Practitioners Respond to PPACA Decision
Key Topic: High court ruling reduces some employer uncertainty about
new rules for providing health benefits.
Key Takeaway: How employers respond to the law's pay-or-play penalties
might reduce employment opportunities in low-wage industries.
By Florence Olsen
Employers will have difficult decisions to make following the Supreme Court's
June 28 ruling to uphold most of the 2010 federal health care system overhaul,
especially about whether employers can avoid costly pay-or-play penalties under
regulations still being drafted, employee benefit attorneys told BNA.
The lack of final regulations on major provisions of the Patient Protection
and Affordable Care Act, including ones implementing employer penalties under
tax code Section 4980H, means that many employers do not yet see clearly how
they might restructure their employee benefits or, in some industries,
restructure their workforces in response to the new regulations.
The employer penalty rules under Section 4980H and separate nondiscrimination
rules for fully insured plans could make it difficult for companies to
restructure, especially in industries such as retail, food service, and
hospitality, “unless employers are willing to limit large portions of their
workforces to less than 30 hours per week,” Alden J. Bianchi, employee benefits
and executive compensation practice group leader at Mintz Levin Cohn Ferris
Glovsky & Popeo in Boston, said in a June 27 email.
In a 5-4 decision, the Supreme Court upheld the individual mandate that is
the centerpiece of PPACA (63 BTM 209, 7/3/12). The court held that Congress was
authorized to impose the mandate under the U.S. Constitution's Taxing and
Spending Clause. The mandate, which goes into effect in 2014, will require
virtually all U.S. citizens to obtain health care insurance or pay a
At some point, many employers will question whether they should continue
managing the cost of employee health benefits themselves or transfer that
responsibility to publicly operated insurance exchanges, to be created by 2014
under the authority of the health care law. But until employers see the rules
under Section 4980H, “this question is premature, since it's all about cost to
the employer,” Bianchi said.
“Every client is asking this question, although all the ones that have looked
at it closely have decided to continue to provide some health coverage,” David
R. Godofsky, a partner at Alston & Bird in Washington, said in a June 27
According to Harvey D. Cotton, a principal at Ropes & Gray in Boston,
nothing in the experience of employers in Massachusetts, which enacted a health
care law similar to PPACA, suggests that employers in the rest of the states
will stop offering health benefits once the states establish publicly operated
insurance exchanges. That is assuming Congress does nothing to change the law,
Cotton said in a June 27 email. “The final chapter has not yet been written,” he
But for employers in some industries, the answer could be different. “We
expect the answer to be driven by industry trends, with some industries
completely forgoing employer-based plans in 2014,” Steven J. Friedman,
shareholder and chair of the employee benefits practice group at Littler
Mendelson in New York, told BNA in a June 27 email.
Godofsky said that, in some industries, such as retail, food service, and
hospitality, employers will respond to the health care law by restructuring
their workforces. “Many employers will restructure, but not to allow employees
to take advantage of subsidies,” he said.
“From the employer's perspective, the goal is to reduce penalties while still
leaving some employees out of their health insurance,” Godofsky said. “That
means employers will increasingly rely on part-time workers and refuse to allow
them to work enough hours to become full time. Other employers will offshore
some operations or concentrate hiring at the lateral rather than entry
From an employee perspective, Godofsky added, the health care law “is bad
news for people just entering the workforce or who are unemployed and trying to
The Congressional Budget Office and Joint Committee on Taxation recently
reported that PPACA will reduce the number of nonelderly people without health
insurance coverage overall by 30 million to 33 million beginning in 2016. Based
on projections made before the Supreme Court ruling, however, CBO and JCT also
reported that, for 2016 through 2019, PPACA will produce a net decrease in the
range of 3 million to 5 million a year in the number of workers who receive
health benefits from their employers, compared with projections made before
The figures for the number of people who will lose employer-provided health
care are probably too low, Godofsky said. “The CBO/JCT underestimated the extent
to which employers will game the system to avoid adding costs,” he said.
“Employers will reduce hours so workers can't reach full time and will increase
employee premiums so that the employees themselves will drop out,” he said.
Friedman added that global competition is having a negative effect on “the
generosity of American employers,” with the result that employers will not be
providing the same level of health benefits to employees that they offered in
A Supreme Court ruling to uphold most of the law's major provisions will free
employers from the task of unwinding provisions of the law they have implemented
and are popular among workers, Greta E. Cowart, a partner at Haynes & Boone
in Dallas, said in a June 27 email.
That said, the challenges of interpreting and implementing the law are just
beginning, she told BNA June 28.
