What Employers Should Know About the Affordable Care Act (ACA)

Author: Jayne Zanglein, Western Carolina University

The Patient Protection and Affordable Care Act of 2010 (ACA), often referred to as Health Care Reform, was enacted to establish near universal health care in the United States. In order to achieve this, Congress had to:

  • Implement insurance market reforms;
  • Establish health care exchanges;
  • Expand Medicaid;
  • Create incentives to deliver quality healthcare and coordinate medical treatment among doctors;
  • Increase consumption of preventative care;
  • Require transparency; and
  • Establish minimum standards for health insurance policies.

ACA Provisions That Impact Employers

Within the ACA, there are a number of provisions that employers need to know. The sections of the ACA that impact employers include:

  • Health Insurance Market Reforms;
  • State High Risk Pools;
  • Health Insurance Exchanges;
  • Individual Mandate;
  • Tax Credits for Small Employers;
  • Subsidies for Low Income Individuals;
  • Employer "Pay or Play" Provision;
  • Automatic Enrollment;
  • Employer Notice to Employees of Exchanges;
  • Employer's Returns to the IRS and Disclosures to Employees; and
  • Tax Provisions.

Health Care Reform Premises

Health care reform is premised on several assumptions.

  • First, in order to achieve near universal health care, it must be affordable and guaranteed. The ACA limits the cost of insurance and provides subsidies to low income residents. Additionally, the ACA guarantees health coverage through market reforms and requires automatic enrollment of new employees.
  • Second, health care reform must avoid the problems of adverse selection by forming a large risk pool that includes healthy people as well as those with pre-existing conditions. This premise led to the enactment of:
    • Provisions that require coverage of individuals with pre-existing conditions;
    • The extension of coverage to young adults under age 26;
    • Mandatory coverage of all individuals who are not otherwise insured through the individual mandate; and
    • The state high risk pools.
  • Third, in order to create adequate healthcare, there must be minimum standards. This provision led to the concepts of essential health benefits and first dollar coverage of preventative care.
  • Fourth, employers must have access to affordable health care. Health care exchanges and tax credits for small employers were created to fill this need.
  • Finally, employers must be convinced to offer health care to their employees. This is accomplished through the "pay or play" employer mandate. The IRS and employees are notified of the extent of health care coverage provided by employers to employees through informational tax returns, W-2 forms and notices to employees.

Individual and Group Market Reforms

The individual and group market reforms are an integral part of the ACA. These provisions were the first to go into effect. They became effective for plan years beginning on or after September 23, 2010.

Individual and group market reforms include:

  • Prohibitions on pre-existing condition exclusions for children under age 19;
  • Restrictions on lifetime and annual limits, which must be completely eliminated by 2014;
  • Prohibition against insurers on rescissions of coverage except in the case of fraud or intentional misrepresentation;
  • First dollar coverage of most preventive health services;
  • Extension of dependent coverage to age 26;
  • Dissemination of a uniform Summary of Benefits and Coverage (SBC) to aid individuals in comparison shopping and to give enrollees advance notice of material changes;
  • Provision of additional information to foster transparency;
  • Nondiscrimination rules relating to health status and genetic information for insured plans;
  • Incentives to ensure the quality of care;
  • Decreases in the cost of health care coverage through the imposition of medical loss ratios and the requirement that insurers give premium rebates to enrollees if they fail to meet the loss ratio;
  • New claims procedures, which include external reviews; and
  • Patient protections including choice of health care providers, coverage of emergency care and cost sharing limits.

Health Insurance Market Reforms

The individual and group market reforms are supported by the health insurance market reforms. These rules generally become effective for plan years that begin on or after January 1, 2014. Health insurance market reforms include:

  • Fair health insurance premiums;
  • Guaranteed issue and availability;
  • Guaranteed renewability of insurance;
  • Prohibition on pre-existing condition exclusions for adults;
  • Nondiscrimination based on health status;
  • Prohibition on discrimination against providers who are acting within the scope of their license;
  • Comprehensive health insurance coverage, which includes essential health benefits;
  • Limitations on waiting periods (maximum of 90 days); and
  • Restriction on wellness program design and reasonable alternative requirements.

