The document discusses how employer challenges will go beyond just health care reform. It notes that health care reform will decrease flexibility in benefits plan design due to new coverage mandates and the excise tax on high-cost plans beginning in 2018. This will result in employer plans becoming more similar over time. Rising health care costs are also projected to exceed the thresholds for the excise tax by 2018 based on projections, meaning plan design will be less able to differentiate employers. Instead, factors like participant experience with online tools and carrier/vendor interfaces will become more important for employer plans.
3. Contents
Introduction 4
Plan Design Flexibility Will Decrease 7
Exchanges – Changing The Paradigm 11
Shared Responsibility – Managing Compliance 17
Conclusion 21
About ADP 22
By John A. Haslinger
ADP Vice President, Product Management - Benefits and Health Care
3
4. 4
Introduction
Employee benefits, as we know them today,
came into existence following the Great
Depression. The Great Depression, by
wiping out personal savings and throwing
almost 13 million people out of work, vividly
demonstrated the need for government and
industry to provide protection against at least
some of the risks associated with illness
and loss of earnings. Labor unions gained
momentum following the Great Depression,
as well, and bargained for better wages,
working conditions, and eventually, benefits.
By the end of World War II, labor unions were
firmly established. And by 1949, they had the
ability to bargain for pension and insurance
benefits. While unions spearheaded the
initial expansion of employee benefits,
management also recognized the value
of providing such benefits as part of a
comprehensive compensation package. In
addition, employers quickly realized that
providing such benefits could also result in
increased productivity and improvements in
worker morale – what we today refer to as
employee engagement.
Source: 1
Centers For Medicare and Medicaid Services, Office of the Actuary,
National Health Statistics Group, U.S. Department of Commerce, Bureau of Economic Analysis
The benefits plan designs which emerged in
the 1950s and 1960s (and which we still have
with us today in 2012) were (and are) concerned
with two major issues:
• Income replacement in the event of
retirement, disability, or death
• Medical coverage to keep the worker,
and later the worker’s family, healthy
and productive
In almost all cases, these plans were designed
as Defined Benefit plans – with the employer
paying all of the costs initially. Over time,
employee contributions became the norm – but
with the employer still liable for the vast majority
of any benefit costs – as well as the risk of costs
exceeding projected levels in any given year.
Employee reaction to improved benefits
was favorable, the government provided
tax incentives (and increasingly regulatory
restrictions), and the post-war economy was
booming. The predictable result was a rapid
and continuous growth in the number and
cost of employee benefits – especially health
care benefits.
The cost of health care has
now risen to the point where it
accounts for over 18% of the entire
U.S. economy, and is expected
to account for 20% by 2015.1
5. 5
Nationally, health care has been a major
topic of discussion since at least the Clinton
Administration. In part this has been driven
by the fact that health care spending has
risen far faster than the rate of inflation. The
cost of health care has now risen to the point
where it accounts for over 18% of the entire
U.S. economy, and is expected to account for
20% by 2015.1
The Patient Protection and Affordable Care
Act and the Health Care and Education
Reconciliation Act of 2010 (together known
as “Health Care Reform”) have refocused
the national dialogue about health care,
and has also dominated the employer-
sponsored benefit plan landscape since 2009
– and will continue to impact strategic and
administrative considerations for the next
Fig 1. Average Cost of Employer-Provided Health Care
• Average annual cost of employer-provided health care rose an average of 8% annually between
1999 and 2011
- Employee only coverage exceeds $5,000 in 20112
- Family coverage exceeds $15,000 in 20112
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$5,791
$2,196
$2,471 $2,689
$3,083
$3,383 $3,695
$4,024 $4,242
$4,479 $4,704 $4,824
$5,049
$5,429
$6,438
$7,061
$9,068
$9,950
$10,880
$11,480
$12,680
$13,375
$15,073
$13,770
$12,106
$8,003
Family
Individual
Source: 2
Kaiser Family Foundation, 2011 Employer Health Benefits Survey
decade and beyond. However, it is critical
for benefits professionals to address the
requirements of Health Care Reform in the
strategic context of employee benefits and
the role that benefits play as part of total
compensation.
