| 14 | JANUARY 2014

T
he Affordable Care Act commonly referred to as the
ACA applies to virtually every person residing legally in
the United States, as well as almost all employers, all
healthcare providers, hospitals, insurance companies, pharmaceuti-
cal companies and medical device manufacturers. The law directly
impacts 17.9 percent of the entire U.S. economy, based on 2011
data from the Center for Medicare and Medicaid Services and is
projected to increase to 20 percent by 2015.
The ACA has imposed a variety of compliance requirements for
employers, since it was enacted in 2010, including such things as:
Reporting the cost of healthcare coverage on each employees
Form W-2.
Providing employees with a notice of Exchange coverage.
Limiting employee pre-tax contributions to health Flexible
Spending Arrangements (health FSAs).
Increasing the Medicare payroll tax.
Changing plan requirements, including limitations on waiting
periods.
Imposing various fees on employers and insurance companies.
For most employers, the most significant requirements are just now
taking effect or soon will.
These requirements are similar to many existing regulations on
employee benefit plans, which require employers to do exactly as
instructed in order to comply. However, the next two major compli-
ance issues facing employers bring with them a range of strategic
issues that not only impact how benefits are administered, paid for
and communicated but also impact things like workforce planning,
development and delivery of goods/services to customers/clients.
These two compliance challenges are:
Employer shared responsibility (penalties delayed until 2015).
Excise tax on high cost health plans (beginning in 2018).
Employer-Shared Responsibility
Large employers (defined for this purpose as employers with 50 or
more full-time employees and full-time equivalent employees in the
prior calendar year) can be subject to penalties under Section 4980H
of the Internal Revenue Code (Code), if they fail to offer affordable,
minimum value coverage (i.e. coverage that is at least as good as a
bronze-level exchange plan) to their ACA full-time employees and
their children up to age 26.
An ACA full-time employee includes an employers regular, full-time
employees, as well as any other employee who has an average of 30
or more hours of service per week. For these purposes, an employer
may look back over a three to twelve month period to determine if
an employee has averaged at least 30 hours of service per week (this
period is referred to as a look back or measurement period). Use of
the measurement period is voluntary; selecting the length of the
measurement period is in the employers sole discretion.
There are two potential employer-shared responsibility penalties.
The stiffer of the two is found at Code Section 4980H(a), which
provides that, if an employer does not offer minimum essential
coverage (see following panel for details) to at least 95 percent of its
ACA full-time employees and their children up to age 26, and one
or more ACA full-time employees receives a federal premium tax
credit/subsidy, the employer will be required to pay an annual non-
deductible $2,000 penalty (assessed monthly) per ACA full-time
healthcare costs wellness programs employee assistance programs
HR NEWS MAGAZINE
By John A. Haslinger
When determining ACA full-time status, the employer must
take into account:
Hours worked;
Hours not worked, but paid such as paid vacation and
Unpaid leave attributable to FMLA, USERRA and
Jury Duty.
Complying with ACA will require data integration across
Payroll, Benefits and Time and Attendance systems.
HEALTH CARE
REFORM:
Planning for
Compliance
employee (not counting the first 30 employees) even those to
whom coverage was offered AND even those who are enrolled in
coverage. As shown below, the cost of this penalty can be significant.
Assuming that the employer DOES offer minimum essential
coverage to at least 95 percent of its ACA full-time employees and
(beginning in 2015) their children up to age 26, they avoid the
broad $2,000 penalty, but may still be subject to a more narrowly
tailored $3,000 annual penalty per individual (assessed monthly),
under Section 4980H(b). This is the second employer shared
responsibility penalty.
A large employer will be exposed to this penalty, unless it does both
of the following:
WWW.IPMA-HR.ORG JANUARY 2014 | 15 |
healthcare costs wellness programs employee assistance programs
Offers at least one plan that meets the minimum value require-
ment (i.e. it has at least a 60 percent actuarial value). The value of a
plan can be determined using a government-provided spreadsheet
found here: http://www.cms.gov/CCIIO/Resources/Regula-
tions-and-Guidance/Downloads/mv-calculator-final-4-11-
2013.xlsm
Ensures that at least one minimum value plan is affordable
(defined in the ACA to mean that self-only coverage can cost no
more than 9.5 percent of the employees household income, but
the employer should consider the three available safe harbors based
on the employees wages (form W-2 , box 1), the employees rate of
pay or the federal poverty line. For more information, see the
proposed regulations at http://www.gpo.gov/fdsys/pkg/FR-2013-
01-02/pdf/2012-31269.pdf
Under this penalty structure, if any ACA full-time employee is not
offered coverage, or is offered coverage that is not affordable and
minimum value, the employer will be required to pay a non-
deductible penalty of $3,000 per year (assessed monthly), based on
each ACA full-time employee who receives a premium tax credit.
