The Basics of Obamacare

Entrepreneur

For nearly three years, Willan Johnson has been trying to figure out the best way to provide health insurance to his 72 employees. He has been delayed by confusion and uncertainty.

When he founded Los Angeles-based pool maintenance company VivoPools in 2009, Johnson's goal was to create a national brand with high service standards to compete in a fragmented industry of mom-and-pop providers. Part of his strategy was to provide health insurance and other benefits to attract and retain good workers. But when he studied his options, The Patient Protection and Affordable Care Act of 2010 (PPACA)--also known as Obamacare--had just been passed. That changed his plans.

"I called a number of different health-insurance consultants and said, 'OK: What do we do about this?' And, by and large, everyone said, 'Don't do anything yet,'" he recalls. The advisors were concerned that he would launch a program that wouldn't be in compliance with the complex new legislation.

But Johnson is going to have to make some decisions before Jan. 1, 2014. That's when the law, which has been rolling out in phases since its passage, mandates that "large employers"--those with 50 or more full-time or full-time-equivalent (FTE) employees--need to provide health insurance or face penalties.

Changes by the Year 2013
• Employers begin reporting healthcare premium costs on 2012 W2s.

• Employers must provide employees with notice of exchange availability.

• State exchanges begin open enrollment in October.

• Employers must withhold an additional 0.9 percent from the FICA wages of employees earning more than $200,000 per year.

• Flexible savings account spending limit is reduced to $2,500.

2014
• Employers with more than 50 full-time or FTE employees must provide health insurance to those employees or face penalties.

• Annual limits on health-insurance coverage are eliminated.

• Clinical-trial insurance coverage provision begins.

• Coverage denial based on preexisting conditions or gender is eliminated.

• Small-business health-insurance tax credit increases.

According to the PPACA and additional guidance provided by the Internal Revenue Service, full-time employees are those who work an average of 30 hours or more per week or 130 hours or more per month. FTE employees work an average of 120 hours per month. Seasonal businesses whose employees work 120 hours per month or for more than four months may also be subject to the mandate, says Kevin Kuhlman, manager of legislative affairs for the Washington, D.C.-based National Federation of Independent Business (NFIB). Companies with fewer than 50 full-time or FTE employees individually, but that have a common owner and exceed that threshold when combined, may also be subject to the mandate.

"The employers in that [40- to 60-employee] threshold are concerned, or those who have a ton of seasonal employees," Kuhlman says. "They're the ones who are going to face the most scrutiny."

For many businesses that already provide health insurance to employees, little will change, except for a few additional reporting requirements. W2 forms for 2012 (issued in early 2013) need to include the cost of coverage provided. Starting in 2014, the coverage has to be "affordable," so the employee contribution cannot exceed 9.5 percent of the employee's household income for the taxable year. That can be a problem for business owners who might not have information about total household income, Kuhlman says, so the IRS has proposed basing affordability on the employee's wages alone. In addition, firms will need to ensure that their plans comply with new provisions of the healthcare law that go into effect Jan. 1, such as a ban on annual coverage limits and eliminating discrimination based on preexisting conditions or gender.

Larry Levitt, co-executive director of The Program for the Study of Health Reform and Private Insurance, part of the nonprofit Kaiser Family Foundation, says employers need to work with their providers to ensure their policies are in compliance. He cites the example of the law requiring all policies to cap patients' out-of-pocket expenses by 2014, stating that currently "not all employer plans have an all-encompassing cap on what patients have to pay."

Policies that have been in place since before the law was passed and which have not undergone significant changes may be grandfathered and have certain exemptions, Levitt says. Check with your financial advisor about those thresholds, rather than making a guess for which you could be penalized.

Not Just the Bottom Line
At least one person is not losing much sleep over the changes. Josh King, general counsel and vice president of business development for Avvo, an 85-person online law resource based in Seattle, says companies like his simply have to provide an effective health insurance plan if they have any hope of attracting the best talent.

"On the long list of things that I worry about every day as a managing partner, healthcare costs and healthcare benefits are not on the list," King says.

A report by the Kaiser Family Foundation and Health Research & Educational Trust states that the average annual health-insurance premium for employer-sponsored policies in 2012 was $5,615 for single coverage and $15,745 for family coverage--up 3 percent and 4 percent, respectively, over the previous year.

