By Susan M. DiMickele, Esq., and Tara A. Aschenbrand, Esq., Squire Sanders LLP 

(Susan M. DiMickele, a partner at Squire Sanders LLP in Columbus, Ohio, co-leads the firm’s labor and employment practice group.  She specializes in labor, employment, contracts, collective bargaining and dispute resolution matters.  Tara A. Aschenbrand, an associate in the firm’s labor and employment practice group, handles federal, state and local employment litigation matters and counsels employers on laws and policies.)    

The U.S. Supreme Court has spoken and upheld the constitutionality of the Patient Protection and Affordable Care Act.  Now what?  Employers have a few options: comply with the law, pay the penalty or structure the workforce so as not to be subject to the law.   

WHAT IS THE BOTTOM LINE?  

Although there are many new requirements under the Affordable Care Act, the heart of the law requires that “large employers” offer a medical plan that provides “minimum essential health benefits” to their full-time employees or pay a tax effective Jan. 1, 2014.¹  Essentially, this requires large employers to provide a comprehensive set of medical benefits, including prescription drug coverage.  The act does not require dental or vision coverage.   

The Affordable Care Act defines a large employer as an employer with 50 or more full-time employees.²  Unlike other laws, the ACA defines full-time employees as any employees who work 30 or more hours per week.³  Although the act does not require large employers to provide insurance to part-time employees, part-time workers can be crucial in determining whether the employer meets the threshold number of employees and whether the employer is subject to the law.   

For example, the law requires that all hours worked by part-time employees in a month be aggregated and divided by 120 to determine the number of full-time equivalents.  When an employer has 50 full-time employees (or a combined total of 50, including the full-time equivalents), the employer is subject to the tax.   

THE TAX 

There are two possible taxes that employers who are subject to the mandate may have to pay.  The first tax applies to employers who do not provide a medical plan offering minimum essential health benefits to their full-time employees.  The second tax applies to those employers who offer a medical plan, but the plan does not provide sufficient levels of coverage or is too expensive for the employees. 

Turning to the first tax, companies that are subject to the employer mandate will be required to pay an annual tax of $2,000 if they fail to provide a medical plan that offers minimum essential health benefits to all full-time employees and their “dependents.”  They will be subject to this tax if one full-time employee who is eligible for a tax credit or cost-sharing benefit purchases coverage through an exchange.⁴   

An exchange is a one-stop marketplace where individuals and small businesses may purchase health insurance.  The ACA requires that all states establish an exchange by Jan. 1, 2014.⁵ Employees who purchase coverage through an exchange could be eligible for a premium tax credit or cost-sharing benefit if the employee’s income is at or below 400 percent of the federal poverty level and the employee is not offered an employer-sponsored plan or is not offered an “affordable” employer-sponsored plan.⁶     

This tax is calculated on a monthly basis.  In other words, employers will be taxed $166.67 per month ($2,000 annually) for each full-time employee who is employed during the month at issue.  However, there is no tax on the first 30 full-time employees.  The tax will be fully applied to all full-time employees, after the first 30, even if only one employee purchases health insurance coverage through an exchange. 

But, as discussed above, merely having a plan that provides minimum essential health coverage does not necessarily insulate employers from a tax.  Employers will be subjected to a $3,000 per year tax if one or more employees who are eligible for a tax credit or cost-sharing benefit purchases coverage through an exchange.⁷ This may happen if the plan provided by the employer fails to provide a sufficient amount of coverage or if the plan is too expensive for the employee.  In such instances, the employer will be subject to this tax, which is designed to ensure that employers provide a competitive plan.  Like the tax for employers without a plan, this tax is also calculated on a monthly basis.   

Unlike the tax for employers without a plan, however, employers will only be required to pay the tax for those employees who actually purchased coverage through an exchange.  Accordingly, this tax will be $250 per month ($3,000 annually) for each full-time employee who purchases coverage through an exchange. 

EMPLOYER’S CHOICE: COMPLY OR PAY 

Employers may continue to conduct the cost–benefit analysis of providing the required minimum health benefits or paying a tax.  In fact, after doing the math, some employers have determined that it may be economically advisable to simply pay the tax.   

Although simple economics might persuade an employer to pay the tax, employers should proceed with caution. Congress could increase penalties if the tax is not a sufficient deterrent.  In addition, employers could lose valuable or desirable employees or candidates to competitors who provide health insurance.   

EMPLOYER’S CHOICE: STRATEGIC STRUCTURING OF THE WORKFORCE 

Besides simply paying the penalty or providing health care benefits to employees, employers can limit or reduce any increased cost by strategically structuring the workforce to consciously stay below the threshold of 50 employees or limit the number of full-time employees.   

Employers can design a workforce that relies on individuals other than full-time employees to conduct business.  The non-traditional workforce includes part-time employees, independent contractors, temporary workers and seasonal workers.  These types of non-traditional arrangements can benefit employees who desire greater flexibility.  In addition, the arrangements can benefit employers who wish to conduct business in an efficient and cost-effective manner. 

Part-time employees: As noted above, the ACA only requires large employers to offer health coverage to full-time employees.  Although part-time employees are aggregated together for purposes of determining whether the employer meets the definition of a “large employer” subject to the tax, those aggregated part-time workers are still not entitled to receive coverage.   

Therefore, a hypothetical employer could have 1,000 part-time employees and be classified as a “large employer” under the ACA.  However, if that same theoretical employer had no full-time employees, it would not be required to provide health coverage to anyone.  