(The employers total annual penalty under Section 4980H(b) is
capped at the amount the employer would pay under Section
4980H(a), discussed above. In other words, an employer will not be
subject to a greater penalty for offering unaffordable coverage than if
it had offered no coverage at all.)
It is important to keep in mind that failure of the employer to offer a
group health plan or to ensure such coverage is affordable and
minimum value, does not, in and of itself, trigger a penalty. The
penalty is only triggered when an employee, who is impacted by
either of these failures, goes to the Exchange and receives a federal
subsidy. Employees who obtain coverage through a spouse or a
parent or those eligible for Medicaid, would not trigger a penalty.
To avoid any penalty under Code Section 4980H, an employer must
offer at least one group health plan to all of its ACA full-time
employees (and their children up to age 26) that:
CONTINUED ON PAGE 18
Minimum essential coverage that satisfies the individual
mandate includes the following types of coverage:
Coverage under an eligible employer-sponsored plan,
which the proposed Treasury rule defines generally to
mean coverage under a group health plan, whether
insured or self-insured, including coverage under a
federal or non-federal governmental plan;
Coverage under an employer-sponsored retiree health
plan;
Coverage under certain government programs, such as
Medicare, Medicaid, the Childrens Health Insurance
Program (CHIP) and TRICARE;
Coverage in the individual insurance market, including a
plan offered by an Exchange; and
Other coverage recognized by HHS, including self-funded
student health coverage and coverage under Medicare
Advantage plans.
Coverage that consists of excepted benefits (as defined
in regulations issued under the Health Insurance Portability
and Accountability Act) does not qualify as minimum
essential coverage. This means that limited-scope dental
and vision coverage and most health Flexible Spending
Accounts by themselves will not qualify.
Number ACA Percent Number ACA Percent Number ACA Percent Number ACA Percent
Total Employees 1,200 N/A 5,000 N/A 18,000 N/A 50,000 N/A
ACA Full-Time
Employees 1,000 100% 4,200 100% 16,500 100% 46,000 100%
ACA Full-Time
Employees Offered
Coverage 945 94.5% 3,980 94.8% 15,658 94.9% 43,675 94.9%
Potential Penalty YES YES YES YES
Potential Annual
Deductible Penalty
Amount $1,940,000 $8,340,000 $32,940,000 $91,940,000
| 18 | JANUARY 2014 HR NEWS MAGAZINE
Meets the minimum value requirement (i.e. has an actuarial value
of at least 60 percent); and
Is affordable (using one of the three permitted safe harbors, if
desired).
Not having to pay a penalty does not mean that an employer is guar-
anteed to avoid a penalty assessment. For example, affordability will
be generally determined by employers based on one of the three safe
harbors (Form W-2, Box 1; rate of pay; or federal poverty line).
However, an Exchange will determine affordability based on house-
hold income, which for most taxpayers is their adjusted gross income.
This sort of definitional difference is likely to result in some penalties
being assessed, which, after appropriate reconciliation by the
employer, will not have to be paid.
The key to avoid having to pay such penalties will be the quality of
the data tracked, reported and maintained by the employer. Such
data generally does not exist in a single system today but rather will
require integration across multiple systems, including, at a minimum,
payroll, benefits administration, and time and attendance.
Such data integration is not optional. ACA reporting requirements
issued on September 9, 2013 make it clear that this will be required
in order to complete Forms 1094-C (Employer Transmittal) and
1095-C (Employee Statements). This reporting will include data
beginning in January 2015, with the first reports due in January
2016.
Excise Tax
The next challenge facing employers is the Excise Tax. This tax is
non-deductible and begins in 2018.
Under Code Section 4980I, health insurance issuers and sponsors of
self-funded group health plans will be assessed an Excise Tax on the
cost of any health care coverage provided to employees that exceeds a
pre-determined threshold. It is anticipated that health insurers will
pass this expense through to plan sponsors of fully insured group
health plans.
Plans with premiums that exceed this pre-determined threshold
(indexed to inflation as measured by CPI) will be assessed a 40
percent non-deductible Excise Tax on any cost above these limits.
For most employer plans covering active employees, the limits will be
$10,200 for individual coverage and $27,500 for family coverage
beginning in 2018. When determining the cost of coverage that is
provided, the employer must take into account the following:
Employer and employee contributions for:
Medical
Prescription Drugs
For self-insured plans, the employer must also take into account
the ASO Fees and the IBNR reserves (incurred but not reported
reserves).
