Remember the phrase “ignorance of the law is no excuse”? Less than one year before full implementation of the Affordable Care Act, the number of business executives who have a firm grasp on how the landmark law will affect their companies is anyone’s guess. What is not subject to guesswork is that they need to get up to speed, because after its validation before the Supreme Court and the national electorate, the rules and regulations associated with the ACA are coming down fast and furious.
In fairness, many of the rules of the game are still being written. Among the latest regulatory bombs to drop is a new $63 per-person fee, to be assessed on all major medical insurance plans, that will raise an estimated $25 million toward the costs of covering people with pre-existing conditions.
While it’s a temporary assessment that is levied for three years starting in 2014 and then gradually declines, it demonstrates why businesses must pay attention to the dictates of Health and Human Services Secretary Kathleen Sebelius, who has been given broad power to shape the regulations associated with the ACA.
So with the pace of regulatory guidance beginning to accelerate, here are some key things businesses need to know as the pivotal year of 2013 begins, plus a look at BadgerCare and wellness incentives.
Give ’em some credit
“There is at least one good thing about this law,” declared Gordon Meicher, managing partner of Meicher & Associates, referring to a small employer health care tax credit that went into effect in 2011. Small employers qualify if they pay at least 50% of the cost of health insurance premiums for the coverage of participating employees. The amount of the credit is equal to 35% of the total amount of premium the employer pays, and it applies to health, dental, and vision care.
To qualify, employers must have fewer than 25 employees and average annual wages of less than $50,000 (excluding certain management employees), but there is a phase-out if businesses employ more than 10. Meicher said his firm has taken advantage of the credit for 10 or 15 small business clients, most of whom were unaware it was available.
The credit phases out for employers with 11 or more full-time employee equivalents, or an average employee wage of $25,000 or more. “The best situation to be in is 10 or fewer employees with an average of $25,000 in wages, because you get a 35% credit for health insurance,” Meicher said. “You can ignore the salary of the owners in that average wage calculation.”
However, even business owners who take advantage of the credit don’t view it as a difference-maker. Shadow Fax, a provider of office equipment and supplies, including new and remanufactured toner cartridges, employs 20 people in its Madison facilities. Owner and president Tim Meixelsperger described the tax credit as “very marginal,” especially when compared to premium increases.
In 2010, Shadow Fax paid $111,327 for employee insurance coverage and received a total credit of $2,085. In 2011, the company’s health insurance costs totaled $96,685 (one employee with family coverage dropped off) and it received a total credit of $1,511. Through Nov. 30, Shadow Fax had spent $110,765 on employee health insurance coverage, with the 2012 credit to be determined.
So while the company faces double-digit annual percentage increases in health insurance costs, the tax credit gradually decreases until it’s completely phased out. As for what happens next, some reassuring regulatory guidance would be welcome news. “For many small employers, it’s kind of a scary time right now,” Meixelsperger acknowledged.
Attorney Todd Cleary, a shareholder with Godfrey & Kahn, said smaller employers, those with fewer than 50-full time employee equivalents, will not have to cover all their employees because they aren’t subject to the law’s “pay or play” rules. In 2014, he said, smaller companies would have the same insurance options as they now do, and they will have the option of buying coverage under an insurance exchange.
Whether that coverage will be more affordable than the employer’s existing coverage is yet to be determined. Cleary noted that small employers who drop group coverage and let employees find coverage elsewhere should be aware that employees will view that as a takeaway and will likely expect increased pay or another substitute.
Pay or play
Businesses with close to or more than 50 employees face a big decision in 2013 – to pay or play. With the provision of health insurance mandated for companies of 50 or more full-time employees, 2013 is the test period for determining if you have at least 50 full-time employees. According to SVA Professional Services, businesses must calculate their monthly average of full-time employees, which is done by counting the number of full-time employees – those who work at least 30 hours per week – plus the number of full-time equivalent employees (add all part-time hours and divide by 120). The calculation does not include employees who are seasonal and work less than 120 days per year.
Starting in 2014, these companies must provide minimum essential coverage. The plan’s share of covered health benefit costs must provide at least 60% of the minimum (actuarial) value; under a 2014 “safe harbor,” the employee portion for self-only coverage must be less than 9.5% of their wages.
