Under PPACA, employer may be classified according to two separate standards. Depending on a given classification, the law affects employers very differently. Thus, proper classification is an integral first step in planning for PPACA as differently affected businesses will benefit from different strategies and plan designs down the road.
To determine how your business is affected, we must classify your business. PPACA has two general classifications for businesses. The first, and most commonly known, is based on the number of full-time employee equivalents a business employs. The second is based on the market through which the employer purchases insurance.
Employer Classifications One
PPACA imposes different obligations on employers of different size. For the first classification, we must determine if your business is an applicable large employer or a small employer.
PPACA uses controlled group and attribution rules that have existed for many years. These rules prevent gaming of PPACA by, for example, splitting one business into myriad subsidiaries, all of which are deemed “small employers” under the law. If your business owns subsidiaries, or if individual owners of the business even partially own other businesses, please consider contacting us or another advisor for controlled group analysis. This analysis is relatively simple and can help you determine whether PPACA views your businesses as separate and distinct or as one entity.
Under PPACA, an employer is an applicable large employer if it employs 100 or more full-time employee equivalents. If an employer employs less than 100 full-time employee equivalents, then the employer is a small employer. Though this test seems simple, and indeed many businesses can make this determination with ease, the test is fraught with nuances which could greatly affect some. For more on calculating this number, please see Calculating the Full-Time Equivalency.
A full-time employee equivalent is not a full-time employee. Full-time employee equivalency is a value calculated by adding the number of full-time employees plus the number of part-time and seasonal employee hours worked in a given time period, such as one month. PPACA very clearly defines what it considers to be a full-time employee at an average of 30 hours a week. Part-time workers work less hours per week, while seasonal workers (for this test) work 120 days or less per year.
By adding the hours of part-time and seasonal workers, full-time equivalency rises. For instance, consider a business with 40 full-time employees and 20 employees who average 15 hours/week. In this case, each part-time worker is about ½ a full-time worker, according to PPACA. To find the full-time equivalency, add 40 (the full-timers) and 10 (20 part-timers whose hours add up to ½ a full-time worker each) to get 50. The business in this example is thus an applicable large employer.
Of course, for most businesses on the edge of being deemed an applicable large employer, this test is never quite as simple as the example above. Strategies such as managing hours with look-back/stability periods or utilizing leased employees are critical to achieving a desirable classification. We encourage businesses with the goal of reducing PPACA liabilities or being a small employer, for PPACA purposes anyway, to look into these strategies and utilize assistance wherever helpful.
As an applicable large employer, a business is subject to the PPACA employer mandates (covered in Step One). PPACA has two employer mandates. The first requires an offer of minimum essential coverage to at least 95% of full-time employees. Failure to meet this mandate entails a penalty of $2,160/full-time employee/year less the first 30 full-time employees. The second mandate requires an offer of affordability and minimum value to prevent public exchange subsidy access. For each employee who qualifies for a subsidy, a $3,240/year penalty will be assessed on the employer, up to a cap of the “opt out” penalty.
Small employers are not subject to employer mandates. Thus, small employers have far greater freedom in making decisions about offering a health plan to their employees. If a small employer decides to offer a plan, they must do so in accord with PPACA’s other regulations. Even a small employer can be penalized for violating provisions of PPACA besides the employer mandates.
Small employers also tend to face greater restrictions on the types of coverage they can offer. This inflexibility is due to Classification Two, which we will discuss presently.
Employer Classifications Two
Classification Two separates employers based on the insurance market in which the employer participates. PPACA defines four distinct insurance markets:
- the individual market
- the small group market
- the large group market
- the self-insured market
Terminology becomes very specific and important between classifications. A small group market employer could be a small employer under PPACA, but a business may be a small group market employer and an applicable large employer. As even the most seasoned professionals can make mistakes with PPACA’s jargon, we strongly encourage caution when classifying your business and planning for PPACA.
