ACA Risk Management 301: A Case Study

By Zack Pace, SVP, Benefits Consulting

A few months ago, we cautioned employers that Offering Coverage to 70% of its Full-Time Employees Does Not Eliminate its 2015 Shared Responsibility Penalty Risk. That fact hasn’t changed. However, in certain situations, completely eliminating this penalty risk might not be the best business decision.

For example, last week we consulted with an employer that:

  • Offers an adequate and affordable health plan to all employees working 40 hours or more per week
  • Is subject to Affordable Care Act (ACA) Employer Shared Responsibility when their plan year begins in 2015
  • Depends on part-time employees to efficiently meet demand spikes from their customers

As you know, the ACA defines full-time employees as those working 30 hours or more per week. Of the employees working 30 hours or more per week for this employer, about 10% work less than 40 hours per week.

Thus, this employer can eliminate the catastrophic “no coverage” Section 4980H(a) penalty during their 2015 plan year by continuing to offer adequate and affordable coverage to 90% of their employees working 30 hours or more. But, they are at risk of paying the “inadequate / unaffordable” 4980H(b) penalty on the remaining 10%.

Based upon the below analysis, this employer decided to:

  • Maintain their current 40 hours eligibility requirement
  • Continue to employ part-time labor to meet the demands of their customers
  • Risk paying the 4980H(b) penalty risk on a small percentage of their population

Analysis

Known Variables:

  • Monthly employer contribution towards single coverage in the health plan: $375
  • Monthly employee contribution for single coverage: $125
  • 4980H(b) penalty risk: For each of the employees working 30 hours or more per week that are not offered adequate and affordable coverage and that purchase coverage on an ACA Exchange and qualify for premium assistance, the penalty is $250 per month ($3,000 maximum per year, subject to indexed annual increases)

Evaluating the risk:

  • While the $375 could be deductible and the $250 is not, the net employer cost to provide single coverage in the health plan exceeds the cost of the penalty
  • The $250 penalty only accrues in the months when the employee works full-time hours and receives a premium tax credit, while the $375 premium cost is paid for each month of the employee’s enrollment
  • Some of employees working less than 40 hours but more than 30 hours per week qualify for the ACA Variable Hour Employee safe harbor. Those that qualify and do not average 30 hours or more during the Standard Measurement Period preceding the 2015 plan year generally cannot create a 4980H(b) penalty risk during the 2015 plan year
  • If the individual does not purchase coverage via a State or Federal ACA Exchange, the 4980H(b) penalty risk for that individual is eliminated
  • If the individual purchases such coverage but isn’t eligible for premium assistance, the 4980H(b) penalty risk for that individual is also eliminated.
  • Meanwhile, if the employer offers these employees adequate and affordable coverage and the employees decline it, both the $375 monthly cost and the 4980H(b) penalty risk are eliminated.

Unknown Variables:

  • How many individuals would take the medical plan, if offered?
  • How many individuals would trigger the penalty?

Everything changes for the 2016 Plan Year

When their 2016 plan year begins, the catastrophic “no coverage” penalty will be triggered if adequate and affordable coverage isn’t offered to 95% (versus 70%) of their employees working 30 hours or more. Thus, at that time, they plan on offering coverage to all employees working 30 hours or more. But, who knows what else might change with the ACA between now and then. . .

Would mitigating but not eliminating the 4980H(b) penalty benefit your business in 2015?

Further Reading:

  1. CBIZ Bulletin: Exploring the Final Employer Shared Responsibility Regulations
  2. Treasury FAQ Listing: Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act