Long-awaited proposed regulations from the Internal Revenue Service have resolved questions about a key health care reform law provision that would impose stiff penalties on employers not offering coverage.
“Certainty is what employers clamored for. Getting these rules is very welcome news,” said Paul Dennett, senior vice president of health care reform at the American Benefits Council.
Until the release of the proposed rules, employers had anything but certainty on the Patient Protection and Affordable Care Act provision that imposes a $2,000 per full-time employee penalty on employers with at least 50 employees that don't offer coverage, starting next year.
Speculation had run rampant in the employer community since President Barack Obama signed the health care reform legislation in March 2010 on how the penalty was to be calculated. One widely circulated interpretation was that the penalty would apply to an employer even if only one of its full-time employees — those working an average of at least 30 hours a week — weren't offered coverage.
The IRS did little to curb those fears. In May 2011, it said that it “contemplated” in forthcoming regulations that employers would have to offer coverage to “substantially all” their full-time employees to avoid the $2,000 penalty.
But it wasn't until late last month that the IRS defined what it meant by “substantially all” full-time employees. To avoid the $2,000-per-employee penalty, coverage would have to be offered to 95% of an employer's full-time employees and their dependents up to age 26, the IRS said in the proposal.
LESS THREAT OF PENALTIES
With that new standard, employers would not have to worry about being hit with penalties — which, for large organizations, could be millions of dollars — if, for example, a single employee weren't offered coverage because of an inadvertent error.
In fact, employers can exclude up to 5% of full-time employees from their health care plans and still be exempt from the $2,000 penalty.
The 95% standard also would allow employers to avoid laboriously tracking employees' hours for fear that a part-time employee not eligible for coverage could trigger the penalty by working at least 30 hours a week for several months.
“You don't have to worry so much about tracking hours for a subset of part-timers,” said Rich Stover, a principal with Buck Consultants LLC.
Other issues resolved with the proposed regulations:
• Employers operating on a controlled-group basis, in which corporate units are run independently, wouldn't face the $2,000 penalty because another group member didn't offer coverage.
• While employers would have to offer coverage to employees' dependent children up to 26, they wouldn't have to pay for it. Under the regulations, a health care reform law “affordability” penalty of $3,000 for each affected employee would apply only if the premium paid exceeded 9.5% of W-2 wages.
“Employers have free rein to charge what they want for family coverage,” Ms. Bergner said.
Unresolved is whether dependents would have a right to obtain federal subsidies to purchase coverage in public health insurance exchanges.
Jerry Geisel is editor-at-large at sister publication Business Insurance.