Individual markets are reserved for purchasers who are single individuals, families, or self-employed, single-employee enterprises. Most businesses are not eligible to purchase off the individual market, which, while seemingly obvious and unimportant, dramatically affects certain strategies for PPACA surrounding private exchanges. Private exchanges typically offer employees individual market coverage, which is distinct from the employer offering small group, large group, or self-insured coverage. For this and other reasons, private exchanges have difficulty satisfying the employer mandates.
The small group market is used by employers with 2-100 employees who purchase fully-insured plans. The employees may be of any variety (full-time, part-time, or seasonal), and qualification for this market is based on the average number of employees over a year-long period. A fully-insured plan is one backed by an insurance company licensed to offer fully-insured products in a given state. Fully-insured plans place the ultimate liability for paying claims on the insurer as opposed to the employer.
The large group market, as you may have guessed, is reserved for employers with more than 100 employees who purchase fully-insured plans.
The self-insured market is not defined by the number of employees serving a given business. Instead, the self-insured market is defined by how the health plan is insured. As noted above, fully-insured plans place the ultimate liability for paying claims with an insurance company. Self-insured plans place the ultimate liability for paying claims with the employer. Employers who self-insure typically purchase reinsurance, which may be thought of as insurance for insurance. Reinsurance may come in the form of medical stop-loss policies, which are purchased to “stop the loss” on the ultimate liability for paying claims to which the employer is obligated. Thus, employers who self-insure health plans can retain some safety with reinsurance from a catastrophic claim event, such as a single medical claim on the plan for $1,000,000, or an aggregate of claims, such as 1,000 claims for $1,000 each.
Note that since PPACA places no employee number restriction on the self-insured market, even businesses with as few as two employees could theoretically self-insure. Smaller businesses (colloquially speaking) tend to avoid self-insuring plans due to the higher risk of catastrophic claims or “shock years,” which can be costly in some cases even with reinsurance. However, self-insured plans can offer incredible value and flexibility compared to fully-insured plans, and investigation of such arrangements is highly encouraged when planning for PPACA.
Under PPACA, two markets are much more heavily regulated: the individual market and the small group market. These require plans which provide all “essential health benefits,” a list of coverage options which plans may have not offered in the past. Large group and self-insured market plans need not provide all of these essential health benefits, allowing employers in the latter two markets much more flexibility. Small group market purchasers thus could save significantly by transitioning to a self-insured plan, if appropriate. Such transitions are not encouraged without a full investigation into the structure and obligations associated with a self-insured plan, but after such an investigation, businesses which can benefit from self-insured plans typically elect to form them.
From our analysis thus far, we can conclude that small employers (from Classification One) will be small group market employers (from Classification Two) unless they self-insure their plans. This means that, assuming a fully-insured plan, small employers must provide all essential health benefits in their plans, among other inflexibilities. Some applicable large employers also fall into this trap, as they may have more than 50 full-time equivalents but less than 101 total employees. These employers are stuck between a rock (the employer mandates) and a hard place (an inflexible fully-insured solution). However, relief may be available under Classification Three.
A word of caution for large group market purchasers. Your status is very powerful in terms of flexibility, as you do not need to provide all essential health benefits in your plans. That being said, an unfortunate number of insurance products are sold to large group market purchasers which comply with all small group market purchaser regulations. Of course, on the product sales side, this process makes sense, as the salesman sells a more expensive product. Insurance companies benefit as well by having larger risk pools for a smaller number of plans. Large group market employers, however, do not benefit. They spend more money for unnecessary features. Large group market employers are strongly encouraged to use their size to their advantage when investigating PPACA solutions.
Once you have classified your business, your planning obligations and options will be available for scrutiny. Applicable large employers face mandates and need a plan to avoid excise penalties. These plans may come from the fully-insured market or the self-insured market, depending on suitable product identification, which we will tackle in a future step. The start date of these plans depends on qualification for special transition relief.
Having covered employer rules, we will next look at employees: how they are defined, how employers can control their classification, and what sorts of coverage they may be offered.
- IRC § 4980H
- PPACA § 1304
- PHSA § 2791
LBMC can help you navigate through the extensive ACA requirements, determine any penalty exposure, and develop strategies to eliminate or reduce future penalty exposure.