State High Risk Pools

States were required to either establish a state-run high risk pool or participate in the federally administered pool. This requirement was effective on March 23, 2010, and remained in place until the requirement that states maintain health market exchanges went into effect on January 1, 2014.

Employers that offer financial incentives to encourage employees to disenroll from the employer's health plan and enroll in a high risk pool must reimburse the high risk pool for the individual's medical expenses.

Health Insurance Exchanges

The ACA required all states to either create a state health insurance exchange or join a regional exchange. The exchanges serve as insurance marketplaces for small employers and individuals. In states that chose not to set up an exchange, the federal government operates a federally facilitated exchange.

Additionally, the ACA required the creation of the Small Business Health Options Program, called SHOP exchanges. The ACA gave states the flexibility to create separate small business exchanges, or to combine them with the individual market.

Individual Mandate

Starting in 2014 (becoming fully effective by 2016), the ACA imposes a penalty (or tax) on individuals who do not have minimum essential health coverage. Individuals must pay $695 (indexed for inflation) or 2.5 percent of income earned over a certain threshold.

Minimum essential coverage includes:

  • Government-sponsored programs including Medicare, Medicaid, the Children's Health Insurance Program, coverage for members of the US military (including TRICARE, veterans' health care, health care for Peace Corps volunteers, and health care through the Defense Department's Nonappropriated Fund Health Benefits Program);
  • Eligible employer sponsored plans including governmental group health plans or group health insurance coverage, any other plan or coverage offered in the small or large group market within a state, or a grandfathered plan;
  • Plans in the individual market within a state;
  • Grandfathered group health plans; and
  • Other coverage as recognized by regulation.

The US Supreme Court upheld this individual mandate in National Federation of Independent Business v. Sebelius.

In preparation for this mandate, employers were required to report the cost of all employer sponsored group health care coverage on 2012 W-2 forms, which were to be distributed to employees in 2013.

Tax Credits for Small Employers

As an incentive for small employers to provide minimum essential health coverage to their employees, the ACA offers a tax credit to eligible small employers. An eligible small employer is an employer that:

  • Employs 25 or fewer full-time equivalent employees;
  • Has an average wage of less than $50,000 per full-time equivalent employee; and
  • Uniformly pays at least 50 percent of the premium for each employee enrolled in the employer's health care plan.

Business owners and their family members are not included in the calculation of full-time equivalent employees, the average wage or the uniform employer paid premium.

The amount of the tax credit depends on the number of employees. The full amount is available for employers with 10 or fewer full-time equivalent employees with average annual wages of $25,000 or less. Such employers are entitled to a credit of 35 percent of the premiums paid by a for-profit employer or 25 percent for a nonprofit employer. The tax credit increases in 2014 to 50 percent (for a for-profit employer) and 35 percent (for a nonprofit employer).

The credit is reduced on a sliding scale for employers with between 11 and 25 full-time equivalent employees and for employers with average employee wages between $25,000 and $50,000.

As of 2014, the Tax Code limits the tax credit to two consecutive years.

Subsidies for Low Income Individuals

Under the ACA, eligible low income employees and their families are entitled to a premium assistance tax credit to subsidize the cost of health insurance through an exchange. This credit is paid directly to the insurer. An employee is eligible for the tax credit if:

  • The employee's household income is between 100 percent and 400 percent of the federal poverty line, and, if married, the employee files a joint return; and
  • The employee may not be claimed as a dependent by another taxpayer, and either:
    • The employee is eligible for minimum essential coverage through the employer, but has chosen not to participate;
    • The employee is enrolled in minimum essential coverage through the employer that covers less than 60 percent of medical costs; or
    • The employee is enrolled in minimum essential coverage through the employer and the employee's premium under the plan exceeds 9.5 percent of household income.

