Are employers ready to comply with the ACA?

Make no mistake: the Affordable Care Act represents an economic threat to your company that’s all too real. Companies that fail to comply with the ACA, or that approach adherence ad hoc, could easily incur penalties amounting to millions of dollars.  

Yet some businesses remain largely unaware of the challenges of meeting those requirements — or, at the very least, are unprepared for carrying out compliance protocols – and of the potentially severe long-term financial consequences. 

{mosads}As ACA implementation continues, deadlines for corporate America are fast closing in and looming large. Starting next year, non-compliance with certain key provisions of the ACA could result in penalties that hit you and hit you hard. 

That’s why employers should start proper planning now.  

First, let’s define the dimensions of the issue faced here. The ACA can trigger three main taxes – the so-called (and aptly named) “catastrophic penalty,” the no less fittingly dubbed “lesser penalty,” and a 40% excise tax on “Cadillac” health plans. Penalties on each of those taxes can run high – the more employees, the bigger the risk, leaving large and midsized companies the most vulnerable. 

Next, let’s freely acknowledge the degree of difficulty organizations face here, and the corresponding demand for education. As I’ve learned firsthand from my experience in the field talking to large companies about their human capital management strategies, more than a few employers remain surprisingly laid back about ACA compliance. They have yet to reckon with its realities. They’re still puzzling over what the law says, what it means, its timing, and what has to be done to comply with it.  

Call it the complexity conundrum.  

A case in point is the little-known – and less understood – Excise Tax on “Cadillac” plans under the ACA. Beginning in 2018, employer plans with costs exceeding specific limits must pay an Excise Tax on their excessive spending.  Here’s how it works. If your cost of health care as an employer, counting both employer and employee contributions, exceeds $10,200 for individual coverage and $27,500 for family coverage, an Excise Tax will be triggered equal to 40 percent of the amount beyond those limits and you will ultimately be liable for the tax. 

That can easily add up fast. Indeed, exceeding those limits even by a small amount annually can result in serious – and non-deductible – penalties. Suppose, for example, that your company covers 500 individuals and 1,500 families. Suppose, too, that your cost for individual coverage exceeds the $10,200 individual limit by merely $350 per individual and the $27,500 family limit by $725 per family. Your annual penalty in 2018 will amount to $505,000. 

Now say your company is three or four times bigger, with1,800 individuals and 6,200 families enrolled, and you’re surpassing those limits by exactly the same margins – a mere $350 per individual and $725 per family. Extrapolated via the same formula, your annual penalty will come out to $2,050,000. Yes, two million dollars. 

As I’ve learned from conversations with employers across the country, much to my distress, many employers have already concluded that they’ll never suffer an Excise Tax penalty. Where most employers go wrong is in believing the limits for coverage to trigger this tax are so high that they’re all but unreachable, much less easy to exceed. But chances are they’re mistaken. Indeed, research by Towers Watson estimates that unless companies adjust accordingly, as many as 60 percent of all employer plans will eventually owe this Excise Tax.  

The good news here is that employers have some breathing room: the Excise Tax comes due in 2018. That leaves some time for you to adjust the company’s health benefits to avoid the Excise Tax.  The bad news is that you’ll have to deal with two other ACA penalties well before then. 

Consider the “catastrophic” or “big” penalty. It requires certain large companies, known as “applicable large employers,” (those that employed on average at least 50 full-time or full-time equivalent employees during the prior calendar year) to offer a “minimum essential coverage” plan to at least 70 percent of all full-time employees in 2015 (95 percent starting in 2016) to avoid paying a fine. If an employer fails to offer the necessary coverage, and if at least one full-time employee goes to an Exchange (aka Marketplace) and qualifies for a federal subsidy, the employer will incur an annualized, non-deductible penalty of $2,000 for every full-time employee. For a company of 2,000 full-time employees, that adds up to almost $4 million a year. 

Ouch. 

The “lesser” penalty is a different story. To avoid it, large employers are required mainly to offer a health plan with at least a “minimum value” and ensure that the plan is “affordable” as described in the ACA. Otherwise, you can incur an annual fine of $3,000 for each full-time employee who receives federal assistance to purchase health insurance through an Exchange.     Still, the total amount levied would be smaller than the total “catastrophic” penalty – hence the word “lesser.”  The annual penalty impact under the “lesser” penalty cannot exceed the “catastrophic” penalty amount.   

To clarify: while the $2,000 annualized penalty (big penalty) appears smaller than the $3,000 penalty, keep in mind the “big penalty” is assessed on all employers vs. the “lesser” is only assed on those employees going to the Exchange for benefits and receiving subsidies. 

The key is for employers to find a trusted Human Capital Management partner who grasps all the nuances at play here. A reliable expert can lay out critical steps toward adopting the right strategy for reaching well-informed decisions.  

For the moment, though, attention must be paid, and soon. You have less time to prepare than you think. 

Haslinger is vice president of Strategic Advisory Services at ADP. ADP has empirical, real-time access to “big data” about employee health benefits drawn from more than 15 million employees and their dependents.