Employers: Get Ready for Health Care Changes Now

Major health care changes start January 1, when most people are required to have coverage or pay a penalty for ignoring the federal mandate.

If you’re an employer, don’t dawdle over your company’s health care plan for 2014. Key deadlines loom, and a slew of decisions must be made to make sure that you and your employees are ready for this brave new world of health care. The first decision to make: Will you provide health care coverage as a benefit to employees and their families?

If yours is a small firm, you don’t have to offer health care to employees under the law, though many small companies will to attract and retain employees. The Affordable Health Care Act defines a small business as one with fewer than 50 employees working 30 or more hours a week. For companies that employ a lot of seasonal workers or people whose hours vary considerably from week to week, there’s some flexibility in calculating whether those workers count as full-timers, laid out in proposed rules from the IRS (opens in new tab).

Small firms that choose to offer health plans can buy coverage either through their state exchange, which will start enrollments on October 1, or elsewhere.

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Larger firms must offer health insurance or pay a penalty: For 2014, the penalty is $2,000 for each of the company’s full-time employees (not counting the first 30) if even one full-timer receives a federal subsidy for health insurance purchased at a state exchange. Penalties will be indexed and so will increase in subsequent years. At least to begin with, the penalty is less than the average employer cost of premiums. But it isn’t a tax-deductible expense.

Some businesses may contemplate shifting work away from full-timers to more part-timers in order to squeak in under the size limit and avoid the mandate to provide health insurance coverage. If you’re considering such a move, take care, says Karen Frost, a consultant with Aon Hewitt. Consider that two 20-hour-a-week workers may not be as efficient as a single full-timer. Also, part-timers are more likely to leave for other jobs with better hours and benefits, says Frost.

For companies required to provide health plans, another penalty looms if coverage is deemed subpar. In that case, the employer incurs a $3,000 fine for each employee who winds up buying a federally subsidized policy through the state health exchange instead of taking the company’s offering. To avoid that hit, employer policies must pay at least 60% of benefit costs, and the share of the premium paid by a worker can’t top 9.5% of the worker’s annual income, as determined by his or her W-2 statement for the previous year. The 9.5% cap applies only to the employee’s share of the premium for self-only coverage under the employer’s lowest-cost plan. So, a company can require a higher share of the premium be paid by workers whose plans cover a spouse or dependents and still be deemed to fall within the standard.

Bigger employers won’t be eligible to buy group coverage from the state exchanges for another two or three years, so they should count on using the brokers they already deal with.

The first deadline: July 31. By that time, any firm, large or small, which offers insurance must pay an annual fee of $1 for each of the average number of folks covered in 2012. The money will fund grants for research into the effectiveness of medical treatments, and that particular fee will cease in 2018.

A larger annual fee, however — around $63 a head — will be levied starting at the end of 2014 on all firms that offer insurance. Uncle Sam will send money raised through it to the states, which will, in turn, funnel it to insurers to help buffer the impact on insurance premiums from covering individuals who wind up with high medical claims. States will make the first of such payments in 2015.

By October 1, all employers must tell workers about the insurance exchanges, whether or not the employer offers insurance coverage. The notice must include contact information for the exchanges and a description of the services provided by the exchanges. The employer must also inform workers that they may be eligible for a subsidy if they buy a plan in the exchange. Notices must use plain, understandable language, be delivered by mail or e-mail and go to part-timers as well as full-time employees. The Department of Labor has developed model notices that can be used by employers (opens in new tab).

Rules on employer interactions with the exchanges are expected this summer. As yet, it’s unclear whether a state exchange will verify the employer coverage information directly with the employer or what additional information an employer must provide. It is also uncertain how employers will learn which employees have received a premium tax credit in a state exchange.

If you are self-employed, you can purchase insurance through a state exchange. And you may be eligible for a subsidy from the government to help pay for it. About one-quarter of the 22 million workers who are their own bosses are now uninsured, at least in part because rates have typically been high, particularly if there is a pre-existing health condition. Government subsidies are available for those with annual incomes up to 400% of the U.S. poverty level. For a family of four, that translates to $94,200.

Individuals whose workplaces don’t offer insurance at all or offer only coverage that falls short of the minimum standards are also eligible for federal subsidies.

Individuals can go without health insurance and pay a tax penalty instead. It’s just $95 per person, with a maximum of $285 for a family of three or more for 2014. The penalty jumps to $325 per person, with a family maximum of $975, in 2015 and then to $695 per person, with a per-family cap of $2,085, in 2016. After that , the penalty will be increased annually for inflation. You can also keep your present policy, if you have one, with no subsidy, of course.

Martha Lynn Craver
Associate Editor, The Kiplinger Letter