Tom Milliken, a principal in the tax service group for SVA, said employers that are close to the 50-employee threshold might have to consider failing the test. “If you are at that level, then in 2014 if you don’t provide this minimum essential coverage, if you have just one of your employees get a payroll tax credit or subsidy to buy their insurance on the exchange, there is a pretty significant penalty that kicks in,” he warned. “So the important thing I see for 2013 is that if you have employers that are around that 50-employee level, and they are looking at expanding their payroll, they really should be trying to fail this test.”
If the employer does not “play” by providing this coverage for all full-time employees, the “pay” comes in the form of a penalty of $2,000 per employee, with the first 30 employees exempt from the penalty. If the coverage provided is not affordable, the penalty is $3,000 per employee whose insurance is not deemed affordable.
The pay-or-play decision is not a simple matter of dropping coverage and paying what appears to be a more economical penalty. For example, there is nuance in the reality that health insurance is deductible, while the penalty is not. If employers drop coverage, the logical substitution for the removal of a benefit is increased pay. “Increased pay is subject to income taxes for employees, and to payroll taxes for both the employee and the employer,” Cleary noted. “It’s just not as easy as comparing the aggregate amount of what we pay for health insurance to the aggregate amount of what the penalty would be.”
Carl Mowery, managing director in the compensation and benefits consulting practice of Grant Thornton, said many employers are under the impression they can get around the 50-employee threshold for large companies by setting up various corporations. However, under the internal revenue code, there is a prohibition against the aggregation of commonly held companies, and it also applies to the ACA. “Setting up a variety of companies to get under the 50 threshold doesn’t really work,” he cautioned.
Many thought Gov. Scott Walker punted to the federal government when he decided not to have his administration design a state health insurance exchange, but the feds have been returning the favor. Based on a recent HHS rule, insurers must provide minimum essential benefits in 10 different categories, including hospitalization, prescription drugs, preventive and wellness services, and chronic disease management. The rule only applies to those plans offered through the exchanges and to insurance coverage offered outside the exchange to individuals and small group plans.
David Flotten, senior human resources consultant for Associated Bank Financial Group, noted that HHS has identified a United Health Care small group plan as the benchmark for minimum essential benefits in Wisconsin. “Obviously, insurance companies can provide greater benefits than the benchmark plan provides for,” he said. “The rule also allows for actuarial equivalence, where they may not have to mirror exactly what the benchmark plan looks like, but it has to, on average, pay out basically the same types of benefits.”
While minimum essential benefits provide some clarity, they are expected to make plans offered through the exchanges more expensive. That was expected in part because the feds based “minimum essential” on what an average plan would offer, not on a minimum threshold. “The cost for some groups will increase as a result of that,” Mowery stated. “One insurance company has estimated that these would cost around 4% to 10% more in the initial year.”
Insurance carriers, already faced with a premium tax that could be passed on to consumers, are comparing their small group plans with the applicable United Health program so they are competitive when they go to the exchange. “To be clear, it’s not so much that it’s a PPO versus an HMO because that’s not an issue,” said Larry Zanoni, retiring CEO of Group Health Cooperative of South Central Wisconsin. “What’s more relevant is the actual benefit provisions in the United Health plan.”
Al Wearing, sales and marketing director for Group Health Cooperative, believes more small employers are likely to put their employees on the exchange. He’s come across estimates ranging between 10% and 30% because, unlike large employers, they face no penalty for doing so. “In that market,” he noted, “there is a much larger incentive to do it.”
Discrimination recriminations
A potentially costly mistake is violating the ACA’s non-discrimination rules on non-grandfathered health plans (those that have lost their grandfathered status since passage of the ACA) and self-insured health plans. Under the ACA, the non-discrimination rules went into effect for plan years beginning on or after Sept. 23, 2010, but they are not being enforced because there are too many open questions about how they work.
Cleary thinks it’s probable that in 2013 the Internal Revenue Service and the other applicable agencies will issue the requisite guidance. Potential examples of prohibited discrimination include paying a higher percentage of the premium for executives than for rank-and-file employees, or paying for all or a portion of COBRA premiums for former executives but not other employees.