Rapidly rising benefits costs – especially
health care – are dramatically focusing the
attention of management at the same time
that significant changes in the demographics
of the workforce are resulting in a
measurable decline in the level of employee
satisfaction. Especially in the area of health
care benefits, employers are paying more and
getting less – less in employee appreciation,
less in employee satisfaction, and less in a
competitive edge.
6. 6
In part, this situation can be traced to the
fact that most employers have not applied
the same strategic planning process to
employer-sponsored benefits as they have
to other parts of their business. The basic
problem stems from the historical dichotomy
between the way benefits and compensation
are viewed.
On the one hand there has been traditional
compensation (pay, bonuses, non-qualified
deferred compensation, restricted stock,
stock options, etc.), which provided
management with direct control of costs
as well as the ability to integrate these
expenses with specific business objectives.
On the other hand, there have been employee
benefits plans (especially health care).
These benefits plans are generally not
integrated into the broader strategic direction
of the employer, beyond the generic goal
of “attracting, retaining, and motivating
employees” – and generally are not tied to
any metrics showing that they succeed in the
standard generic goals. Equally important,
benefits costs often bear no relationship to
any specific business objectives – in fact, they
are driven to a significant degree by forces
outside of the control of the employer: inflation,
utilization, and government mandates.
Health Care Reform is the most significant
government mandate impacting employer-
sponsored benefits plans since the passage of
the Employee Retirement Income Security Act
of 1974, as amended (ERISA). It imposes
new administrative, communication, reporting,
compliance, tax, and plan design requirements
impacting every employer-sponsored health
care plan.
Viewed strategically, it also offers an
opportunity for employers to re-think how
health care benefits should be designed
and delivered. In fact, the participant and
service experience (i.e., Web, call center,
mobile apps, decision support tools,
carrier / vendor interfaces, payroll / HR
integration, etc.) will become the key
differentiator among employer plans,
rather than plan design as a result of
Health Care Reform.
Rather than present an overview of the various requirements under Health Care Reform,
the balance of this article will focus on employer considerations in addressing three key
areas impacted by Health Care Reform:
Plan Design
less flexibility and
differentiation
among employers
Exchanges
both public and private
Shared
Responsibility
Requirements
managing the part-time
labor force
7. 7
Health Care Reform will require significant re-thinking around benefits design as a result of
both coverage mandates and the nondeductible 40% excise tax (the tax on high-cost health
coverage) that will go into effect in 2018. The result of these two provisions will be a narrowing
of differences among employer-sponsored health care plans – in fact, it is likely over the next 5
to 10 years that employer sponsored plans will begin to look more and more alike.
For more than 50 years, annual average per capita health care spending has increased at more
than twice the rate of inflation, as measured by the Consumer Price Index (CPI). In fact, there
has not been a single year during the last 50 years when the increase in per capita health care
spending was equal to or less than the rate of increase in the CPI – it has exceeded the rate of
growth in the CPI every single year.
Plan Design Flexibility Will Decrease
Fig 2. Percent Change in Health Care Costs Compared to
Costs for All Items (percent increase from prior year)
• Every Year Since 1965
- Medical CPI has risen faster than general CPI
- Percent change in per capita health care expenditures has been higher than change in
medical CPI
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
7.7%
11.6%
13.1%
14.2%
8.4%
5.4%
4.5%
6.1% 6.2%5.7%
4.2%
1.6%
3.4% 3.4%
2.8%
3.6%
13.5%
10.6%
1.6%
5.7%
9.1%
PROJECTED
Change In CPI
not yet available
for 2015
Short-term impact
of HMOs
Per Capita NHE3
CPI All Items4
Sources:
3
Per Capita National Health Expenditures (NHE) - Centers For Medicare and Medicaid Services, National Health Statistics Group,
U.S. Department of Commerce, Bureau of Economic Analysis
4
Percent Change in CPI (All Items and Medical Care) - U.S. Dept of Labor, Bureau of Labor Statistics
8. 8
Looking at it another way, the annual per capita U.S. Gross Domestic Product (GDP) grew on
average 3.3% between 1999 and 2009. During the same period of time, annual per capita health
care spending grew on average 5.8%.5
The result being that health care spending accounted for
an ever-increasing share of the entire GDP.
