Health Care Reform Monthly
The State of SHOP Plans (and Where they’re Headed)
The Affordable Care Act (ACA) Small Business Health Options Program (SHOP) got off to a slow start. Many factors behind the sluggish launch, however, theoretically won’t weigh it down in 2015. So now might be a good time for small employers to begin planning for next year — even though you can enroll in SHOP plans anytime before then and still possibly qualify for a tax credit.
SHOP plans were intended to make it easier for small businesses to find affordable health care coverage to offer employees. The idea was that each state would set up its own Health Insurance Marketplace for businesses and individuals. But more than 30 chose not to do so. As a result, the federal government stepped in and created healthcare.gov.
Late last year, an official at the U.S. Department of Health and Human Services confirmed that applying for SHOP coverage online through healthcare.gov would be delayed until November 2014.
Until the website is ready, to apply for SHOP coverage, paperwork generally must be submitted through a broker or agent. You can still go to healthcare.gov to research health care coverage and find other pertinent information.
SHOP plan coverage must include the same “essential health benefits” that are required of other plans (except those with “grandfathered” status). In addition, SHOP plans can cover the same four-level metal spectrum (bronze to platinum) as other plans.
Generally, to be eligible to enroll in a SHOP plan, you must meet the following requirements:
Employ fewer than 50 full-time employees (employees who work 30 or more hours per week) or a combination of full-timers and full-time equivalent employees (FTEs) that doesn’t reach 50 at the time you enroll (a number that will rise to 100 in 2016). (Determining FTEs, as defined under the ACA’s shared-responsibility provision, involves totaling part-time employees’ monthly hours and dividing that figure by 120).
Offer health coverage to all of your actual full-time employees (a number that might be considerably less than 50, if most employees work fewer than 30 hours a week).
Have at least 70 percent of your eligible employees enroll in your plan.
That last point may vary by state. In Tennessee, for example, you need to hit only 50 percent. Meanwhile, in Arkansas, Iowa, New Hampshire, New Jersey, South Dakota and Texas, the participation threshold is 75 percent.
To give you a chance to get your plan off the ground, these requirements don’t apply during the initial enrollment period — November 15 to December 15 each year. Also, though employee spouses are eligible to participate in SHOP plans, spousal enrollment numbers aren’t used to satisfy the minimum enrollment test.
If you enroll in SHOP plan coverage, you might be eligible for a tax credit for a portion of the premiums you pay — or you might not be. Eligibility requirements for the credit are different from those for SHOP plan enrollment. So you might be eligible to enroll in a SHOP plan but not be eligible for a credit.
The maximum credit of 50 percent (up from 30 percent in 2013) is available only to business employers with 10 or fewer FTEs whose annual wages average no more than $25,000. (But, as defined under the ACA’s provision for the credit — total number of employee hours for the year divided by 2,080, then rounded down, though not below zero — this FTE definition is different from the one under the shared-responsibility provision that also applies to SHOP eligibility.) The credit’s value declines on a scale until you reach 25 FTEs or average annual wages of $50,000, when it’s completely phased out. Additional rules and limitations apply, covering aspects such as how the credit is determined and how FTEs are calculated.
You can still start a SHOP plan this year and claim the credit. But any tax benefits for which you’re eligible will be prorated. Plus, you can now take the credit for only two years, which must be consecutive. So if your 2014 credit would be prorated, you might be better off forgoing the credit this year so you can take it for two years when your tax savings will be greater. To ensure that you get the benefit even if you have no — or minimal — tax liability in the year you apply, the tax credit can be carried back or forward.
Credit without SHOP
Originally, SHOP enrollment was going to be a requirement for tax credit eligibility beginning in 2014. What’s the impact of the SHOP website delay on this requirement?
As of this writing, there has been no corresponding deferral of the SHOP coverage requirement. But the U.S. Treasury Department has announced that employers without access to coverage via the SHOP will be eligible for the credit as long as they provide coverage that meets the guidelines of a SHOP plan. This generally applies to the more than 30 states that didn’t create Health Insurance Marketplaces.
