Breaking News: On July 2, 2013, the United States Treasury Department announced a delay in the previously-scheduled 2014 deadlines for businesses to comply with the new health insurance mandated under the Affordable Care Act. Recognizing concerns about the complexity of the Act’s requirements and the need for more time to implement them effectively, the Obama Administration has decided to push the implementation date forward until 2015. The Treasury Department announced that it would publish formal guidance addressing the concerns which prompted the delay in mid-July 2013, however, at the time of publication, such announcement had not yet been made. While questions remain as to whether any additional legislative or regulatory changes may be made during the transition period, one thing that is for sure is that employers should use this additional time wisely and take initial steps towards ACA readiness.
ACA Applicability to the Restaurant Industry
The employer mandate under ACA, also known as “Pay or Play,” requires employers to either provide health coverage to their employees (“play”), or else pay a tax penalty toward a publicly provided system that covers people without private insurance (“pay”).
ACA applies to employers with over 50 full-time employees. Due to the highly-variable hours of restaurant employees, largely based on season, shift, or employee availability, restaurant owners and franchisees are certainly impacted by ACA’s departure from the 35-40 hour per week definition of full-time employment common in the restaurant industry. Under ACA, a full-time employee is someone who works 30 or more hours per week on average. However, to appropriately take into consideration variability in employees’ hours, the employer is allowed to select its own measurement period, between three months and one year, to determine whether each employee indeed works 30 hours or more per week on average within that selected period of time.
Also significantly affecting the part-time heavy restaurant industry is the calculation of the total number of eligible employees. ACA applies to “large employers” with 50 or more “full-time equivalent” employees. The term “full-time equivalent” is used because both full-time employees (working 30 or more hours) are counted and a pro rata number of part-time employees. To calculate pro rata part-time employees the total number of all part-time employees hours worked are divided by 120. For example, if your restaurant has 40 employees who work an average of 30 or more hours per week, each of them is counted as 1 employee towards the count. Additionally, if you have 80 part-time employees who work an average of 20 hours per week, their total hours (1600) are divided by 120, for a total of 13 employees which are added to the count. Under this scenario, your restaurant would have 53 full-time equivalent employees and therefore, the ACA employer mandate would apply.
Due to the costs of providing health coverage for all eligible employees under ACA, some employers have opted to drop existing health coverage or not to begin providing coverage at all under ACA, and intend to simply pay the penalties instead. The economic case for not offering health coverage is that it may appear cheaper to pay the $2,000 penalty per full-time employee rather than paying for health care benefits. In the restaurant industry, however, many companies are currently providing health insurance benefits for various reasons, including:
- as an incentive for full-time commitment;
- to recruit management talent at the store level;
- for positive public relations and a sense of corporate responsibility;
- due to financial and productivity loss associated with employees’ major or minor recurrent illnesses; or
- simply because it costs less to provide health coverage than to pay a higher salary that an employee would require if he/she were left to purchase health coverage as an individual in the market.
These soft benefits may have a negative impact on employee morale if dropped. Moreover, while paying the penalties may appear cheaper than paying for health coverage, penalties are not tax deductible; thus, the income tax and FICA exemptions on pre-tax employee premiums may have an impact on the total cost-benefit calculation.
Furthermore, restaurant owners who are more inclined to pay than play, should become familiar with employees’ alternative options for health coverage to determine its exposure to penalties. Beginning in 2015, U.S. citizens will be able to obtain health coverage through the federal government’s health care exchange, without regard for pre-existing conditions. Though it is uncertain at this time what the costs associated with exchange coverage will be, it will be heavily subsidized by the federal government. The subsidies available will be based on income on a sliding scale up to approximately $40,000 of individual income. Those making over $40,000 annual income will like receive little, if any, subsidy. Low income full-time workers will likely benefit from the costs savings associated with a federal government subsidy and, to the extent they purchase coverage in an exchange, would reduce the employers exposure to penalties. Thus, it is critical to determine the likelihood of employees who are likely to opt in to the employer-provided healthcare plan rather than purchasing coverage through the exchange in evaluating the potential costs of providing coverage.
Pay Option: The Costs-Benefit Analysis of Choosing Not to Provide Health Coverage
While employers may choose not to offer health insurance, they will have to pay penalties for not doing so. Beginning in 2015, large employers that do not offer health coverage will have to pay a penalty of $2,000 per full-time employee. Please note, however, that part-time workers are not included in penalty calculations, even though they are included in the determination of the “large employer” calculation. Therefore, an employee will not pay a penalty for any part-time worker not provided health coverage.
