Thoughts on Employers Dropping Coverage and Paying the Penalty

Employers across the country are wondering what will happen after thePatient Protection and Affordable Care Act's "individual mandate" is in effect. Some small business owners are so concerned that they are reluctant to expand until they know what consequences the law will bring. To add to the confusion, employers are hearing that it might be less expensive to pay the law's penalty fee instead of extending health coverage to employees.

On the surface, after looking at two numbers, it's understandable why it might look like a good idea to drop coverage:

  • Annual premiums for employer-sponsored family health coverage reached$15,745 this year, according to a recent survey from the Kaiser Family Foundation/Health Research & Educational Trust.
  • After 2014, if an employer has 50 or more workers, the fine for not offering coverage is $2,000 annually per qualified worker (although the first 30 employees do not count).

Under the law, most Americans must have healthcare insurance by 2014, or pay a penalty tax for not having it. Starting in 2014, employers with 50 or more full-time equivalent employees that do not currently offer health insurance will be charged a penalty if any of the full-time employees qualify for federal subsidies and receive them.

Businesses with less than 50 employees are exempt. To encourage them to provide coverage, they will be eligible for small business tax credits.

Why Dropping Coverage May Be More Expensive

What if employers simply cut coverage and expect employees to start paying for medical costs or exchange-based coverage with their current paychecks? Employers may not pay staff members enough to compensate for this.

As employers know, it is important to retain skilled workers. In order to do this, offering adequate compensation and benefits is a must. If your business has no healthcare benefits, your employees may leave for a competitor that does.

Without significant raises, uncovered employees may not be able to absorb the cost of healthcare.

If workers cannot afford care, many will not seek it. When employees come to work sick, performance suffers. There could be more sick days, higher turnover and in some cases, more workplace injuries.

If an employer drops coverage, there would also be the cost of payingPatient Protection and Affordable Care Act penalty fees. When adding all these costs, employers may realize that dropping coverage is detrimental.

At this point, however, there are still many unanswered questions such as:

  • Will employer's healthcare premium costs increase significantly under the new law?
  • How can employers handle such increases?
  • Will employers shift to part-time employees to avoid the 50 full-time employee threshold?

Employers will have to stay tuned for help answering these and other questions. Consult with your employee benefits adviser or attorney if you have questions about your situation.

Federal Guidance
on "Excessive" Waiting Periods for Healthcare Coverage

The IRS, Department of Labor and Department of Health and Human Services have been given the task of implementing certain healthcare reform requirements. The three agencies recently issued similar temporary guidance on what initially will be considered compliance with healthcare reform's prohibition on excessive waiting periods for coverage.

Background: For plan years beginning on or after January 1, 2014, group health plans and insurers are prohibited from applying a waiting period that exceeds 90 days. The temporary guidance, which follows a previous request for comments, will remain in effect at least through the end of 2014. (IRS Notice 2012-59 and DOL Technical Release No. 20012-02)

A waiting period involves the time that must pass before coverage for an otherwise eligible employee (or dependent) can become effective.

The guidance clarifies that the 90-day limit applies only to eligibility conditions based solely on the lapse of time and that substantive eligibility conditions (such as full-time status, job category, or licensing conditions) are permitted as long as the condition is not designed to avoid compliance with the waiting period limitation. The waiting period ends when an individual can elect coverage. Therefore, a health plan does not violate the limitation simply because employees take additional time to make a coverage election.

In addition, the federal agency guidance provides information on applying waiting periods to employees with variable hours (including part-time employees). Under the guidance, which includes examples, a plan may take a reasonable period of time to determine whether a variable-hour employee meets the plan's eligibility conditions. This may include a measurement period that is consistent with the timeframe used for purposes of the employer shared responsibility ("play or pay" penalty) provision.

In general, a period will be considered reasonable if coverage is effective no later than 13 months from the employee's start date, plus, if applicable, the time remaining until the first day of the next calendar month.

Examples indicate that, where cumulative hours of service are required for eligibility, up to 1,200 hours may be required. More than 1,200 hours would be considered designed to avoid compliance with the 90-day waiting period limitation.

Note: The federal guidance is useful for plans implementing design changes in order to comply with the new waiting period rules by 2014 but it leaves some important questions unanswered.

For example, it does not address the challenge that arises if a plan requires that coverage begins as of the first day of the month after the waiting period ends. Since, under the guidance, it appears that the leeway to begin coverage as of the first of the next month is limited to variable-hour employees, plans would be wise to strictly comply with the statutory language, under which the waiting period may not exceed 90 days (in other words, with no delay to the beginning of the following month). Another unanswered issue is whether plans may require continuous service to satisfy the applicable waiting period, or whether discrete periods of service must be aggregated.

For more information about compliance, consult with your employee benefits adviser or attorney.

Poll: What Americans Think Will Happen

According to a Gallup Poll done this summer, 59 percent of Americans responded that thePatient Protection and Affordable Care Act will make things better for people who do not currently have health insurance. However, the majority of respondents said the law will make things worse for businesses (57 percent) and taxpayers (60 percent).

What about people who currently have insurance? According to the respondents, 36 percent stated the law will make things better once it is fully implemented, 46 percent stated things will be worse, and the rest said there will be no difference or they don't have an opinion.


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