Health Care Reform includes a range of
insurance market reforms aimed at lowering
premium growth, improving health benefits,
and ensuring near-universal coverage in
the U.S. These include a set of affordable
insurance options available through new
state insurance exchanges, rules limiting
insurance administrative costs and profits as
a share of premiums, and review of excessive
insurance premium increases. In addition,
the law contains payment and health care
system reforms that seek to slow the growth
in costs.
However, at least in the short-run (the next
3 to 5 years), Health Care Reform appears
to do little to slow the anticipated rate of
Fig 3. National Health Expenditures of GDP
• Health care represents a larger portion of the GDP almost every year since 1965 - accounting
for over 18% of GDP in 2011
25%
20%
15%
10%
5%
0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Medicare
enacted
0.9% 0.8% 1.0%
5.8%
7.2%
9.1%
10.3% 10.5%
12.5%
13.9% 13.8%
16.0%
18.0%
20.0%
PROJECTED
Source: Centers For Medicare and Medical Services, Office of the Actuary,
National Health Statistics Group, U.S. Department of Commerce, Bureau of Economic Analysis
increase in health care spending, especially
for employer-sponsored plans. In fact, some
analysts have argued that covering the
uninsured (estimated at between 30 and 50
million), expanding coverage to meet new
mandates, and the potential for new benefits
to be added to the current mandates as
part of the ongoing political process, could
actually accelerate the rate of cost increases
over the next decade.
Not surprisingly, health care spending is
projected to annually increase 6.1% between
2009 and 2016 according to the Centers for
Medicare Medicaid Services (CMS).6
Actual
claim increases reported by employers have
generally been in excess of this estimate.
9. 9
For example, Buck Consultants, LCC
conducts a national survey of insurers to
determine the rate of increase in employer-
sponsored plans and found that costs rose
faster than 10% in 2009, 2010, and 2011.7
Other consulting firms found similar results
with Segal reporting cost increases above
10% for 2010 and 2011, PwC reporting 9.9%
for 2010 (followed by 9.5% in 2011), and
Towers Watson reporting a range of 9.5%-
10.9% for 2010 (8.5% in 2011).8
AonHewitt
reported cost increases of approximately 10%
for both 2010 and 2011.9
Keep in mind that in 2009 the CPI declined
by 0.4% and in 2010 it rose by 1.6%.10
During this same time, CMS projected
more than a 6% increase in health care
spending and employers reported an increase
in excess of 9%.
At the same time, Health Care Reform places
a cost cap on how high benefit spending can
go before it is subject to a nondeductible
40% excise tax. Beginning in 2018, the cost
of health care benefits that exceeds $10,200
for individual coverage or $27,500 for family
coverage will be taxed at a 40% rate. As a
result, most employers will not want plan
costs to exceed these monetary levels.