“The reason I think it’s so important is that the excise tax for failure to comply is huge – $100 per day, per person discriminated against,” Cleary stated. “So let’s say you have an employer with 500 employees, and the employer pays for 100% of the premium for one executive and it pays less than that for its other employees. Arguably, you have 499 employees who are being discriminated against, and you could have a staggering penalty.”
Business case for BadgerCare
BadgerCare, enacted into law in 1999, provides health insurance to low-income working parents and their children. Under the program, parents typically are covered by Medicaid and children are covered under the State Children’s Health Insurance Program (SCHIP). The premise of BadgerCare is that adults with health insurance are more likely to seek coverage for their children; since its enactment, Wisconsin has enrolled the vast majority of the state’s uninsured, low-income children.
The level of that coverage became an issue when Gov. Walker announced changes in eligibility for nonpregnant, nondisabled adults, later pared back by the Obama administration, to address a $128 million deficit in the Medicaid program. It was done through a combination of premium increases for families with incomes of more than 133% above the federal poverty limit, and changes in eligibility requirements, which pared enrollment by 17,000. The changes increased BadgerCare Plus premiums for affected families, including a single parent with two children who makes $25,390 a year, as the new premiums consume between 3% and 9.5% of household income.
Most of the focus is on how it helps economically disadvantaged families, but some small employers depend on BadgerCare for their family coverage. Paul Vanderscheuren, owner of Senior Benefit Services, sells health insurance policies to Medicare recipients. Vanderscheuren and his wife are insured through the Health Insurance Risk Sharing Plan (HIRSP), which serves people with a pre-existing medical condition that prevents them from getting health insurance coverage on the individual market, and he is a BadgerCare customer, with two young sons in the program. All four family members still at home (three older children have moved on) are otherwise uninsurable.
Vanderscheuren has not noticed any impact on his benefits from the recent state changes. Under the program, his premium costs are linked to his income. If his income goes up, so do his premiums, and vice versa. His overall cost to provide health care to his family (including $700 per month for a high-deductible plan under HIRSP) is now about $2,000 per month and includes prescription co-pays, dental, and vision coverage. The strong benefits don’t come cheap, but “the program is extremely valuable to me,” Vanderscheuren said. “Without it, I probably would not be able to be self-employed. It would be very difficult to serve my clientele if I didn’t have BadgerCare for my kids.”
The Discriminating Features of Wellness
Wellness programs are one of the few areas where employers can discriminate, and ironically enough, it’s the Affordable Care Act that is providing employers with more incentive to engage in discriminatory practices – for the benefit of employees, of course.
Unlike the law’s prohibitions on benefits-based discrimination, the permissible discrimination is based on health risks engendered by bad health habits like cigarette smoking. As David Flotten, senior human resources consultant for Associated Bank Financial Group explains, the concept of punishing bad health habits (and rewarding good ones) is nothing new. It’s simply taken on a new dimension thanks to affirming regulations issued recently by the U.S. Department of Health and Human Services.
“Under current law, the maximum incentive an employer is allowed to provide is 20% of either the single or family premium, depending on who is allowed to participate in the plan,” Flotten explained. “What those regulations did was they expanded that. Starting in 2014, the maximum wellness incentive can go up to 30% of the total premium or, if you have tobacco uses as one of your factors, to 50% of the premium.”
In other words, if you are a smoker, you are deemed as someone who contributes more to the cost of health care than nonsmokers, so you can expect to pay more for your employer-sponsored coverage.
The provision is specific to wellness programs. Under existing law, employers can create wellness incentives. So in addition to identifying various biometrics pertaining to wellness, which are typically done with a health risk assessment to measure things like tobacco use, cholesterol, and body mass index, employers are then allowed to provide an incentive based on those scores.
In many cases, the incentive to participate in a wellness program, which could include a smoking cessation program, is a premium discount. That can also be flipped around and called a surcharge based on your health risk assessment score, “and that discount or surcharge is subject to that 30%,” Flotten noted.
“It can be other forms,” he added. “You can do it in cash or you can do it as a contribution to account-based plans like HRAs and HSAs, but that is what that rule was getting at.”
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