This article was first published in the April 2013 International edition of Accounting and Business magazine.
Britain has a national health service. America’s answer is a corporate healthcare service in which most citizens get medical insurance through their employer. Despite the system’s many drawbacks, President Barack Obama’s Affordable Care Act will set it in stone.
For most of the modern period, companies saw offering healthcare coverage to employees as an optional perk as a way of winning over the best workers. Come 1 January 2014, when the new law comes into full effect, large employers must offer coverage or face a hefty tax penalty.
Most companies have been dreading the implementation of Obamacare, as the law has been dubbed. Jeff Saviano, global director of indirect, state and local tax for Ernst & Young, says: ‘This is not just a law that affects what health insurance companies offer. Even companies with great healthcare schemes will need to collect and hand over a great deal of information. It will take many departments working together to prepare for this.’
The first challenge is one of timing. The healthcare act was the big achievement of Obama’s first term, passed back in March 2010. So in theory companies have had nearly four years to prepare for it. In reality many companies were unsure whether the act would survive. Opponents took their case all the way to the Supreme Court, which only gave Obamacare the green light in June 2012. Even then Republican US presidential candidate Mitt Romney said he would repeal it if elected last year.
‘As a result, it is only really over the past few months that employers have really resigned themselves to implementing this law,’ says Judith Solomon, the health policy director for the Center on Budget and Policy Priorities, a think-tank in Washington. ‘That does not leave much time for implementation considering the complexity of the regulations.’
Employers are at the heart of the US healthcare system. Currently almost 60% of citizens under retirement age are provided with healthcare insurance by their employer. During World War II Uncle Sam placed restrictions on salary increases for Americans, so many companies started to offer fringe benefits such as healthcare to retain skilled workers and attract new staff.
The system was given another boost in 1943 when employer contributions to healthcare were made tax-free. Individuals paying privately for insurance were not entitled to a similar tax privilege.
Among the many problems with this employer-centric system is that it blinds citizens to the true cost of their healthcare, and many blame it for over-consumption and spiralling costs. Workers also lose their healthcare if they lose their job, and it has become a bureaucratic burden for companies.
Still, the system has become so entrenched that the Obama administration had no alternative but to work with it. The Affordable Care Act further formalises the role of companies in providing health insurance. After 1 January 2014 large companies that fail to provide affordable and minimum quality coverage will be penalised. ‘The act gives corporate health insurance the air of a public requirement,’ says Gary Claxton, a scholar at the Kaiser Family Foundation and a former deputy assistant secretary for health policy at the US Department of Health. ‘That means far more public scrutiny and degree of stigma for those who don’t offer coverage.’
The law applies to any employer – US or foreign-controlled – with more than 50 full-time staff or equivalent part-time staff. Even charities and other non-profit organisations not subject to income tax have to comply. Nor can companies escape the law by counting each subsidiary as a separate entity – workforce size is based on the overall size of the parent or controlling group.
While most companies would consider an employee full-time only if they worked at least 40 hours a week, the act considers an employee to be full-time if they put in more than 30 hours a week over the course of a month – a total of 130 hours a month, or the equivalent of working between 9am and 3pm. This is a headache for companies – particularly in the retail and hospitality sectors – with large numbers of lower paid staff, whose schedules are hard to predict over the course of a year. Some shopworkers might qualify for insurance one month and not the next.
‘For companies that have a lot of seasonal workers this can be really hard to track,’ says Saviano. ‘This calculation could end up causing a lot of heartburn.’ Thankfully, employers will be given a certain period of time to judge the hours that an individual is working if they are in a grey zone between full and part-time.
Having figured out whether the act applies to their organisation, companies need to calculate what to offer. They are obliged to offer insurance only to full-time employees and their dependants; this covers any children, including foster children, but not spouses. The law also requires the insurance to be affordable and of minimum value. In terms of affordability, the insurance premium should not cost workers more than 9.5% of their household income. In terms of minimum value, employers must foot the bill for at least 60% of the cost of benefits.
The company’s responsibility does not end there. Since all Americans will be required to buy some form of coverage, workers whose employers have not offered coverage will have to seek an alternative. At this point they can turn to health insurance exchanges (forums that each state must set up) that will provide a market where insurers can offer their wares. The exchanges will also assess whether individuals qualify for government assistance in buying coverage – a premium tax credit. To do so a worker must earn between 100% and 400% of the national minimum wage (at present US$11,000 a year). They must also work for an employer either not offering insurance or whose policies do not meet the affordability and quality standards.
If a company does not offer coverage, all it will take is a single employee qualifying for this tax credit at an exchange to land them with an extra tax bill. This bill will be equivalent to $2,000 for each full-time employee that works at the company – a potentially formidable penalty. Where a company does offer insurance but does not meet the quality or affordability standard, the tax is equal to $3,000 for each employee who qualifies for the credit or $2,000 for the total number of full-time staff – whichever is the lesser amount.
Since it is these exchanges that will trigger penalty taxes, companies need to ensure that they properly manage their communications with these bodies. Once an employee goes to an exchange and claims that a company’s coverage is sub-par, the exchange will contact the employer to verify this. Companies will then have 90 days to challenge any claim they are not offering adequate coverage.
‘Companies may get data from multiple exchanges since every state will have one,’ says Helen Morrison, a principal at Ernst & Young and a former official at the US Treasury.
Handling notices from the exchanges might not be easy. There will be 50 exchanges and some employers will have multiple locations. ‘This will be a hot potato within many companies,’ says Saviano. ‘Some companies may not even be able to find the potato.’
The upshot is that this complicated law will put additional requirements on companies to collect and interpret data about their employees. For many organisations this may require new systems and IT processes, Ernst & Young warns. Employers will have to monitor communications with a host of insurance exchanges. ‘Many parts of an organisation will need to be mobilised to cope with these new pressures,’ warns Saviano.
The healthcare law is likely to have many positive effects. Most notably it will help ensure coverage for many of the near 50 million Americans who lack insurance. But it will also add another layer of complexity and regulation for companies operating in the US.
Q What is the deadline?
A Employers must comply with the new law by 1 January 2014.
Q Who does it apply to?
A Employers with 50 or more full-time workers – or the equivalent in part-time staff – must offer coverage to these employees and their dependants.
Q What is full time?
A Over 30 hours a week per month: 130 hours a month for a year.
Q When constitutes non-compliance?
A If at least one of the business’s employees with an income between 100% and 400% of the minimum wage qualifies for a premium tax credit when buying their own health cover.
Q What is the penalty?
A If an employer fails to offer minimum coverage, the tax is $2,000 multiplied by the number of full-time employees.
Alternatively, if the company offers coverage that is unaffordable or below a certain value, it must pay the lesser of $3,000 times the number of employees getting state assistance with premiums or $2,000 times the total number of full-time employees.
Q What is affordability and value?
A Premiums may not cost over 9.5% of household income and a plan must pay for at least 60% of the cost of benefits.
Christopher Alkan, journalist based in New York