The Affordable Care Act (ACA) is in full swing. Companies should have provided employees with their 1095 forms for 2015 by March 31st, and the deadline of June 30th for filing with the IRS for electronic filers is fast approaching. The reporting requirements are complicated and for those who fail to report, the fines can be steep.
For federal contractors, the increased overhead cost associated with ACA compliance has been troubling. Winning and maintaining contracts in an LPTA environment means cutting costs as much as possible. Yet, a recent report by the Congressional Budget Office noted that, over the next 10 years, private health insurance premiums will increase by about 5 percent annually, which exceeds the expected gross domestic product growth by 2 percentage points over the same period. Other reports suggest that by 2025, the cost for employment-based health coverage will increase by sixty (60) percent. One cost cutting measure being weighed by some companies is to reduce employee hours to avoid ACA compliance. But the risks may not be worth the reward.
Reducing Employees’ Hours Could Reduce Your ACA costs
As background, the ACA requires employers with 50 or more employees to offer affordable, minimum value coverage to full-time employees and their dependents or pay a penalty if they fail to offer such coverage and the employee then receives premium assistance from the federal government and obtains coverage through the Health Insurance Marketplace. Full-time employees are defined by the ACA to include those employees who work thirty (30) hours or more per week. Employers are not required to offer health insurance to employees working less than thirty (30) hours per week. Seemingly then, employers could glean two advantages by reducing employees’ hours below thirty (30) hours per week. First, for employers hovering around the fifty (50) employee ACA coverage threshold, converting a class of full-time employees to part-time (i.e., less than 30 hours per week) might lessen the company’s “full time equivalent” count and actually take them below the fifty (50) employee coverage threshold. Secondly, for larger employers, limiting some employees’ hours to less than thirty (30) per week means not having to offer health insurance to those now “part time” employees. Either of these scenarios could present a significant monetary savings for a federal contractor on a tight budget.
But What About Employers’ ERISA Obligations?
ACA avoidance seems like a great cost reduction strategy, until you take a look at the Employee Retirement Income Security Act (ERISA). Section 510 of ERISA prohibits employers from interfering “with the attainment of any right to which such participant may become entitled under the plan.” Essentially, this provision means that employers cannot discriminate or retaliate against those employees who might seek to attain coverage under an employer sponsored health plan. But would an employer’s decision to restructure its workforce to lower its health insurance costs under the ACA really violate this provision? As it turns out, the answer is “maybe.”
A Federal Court Weighs In on the Issue.
Until now, whether a reduction of workers’ hours to avoid ACA coverage would create ERISA liability was a matter of academic conjecture. However, a U.S. Federal District Court in New York has recently upheld the rights of employees to sue their employer for limiting work hours to under thirty (30) per week in an effort to avoid having to offer them medical coverage. As the court observed, while the act of reducing employee hours does not violate any specific provision of the ACA, the Company’s employees have satisfactorily alleged that such a reduction creates a retaliatory cause of action under ERISA Section 510.
The case is not fully resolved; the employees have thus far only survived the employer’s motion to dismiss their claims. To be successful in their lawsuit, the employees must ultimately prove that the Company intended to interfere with their benefits by reducing their hours below thirty (30) per week. But given the Company’s stated rationale of trying to avoid ACA healthcare costs, the employees’ claim seems fairly strong. And the initial ruling from the Court suggests that it views intentionally reducing employees’ hours to avoid having to provide health coverage as an ERISA violation.
So What Should Employers Do?
Given ERISA section 510 and the pending litigation around this issue, employers would be wise to avoid basing workforce changes solely with the goal of lessening the impact of the ACA’s employer mandate. Enacting workforce changes for reasons that have a broader business impact (and carefully memorializing those reasons) is a smarter way to proceed. Some tips to keep in mind as your organization weighs workforce changes include the following:
- Carefully evaluate the need for reducing employee hours and be mindful of the thirty (30) hour per week threshold. Any decision to reduce hours should be communicated to employees in writing and include clear and specific underlying business rationale for the changes.
- Make sure public statements about the workforce change mirror internal statements to employees.
- Avoid large, sweeping changes that occur at once. Such large-scale events tend to invite unwanted questions and scrutiny from both inside and outside the company.
- Try to leave the hours for current full-time employees largely unchanged and focus, instead, on capping hours for newly hired employees or outsourcing new work to contractors.
There are certainly legitimate reasons to reduce employee hours – but doing it intentionally to avoid ACA obligations looks to be problematic. Employers would be well advised to proceed with caution in this area and to carefully plan for and communicate workforce reductions in ways that do not run afoul of ERISA.
C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.
