By: John L. Barlament, Kirk A. Pelikan, and Eric Rumbaugh, Michael Best & Friedrich, LLP
In March, President Obama signed into law major healthcare reform legislation that is likely to affect every citizen and every employer in the country: the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. The PPACA and the Reconciliation Act will affect nearly every group in the healthcare arena: large employers, small employers, individuals, insurers and medical providers, as well as suppliers and users of contingent labor. This article focuses mainly on changes for midsize and large employers.
The biggest change for suppliers of contingent labor appears to be that they must now either ensure that the contingent labor staff has health coverage available or pay a fine for failing to provide this coverage. Regardless of whether the supplier chooses to pay the fine or provide the coverage, this change is likely to affect the bottom line of suppliers and users of contingent labor alike.
Midsize and Larger Employers
Most midsize and large employers (those with more than 50 employees) that offer traditional health coverage will likely see the least amount of changes -- but there will still be significant changes. These changes are likely to apply to both fully-insured and self-funded plans. Significant points to note:
1. Must Offer Minimum Coverage. If an employer does not offer "minimum essential coverage," the employer likely will pay a fee of $2,000 per year per employee (calculated on a monthly basis).
2. Incentive to Subsidize Coverage. If an employer offers health coverage, an employee may choose not to select it because the employer contribution is too small and the coverage is not affordable. (The "affordability" test examines whether the employee's cost exceeds 9.5% of the employee's household income.) If the employee is eligible for a federal subsidy for coverage, the employer may be penalized up to $3,000 per year for each of these employees (calculated on a monthly basis). This appears to be an effort to ensure that employers subsidize coverage sufficiently to keep such individuals in the employer's plan, rather than the federally-subsidized individual market.
3. Must Offer Better Coverage. PPACA (as amended by the Reconciliation Act) imposes new mandates on the type of coverage that must be offered. Changes include:
- Covering adult children up to age 26 in some circumstances;
- Elimination of lifetime limits and restrictive annual limits;
- Elimination of preexisting condition exclusions;
- Required coverage of certain preventative services (e.g., immunizations and infant screenings); and
- Prohibiting a "rescission" of coverage.
These changes can be somewhat complicated. They often have different effective dates, and some changes do not apply to a "grandfathered" plan. The Reconciliation Act does provide some good news for employers struggling with how to calculate the fair market value of coverage for older dependents. Effective immediately, it appears that the Reconciliation Act provides that such coverage generally is not included in an employee's income.
4. New Reporting Obligations. Certain plan coverage information must be reported to the federal government (e.g., the aggregate cost of coverage must be reported on Form W-2).
5. Retiree Health Subsidy. An employer that offers retiree health coverage may be eligible for a subsidy from the federal government.
6. New Taxes on High-Cost Plans. The so-called "Cadillac" tax on high-cost plans remains in place, although, under the Reconciliation Act, the effective date is pushed back to 2018 and the threshold limits are increased to $10,200 for single coverage and $27,500 for family coverage.
7. Limits on Health FSAs; HSAs. Beginning in 2013, health flexible spending arrangement contributions would be capped at $2,500 per year. Additionally, beginning in 2011, PPACA restricts a participant's ability to use FSA and HSA funds to purchase unprescribed over-the-counter medications.
Small employers will face many of the same restrictions as their larger counterparts (e.g., the requirement to offer better coverage, new reporting obligations, retiree subsidies, new taxes on high-cost plans and limits on health FSAs). However, employers with 50 or fewer employees will not face the $2,000 per employee tax for failing to offer coverage. Certain small employers with fewer than 25 employees and annual wages of less than $50,000 will receive a tax credit based on the employer's contributions toward plan coverage.
Uncertain Impact: Employers with Collective Bargaining Agreements
"Grandfathering" of health plans provided for in collective bargaining agreements, whether insured or through participation in single or multiemployer trusts, is presently unclear. Numerous labor agreements have provided for "reopeners" as legislation has continued. Employers that provide health benefits pursuant to a collective bargaining agreement will want to pay particular attention to this provision.
Effect on Contingent Workforce
PPACA is generally vague as it relates to contingent workforces. However, there are a few provisions within the Act which should be of particular concern to contingent labor suppliers and to employers who utilize contingent labor. The key with all these provisions is the size of the employer's workforce and how it is determined. The size of the workforce dictates whether the employer has an obligation to meet, whether it will be subject to penalties for non-compliance, and whether government assistance is available to the employee. While these issues are applicable to all employers, it is particularly important and unclear how these rules will be applied to the contingent workforce industry.
For example, an employer's responsibilities differ depending upon its size. Large employers are required by law to provide minimum essential coverage to employees or to pay a fee for failing to do so. The PPACA does not provide a clear definition of a large employer; though it appears to be one that employs more than 50 full-time employees during the preceding calendar year. Relatively clear, right? Not really.
Like other benefit plans, certain provisions of PPACA require aggregation of employees between employers when they are part of the same controlled group. While the provisions of Internal Revenue Code (section 414(n)), relating to treatment of leased employees, are not adopted, provisions relating to the (as of yet unexercised) administrative authority to interpret Code Section 414(n) are. Therefore, it is unclear exactly how an employer is responsible for accounting for its contingent workforce.
There are also questions as to how full-time employees are determined. It appears that full-time employees are counted on a monthly basis. PPACA provides that a full-time employee is an employee who is employed on average at least 30 hours of service per week. However, employers must also account for full-time equivalent employees. A full-time equivalent employee is determined by dividing the aggregate number of hours of service of employees who are not full-time employees for that month by 120. Therefore, while not entirely clear, it appears that Congress intended that an employer's determination of whether it averaged more than 50 employees over the course of the preceding year must be performed using the monthly totals of full-time (and full-time equivalent) employees.
That said, PPACA is not devoid of references to leased employees. For example, a leased employee is counted toward the threshold eligibility determination of small employer status for purposes of obtaining the tax credits.
Employers should review the legislation carefully in order to determine how it will likely impact their health plans and businesses (or, for attorneys, their clients and their plans). Consider both the short-term changes (e.g., new mandates that are effective later this year or early next year) and long-term concerns (e.g., whether to modify the plan to avoid any "Cadillac tax" issues). Clients should be advised to discuss their situation with their benefits consultant/broker and legal counsel.
Click here to review the PPACA
John L. Barlament and Eric H. Rumbaugh are partners and Kirk A. Pelikan is an associate with the law firm of Michael Best & Friedrich LLP, headquartered in Milwaukee (www.michaelbest.com). They represent employers in labor, employment and employee benefits law matters.