Minimum Essential Coverage Plans Solve ACA Problem for Employers With Many Low Paid Hourly Workers
The Affordable Care Act has been disruptive for employers with many low paid workers. Fast food chains, janitorial companies, security companies, staffing agencies and employers with similar workforce demographics have been most challenged to meet the onerous compliance requirements of the ACA.
How Does The ACA Affect Employers With Low Paid Hourly Workers?
The situation we encounter most often includes an employer with an ownership/management class of employees representing 5-10% of the total workforce. These employees typically enjoy good quality health insurance offered at typical market rates with average employee contributions. We find rank and file employees with incomes ranging from minimum wage to $20 per hour. These hourly employees, historically known as the working poor, have usually declined to participate in the employer’s health insurance plan. Coverage has been offered to them but they struggle to take care of their families financially and waive the employer provided health insurance.
This scenario is problematic for the employer on a variety of levels. Usually overall participation in the employer provided health plan is well below 50% of the total eligible employees. Insurance companies don’t like low participation as it leads to poor claims experience and this employer lives in fear that due to poor participation their medical plan will be cancelled at each renewal.
Now with the ACA Employer Shared Responsibility rules the situation is much worse. Employers must offer quality affordable coverage to their employees or face steep penalties. While this applied to employers with more than 100 full time or full time equivalent employees as of January 1, 2015, it will extend down to those with 50 or more as of January 1, 2016.
What Employers Are Required To Offer
Remember that “Affordable” means the employer can charge no more than 9.56% of employees’ Box 1 W2 wages for their lowest level single only coverage plan. Quality means that the plan is at least as strong as the government mandated Bronze level (60% actuarial value) Minimum Value Plan (MVP).
The dilemma lies in the affordability. An employee who makes $10/hour, $20,000 per year can be charged no more than $160/month ($40/week) for medical coverage and have it deemed affordable. These employees haven’t typically enrolled in coverage. With an average monthly premium of at least $400, offering coverage at these rates costs the employer nearly $3000 per year for each employee who enrolls. The employee cannot afford $40 per week in contributions and the employer cannot afford to have a significant number of employees enroll in the plan who were not previously covered.
However, if the employer doesn’t offer 95% of their employees Minimum Essential Coverage (MEC) then they are assessed a non-tax deductible ACA penalty of $2000 times the total number of full time employees minus 30.
145 employees not offering MEC coverage
Minus 30 employees
115 times the $2000 penalty= $230,000
Remember that a non-tax deductible penalty could have an economic as high as double-$460,000-depending on the employers effective tax rate.
How Does Minimum Essential Coverage Benefit Employers?
The solutions to this dilemma is a MEC strategy. With the MEC strategy the employer provides all full time employees with a Minimum Essential Coverage Plan. This is a plan that covers government mandated screenings and wellness services. This is not medical insurance but rather a plan designed to meet the requirements of the ACA mandates. Rates range from $75-90 per employee per month and are usually paid 100% by the employer. By providing the MEC plan, the employer completely meets their requirement for providing Minimum Essential Coverage and avoids the $2000 per employee penalty.
This is only part of the solution. We still have to be concerned about the 2nd of the ACA penalties which is the $3000 penalty assessed when an employee is not offered quality affordable coverage and goes to the exchange and receives a subsidy.
How To Ensure Your Coverage Is Affordable & Avoid Penalties
In order to avoid the $3000 penalty the employer must offer “Quality & Affordable” coverage. The operative word here is “offer”. We look at the employer’s census sorted from highest to lowest income. Beginning with the lowest paid workers, we identify who will be eligible for Medicaid (based on income) and educate them about their options through this government program.
Then we choose a contribution level that makes coverage affordable for the vast majority of the remaining hourly workers. This is the same coverage offered to the ownership/management class of employees. The rank and file employees likely will not enroll in this coverage because they cannot afford to do so. However, since it was offered to them the employer avoids the $3000 penalty. Additionally, this strategy also address the Individual Mandate, requiring all persons to have Minimum Essential Coverage. This enables employees to avoid individual penalties.
Utilizing a MEC strategy is a complex concept designed to help employers with many low paid workers avoid the punishing penalties of the Affordable Care Act. Employers utilizing this strategy will want to be sure that they have all ACA and ERISA compliance matters properly addressed in order to avoid potential regulatory overreach as these plans could be the target of regulatory scrutiny. In all cases we recommend consulting both legal and tax counsel.
About the Author- Scott Rappoport is an Employee Benefits professional with more than 30 years of experience helping employers from 50-5000 employees manage the costs and complexities of their benefit program. Scott is a Certified Employee Benefits Specialist (CEBS), a professional designation program offered through the Wharton School of Business of the University of Pennsylvania in conjunction with the International Federation of Employee Benefit Professionals. Scott is a Principal in Chadler Solutions where he directs the Employee Benefit, Retirement, Human Resource & Individual Insurance divisions. For more information on ACA Compliance and how these complex issues apply to your company, you can reach Scott at firstname.lastname@example.org.
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