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Long-awaited Internal Revenue Service proposed regulations favorably resolve key questions about a key health care reform law provision that imposes stiff penalties on employers that do not offer coverage.
“Certainty is what employers clamored for. Getting these rules is very welcome news,” said Paul Dennett, senior vice president-health care reform with the American Benefits Council in Washington.
“The good news is we have certainty,” said Amy Bergner, managing director-health care practice with PricewaterhouseCoopers L.L.P. in Washington.
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 starting in 2014 on employers with at least 50 employees that do not offer coverage.
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 — was not offered coverage.
The IRS did little to curb those fears. In May 2011, the IRS said it “contemplated” in forthcoming regulations that employers would have to offer coverage to “substantially all” of their full-time employees to avoid the $2,000 penalty.
But it wasn't until late last month in the proposed regulations that the IRS defined what it meant by “substantially all” full-time employees. To avoid the $2,000 per employee penalty, coverage has to be offered to 95% of an employer's full-time employees and their dependents up to age 26, the IRS said in the proposed regulations.
With that new standard, employers do not have to worry about being hit with penalties which, for large organizations, could be millions of dollars if, for example, a single employee was not offered coverage because of an inadvertent error.
In fact, as a matter of plan design, employers can exclude up to 5% of full-time employees from their health care plans and still be exempt from the $2,000 penalty, under the IRS-proposed rules.
Through the 95% standard, for example, employers won't have to laboriously track employees' hours for fear that a part-time employee, who is not eligible for coverage, could trigger the penalty if the individual for several months worked at least 30 hours a week and was not offered health coverage.
“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 L.L.C. in Secaucus, N.J.
Numerous other issues also were resolved. For example, employers that operate on a controlled-group basis, in which corporate units run independently of one another, will not face the $2,000 penalty just because another controlled group member does not offer coverage.
“That could have been a big exposure for employers” that operate as a controlled group, said J.D. Piro, a senior vice president with Aon Hewitt in Norwalk, Conn.
In addition, the regulations make clear that while employers have to offer coverage to employees' dependent children up to age 26, employers do not have to pay for coverage. Under the regulations, a health care reform law “affordability” penalty of $3,000 for each affected employee only applies if the premium paid by the employee exceeds 9.5% of W-2 wages.
“Employers have free rein to charge what they want for family coverage,” PwC's Ms. Bergner said.
In addition, employers that do not offer dependent coverage would have until 2015 to add the coverage.
Left unresolved, though, is whether dependents would have a right to obtain federal subsidies to purchase coverage in public health insurance exchanges, if the premium charged by employers for family coverage exceeded the 9.5% affordability test.
“That is still an open issue for the IRS,” said Mr. Dennett of the American Benefits Council.
Employers still are awaiting guidance from the Internal Revenue Service on several other issues concerning the nation's 2010 health care reform law.