5 Centers for Medicare Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis;
and U.S. Bureau of the Census, https://www.cms.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp#main_content
6 Centers for Medicare Medicaid Services, National Health Expenditures, NHE Fact Sheet,
https://www.cms.gov/NationalHealthExpendData/25_NHE_Fact_sheet.asp
7 Buck Consultants 22nd National Health Care Trend Survey,
http://www.buckconsultants.com/buckconsultants/portals/0/documents/PUBLICATIONS/Press_Releases/2010/PR-HCcosts-Increases-Continue-2011-101210.pdf
8 Benefit Informatics, 2010 Employer Healthcare Cost Survey Data,
http://besthealthplans.files.wordpress.com/2009/11/tinformaticscompiled2010employerhealthcarecostsurveydata.pdf
9 AonHewitt 2011 Health Care Trend Survey, http://www.aon.com/attachments/thought-leadership/2011_Health_Care_Trends_Survey_Final_FINAL.pdf
10 U.S. Department of Labor, Bureau of Labor Statistics, All Urban Consumers, U.S. City Average, All Items, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
However, as shown in chart (fig. 1), average
plan costs are approaching these levels
already – with individual coverage totaling
almost $5,500 and family coverage exceeding
$15,000 in 2011. And these are average
national costs. Costs in high-cost markets
such as Boston, New York, Chicago, and Los
Angeles are already significantly above these
national averages.
If we rely on the projected level of cost
increases of 6.1% put forth by CMS, the
U.S. average cost of $15,073 in 2011 will be
$22,814 in 2018 – with plans in high-cost
areas (say family costs of $18,500 in 2011)
potentially exceeding $28,000 in 2018 –
triggering the 40% excise tax on the amount
over $27,500.
If costs increase at the current actual rate of
9% or more, the U.S. average family health
care premium will likely exceed $27,500
in 2018 – impacting virtually all employers
across the U.S. not just those in traditionally
high-cost areas.
Rising health care costs, hitting a cap above
which will be a 40% excise tax, will make it
difficult for plan sponsors to use plan design
to differentiate their benefits offerings.
If costs increase at the current
actual rate of 9% or more, the U.S.
average family health care premium
will likely exceed $27,500 in 2018...
10. 10
Since plan design will likely become less of a differentiator among employers – and since more
employers may likely move toward a Defined Contribution strategy – the value proposition for
employer-sponsored health care plans will likely shift to such things as:
• Improving the ability to control costs for both the employer and the employee
- Engaging the employee as a consumer at both the moment of plan selection and
at the moment of service being provided
- Implementing consumer driven health plans
- Moving to a Defined Contribution model for employer-sponsored health care plans
• Ensuring an employer-branded, consistent, and high-quality participant
benefits experience
Fig 4. Health Care Reform Impact on Employer-Sponsored Plans
• Government-mandated coverage coupled with ongoing health care inflation will reduce
employers’ ability to design health care plans that act as a differentiating component of total
compensation and will increase likelihood of employers:
- Potentially eliminating / reducing coverage
- Focusing on consumer-based solutions
• HDHPs • HRAs, HSAs • Wellness
- Potentially moving some employees to exchanges for coverage
40% Excise Tax On Value Of Benefits Above Limit
Mandated Requirements
$10,200 for Individual “Cadillac Tax” $27,500 for Family
Medical
Inflation
Provider
Lobbying
Strategic Benefits Plan Design
Note: Medical
inflation continues
to rise at 2 to 3
times the rate of
overall inflation -
and has done so for
more that 50 years
The value of
strategic benefits
design is likely
to shrink over time
due to Health Care
Reform
11. 11
An exchange is a relatively simple concept –
an online shopping mall where buyers can
compare plans and select the one that best
meets their individual needs in terms of cost
and other key preferences, such as out-of-
network care, the need for a referral to see a
specialist, etc.
Today virtually all employers offer coverage
through what is effectively an exchange –
although a limited exchange.
For example, most employers hold an annual
enrollment during which their employees
can pick a coverage option (e.g., PPO option,
Exchanges – Changing The Paradigm
Fig 5. Public Private Overview
Employer’s
Existing
Health Care
Strategy
(Limited Exchange)
Individual
Exchange
Group
Exchange
Private
ExchangeCurrent model: Multiple choices
offered to employees in the cafeteria
model. Has many features in
common with an exchange.
Evolution of current model. Becoming synonymous
with “Defined Contribution Health Plan.” Expect rapid
growth in this area, whether PPACA survives or not.
Likely to survive in some states even if ppaca is
struck down. Subject to variation jurisdiction by
jurisdiction – as a result state exchanges may
not meet the needs of multistate employers.