The exchange will notify employers of any employees who are qualified for a premium assistance credit because the employer's health plan is either unaffordable (i.e., more than 9.5 percent of household income) or not comprehensive enough (i.e., does not cover at least 60 percent of medical costs). The notice must:

  • Identify the employee;
  • Inform the employer that the employee is eligible for the premium tax credit;
  • Inform the employer that if it has 50 or more employees it may be subject to an excise tax; and
  • Notify the employer of its right to appeal the decision.

In addition, the ACA also provides for cost sharing subsidies for certain low income individuals who cannot pay their out-of-pocket expenses. To be eligible, the individual must be enrolled in a silver plan, and must make more than 100 percent and less than 400 percent of the federal poverty line based on family size. The size of the reduction depends on the individual's income level. For example, a person at 100 percent of the federal poverty line will receive a 66.66 percent reduction, a person at 200 percent will receive a 50 percent credit and a person at 300 percent will receive a credit of 33.33 percent.

The exchange will notify employers if they have any employees who are qualified for this reduction in cost sharing. The employer or its insurer or plan must reduce the cost sharing requirements for those individuals who received a premium credit for that month. If an employer has an employee who is eligible for the cost sharing subsidy, the employer must pay an excise tax.

An employer that discriminates against or terminates an employee because of eligibility for premium assistance credit violates the Fair Labor Standards Act.

Employer "Pay or Play" Shared Responsibility Provision

Beginning in 2016, the ACA requires employers with 50 or more full-time employees, including full-time equivalent employees (FTEs), to either offer minimum essential health care coverage to at least 95 percent of full-time employees and their dependents or pay a penalty.

Final regulations for the shared responsibility mandate, issued in February 2014, provide transition relief for employers. In 2015, only employers with 100 or more full-time employees and FTEs are subject to the penalty if they do not provide affordable and adequate coverage to at least 70 percent of full-time employees and their dependents.

The penalty is imposed if the employer does not offer the minimum required health insurance and a state exchange certifies that a full-time employee is entitled to a premium assistance tax credit or a cost sharing subsidy. The penalty is $2,000 for each full-time employee in excess of 30. For 2015 only, the penalty is $2,000 for each full-time employee in excess of 80.

The penalty is increased to $3,000 if the employer offers the minimum essential health insurance and has at least one low income full-time employee who is eligible for a tax credit because the employer's health care coverage does not cover at least 60 percent of medical costs or because the premium is unaffordable (i.e., exceeds 9.5 percent of the employee's household income). The penalty is the lesser of:

  • $3,000 multiplied by the number of employees who receive the premium assistance tax credit; or
  • $2,000 multiplied by the number of full-time employees, minus 30 (minus 80 for 2015 only).

Automatic Enrollment

The ACA amended the Fair Labor Standards Act to require employers with 200 or more employees to automatically enroll all new employees in employer provided health insurance at the end of the plan's waiting period. The employer must allow the employee to opt out of coverage or elect a different coverage option.

Employers do not need to comply with this provision until final regulations are issued.

Employer Notice to Employees of Exchanges

The ACA amended the Fair Labor Standards Act to require employers to notify employees of the state exchanges. The notice must include:

  • An employee's right to purchase insurance through a state health insurance exchange;
  • The services provided by the exchange;
  • Contact information for the exchange;
  • An employee's potential eligibility for government subsidies; and
  • The possible loss of an employer subsidy if the employee purchases insurance through the exchange.

Current employees should have received this notice by October 1, 2013. New employees must receive this notice within 14 days of their start date.

