A simple approach to eliminating ACA shared responsibility penalty risks
Last month, in The ACA: What’s been repealed, delayed, or retained, I asked if we’ve made Affordable Care Act employer shared responsibility more complicated than needed. This month, I’d like to explore that question, share a story and provide a quick case study highlighting the radically simple ACA easy button.
Historically, the best practice in employee benefit design has been to offer benefits employees desire at a price the employer can afford. For employers subject to ACA shared responsibility (generally those with 50 or more full-time employees plus full-time equivalents), what’s changed is that the government now regulates the definition of affordability. By now, we all know there are three affordability safe harbors:
1. Federal poverty line (FPL)
2. Form W-2
3. Rate of pay
While the Form W-2 and rate-of-pay safe harbors require precise monitoring and lots of math, I’m probably not the first person that’s called the FPL safe harbor the easy button. For plan years beginning in 2016, this safe harbor is met if the employee contribution toward single coverage in the lowest-cost plan is no higher than 9.66% of the 2016 single FPL rate: 9.66% multiplied by $11,880 divided by 12 months equals $95.63. Those that have a touch of risk aversion prudently round down to $95 or so.
We also all know that an employer’s shared responsibility risk can generally be eliminated if it offers adequate, affordable coverage to all employees working 30 hours or more per week. What this means is that if we offer a plan that meets the minimum value standard and the FPL safe harbor to everyone working 30 hours or more, 98% of all of the headaches associated with employer shared responsibility go away (if you need a refresher on employer shared responsibility risks and rules, please read Exploring the Final Employer Shared Responsibility Regulations). Those of you who just completed Form 1095-C preparation can attest to the benefits of this easy button, for example.
So, why isn’t everyone pressing this easy button? Mostly because we’re still focused on the historic best practice of offering health benefits that employees desire at a price the employer can afford. For example, an employer might be charging $125 per month for single coverage in an HMO featuring a $500 deductible. This employer might cite that most of its employees do not desire a lower-cost plan and that it cannot afford to lower the $125 monthly charge to $95. Thus, the employer is stuck with slugging through shared responsibility penalty mitigation using the laborious rate-of-pay or Form W-2 safe harbors.
As a benefits consultant, when I first began proposing the easy button, I often caved when my client objected, “But, Zack, my employees don’t want a high-deductible health plan with a $4,000 single deductible. Why would I offer a plan no one wants?”
I caved because I was looking through the historic lens. A local ERISA attorney corrected my vision.
In late 2014, we sponsored a regional meeting of human resources professionals and invited this ERISA attorney to speak about these topics. In his opening overview, he looked at all of us and said, simply, “Look, all of this is really easy – all you need to do is introduce a plan that meets minimum value that you can afford to offer at the FPL safe harbor rate. You can keep your current plans. If no one enrolls in the new plan, who cares?”
That was the point I was missing – the ACA is not saying that the easy button plan needs to make sense within the benefits offering. Like it or not, the ACA is essentially saying: Offer this easy button plan. Don’t worry if no one enrolls in it. Move on.
A few months later, a company asked me to respond to an RFP for benefits consulting. The company’s stated goal was identifying a radical approach to solving its benefits and ACA challenges. Do you find that what some deem radical is often the simplest approach? In our RFP response, we suggested that the company solve its ACA affordability issues by following this attorney’s advice. The company agreed.
Following is a quick, simplified overview of this company’s previous health plan menu and the new menu we designed together.
Previous health plan menu:
Stated challenges with this previous design:
1. Reliance on the cumbersome W-2 safe harbor.
2. Lack of a low-cost option.
3. Lack of a health savings account (HSA)-qualified option.
4. Lack of strong differentiation between offerings.
5. Lack of a defined employer-contribution strategy.
New menu, featuring the ACA easy button option:
Advantages of new design:
1. Introduction of easy button option featuring FPL safe harbor.
2. Introduction of two lower-cost, HSA-qualified options.
3. Clear price and benefit differentiation between the plan options.
4.Employer contributes the same amount to all three plans and allows employees to buy-up to Plan 2 and Plan 3. That is, the employer introduced a defined contribution. Thus, the employer’s budget is not impacted by the plan the employee selects.
1. In this example, the health insurer agreed to continue offering plan No. 1 (easy button) even if no on enrolled in it. This proactive negotiation is critical to this strategy because if no one enrolled in plan No. 1, and the insurer ceased offering it, the FPL safe harbor could no longer be used.
2. This strategy would not have worked, financially, if the employer wasn’t willing to change health insurers and networks.
3. This strategy requires intensive, comprehensive, personalized communication efforts. Employees, for example, must understand the financial risks associated with the easy button plan.
4. This strategy still requires annual maintenance to ensure that:
a) The plans continue to meet minimum value.
b) The cost of single coverage continues to meet the FPL safe harbor.
c) All employees working 30 hours or more continue to be offered coverage (note that for brevity’s sake, I’m not addressing the measurement and stability periods some employers use to establish health plan eligibility).
Have you had similar success implementing this easy button approach? Please let us know via the comment section or via Twitter: @zpace_benefits. I’m also happy to answer any questions you may have about this case study.
1. CBIZ: 2015 Year-End Wrap Up
4. Treasury: Final Employer Shared Responsibility Regulations
5. CMS: Minimum Value Calculator (search “minimum value” from this site to locate the link to the Excel-based calculator)