Health Insurance Penalty and What it Means for Employers
By: Melanie Berkowitz, Esq.
After months of debate, weeks of political wrangling and a dramatic last-minute flurry of activity, the country now has a new law pledging wide-spread health care reform.
Widely praised or condemned depending on party lines, there is no doubt that the Patient Protection and Affordable Care Act means big changes for health care providers, insurers, drug manufacturers, the uninsured, employees, small businesses and large employers. In other words -- everyone.
Trying to make sense of all 2,400 pages of the bill can be daunting. This is particularly true for employers, who will likely need to begin to respond by auditing their workplace and revising their policy changes.
So, what does an employer need to know about complying with the law?
The health care bill requires nearly all Americans to obtain health insurance. The law expects that most workers will get that coverage through their employers and has created a system of subsidies and penalties to make this possible.
If you’re an employer, the size of your workforce is significant, as the law has different requirements depending on the number of employees that your business employs.
The major aspects of the health care bill as it relates to business are described below:
What is a “small business”?
Under the Act, a small business is not specifically defined, but a number of sections of the law apply only to entities with fewer than 25 employees (for more detail see below.) However, under some sections of the law, the effective company size is 50 or 100 employees.
What are “insurance exchanges"?
Beginning in 2014, health insurance will be available to individuals and small businesses through state-run “exchanges.” These will require insurance companies to compete for business in the marketplace. The objective is to make it it easier for individuals and small businesses to obtain health insurance at a lower price.
The exchange program for small businesses, known as the Small Business Health Options Program (SHOP), will allow small businesses to pool together to increase their purchasing power. This will allow these businesses to offer health insurance to their employees at rates similar to those available to large corporations.
SHOP is available to small businesses with up to 100 employees, although states have the option to limit participation to businesses with 50 employees or less until 2016. If a business participating in SHOP grows to over 100 employees, it may continue to take advantage of the program. Beginning in 2017, states may opt to allow businesses with more than 100 employees to participate in SHOP as well.
The exchange program is also important because larger employers may be penalized if some of their employees opt to obtain insurance through an exchange and not through the company’s insurance plan (for more detail see below.)
Are employers required to provide health insurance to their employees?
Businesses with fewer than 50 employees are exempt from having to provide health insurance. However, as explained above, such smaller employers may opt to offer health insurance at a reasonable cost by participating in a SHOP exchange.
Larger businesses are subject to a number of requirements and potential penalties, depending on the number of employees they have and the type of coverage they provide:
- Automatic enrollment: Employers with more than 200 employees are required to enroll new employees in their health care plan, subject to any waiting period. Employers must provide notice of employees’ right to opt out of automatic enrollment.
- Notice of coverage options: Employers must give employees notice about the availability of an insurance exchange.
- Penalty for not providing insurance: Employers with over 50 employees that do not provide insurance must pay a penalty of $2,000 for every employee in the company if even one employee opts to obtain insurance through an exchange. However, the first 30 employees are not counted in calculation of the penalty. Example: an employer with 75 employees would pay the penalty for 45 workers, or $90,000 (45 x $2.000).
- Penalty for providing insurance that is “too expensive”: Employers with more than 50 employees that do provide insurance must pay a penalty if any of their employees obtain a subsidy to help pay for insurance. The penalty equals $3,000 per worker who uses the subsidy OR $750 for every employee at the company, whichever is less.
Is there help for small businesses to provide insurance for their workers?
From 2010 through 2013, businesses with fewer than 25 employees and average annual wages of $40,000 or less may be eligible for a tax credit of up to 35% if they pay for at least 50% of their employees’ health insurance costs.
Beginning in 2014, small businesses that purchase health insurance for their employees through SHOP can receive a two-year small business tax credit of up to 50% of the cost of the premiums.
While small businesses are not required to obtain insurance for their employees through the exchanges, the available tax credits will likely spur many smaller employers to purchase coverage for their workforce.
What special rules cover employers with fewer than ten employees?
Tax credits are available for small businesses on a sliding scale depending on the number of employees and average annual wages.
Businesses with 10 or fewer employees and average annual wages of $20,000 or less are eligible for the full 35% credit between 2010 and 2013 and then a 50% tax credit beginning in 2014.
What is the “reconciliation bill”?
As if the law itself weren’t complicated enough, the Act could not become fully effective until the Senate also passed a second bill which reconciled its version of the law with the version passed by the House. The Health Care and Education Reconciliation Act, H.R. 4872, makes various technical changes to the law as originally passed by the Senate. For example, it amends the size of certain employer penalties for failing to provide affordable health insurance.
The complexity of the Act will likely lead to the need for additional answers about how various sections of the law will be implemented over the coming weeks and months.
Monster will continue to report on changes or clarifications to the law as they become available.
None of the information provided herein constitutes legal advice on behalf of Monster.