Employer's Returns to the IRS and Disclosures to Employees

Information Reports on No Coverage or Subsidized Coverage and Disclosures to Employees

Under Internal Revenue Code (IRC) Section 6056, each applicable large employer (ALE) that is required to meet the employer shared responsibility provisions must file a tax return with the IRS, which includes the following information:

  • The ALE's name, address and employer identification number (EIN);
  • The name and phone number of the ALE's contact person;
  • The calendar year for which the information is reported;
  • A certification as to whether the ALE offered its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan, by calendar month;
  • The months during the calendar year for which MEC under the plan was available;
  • Each full-time employee's share of the lowest cost monthly premium (self-only) for coverage providing minimum value offered to that employee under an eligible employer-sponsored plan, by calendar month;
  • The number of full-time employees for each month of the calendar year;
  • The name, address and taxpayer identification number (TIN) of each full-time employee during the calendar year, and the months, if any, during which the employee was covered under the plan; and
  • Any other information specified in forms, instructions or published guidance.

The employer must also notify each full-time employee listed on the employer's information return, in writing, of the information included on the return regarding that employee as well as the employer's name, address and EIN.

Final regulations issued in March 2014 provide ALEs with two alternative reporting methods:

  1. Certification of a qualifying offer; and
  2. Reporting without separately identifying full-time employees.

See Health Care Benefits > Annual Information Reporting Related to Health Insurance Coverage.

Information Reports on Minimum Essential Coverage and Disclosures to Employees

Under IRC Section 6055, any entity providing MEC, including self-insured employers, must file a return that includes the following information:

  • The name, address and EIN of the reporting entity required to file the return;
  • The name, address and TIN (or birth date if a TIN is not available) of the primary insured;
  • The name and TIN (or birth date if a TIN is not available) of every individual covered under the policy or plan;
  • The months for which, for at least one day, each covered individual was enrolled in coverage and entitled to receive benefits; and
  • Any other information specified in forms, instructions or published guidance.

In addition to the above, information returns reporting MEC provided by a health insurance issuer through an employer's group health plan must also include:

  • The name, address and EIN of the employer sponsoring the plan;
  • Whether the coverage is a qualified health plan enrolled in through the Small Business Health Options Program (SHOP) and the SHOP's unique identifier; and
  • Any other information specified in forms, instructions or published guidance.

The reporting entity must also disclose to each employee listed on the return the information reported to the IRS concerning that employee, the phone number for an individual designated as the reporting entity's contact person, and policy number, if any.

See Health Care Benefits > Annual Information Reporting Related to Health Insurance Coverage.

Form W-2 Reporting Requirement

The ACA requires employers to report the cost of all employer sponsored group health care coverage on W-2 forms. The requirement applies to all private employers, as well as public and church employers. It does not apply to tribal plans.

Certain employers and plans are entitled to transitional relief until the IRS publishes guidance.

Certain employers and plans are entitled to transitional relief until the IRS publishes guidance.

Tax Provisions

Limits on Contributions to Flexible Spending Accounts (FSAs)

The ACA imposes a $2,500 limitation on salary reduction contributions to flexible spending arrangements. Plan sponsors may retroactively amend a plan to reflect the $2,500 limit, up until December 31, 2014. The $2,500 is the maximum limit. Employers may provide for a lower limit in the health plan.

The limitation only applies to health FSAs, not to dependent care or adoption assistance FSAs. In addition, the limitation does not apply to premium coverage FSAs, health savings accounts or health reimbursement arrangements.

Employer's Business Expense Deduction for Medicare Part D Subsidy

The ACA modifies the employer's business expense deduction with respect to Medicare Part D subsidies. The employer's deduction for retiree prescription drug expenses must be reduced by the amount of the excludable subsidy payments received.

Increase in Medicare Payroll Tax for High Wage Earners

The employee portion of Medicare tax is increased by an additional 0.9 percent on wages for individuals who earn more than $200,000 ($250,000 for individuals filing a joint tax return). Employers are required to withhold the additional 0.9 percent on the portion of wages in excess of $200,000 ($250,000 for individuals filing a joint tax return).

Additional Resources

Employee Benefits > Health Care Benefits

Employee Benefits > Compliance, Reporting and Disclosure Requirements

Employee Benefits > Benefit Planning and Design

Employee Benefits > Managing Health Care Costs

Employee Benefits > Health Information and Privacy (HIPAA)