credit(approximately 100 percent of the poverty level).If you determine that based on your current health benefits package youwont meet the employer responsibility standards of the Affordable Care Act next year, the financial dimension of the decision youll face iswhether its cheaper to drop benefits and pay the penalty, or improvebenefits to meet the requirements. In many circumstances the penaltywould be cheaper.»»»
  7. 7. Dont Neglect Human Resource Strategywww.hrp.netBut what about the human resource strategy considerations? Basicquestions include the impact on employee morale, as well as how criticalhealth benefits are to your ability to recruit strong talent. You may alreadybe exceeding ACAs requirements -- and employees may consider it a fairsubstitute for higher wages.
  8. 8. Tax considerations also can play a role. If you were to drop healthbenefits and simply pay employees more so they can go out and securetheir own health benefits via a health care exchange, that addedcompensation is taxable to them, unlike the value employer providedhealth benefits (assuming it falls below so-called "Cadillac" benefit levels).Also the penalties you would pay, unlike the cost of providing healthbenefits, would not be tax deductible for your company.Finally, a decision to maintain a healthbenefit plan thats generous enoughto satisfy the Affordable CareActs standards isnt a permanent one.You may simply decide to meet thestandards in 2014, and see how thingsplay out with health exchanges andthe actions of other employers whoyou compete with for employees.»»
  9. 9. 14550 Torrey Chase, Suite 100 Houston, TX 77014 USAwww.hrp.netE-mail : info@hrp.netToll FreePhoneFax:::877.880.4477281.880.6525281.866.9426
  10. 10. 14550 Torrey Chase, Suite 100 Houston, TX 77014 USAwww.hrp.netE-mail : info@hrp.netToll FreePhoneFax:::877.880.4477281.880.6525281.866.9426