Federal exchanges should provide consistency
across states, but will only apply to states
without their own exchanges.
Employers provide a dollar
amount and a gateway to a private
exchange. Members are independent
purchasers of health insurance on
the private exchange. Employer
stays active and leverages employee
support tools such as Web, mobile,
call center and customer service.
Contracting is done by an aggregator
who offers administrative support
required to operate the exchange
–like benefits administration,
spending accounts, decision support
tools and ancillary services. Likely to
utilize insured products.
Similar to the individual exchange
described above – except that
employer may self-insure some
offerings, thereby preserving
the ERISA preemption and
direct control of plan provisions.
Employer may also be responsible
for at least some of the vendor
aggregation. May include insured
and self-insured products.
HMO option) under a health care plan – from
among those that are offered – and in most
cases, several vendors / carriers are involved.
A typical plan sponsor may offer a choice of
one or more coverage options through an
insurance company like United, Aetna, or
Blue Cross- along with one or more HMOs.
Employees can compare plan provisions,
network coverage, and price – and may even
be provided with decision support tools (at
a minimum, some sort of coverage options
comparison capability) to assist them in
picking the coverage options that is best
suited to meet their needs.
Public
Exchange
12. 12
These plans are Defined Benefit in nature, with employees paying a relatively small share of
the total estimated cost, and employers funding the balance, regardless of how expensive the
actual cost turns out to be.
With this in mind there are really three types of exchanges for employers to consider:
Public and private exchanges offer many similar advantages for employers to consider — and
what may be right for any employer will depend on a number of different variables including
each employer’s specific employee demographics.
The following chart summarizes some of the key aspects of each type of exchange.
Limited Exchange:
Traditional employer-sponsored plans – generally limited to 3 to 6
health care plan choices, and still primarily Defined Benefit in design
Private Exchange:
A variety of plan choices aggregated by a provider or an outsourcer
with employer input as to which ones are offered, with the ability for
employers to rapidly embrace a Defined Contribution strategy utilizing
a qualified funding vehicle (i.e., 501(c)(9) Trust / VEBA, HSA / HRA – or
for public-sector employers an Integral Part Trust, etc.)
Public Exchange:
The state exchanges required under Health Care Reform (will vary
by jurisdiction in terms of coverage, quality, and participant support /
experience). Beginning in 2014, small employers will be able to participate
in the public exchanges through the Small Business Health Options
Program (SHOP). In 2017, larger employers may be permitted to
participate in the public exchanges, however, this will vary by state.
1.
2.
3.
13. 13
Beginning in 2014
Limited Private Public
Offered By Individual Employer Plan Aggregator State or Federal
Government
Rating Basis Individual Employer
Experience
Individual Employer
Experience
General Population
Experience
Plan Type Defined Benefit Defined Contribution Defined Contribution
or Defined Benefit (at
employer discretion)
Employer
Contributions
Pretax Pretax Pretax or Post-tax
(at employer discretion)
Employee
Contributions
Pretax Pretax Pretax or Post-tax
(at employer discretion)
Funding
Approaches
Combination of direct
employer contributions,
contributions to HSA
and / or FSA, plus pretax
employee contributions
Employer contributions
to an HSA / HRA, VEBA,
or other qualified vehicle
plus pretax employee
contributions
Combination of direct
employer contributions,
contributions to
HSA / HRA and / or FSA,
plus pretax employee
contributions
Who Selects
Vendors / Carriers
To Be included
Individual Employer Plan Aggregator and / or
Individual Employer
State or Federal
Government
Who Selects Plans
To Be Included
Individual Employer Plan Aggregator and / or
Individual Employer
State or Federal
Government
Number of Plans
Offered
Generally limited
to 3 to 6
Determined by Employer
in conjunction with the
Plan Aggregator. Number
of options will vary
Determined by State
or Federal Regulators.