Some of those benefits, including permitting children up to age 26 to be
covered by a parent's employer-subsidized health insurance, are beneficial for
employers as well as employees, Godofsky said. “Despite high unemployment, it is
actually hard to find the workers you really want. Employers are going to be as
focused on keeping their best workers as they are on keeping costs down,” he
Commenting June 28 on the Supreme Court decision itself, Godofsky said that
“the [law] survives one more day, and employers and states need to work toward
Friedman said the Supreme Court's ruling “will have a significant effect on
our practice because many clients have been on the fence about making the
changes they will need to consider in connection with their health care
With the certainty provided by the Supreme Court ruling, employers will now
focus on provisions of the law and regulations that most concern them. Topping
that list, Cowart said, are new requirements for employers to report the value
of health benefits on employees' W-2 forms, provide employees a uniform summary
of benefits and coverage, amend health plan documents to reflect a $2,500 cap on
employee contributions to health flexible spending accounts, and automatically
enroll new full-time employees for health benefits if the employer has more than
200 full-time workers.
The automatic-enrollment requirement has been delayed until after the
Department of Labor issues guidance. In recent comment letters, employers raised
concerns about requirements for automatically enrolling employees to receive
The $2,500 annual limit on salary reduction contributions to health flexible
spending arrangements applies to plan years starting in 2013.
Bianchi said his clients are most concerned about the summaries of benefits
and coverage. “These rules are prescriptive and granular, and the penalties for
noncompliance are steep,” he said.
Cotton said his clients are expending most of their energy on developing the
required uniform summary of benefits and coverage that employers must give to
employees during the next open enrollment season beginning on or after Sept.
Federal regulators have said they generally will not take enforcement action
against health plan issuers and group health plans for failure to comply fully
during the first year that the rules on providing a standardized summary of
benefits and coverage apply (63 BTM 153, 5/15/12).
Employers also must prepare for the Medicare portion of the payroll tax to
increase in 2013 by 0.9 percent to 2.35 percent of annual wage or self-employed
income in excess of $200,000 for individuals or $250,000 for couples filing
“I would say the tax increase tops the list, but since there's nothing to do
about it, most [employers] aren't giving it much thought,” Godofsky said. “The
W-2 reporting is a nightmare because no one knows how to collect the data, and
they're supposed to be collecting it now.”
In 2013, employees' W-2s must reflect the aggregate cost of all reportable
benefits that an employee received under all the group health plans in which he
or she participated during all or part of the 2012 plan year.
Many of the new requirements require what Cotton described as “administrative
adjustments.” However, he said, most of his clients view the requirements as
simply the “new normal” in terms of how they must administer employee
Attorneys that BNA interviewed also said they expected that final rules
centered on employer pay-or-play provisions in the health care law will provide
workable definitions of “full-time” employee, “affordable” health benefits, and
“minimum value” health plans.
“There are some pretty savvy organizations lobbying pretty hard on this, and
the regulators understand fully the extent of the problem,” Bianchi said.
Godofsky noted, “I think the definitions will end up being workable.” He
added, “The bigger issue is that employers are going to prevent workers from
going full time. This obviously hurts people who want or need to make more
money, especially at the lowest wage levels.”
Under the law, large employers, defined as having 50 or more full-time
employees in the previous business year, are potentially liable for two separate
pay-or-play penalties. One penalty would apply if a large employer does not
offer health benefits to its full-time employees and has any employees who
qualify for and are receiving federal tax credits or federal subsidies to buy
health insurance through a PPACA exchange.
The pay-or-play penalty is calculated monthly based on $2,000 a year
multiplied by the number of the employer's full-time employees and indexed to
the growth rate of health insurance premiums.
A separate penalty can be assessed on large employers for offering health
benefits that are not affordable or that do not provide a certain minimum level
of benefits if those employers have any employees who are receiving federal tax
credits or other federal subsidies to buy health insurance through a PPACA
For those employers, the pay-or-play penalty is calculated monthly based on
$3,000 a year multiplied by the number of employees receiving a federal tax
credit or other federal subsidies to buy health insurance through an
Attorneys at McDermott Will & Emory told BNA June 28 that they are
talking with federal officials about crafting rules under Section 4980H that
will accommodate the business needs of employers with a seasonal or flexible
workforce, such as retail and grocery chains. “How you characterize someone as a
full-time employee is a big issue for some of our clients,” said Amy M. Gordon,
a partner at McDermott Will & Emory in Chicago.
“We've been working with the agencies on meaningful and practical rules on
how to measure that,” said Susan M. Nash, also a partner in the Chicago
“We've also been helping clients understand what they have to do to make sure
their coverage is not unaffordable,” Gordon added.