Yet another scheduled change for 2014 has been delayed. Specifically, starting this year, employees were supposed to be able to freely choose among a variety of SHOP-eligible plans. But there have been notable regional variations in the availability of SHOP plans.
Many experts anticipate enrollment to increase toward the end of 2014 and into 2015 as employers opt out of early renewal contracts and “keep your plan” arrangements. Also, as SHOP itself becomes better established and demonstrates more administrative stability, employers are likely to get on board in larger numbers.
Work with your financial and health care advisors when choosing whether to renew your company’s coverage. A SHOP plan may offer solid benefits and a tax credit, but you still need to weigh its after-tax price competitiveness against other small group offerings.
Play-or-Pay update: Final Regs Offer Clarity, Breathing Room
Fully understanding and adapting to the ACA hasn’t been easy on any organization — be it for-profit, nonprofit or government entity. In an effort to provide clarification and give midsize to large employers breathing room regarding the act’s shared-responsibility (“play or pay”) provision, the IRS released final regulations in February. These final regs defer an important deadline for some employers and offer other transitional relief throughout 2015.
Would a Group Plan with No Open Enrollment Period Run Afoul of “Play or Pay”?
Question: Our company sponsors a self-insured group health plan, and we’ve historically not conducted a regular open enrollment period. We do have hundreds of employees, however, and are considering compliance with the ACA’s shared responsibility provision. Would our plan design subject us to the employer penalties that take effect in 2015?
Answer: Since your company appears to have enough employees to be a “large employer” for play-or-pay purposes in 2015, your current plan may subject you to penalties next year.
Keep in mind: There are two types of employer penalties — one when eligible employer-sponsored coverage isn’t offered to enough full-time employees and dependents, and another when the coverage offered doesn’t meet minimum-value and affordability standards. (In 2015, large employers won’t be required to offer coverage to dependents if they’re taking steps to arrange for such coverage in 2016.) A penalty generally applies only if a full-time employee is certified to the employer as having bought coverage through a Health Insurance Marketplace through which a premium tax credit is allowed or paid to the employee.
Generally, under the Employee Retirement Income Security Act, the sponsor of a self-insured health plan has broad discretion to establish enrollment periods — subject to special enrollment rights under the Health Insurance Portability and Accountability Act. But the ACA’s play-or-pay provision imposes more requirements, and your plan design may prove problematic under those rules.
According to the IRS, a large employer won’t be treated as having “offered” coverage unless employees and dependents are given at least an annual opportunity to accept or decline coverage. For this purpose, “dependent” is defined under the Internal Revenue Code as someone under age 26 who is the employee’s child, stepchild, adopted child or eligible foster child.
Because your plan doesn’t offer an annual opportunity for full-time employees and their dependents to accept or decline coverage, you’d likely be treated as nothaving “offered” coverage to them. And, yes, this could trigger the play-or-pay penalties.
Notably, however, the definition of “dependent” doesn’t include individuals other than the employee’s children — such as the employee’s spouse. Thus, your plan may continue to not make an annual offer of coverage to spouses. In fact, you may entirely exclude non-employee spouses from coverage without risking penalties.
Reviewing the Basics
The play-or-pay provision imposes a penalty on large employers that don’t offer “minimum essential” health care coverage — or that offer coverage that isn’t “affordable” or doesn’t provide at least “minimum value” — to their full-time employees (and their dependents) if just one full-time employee enrolls in a qualified health plan through a government-run Health Insurance Marketplace (originally referred to as a “health insurance exchange”) and receives a premium tax credit.
Under the ACA, a large employer is one with at least 50 full-time employees or a combination of full-time and part-time employees that’s equivalent to at least 50 full-time employees. This involves totaling part-time employees’ monthly hours and dividing that figure by 120 to calculate full-time equivalent employees (FTEs). That figure is then added to the total number of actual full-time employees. A full-time employee generally is someone employed on average at least 30 hours a week, or 130 hours in a calendar month.
Under the final regs, eligible midsize employers will not be subject to the play-or-pay provision until 2016. To qualify for the midsize-employer relief, an employer must employ on average fewer than 100 full-time employees or the equivalent during 2014.