All employee contributions made into a health FSA, plus the
amount of any reimbursements in excess of the employees
contributions.
All employer contributions made into a Health Reimbursement
Arrangement (HRA).
All pre-tax employee contributions and all employer contributions
to a Health Savings Account (HSA).
While many employers currently have costs well below these limits,
it is possible that plan costs could exceed these limits as early as 2018
or shortly thereafter. It is important to keep in mind that since 1965,
there has not been a single year in which per capita healthcare
spending has not increased faster than the rate of inflation as
measured by CPI, as shown below.
healthcare costs wellness programs employee assistance programs
Compliance CONTINUED FROM PAGE 15
Employers should evaluate the likelihood of their plan costs
exceeding the Excise Tax thresholds as soon as possible, since the
impact, as illustrated below, can be substantial.
! " #$ %&! '(
ndividual
Coverage
Family
Coverage
Excise Tax Limit $10,200 $27,500
Cost of Plans $10,550 $28,250
Amount Subject To Excise Tax $350 $750 Total
Number Enrolled 500 1,500 2,000
Annual Penalty n 2018 $70,000 $450,000 ) * +, -, , ,
! " #$ %&! '+
ndividual
Coverage
Family
Coverage
Excise Tax Limit $10,200 $27,500
Cost of Plans $11,000 $29,000
Amount Subject To Excise Tax $800 $1,500 Total
Number Enrolled 500 1,500 2,000
Annual Penalty n 2018 $160,000 $900,000 ) ( -, . , -, , ,
Exceeding the Excise Tax limits by even a small amount can result in a significant
non-deductible penalty
n Example 1
ndividual costs exceed the Excise Tax limit by only $250 per year (less than $21 per month
Family costs exceed the Excise Tax limit by only $750 per year
n Example 2 costs are higher as is the corresponding Excise Tax assessment
ndividual costs exceed the Excise Tax limit by $800
Family costs exceed the Excise Tax limit by $1,500 per year



Should an employer determine that there is a reasonable risk that
plan costs will exceed the Excise Tax thresholds, they may want to
consider making plan changes to high cost plans to avoid having to
!
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7.7%
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11.6%
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3.6%
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Healthcare Cost Continue A Long Term Cost Increase
Far In Excess Of Inflation
Sources: 1. Per Capita National Health Expenditures (NHE) - Centers For Medicare and Medicaid Services, Office of the
Actuary, National Health Statistics Group, U.S. Department of Commerce, Bureau of Economic Analysis 2. Percent Change in
CPI (All Items and Medical Care) U.S. Dept of Labor, Bureau of Labor Statistics
The Excise Tax: Two Simple Examples
WWW.IPMA-HR.ORG JANUARY 2014 | 19 |
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pay the 40 percent non-deductible Excise Tax. Phasing in such
changes over several years could be a better alternative than making
significant changes in a single year.
Employers may also want to consider the introduction of Consumer
Driven Health Plan (CDHP) options as a way of involving
employees in helping to lower the cost of medical benefits.
Conclusion
Employers have to make a number of key decisions as they decide
how best to address the compliance requirements under the ACA,
including:
Decide whether to offer benefits or not offer benefits and pay the
penalty.
Some employees may be eligible for subsidies through the
Exchanges that would result in their paying lower costs for
comparable coverage compared to employer-sponsored
plans.
Evaluate best balance of ACA full-time versus part-time employees.
Better track and manage employees, who are scheduled to
work part-time
Move more employees to full-time status, which can
substantially simplify ACA administration and the related
costs of compliance
Assess recordkeeping and other systems to enhance ability to
prove coverage claims.
Consider offering CDHPs in conjunction with either an HSA
or HRA.
This can actively engage employees as consumers, which
can result in lower costs without a decline in the quality of
care in many cases.
Consider adding or expanding wellness programs in order to begin
reducing the demand for care that is directly related to unhealthy
lifestyle decisions.
Consider implementing improved dependent verification require-
ments to avoid offering coverage to people, who are not legiti-
mately eligible under the plan rules.
Conduct dependent eligibility audit.
Require verification of dependents, when any dependent is
added to coverage.
Benefits are likely to remain an important part of total compensation,
directly impacting an employers ability to recruit, engage and retain
talented people. Finding the right balance between costs and plan
design, while ensuring compliance, continues to be a challenge but
one that is achievable with the proper planning.
John A. Haslinger is vice president of Strategic Advisory Services for ADP.
He can be reached either by email at john.haslinger@adp.com.
N
healthcare costs wellness programs employee assistance programs