While the management team at Avvo is unfazed, Marcia Boyce, co-owner of Boyce Body Werks, a Batavia, Ill., automotive repair shop, is worried about healthcare costs in general. She received her plan renewal for her 29-employee firm--24 of whom are covered by the company health insurance--in January, and the rate increase was 33 percent. In 2012, the cost increased 14 percent over the previous year. In 2009, for the first time since the business was founded in 1985, she began having workers contribute $6.50 each week to their health insurance costs. Now employees pay roughly $70 per month and will pay even more when the plan renews. "I've been talking to my insurance broker about options, and it's just overwhelming," Boyce says.

A report by the Kaiser Family Foundation and Health Research & Educational Trust states that the average annual health-insurance premium for employer-sponsored policies in 2012 was $5,615 for single coverage and $15,745 for family coverage--up 3 percent and 4 percent, respectively, over the previous year. While that gain seems modest, it can be a hefty increase when multiplied by a sizable work force. The report also stated that covered workers in 2012 contributed, on average, 18 percent of the premium for single coverage and 28 percent of the premium for family coverage, which is the same percentage reported in 2011.

The much-touted small-employer health credit is available to employers who pay at least 50 percent of each eligible employee's single coverage, have fewer than 25 full-time or FTE employees and pay average wages of less than $50,000 per year. (Boyce doesn't qualify, as she has 29 employees with average wages of more than $50,000.) Qualifying businesses may receive a maximum 2013 credit of 35 percent of the employer's premium cost; this increases to up to 50 percent for qualifying employers in 2014.

State Programs
In an effort to curb costs and make policies accessible for small businesses and individuals, every state will have an Affordable Insurance Exchange. Open enrollment is expected to begin in October 2013. The exchanges will operate Small Business Health Options Programs (SHOPs) that offer small businesses and their employees four tiers of policies with varying levels of coverage. Initially, businesses with more than 100 employees will not be permitted to participate in the SHOPs; however, that may change in the future, NFIB's Kuhlman says.

Some states are opting to create their own exchanges; the federal government will create one for those that are unwilling or unable to do so. If businesses with more than 50 employees choose not to provide health insurance, they will be subject to a fee of $2,000 per employee for every full-time employee beyond the company's first 30 workers. In those cases, employees would then purchase insurance directly through the exchanges or, if they prefer, through a traditional insurance broker and may qualify for tax credits, based on their income.

Brad DeLong, an economics professor at the University of California, Berkeley, and a fellow with research group the Ewing Marion Kauffman Foundation, likens SHOPs to outsourced benefits departments. "The small and medium-size businesses will no longer be at a disadvantage to large businesses that can offer health insurance, which is a tremendously valuable benefit," he says.

Still, there is a great deal of uncertainty. The IRS just issued its guidance on full-time and FTE calculations in January. Many states are lagging in developing their exchanges, even with open enrollment slated to begin this fall. And some large companies have made headlines by announcing that they're going to cut workers' hours to avoid the mandate requirements.

At VivoPools, Johnson is still working through his analysis paralysis. But he says he is committed to getting his employees covered. He is considering restructuring his pricing model and increasing service offerings to make up the cost, but he sees the investment as a long-term advantage, helping him attract better employees and keep them longer.

Stay Informed on Reform
Throughout the year, more information will emerge from the federal and state government agencies responsible for implementing healthcare reform. Here's an overview of some of the key players:

Internal Revenue Service: The IRS oversees the health-insurance mandate and provides guidance to businesses about compliance requirements and penalties. Visit the Affordable Care Act update page at IRS.gov.

Department of Health & Human Services: HealthCare.gov, which is managed by this federal government agency, is a one-stop information resource about the state of healthcare reform.
national conference of state legislatures: This organization is closely monitoring the status of state health-insurance exchanges. Visit NCSL.org.

Health Reform Source: Created by the Henry J. Kaiser Family Foundation, Health Reform Source runs a comprehensive site for information about health-insurance law. At HealthReform.kff.org, you can learn about everything from the insurance mandate and timelines to how exchanges will work on a state-by-state basis.

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