Also, the employer must retain the health care coverage it offered as of February 9, 2014, and maintain its workforce size and aggregate hours of service (meaning it can’t reduce its workforce or overall hours of employee service to qualify). In addition, the employer must certify that it meets these requirements.
Be aware that midsize employers will still be subject to the ACA’s large-employer information-reporting requirements in 2015.
Playing the percentages
Under the ACA, large employers that don’t offer at least 95 percent of full-time employees minimum essential health coverage will be assessed a penalty if one of their full-time employees receives a premium tax credit when buying health care insurance from a government-run Health Insurance Marketplace. The annual penalty is $2,000 per full-time employee in excess of 30 full-timers.
The final regs provide that large employers that don’t qualify for the midsize-employer relief in 2015 can avoid the penalty for not offering minimum essential coverage by offering such coverage to at least 70 percent of full-time employees (95 percent will apply in 2016 and beyond).
Helping with the Transition
The final regs extend and expand transitional relief in other ways, too. In preparing for 2015, employers can determine whether they had at least 100 full-time employees or the equivalent in 2014 by reference to a period of at least six consecutive months (instead of a full year).
Also, employers with plan years that don’t start on Jan. 1 can begin compliance with the play-or-pay provision at the start of their plan years in 2015. And the requirement to offer coverage to full-time employees’ dependents will not apply in 2015 if an employer is taking steps to arrange for such coverage in 2016.
Docking at Safe Harbors
Generally, if an employee’s share of the premium would cost that employee more than 9.5 percent of his or her annual household income, the coverage isn’t considered affordable. Because an employer generally won’t know an employee’s household income, the proposed regulations provided safe harbors under which an employer can determine affordability. The final regs maintain the proposed safe harbors with some minor changes.
Under these safe harbors, affordability can be determined based on an employee’s Form W-2 wages or the federal poverty line. Affordability can also be based on an employee’s rate of pay. (Unlike under the proposed regs, the rate-of-pay safe harbor is available even if the employee’s rate of pay fell during the year.) If the employer meets the requirements of a safe harbor, the offer of coverage will be deemed affordable.
Looking Back at Full-Timers
The final regs allow employers to use an optional look-back measurement method to determine whether seasonal employees and employees with varying hours are full-time. They also clarify the application of the look-back and alternative monthly methods of determining full-time status.
Additionally, the final regs clarify whether certain types of workers will be considered full-time. For example, bona fide volunteer hours worked for government or tax-exempt entities won’t cause the volunteer to be considered a full-time employee.
Addressing Other Staff
Many employers have wondered about the impact of independent contractors and similar workers. The final regs clarify that the IRS will determine on a case-by-case basis, and under common law (not employment tax safe harbors), whether an organization is properly classifying independent contractors. The agency is wary of employers misclassifying workers as independent contractors to sidestep health coverage requirements.
Some employers use staffing agencies to augment their workforces. The final regs state that, for temporary workers, employers will fulfill their offer-of-coverage obligations if the temp is offered coverage via his or her agency — provided the fee paid to the agency is higher than it would be if that worker weren’t enrolled in coverage.
Procrastinating not Advisable
The IRS indicated it will consider whether it’s necessary to extend beyond 2015 any of the transitional relief provided by the final regs. Nevertheless, the relief shouldn’t be regarded as permission to procrastinate. Rather, midsize to large employers should use the additional time to decide whether to offer full-time employees coverage that will allow them to avoid the risk of incurring penalties. Also bear in mind that even more regulations regarding play-or-pay’s information-reporting requirements are soon expected from the IRS.
Proposed Regulations Address ACA’s “Excepted” Benefits
The ACA and other federal health coverage laws “except” some employee benefits from certain requirements that otherwise apply to health plans.
Examples of excepted benefits include limited-scope dental and vision coverage and disability insurance. These benefits are excepted because they aren’t considered health coverage; they’re offered separately or aren’t an integral part of benefits under a group plan.
New proposed regulations — issued by the Departments of Labor, Treasury and Health and Human Services in January — amend the regs on excepted benefits regarding vision and dental benefits, employee assistance programs (EAPs), and “wraparound” coverage. Although they’re considered proposed regs, employers can generally rely on them for compliance purposes.
