With a Year to Go, Is Obamacare Taking Shape to Favor Expansive — and Expensive — Coverage?

As the business community continues waiting for practical guidance on the Patient Protection and Affordable Care Act (ACA), the IRS has recently proposed regulations illustrating how it believes companies should qualify as “large employers” falling within the ACA’s mandates and what type of coverage it feels those employers must provide to avoid penalties. Not surprisingly, the IRS approach not only overwhelmingly favors employer coverage, it also makes providing qualifying health benefits a potentially expensive proposition. The ACA requires companies with 50 or more full-time workers to provide health benefits to at least 95 percent of full-time employees or pay a $2,000 per-employee penalty (that mercifully excludes payment for the first 30 full-time employees). In its 144-page set of proposed regulations and accompanying Questions and Answers page, the IRS outlines what it thinks should qualify as a full-time employee for purposes of the 50-employee threshold: any worker who is compensated for — not who actually works — 30 hours in an average week. These 30 hours thus include, in a departure from most state and federal conceptualizations of “hours worked,” all paid hours for things like vacation, jury duty, voting time, and even military duty.

The IRS’s approach also ignores the “everyday” meaning of “full-time employee,” focusing instead on full-time equivalents, meaning part-time employees working under 30 average hours per week will count toward the 50 full-time employee threshold because their hours will be combined to create full-time equivalents. For example then, two 15-hour per week workers will count as one full-time employee, and three 20-hour per week employees will count as two for purposes of triggering the 50 full-time employee threshold.

Coupled with these parameters seeking to compel employers to provide health benefits, the proposed regulations also create potentially substantial costs necessary to satisfy the insurance mandate and avoid penalties. The IRS proposes that if an employer does not provide qualifying “affordable” coverage to 95 percent of full-time employees, and any one of those employees receives a subsidy or tax credit intended to allow purchase of coverage on an insurance exchange, the employer must make a $2,000 per-employee “shared responsibility payment.” The cheapest coverage option necessary to avoid that penalty cannot exceed 9.5 percent of any full-time employee’s household income, meaning that a reduction in an employee’s household income through events entirely beyond an employer’s control (such as a family member leaving the workforce) could cause an employer’s coverage to no longer satisfy the ACA’s requirements. The obvious concern with such proposed provisions is that an employer could provide health benefits to employees at a level it believes satisfies the ACA, only to learn later that it also must pay substantial penalties because of events outside its control or knowledge. Adding to the potential cost paradigm, the IRS, in connection with the federal Health and Human Services Department, proposes that employer coverage must meet a minimum value threshold based on a combination of co-payments, deductibles, and other cost factors, determinable through an as-yet undeveloped automated tool employers can use to see if their coverage options qualify.

What the IRS has thus shown is that it wants to impede strategies to avoid qualifying as a large employer. Additionally, if they become final regulations, the 9.5 percent of household income affordability requirements also suggest that employers choosing to provide health insurance may want to ensure at least one coverage option does not require a premium contribution greater than 9.5 percent of the lowest-paid full-time employee’s annual compensation so the employer can ensure it does provide health insurance coverage to employees and still have the IRS come calling for penalties.

It is important to remember that these IRS regulations are still in the proposal stage, with public comment due by March 18, 2013, so there may yet be some evolution to them. We also have a year to go before the ACA’s mandates become effective on January 1, 2014, and employers can certainly expect more developments in the coming months. However, as many employers expect their overall labor costs to rise, particularly those in industries where health insurance coverage is not widespread, each such development becomes a key factor in business planning for 2014 and beyond.