Employer Payment Plans Violate the ACA- For many employers, the Affordable Care Act (“ACA”) seems like a labyrinth of rules and regulations that offer little practical guidance on how and under what circumstances employers can (or must) offer their employees group health insurance. However, employers recently got a bit of clarity from the IRS’ guidance (Notice 2015-17) regarding employer payment plans. A payment plan is a system by which an employer pays or reimburses an employee for some or all of the premiums paid by the employee for an individual health plan secured by the employee. This had been a practical solution for small companies who could not reasonably afford or wanted to avoid the administrative headache of sponsoring a group health plan for its employees. According to the IRS and DOL, that option is now off the table.
Both the IRS and the U.S. DOL agree that such employee payment plans are “group health plans,” which are required to comply with the minimum coverage requirements of the ACA. But of course, such reimbursement plans are not ACA compliant. As a result, employers currently offering its employees these types of reimbursement arrangements are offering a “group health plan” that does not comply with ACA requirements and can, therefore, be subject to a $100 per day excise tax for each employee. The IRS has correctly recognized the confusion stemming from this issue and has granted limited transition relief to small employers who would not ordinarily be subject to the ACA minimum coverage requirements. Small employers (less than 50 FTE’s) will not be charged any excise tax for 2014 and have until June 30, 2015, to come into compliance and avoid excise tax for the first six (6) months of 2015. Note though, absent further IRS guidance, the relief does not apply to an S corporation 2%+ shareholder-employee healthcare arrangement, where such reimbursement plans cover employees who are not 2%+ shareholders.
So what are small employers to do? The easiest option may be to simply terminate the reimbursement or payment program and send the employees out to the exchanges. However, that is not the only option. Small employers could discontinue the reimbursement plan and voluntarily replace it with an ACA compliant group health plan – even though they may not be legally required to offer a plan. Or lastly, the IRS guidance expressly states that employers may raise their employees’ taxable compensation to assist with the purchase of individual plans. But the employer cannot
condition the raise on the employees’ purchase of health coverage. In essence, employers can raise taxable earnings for all its employees to help defray health care costs, but cannot deny the raise to an employee that chooses to lease a new car with the additional money instead of purchasing individual health coverage.
The prohibition on employee reimbursement plans also applies to TRICARE-related medical expense reimbursements (where 2 or more employees participate). However, the IRS guidance states that such TRICARE plans will not violate the ACA if they are integrated with another group health plan that does not consist solely of excepted benefits.
For more information about health coverage reimbursement arrangements, please visit http://www.irs.gov/pub/irs-drop/n-15-17.pdf.
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The Affordable Care Act (ACA) requires state and federal exchanges to send notices to employers identifying employees who have purchased coverage through an exchange and qualified for a premium tax credit subsidy. These initial subsidy notices do not constitute an assessment of a ‘Pay-or-Play’ penalty and will be provided to all employers, regardless of whether the employer employs 50 or more full-time or fulltime-equivalent employees.
Each Exchange Notice will:
- Identify the employee;
- Indicate that the employee has been determined eligible for an Exchange subsidy (i.e., advance payment of the premium tax credit);
- Indicate that, if the employer has 50 or more full-time employees, the employer may be liable for the excise tax assessed under Code Section 4980H; and
- Notify the employer of the right to appeal the determination
Currently, subsidy notices will be sent to employers at the addresses provided by employees during the Exchange application process. The subsidy notices will provide the employer with the right to appeal the determination that an employee is eligible for a premium tax credit subsidy. If the Employer disagrees with this determination (i.e. if the employee declined the employer’s minimum essential coverage that is affordable and provides minimum value), the employer may, but is not required to, file an appeal. Filing an appeal will be especially beneficial for employers subject to the ‘Pay-or-Play’ penalties, as it can help protect the employer from having to appeal the determination after a penalty tax has already been assessed. Filing an appeal will be especially beneficial for employers subject to the ‘Pay-or-Play’ penalties, as it can help protect the employer from having to appeal the determination after a penalty tax has already been assessed.
For more information about Eligibility Determinations for Exchange Participation and Insurance Affordability Programs, please visit http://bit.ly/1DWx3Ll.
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The IRS has released the drafted forms and instructions for reporting employer-provided coverage. The drafted forms include:
- Form 1094-B: Transmittal of Health Coverage Information Returns
- Form 1095-B: Health Coverage
- Form 1094-C: Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns
- Form 1095-C: Employer-Provided Health Insurance Offer and Coverage
The forms will be used to report the following:
- Which individuals had coverage that satisfied the ACA individual mandate for all or a portion of the calendar year
- Which employers offered coverage that satisfied the ACA employer mandate
Reporting becomes mandatory in early 2016 and will be based on the 2015 calendar year. The IRS expects to release the final forms and instructions in before the end of 2014.
Comments on the draft versions of the forms and instructions can be submitted on the IRS website at http://www.irs.gov/uac/Comment-on-Tax-Forms-andPublications
Find out more about C2’s Payroll & Tax Administration.