Excepted benefits have long been exempt from certain mandates applicable to group health plans under the Health Insurance Portability and Accountability Act. These include special enrollments and certificates of creditable coverage. The ACA also has previously exempted excepted benefits from certain requirements, including:
The age-26 mandate,
Enhanced claims and appeals rules,
The ban on waiting periods exceeding 90 days,
Rules governing distribution of Summary of Benefits and Coverage statements,
Cost-sharing limits, and
The annual dollar-limit prohibition.
Importantly, however, an employer cannot reduce or avoid ACA employer shared responsibility (“play-or-pay”) penalties simply by providing excepted benefits. And, from an employee’s perspective, excepted-benefit coverage doesn’t satisfy the individual coverage mandate — though electing such coverage also doesn’t disqualify someone from eligibility for premium tax credits for coverage bought through a Health Insurance Marketplace.
Changes to Dental and Vision Coverage
Previously, self-insured dental, vision and long-term care coverage were considered excepted benefits if employees could elect not to receive the coverage and those electing coverage had to pay an additional contribution for them. The proposed regs would maintain the separate election requirement but eliminate the additional contribution requirement. (Insured coverage of these types would continue to be an excepted benefit if they’re offered under a separate policy of insurance, without regard to participant contributions.)
The “separate contribution” condition has long been viewed as a formality. So, most employers will likely welcome this change in the rules because it resolves some uncertainty regarding Health Reimbursement Arrangements structured to provide only excepted benefits, such as limited-scope vision and dental coverage.
New Exception for EAPs
According to a recent IRS announcement, EAPs that don’t provide “significant benefits in the nature of medical care” are to be treated as excepted benefits. The proposed regulations add the following four conditions:
EAP benefits cannot be coordinated with benefits under another group health plan.
An EAP cannot be a “gatekeeper” (that is, participants in another group health plan can’t be required to exhaust EAP benefits before being eligible under the other plan).
EAP eligibility can’t be dependent on participation in another group health plan, nor can EAP benefits be financed by another plan.
No employee contribution can be required as a condition of EAP participation.
There had been concern that EAPs would have to offer an opt-out to allow employees seeking Health Insurance Marketplace coverage to preserve their eligibility for tax credits. Unfortunately, the proposed regulations don’t define “significant benefits in the nature of medical care.”
The surprise in the regulations is the proposed addition of a new excepted benefit: wraparound coverage. The exception applies to coverage that “wraps around” and supplements employee-purchased individual policy coverage (including coverage bought via a Health Insurance Marketplace). Specifically, the wraparound coverage must:
Provide benefits in addition to essential health benefits (which, by law, individual policies must cover), or
Reimburse services that are out-of-network under the individual policy.
The coverage in question may also address both of these points, as well as cover applicable cost-sharing under an individual policy.
A number of other conditions are proposed for this exception, however, including that the employer must sponsor a group health plan providing minimum value coverage (called the “primary plan” under the regulation). The primary plan must also be affordable for a majority of eligible employees, and only individuals eligible for the primary plan may be eligible for the wraparound coverage. The total cost of the wraparound coverage (employer and employee portions) must not exceed 15 percent of the primary plan’s cost of coverage.
In addition, the proposed regulations make the wraparound coverage subject to certain health care reform mandates that wouldn’t otherwise apply to excepted benefits. Specifically, the wraparound coverage can’t discriminate on the basis of health status or impose any preexisting condition exclusion. What’s more, as a condition of excepted benefit status for the wraparound coverage, neither the wraparound coverage nor the primary plan may discriminate in favor of highly compensated individuals.
Several aspects of the proposal remain unclear, including what constitutes a “majority” of eligible employees and how affordability is to be determined.
For many employers, the most significant elements of these new proposed regulations affect dental and vision benefits. But the changes to the treatment of EAPs and wraparound coverage are also critical for employers that offer these options or might consider doing so. Overall, it’s highly advisable to review your company’s benefits plan in total to see which offerings may now qualify as excepted.