Number of plans will
vary by exchange
Participant
Experience
Consistent across
the country
Employer-branded
Portal / Web
Call Center
Online support
Mobile Apps
Consistent across the
country (best practice)
Employer-branded
Portal / Web
Call Center
Online support
Mobile Apps
Private exchanges
could vary state by state
based on regulations or
employer preference
Will vary widely in
terms of look and feel,
content, and quality at
both state and federal
levels
Not Employer-branded
Portal / Web
Call Center
Online support
Mobile Apps
14. 14
The Private Exchange combines many of the best aspects of the current Limited Employer-
Sponsored approach and the new Public Exchanges that will become effective in 2014.
A Private Exchange enables an employer to continue to leverage the value of an
employer- sponsored health plan with a significant reduction in the current effort (in some
cases the total elimination of some employer requirements). In addition, the value to the
employer and the employee is not based on individual plan design, but rather on lower costs
and high-quality service.
Lower costs are achieved by:
• Reducing or even eliminating the
effort and cost spent on designing and
updating health care plans annually
- The employer could eliminate the need
to design the plans offered through
the exchange
• Moving to a Defined Contribution
approach
- Possibly utilizing an HSA / HRA or a
VEBA (Integral Part Trust for public-
sector employers) as the employer
funding vehicle along with pretax
contributions made by employees
- Employer costs could be designed to
track the Consumer Price Index (CPI) or
some other benchmark
• Reducing or even eliminating most
of the government reporting and
communication requirements
- The only plan maintained by the
employer could be an HSA used as
a funding vehicle from which the
employee could pay premiums, along
with a Section 125 Premium Only Plan
(and possibly a limited purpose FSA)
• Employers don’t design the mutual
funds offered in a 401(k) plan – under a
robust private health care exchange, they
would no longer design the health plans
offered, but would retain control over
vendors and specific plans to be offered
- This would reduce the effort associated
with such things as Form 5500 filings,
Summary Plan Descriptions (SPDs),
Summary of Material Modifications
(SMMs), and other mandated reporting
and communication requirements
• Basing rates on specific employer
experience rather than that of the
general population, as would likely be the
case in a public exchange (assuming that
regulations do not prohibit this).
• Involving participants, as informed
consumers, at both the point of purchase
of the plan and at the point of purchase of
health care services
• Providing employees with a far wider
array of choices than a single plan
sponsor could offer – thereby permitting
employees to pick a plan that best meets
their needs, in terms of plan provisions
and plan cost
15. 15
Fig 6. Private Exchange Overview
Private exchanges have become synonymous with “Defined Contribution” insurance plans
• “Private” denotes employer-sponsored vs. the public exchanges managed by governments
• Gets the employer out of selecting benefits for employees; limits role to financing
facilitating
Eligibility
System
• Status
• Position
• Dependents
Employer
• Funding Vehicle
• Funding Level
• Benefits Options
Employee
• Funding Vehicle
• Funding Level Insurer
Insurer
Employer’s role is limited to
deciding how much funding to
provide and which benefits
options / carriers are available
Web portal has educational
tools, as well as a
questionnaire, that help
employees understand
options and make selections
Employee selects among a
wide range of health insurance
and other benefits; could
have $ remaining or require
payroll deductions
Exchange could source
one or multiple carriers
Coverage can be
group or individual
(community-rated
starting 2014 in public
exchange)
Employee has a
funded vehicle
from which to
purchase benefits
Decisioning
Tools
• Education
• Health issues
• Priorities
• Risk appetite
Product
Marketplace
• Health insurance
• Dental, life,
disability insurance
• Other ancillaries
Benefits Administration (Employer-Branded)
• Eligibility enrollment / Participant support
• Account plan recordkeeping payroll deduction
• Premium aggregation money movement
16. 16
High-quality service and ongoing employee engagement is achieved by:
- Common decision support tools
and applications
- Advocacy (and other specialized service)
support that is consistent across all
vendors and the entire country
• Compliant administration based
on Federal and applicable state
requirements
- Automated processes to ensure
consistent administration
• Carrier / vendor Interfaces similar
to what is done under traditional
employer- sponsored plans
• Money movement
• Payroll / HR Integration
• Flexible reporting and management
dashboards
• Employer branding of all tools and
communications (Web, print, call
support, etc.)
