The Obama administration’s health insurance overhaul was designed to guarantee coverage for all Americans, partly by broadening access to employer-provided coverage.
Under the federal health care reform law, known widely as ObamaCare, employers with at least 50 full-time employees must provide health insurance options to all full-time workers (defined as at least 30 hours a week). If the employer doesn’t offer coverage to eligible employees, and the employee instead seeks insurance through the subsidized exchange market, the employer must pay a fee of $2,000 per subsidized employee after the first 30 employees.
For example, a business that has 55 full-time employees but does not provide health coverage would pay $2,000 each in penalty fees on behalf of 25 employees ($50,000).
Employers using loopholes to avoid penalties
In 2011, global marketing firm McKinsey & Company Inc. surveyed 1,329 private sector employees. The survey found that 30 percent of employees whose companies offered employer-sponsored health insurance said they would “definitely” or “probably” drop coverage in the years following 2014, after the Affordable Care Act takes full effect.
According to the study, it seemed that for employers, it would be cheaper to pay the penalties and let employees buy their own health insurance through the new health insurance marketplaces.
And because the mandate to provide health coverage to employees applies only to people who work at least 30 hours a week, many companies have started limiting their employees’ hours so that that they don’t fall under the mandate. Darden Restaurants, the parent company of the Red Lobster and Olive Garden chains, already has begun cutting workers’ hours at some restaurants so that full-time schedules no longer are available.
To avoid the penalties, other companies have chosen to use temporary staffing agencies rather than hiring full-time employees.
The intent of the employer mandate was to encourage employers to provide health insurance, but many fear it may have the opposite effect.
IRS cracks down on employer loopholes
However, the IRS has made it clear that it won’t tolerate employers’ attempts to skirt the health insurance rules.
The IRS plans to issue “anti-abuse rules” that will subject temporary employees to the same health insurance requirements as permanent employees. If the IRS thinks a company is using a temporary agency as a way to get around paying for health insurance, the company may be fined.
Additionally, the agency said employers still are subject to the mandate if they employ enough part-time workers to be equal to 50 full-time workers – for example, if a restaurant employs 100 part-time employees who each work just 20 hours a week.
And the IRS intends to enforce these rules. According to a recent federal report, the IRS will hire more than 2,000 employees in 2013 alone to monitor whether businesses are complying with the health insurance mandate. Businesses that don’t follow the rules will be subject to the penalty of $2,000 per eligible employee.
What business owners need to know
If you’re a business owner, it’s important to understand how this new mandate will affect you.
If you’re self-employed or owns a small business with fewer than 50 employees (or the equivalent in part-time workers), the group health insurance mandate does not apply to you. However, you still will be responsible for buying your own insurance policy. If you refuse, you’ll be subject to a graduated penalty fee, which starts at $95 per uninsured person in 2014 and goes up to $325 the following year. The exception: If your income falls below the tax filing threshold ($9,500 annually for a single person under 65, or $19,000 for a married person filing jointly), you won’t face penalties.
If you’re an employer with at least 50 full-time employees (or the part-time equivalent), you’ll need to follow the new regulations closely. That means:
- If you don’t offer coverage at all, you’ll be fined if at least one of your employees applies for a tax credit through a health insurance exchange. The penalty will be $2,000 per employee after the first 30 employees.
- If you offer health coverage to employees, your company must cover at least 60 percent of an employee’s health care expenses. The policy must cost less than 9.5 percent of the employee’s household income. If these requirements are not met, employees can buy subsidized coverage through the exchanges. Your business will be fined $3,000 for each employee receiving subsidized coverage, up to a limit of $2,000 times the number of full-time employees (minus the first 30 employees).
As the IRS has stressed, it’s not acceptable to use loopholes to get out of paying for employee health insurance if your business has at least 50 full-time employees. If you meet the criteria, it’s important to talk with a health insurance broker who can help you come up with a group employee policy that will fit your budget. If you decide against buying a group policy, that’s acceptable, too — but be aware that you’ll be on the IRS’ radar and may be forced to pay a hefty tax on behalf of your employees.