Independent contractors: Depending on the type of work, some employers can use independent contractors to provide services traditionally performed by full-time employees.  Independent contractors do not count as employees when determining whether the employer meets the minimum threshold as a “large employer,” nor will independent contractors be entitled to health coverage if they are providing services for a “large employer.”   

Employers must proceed with caution regarding increasing the use of independent contractors, since misclassifying an employee as an independent contractor can result in adverse consequences beyond the ACA.  Simply designating an individual as an independent contractor is not sufficient.  Courts conduct a multi-factor analysis in determining whether an individual is properly classified as an independent contractor.   

Although courts use different factors in analyzing the relationship, they generally engage in one of two tests: the right-of-control test or economic realities.  The right-of-control test is based on the premise that the independent contractor has the right to control the manner and means of accomplishing the results desired.  The economic realities focus on whether a worker is economically dependent on the employer for his or her livelihood.   

Temporary workers: Employers can choose to structure their workforce or groups within the workforce to include more temporary workers with the expectation that the temporary agencies will provide the required insurance.  Although staffing agencies might provide such coverage, employers should expect to see the increased costs passed through in their contracts with the temporary staffing agencies.  Further, employers should be aware that joint-employer liability applies to the employer’s conduct.  If a court determines that the employer is a joint employer with the temporary agency, it can be liable for a variety of employment-related laws.   

Although courts utilize various tests to determine whether an employer is a joint employer, five factors generally are considered:  

•           The extent of the employer's control and supervision over the worker, including directions on scheduling and performance of work. 

•           The nature of the occupation and skill required, including whether skills are obtained in the workplace. 

•           Responsibility for the costs of operations (such as equipment, supplies, fees, licenses, the workplace and maintenance of operations). 

•           The method and form of payment and benefits. 

•           The length of the job commitment, expectations or both. 

The degree of control exerted by the employer is the most important of these factors.  Currently, it is unclear whether the courts would find such liability in the context of the ACA.   

Seasonal workers: The use of seasonal workers may allow some employers to escape the ACA’s insurance mandate.  The Internal Revenue Service has proposed a seasonal worker exception that would permit employers to escape the mandate if the employment of seasonal workers was the reason for the employer’s classification as a large employer.  Such employers will not be subject to the act if the employer uses the services of seasonal workers, the employer’s workforce was only over 50 full-time employees for 120 days or less during the preceding calendar year and all of the employees in excess of 50 full-time employees were seasonal workers.  Accordingly, using the services of seasonal workers could allow some employers who are very close to the threshold of 50 to escape the insurance mandate contained in the ACA. 

As with all strategic decisions, there are advantages and disadvantages.  Although exposure or costs may be decreased by increasing the use of non-traditional workers, employers may find that it is increasingly difficult to attract and retain good employees.  In addition, employers who once held a competitive advantage by providing health insurance to their employees will probably lose that advantage.   

PROTECTION FROM RETALIATION  

As with most laws, the ACA protects employees from discrimination and retaliation.  As noted above, employers are only forced to pay a tax in certain situations if an employee who is eligible for a tax credit or cost-sharing benefit purchases coverage through an exchange.  Accordingly, such an employee has the potential to cost his or her employer significant sums of money by making the decision to purchase insurance through an exchange.   

Understanding that some employers might react negatively toward an employee who makes this decision, the ACA contains anti-discrimination and anti-retaliation provisions.  An employee who believes he or she was discriminated against or retaliated against by an employer based on the decision to purchase health coverage through an exchange will have a cause of action against the employer.  In addition, the law also provides “whistle-blower” protection to any employee who reports a violation of any of the act’s mandates.   

Because the ACA created additional classes of protected individuals who did not previously receive special protection, employers should use this time to train supervisors regarding the practical employee-relations issues related to the act.  Employers cannot take adverse action against employees or candidates (e.g., discipline, suspend, demote or terminate) simply because the person purchased coverage through an exchange.  Since more individuals are capable of receiving special protection under existing laws, the ability to defend a potential discrimination claim from any adverse action that employers take against employees becomes more important.   

SUMMARY 

The Affordable Care Act can significantly affect employers and the way in which they do business.  The changes required under the ACA can be time-consuming and expensive.  As a result, many employers delayed making these changes and instead waited for the Supreme Court to decide whether the ACA was constitutional before they began to implement the reforms required by the act.  Now that the Supreme Court has spoken, employers can no longer wait.  They must now consider the issues and formulate a plan for implementation.   

Notes 

1          See § 1513 & § 10106 of the Patient Protection and Affordable Care Act (P.L. 111–148), as amended by § 1003 of the Health Care and Education Reconciliation Act of 2010 (P.L. 111–152). 

2          See § 1513 of the Patient Protection and Affordable Care Act.  

3          See id. 

4          See § 1513 & § 10106 of the Patient Protection and Affordable Care Act, as amended by § 1003 of the Health Care and Education Reconciliation Act of  

5          See § 1311 of the Patient Protection and Affordable Care Act. 

6          See § 1401 of the Patient Protection and Affordable Care Act, as amended by § 1001 of the Health Care and Education Reconciliation Act of 2010.  

7          See § 1513 of the Patient Protection and Affordable Care Act. 

(The Article was originally published in Westlaw Journal Insurance Coverage, Vol. 22, Iss. 45.)