Under the Sledgehammer Penalty, which would apply if at least one eligible employee receives a federal government subsidy and purchases coverage though the healthcare exchange, an employer would be exempt from penalties for the first 30 employees. The Sledgehammer Penalty formula is as follows: $2,000 annual penalty x total number of full-time employees (not including full-time equivalents) – first 30 full-time employees. For example, an employer with 100 full-time employees, 20 of whom are eligible for subsidies and purchase coverage, would pay penalties for 70 employees at a rate of $2,000 each.
As the restaurant industry employs many full-time hourly workers who would likely qualify for federal government subsidies, such as hostesses, bus persons, prep cooks, or servers who report less than $40,000 of income, small-business restaurants that are technically large enough to qualify as “large employers” under ACA may benefit greatly from the 30 employee exemption to the extent the decision is made not to provide health coverage.
Tack Hammer Penalty
Rather than not providing coverage, some employers have shifted much of the costs to the employee by offering health coverage at a high premium to the employee. While there are still penalties associated with this strategy, they are assessed differently and apply based solely on the number of employees who have chosen to obtain coverage through the healthcare exchange rather than employer coverage. This penalty, known as the Tack Hammer Penalty, applies if an employee opts out of an employer plan because coverage is “unaffordable” – that is, if the premium exceeds 9.5 percent of family income. Under the Tack Hammer Penalty, the employer must pay a $3,000 penalty for each full-time employee who purchases coverage through an exchange.
Play Option: Managing the Costs and Selecting Qualifying Coverage
By 2015, all health insurance policies provided to employees will have to include an “essential health benefits package” that provides a comprehensive set of services covering no less than 60 percent of the costs of the covered benefits. Package components will be defined and annually updated by the Secretary of Health and Human Services, and must include items and services with at least the following 10 categories: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative and habilitative services and devices, lab services, preventive and wellness services, and pediatric services.
To discuss the options and costs associated with a qualifying plan, please contact your health insurance agent. After that conversation, you will likely need to pick your jaw up off the floor quickly so that you can begin thinking of ways to cut costs.
In light of the increase in operational costs associated with implementing ACA, it is important to evaluate operations to determine where cuts can be made. Though it may be tempting to simply cut employee hours to less than 30 hours per week, employers should proceed with caution as potential liability under the Employee Retirement Income Security Act (ERISA). Section 510 of ERISA (24 U.S.C. § 1140) makes it unlawful for an employer to take an adverse action, such as reduction in hours or reduction in force, for the purpose of interfering with an employee’s attainment of any right to obtain an employment benefit. Though unlitigated as of yet, a collective action is a potential risk for any employer wishing to reduce hours below the full-time threshold or reduce the number of employees below the “large employer” threshold in order to restrict employees’ access to employer-provided health coverage.
Strategies for ACA Compliance
• Appoint an executive to monitor requirements and ensure compliance.
As ACA compliance issues are many and regulations about applicability and potential penalties are constantly changing, employers may benefit from designating a ACA go-to person to serve as a compliance officer, whether that person be an in-house benefits specialist or outside tax or legal counsel.
• Understand the significant tax implications of offering/not offering coverage.
As discussed above, the cost-benefit analysis of providing health coverage is more involved than simply comparing the $2,000 penalty cost per employee to the cost of health coverage per employee. There are several moving parts related to tax liability, which a tax consultant can calculate and explain to help determine the bottom-line costs of your ACA compliance strategy. Moreover, HR professionals can assist in determining the soft costs and benefits related to employee relations, and legal counsel can assist in analyzing potential compliance risks and exposure to litigation.
• Determine the most advantageous measurement, administrative, and stability periods immediately.
To provide more certainty about those eligible for benefits, employers must determine the most-appropriate measurement period, between three to twelve months, within which to track employee hours. For calendar year plans that intend to use a 12-month measurement period, employers may begin tracking and analyzing hours this year. Thus, time is of the essence with regard to selecting the most advantageous periods.
• Consider your benefits philosophy and what your peers are likely to do.
Richness of benefits offered and the amount of employee contribution to plans compared to your competition will impact employee retention and candidate decisions. Thus, the potential impact on employee relations is an equally as valuable consideration as the cost-benefit analysis in determining a ACA compliance strategy.
• Over-communicate with notices to employees.
ACA implementation is complicated and confusing to employers and employees alike, so be prepared to become as educated as possible and, in turn, educate employees on your plan’s affordability and their options.