- As a result, the employer:
• Retains the benefit of offering
coverage and
• Has control over which vendors and
plans will be offered from among a
group that has been previously vetted
and priced by an aggregator
• Service-level agreements that ensure
- Portal experience that is consistent
across the country
- Call center quality that is consistent
across the country
- 24/7 Web availability and online support
- Common mobile applications
17. 17
SharedResponsibility–Managing
Compliance
Health Care Reform does not require employers to provide health coverage to their full-time
employees. However, it does impose a potential penalty on those employers (with at least 50
employees) who fail to do so.
Beginning in 2014, employers must meet the requirements described below, or be subject to
a potential penalty:
• Offer full-time employees the opportunity to enroll in minimum essential coverage under
an employer plan (Code Sec. 4980H(a));
• This minimum essential coverage, among other things, must be affordable (i.e., no more
than 9.5% of the employee’s W-2 earnings with the employer).
If the employer fails to do the above, AND the employee purchases coverage through a
Public Exchange, AND the employee is eligible for and receives a Federal Tax Credit in order
to subsidize the cost of their coverage, THEN the employer will be subject to a penalty.
It is important to keep in mind that employees with household income up to 400% of the
Federal Poverty Level (FPL) will be eligible to receive the Federal Tax Credit. For 2011, the FPL
was $22,350 for a family of four – meaning that an employee with a family of four earning less
than $88,200 would be eligible for a Federal Tax Credit if they enrolled in a Public Exchange.
(Note: the FPL is indexed for inflation – and will likely be higher in 2014).
This could be a significant issue for employers with hourly employees regularly scheduled
to work less than 30 hours per week – many of whom are likely to have both W-2 wages and
household income that will be less than 400% of the FPL.
An employee with a family
of four earning less than
$88,200 would be eligible for
a Federal Tax Credit if they
enrolled in a Public Exchange.
18. 18
Of particular importance for many employers is how Health Care Reform defines “part-time”
and “full-time” employees for purposes of determining this potential penalty. In simplest
terms, a full-time employee is any employee who works, on average, 30 hours or more per
week in any month. Employers can use 130 hours of service per calendar month in making
this determination (see IRS Notice 2011-36 for specific details). Generally speaking, seasonal
employees who work less than 120 days per year are not counted.
The proposed guidance provides another administrative wrinkle – a look-back period and
a coverage / stability period.
Using the look-back period approach, an employer would determine if an employee is
full-time by looking at a period of 3 to 12 months (the measurement period is at the discretion
of the employer and will generally be 3, 6, 9, or 12 months) to determine whether the
employee averaged at least 30 hours of work per week or at least 130 hours of service per
calendar month during that period.
Fig 7. Employees May Qualify for Federal Subsidies
at Fairly High Income Levels
2011 Income Levels For 400% of FPL (Indexed For Inflation)
No. Persons
In Family
Federal Poverty
Level: 2011
48 Contiguous States
48 Contiguous
States / DC
Alaska Hawaii
1 $10,890 $43,320 $54,120 $49,840
2 $14,710 $58,280 $72,840 $67,040
3 $18,530 $73,240 $91,560 $84,240
4 $22,350 $88,200 $110,280 $101,440
5 $26,170 $103,160 $129,000 $118,640
6 $29,990 $118,120 $147,720 $135,840
7 $33,810 $133,080 $166,440 $153,040
8 $37,630 $148,040 $185,160 $170,240
Source: Federal Register 4200, January 23, 2009, http://aspe.hhs.gov/poverty/09fedreg.pdf.
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If an employee averaged at least 130 hours
per month during the look-back period
he / she will be considered to be a full-time
employee. In such a case, the employee must
be made eligible for coverage going forward,
with the period of coverage being equal to the
look-back period used to determine eligibility.
