Now that both the "Patient Protection and Affordable Care Act" (PPACA) and the reconciliation "fixer" bill, the "Health Care and Education Reconciliation Act" have been signed into law, employers must take a new look at the offering of health insurance benefits. This below is not legal advice, but is intended to serve as an outline to the new realities employers face in this landscape of compliance responsibilities. Businesses face important choices to include:

• Offering vs. Non Offering: Small Business Tax Credit; Plan Requirements; Plan Costs vs. Penalty Costs; Vouchers; Affordability Penalties for Offering Firms; Employees’ Subsidy Eligibility
• Plan Cost Considerations: Purchasing Traditional Insurance; Self-Insuring; Sending Employees to the Exchange
• Other Benefit Considerations: Long-Term Care; Retiree Prescription Drug Plans; Compensation: Salary vs. Benefits; Consumer-Directed Account Options

Today we will look at the first of these: To Offer, or Not to Offer?

Small Business Tax Credits: Employers of different sizes have different concerns here. The smallest employers (those with 25 or fewer employees and an average workforce salary of $50,000 or less) may wish to consider utilizing the small business health insurance tax credits. These credits may pay for up to half of the costs of providing health insurance to employees, and will last two years past the creation of Exchanges (the credit is 35 percent before 2014 and 50 percent for two years after). However, there is no transition after the two year cutoff, so for some firms costs could double the next year, or they may be forced to drop a benefit that employees had relied upon or grown accustomed to.

Employers with between 25 and 50 employees are not eligible for subsidies, and will not be fined for failing to offer health insurance; however, if they do offer a plan, the plan will need to meet essential benefit and actuarial standards, or employees will still be subject to the individual mandate penalty.

Plan Requirements: In order to be a qualified health plan (and thus to exempt an individual from the individual responsibility penalty and an employer from the shared responsibility penalty), a health plan must meet both the actuarial requirements enacted in the PPACA (generally a 60 percent actuarial value), as well as cover all of the "essential benefits." The essential benefits will be promulgated by the Secretary of Health and Human Services prior to the mandates taking effect in 2014.

Plan Costs vs. Penalty Costs: For employers with more than 50 employees who choose not to offer coverage, no fines will be levied if all employees’ incomes are above 400 percent of the Federal Poverty Level (FPL). If any employees are below 400 percent of FPL, the likely fine will be $2,000 times the number of employees minus 30 (provided that at least one employee gets an Exchange credit). The same goes for employers who have plans that do not meet government requirements. An employer’s number of employees is calculated via adding all employees who work 30 or more hours a week, to the number of "full-time equivalent" workers (roughly translated as, if one adds up the hours per week of all the part-time employees, how many times this can be divided by 30).

Vouchers and Affordability Credits for Offering Firms: Employers with more than 50 employees who do offer qualified health insurance to employees will also have new concerns. Many employers pay large portions of health insurance premiums on behalf of employees, and employees pay the remaining portion. If any employee’s contribution constitutes between 8 and 9.8 percent of his or her income, the employer is required to offer this employee a voucher that is equal to the employer’s expected contribution, to be used to purchase health insurance in an Exchange. If an employee’s contribution exceeds 9.8 percent of his income, he may (if income is below 400 percent of FPL) obtain an Exchange subsidy, incurring a $3,000 fine for the employer. If enough employees have low enough incomes and get Exchange credits, an employer offering a qualified plan could be fined just as much as an employer offering no health insurance and paying the free-rider penalty.

Employees’ Subsidy Eligibility: Employees who do not meet these two specific "affordability" requirements and otherwise have an offer of a qualified plan from an employer are not eligible for Exchange credits. Thus the offer of an employer plan may be disadvantageous to some employees, who would be eligible for more generous subsidies if they were not offered a qualified plan through their employer. Further, in many cases the $2,000 per employee fine will be significantly less than the average employer contribution to employees’ premiums. An offering employer will also need to list the value of the benefit on employee W-2s starting in 2011. Employers will now need to weigh the decision whether or not to offer plans against the possible savings the employer could obtain by opting for the penalties, the possible fines that low-income employees could generate, and the possible subsidies that employees could receive if there is no plan offered.

// 15 Apr 2010 Update - Part II "Managing Plan Costs and Avoiding Penalties" is here. (link corrected April 21, 2010)