President Obama’s Election Day victory ends, or at least postpones, Republican promises to overhaul or repeal the Patient Protection and Affordable Care Act (PPACA), a hallmark piece of legislation from the president’s first term. This means that, starting on Jan. 1, 2014, employers with more than 50 full-time equivalent employees must either provide health care coverage for their workers or pay a penalty.
In the November feature “Pay or Play,” InsideCounsel provides a look at the key factors that companies should consider when deciding whether to comply with the law—or face a stiff fine for failing to do so.
Does the size of a business matter?
The PPACA applies to all companies with more than 50-full time employees. Employers can choose not to provide coverage, but will pay $2,000 for every worker they do not insure, excluding the first 30 employees.
A General Accounting Office review of several studies on the subject found that larger employers are less likely to drop health care coverage when the new reforms take effect, largely to remain competitive in attracting the best employees. Smaller companies with less than 100 workers, on the other hand, could face a disadvantage on the health care market, as they often can’t get the same deals on insurance as their larger counterparts, so paying the penalty may make sense to them.
How are part-time and full-time workers affected?
Currently, many employers offer benefits only to full-time employees, generally defined as those working 35 or more hours a week. The PPACA, however, has lowered the standard for full-time employment from 35 to 30 hours, leaving companies that rely on part-time employees with a difficult choice to make.
“The problem arises when you have a workforce where your criteria [for receiving health benefits] was 35 hours per week, and now the threshold is 30,” says Patricia Cain, a partner at Neal, Gerber & Eisenberg. “If you have a lot of employees working 30-plus hours but less than 35, your choices are to cut them back to under 30 hours, pay the penalty tax or offer coverage.”
What industries will be most affected by the new reforms?
Unsurprisingly, the hardest-hit industries are likely to be those that have not provided health coverage—or have provided very minimal insurance—to workers in the past, while offering insurance to executives. These include restaurant chains, retail outlets and other businesses in the service sector. A nondiscrimination clause in the PPACA now requires that companies provide the same coverage to all employees at all levels, or face a $3,000 per employee penalty.
Complicating matters for these businesses, the coverage they offer must be affordable, which is defined as coverage that does not cost more than 9.5 percent of an employee’s yearly W-2 wages. “To get out of all penalties, you have to offer [coverage] at 9.5 percent of household income. That’s a pretty low threshold for servers or shift cooks,” says BakerHostetler Partner John McGowan. “The business will incur some meaningful costs it doesn’t have in the budget right now.”
Are there hidden costs?
Ideally, the health care reforms will reduce health care costs by providing affordable preventative care and putting new regulations on health care providers. But the future of health care costs remains murky, and if they continue to rise after 2014, employers may be more likely to drop coverage.
“[The PPACA] mandates certain types of coverage be provided and mandates preventative coverage be provided at no cost, all of which are good for employees. But it doesn’t appear to take an aggressive stand toward lowering costs, and that’s what troubles employers,” says Littler Mendelson Shareholder Steve Friedman.
What role will state-run health care exchanges play?
The PPACA requires everyone to have health insurance, meaning that those employees who don’t receive it from their companies likely will have to seek it on state-run health care exchanges. But officials in some states have signaled their unwillingness to establish and oversee these exchanges, leaving the task to the federal government. And even if states do implement exchanges, some employers, particularly those operating in multiple states, are concerned about the quality and consistency of the programs.
“The big unknown is whether the exchanges will be a viable alternative to employer coverage,” says Michael Tomasek, a partner at Freeborn & Peters. “How good will the quality be? Will they function well? Will they be administered well? We just don’t know that yet. Until we know what the alternative to employer coverage is, it’s impossible for employers to make a rational choice about pay or play.”