Thus if an employer relied on a three month
look-back period, any employee who was
found to work an average of 130 hours or
more per month during that period would
have to be made eligible for coverage for a
three-month period going forward, regardless
of how many hours per week that employee
might work during the going-forward
coverage period.
Employees who exceed the average of
130 hours per calendar month must be
considered as full-time and, if not eligible
for benefits, will trigger a penalty for the
employer should they obtain coverage AND
receive a Federal subsidy through a Public
Exchange. On the other hand, providing
coverage for such newly defined “full-time”
employees will significantly increase the
average hourly cost of labor. So what is an
employer to do?
The solution is to actively manage these
potential issues by integrating automated
time and labor management tools, payroll
services, and benefit administration.
In simplest terms, a full-time
employee is any employee who
works, on average, 30 hours or
more per week in any month.
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Fig 8. Basic Steps In Integrated Shared Responsibility Solution
1. Workforce Management
• Notices sent to managers as employees approach 30 hours in any week
• Ability of managers to see report / dashboard of scheduled and actual hours for
all employees in order to manage hours assigned in conjunction with liability for
health care costs
• Active management of hours assigned can reduce exposure to additional health
care costs and / or federal penalties
2. Database of Record
• Payroll tracks actual hours worked (which may differ from scheduled hours)
• Payroll sends an automated trigger to benefits administration system when an
employee exceeds 130 hours per month
3. Benefits Administration
• Employee eligibility calculation is triggered
• Appropriate look-back and coverage period rules are applied
• Employee is notified of benefit eligibility – avoiding penalty for failure to offer coverage
• Calculation of premium as percent of W-2 earnings is done
- Report generated showing employees for whom contributions are greater than
9.5% of W-2 earnings
- Enables management to estimate potential liability
- Reconcile with government data if penalties are assessed
21. 21
This integrated solution:
• Empowers local managers to make the most cost-effective decisions in real-time
- Providing the tools for the manager to differentiate among employees who have already
triggered a “full-time” designation (with the related health care liability), those who are far
away from such a designation based on scheduled hours, and those who are very close to
crossing from part-time to full-time
• Ensures that employees who should be eligible for coverage are actually made eligible in
a timely and compliant fashion
• Provides management the data necessary to track and reconcile with the government
for those employees who ultimately do chose to utilize a Public Exchange rather than an
employer’s plan
- Track and report on all part-time employees who became “full-time” and for what period
of time this coverage applied
- Track and report on all newly designated “full-time” employees who are eligible,
whose contributions exceed 9.5% of their W-2 wages, and for what period of time they
would be eligible
Equally important, these processes occur seamlessly and consistently without the need for
local managers or HR professionals to take any special action.
Health Care Reform presents both challenges and opportunities for employers – many of which
will remain even if the law is repealed or modified.
Controlling costs, engaging employees, and ensuring compliance with applicable federal and
state regulations are critical issues for benefits professionals as they and their employers
navigate an increasingly competitive global business economy.
In this new environment, the traditional distinction between HR strategy and operations may
not serve as a meaningful model. Instead, this author suggests that the two need to be brought
together by “operationalizing strategy” – using technology and process to enable strategic goals
in measurable ways.
Conclusion
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AboutADP
Automatic Data Processing, Inc. (NASDAQ: ADP), with about $10 billion in revenues
and approximately 570,000 clients, is one of the world’s largest providers of business
outsourcing solutions. Leveraging over 60 years of experience, ADP offers a wide range of
human resources, payroll, tax and benefits administration solutions from a single source.
ADP’s easy-to-use solutions for employers provide superior value to companies of all
types and sizes. ADP is also a leading provider of integrated computing solutions to auto,
truck, motorcycle, marine, recreational vehicle, and heavy equipment dealers throughout
the world. Reach us at 1-800-225-5237 or visit the company’s website at www.ADP.com.