Despite the highly publicized announcement that enforcement of the “Pay-or-Play” mandate (which requires businesses to provide health insurance to all full-time employees or face yearly penalties of up to $3,000 per employee) has been delayed until 2015, important considerations remain for businesses and consumers about how they will ultimately be affected by the Affordable Care Act. Businesses may have additional time to comply, but given the volume of new rules and changes, a number of areas still require assessment and planning.
The Placement of Limitations on Out-of-Pocket Costs for Consumers has been Delayed
The limitation on out-of-pocket costs for insured consumers has been considered one of the primary merits of the ACA. However, a report recently covered by the New York Times
and confirmed by department officials has revealed that the anticipated limit on out-of-pocket costs ($6,350 for individuals and $12,700 for families) has been stalled for one year to the benefit of many group health plans and the sponsoring employers. As a result, many group health plans will be able to charge additional amounts during 2014. Although not necessarily “new” (as the New York Times
reported, this grace period has actually been contained within a “frequently asked questions” bulletin on the website for the Department of Labor since February 2013), this extension provides insurers and employers with more time to comply with the ACA. According to government officials, the delay has resulted primarily from technological shortcomings – the inability of separate health plan sponsors and carriers’ computer systems to communicate with one another so costs can be aggregated and limits on out-of-pocket costs can be calculated. Over the next year, employers who use separate vendors to manage their medical and drug coverage should ensure their plan administrators have a plan for guaranteeing their computer systems can manage this function. In the meantime, certain insurers will have the ability to set higher limits on out-of-pocket costs or no limits at all.
Contract Workers and the ACA
As employers consider strategies for addressing ACA compliance by the new 2015 timeline, some have undoubtedly considered ways to avoid the ACA altogether. As a brief refresher on this subject, the ACA requires businesses with at least 50 full-time equivalent employees to provide health insurance to those full-time employees; otherwise, the employer must pay a penalty. The ACA provides that “full-time employees” are those who work 30 (not 40) hours per week, and “full-time equivalent employees” are determined by calculating the total hours of service for all non-full-time employees (but not more than 120 hours for any one employee) in a month and then dividing that total by 120. If this total (actual full-time employees are also added to the mix) is 50 or more, the ACA applies to your business.
This has spurred some employers to reduce employee hours below the 30-hour full-time employee threshold to avoid ACA coverage; others have simply terminated employees to reduce their numbers below the 50 full-time equivalent base; and yet other employers have taken a second look at their employee classifications to ensure they are correctly characterized as “employees” (rather than contract workers or independent contractors). Some employers have taken the opposite approach, electing not to change anything and instead increase their employee benefits spending. For those employers reducing their headcount or employee hours, special considerations should be kept in mind.
The ACA expressly gives the term “employee” the same meaning as found under Section 3(6) of the Employment Retirement Income Security Act of 1974 (29 U.S.C. § 1002(6)) (ERISA). Under ERISA, an “employee” is defined as an individual employed by an employer; and an “employer” is any person acting as an employer in relation to an employee benefit plan. The Supreme Court has construed the meaning of an “employee” under ERISA to incorporate “traditional agency law principles” for identifying the “master-servant” nature of the relationship. Nationwide Mut. Ins. Co. v. Darden
, 503 U.S. 318, 319 (1992). Specifically, the Supreme Court has pointed to “the hiring party’s right to control the manner and means by which the product is accomplished,” as well as “the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.” Id
. at 323-324. Alternatively, courts may ultimately focus on the similar, longstanding 20-factor control and direction test used by the Internal Revenue Service, which examines a number of analogous criteria like who sets the hours worked, where the work is performed, who directs or controls the sequence of the work performed, how expenses are reimbursed, who retains the right to terminate the services, among other factors. Until regulators or courts provide more guidance, it is this type of analysis that employers should be using to assess whether their workers are “employees” under the ACA.
This analysis should not be confused with the “variable hour” employee under the ACA. For new employees
whose tenure is anticipated to be of a limited duration (e.g., 4-5 months from a staffing firm per examples set out in the applicable proposed regulations), whether or not those employees constitute “variable hour” employees is another consideration. Under the ACA, an employee is a “variable hour” employee if, based on the facts and circumstances available at the employment start date (and not the aggregate turnover of the entire workforce), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week. In this case, there is no obligation to provide these new “variable hour” employees with health insurance during the initial measurement and administrative periods in which their status is being determined, and there is likewise no ACA penalty that applies for these employees during those periods (as opposed to regular full-time employees who are obligated to receive an offer of coverage within 90 days of the start date).
As businesses struggle to predict and remediate issues associated with ACA compliance, it will be critical to consider these factors when examining employee/contractor classifications and the status of new employees. While appropriately characterized independent contractors do not fall within the confines of ACA coverage for the purpose of the employer mandate discussed above, misapplication of these factors resulting in a mischaracterization of your workforce could ultimately subject your business to a host of federal and state law violations in addition to ACA penalties.