Physician Practices as Employers under Federal Health Care Reform: The Employer Mandate and Related Requirements and Opportunities

This article was originally published for the American Health Lawyers Association Physician Organizations Practice Group

It is no secret that the Affordable Care Act (ACA) provides physician practices with plenty of information to digest and tasks to accomplish. On a daily basis, physician practices strive to understand and implement a plethora of requirements they need to satisfy in order for them to thrive as providers of health care under new payment and delivery models, which increasingly focus on value (i.e., quality and efficiency) in addition to the volume of services provided. As business owners, many physician practices realize, for example, that they will need to inspire their workforce to strengthen clinical integration efforts, implement a robust and living compliance program, and overcome challenges related to electronic health record meaningful use implementation. That being said, physician practices also must stay abreast of their legal obligations as employers during this time of change under the ACA.

This article provides a broad overview of the obligations of certain physician practices to offer a minimal level of health insurance coverage to their employees, as well as certain carrots and sticks that the federal government has promulgated in hopes that employers do indeed provide such benefits. Employer Mandate and Its Application to Large Employers To advance its goal of increasing health insurance coverage and affordability, and as a counterpart to its general requirement that individuals maintain a minimum level of health insurance, the ACA requires, in general, that large employers either:

(1) provide affordable minimum value health coverage to their employees and their dependents; or

(2) risk being responsible to the federal government for an assessable payment for not doing so (Employer Mandate).

Generally stated, large employers who do not provide affordable minimal essential coverage that meets the minimum value standard to substantially all of their fulltime equivalent (FTE) employees (and their dependents) may be subject to a payment requirement if at least one of its FTEs receives a premium tax credit for purchasing individual coverage on the health insurance marketplace (also often referred to as the individual exchanges).

The amount of the payment depends on the specific circumstances but will in no case exceed $2,000 per year per FTE (subject to an inflation adjustment). According to the American College of Physicians and other organizations, many physician practices already offer such coverage and will remain largely unaffected by the Employer Mandate.

Generally stated, employers that employed an average of at least 50 FTEs on business days during the preceding calendar year are referred to as “applicable large employers” or “large employers” and are subject to the Employer Mandate.

The regulations implementing the Employer Mandate define “employee” as an individual who is an employee under the common law standard, and not including a leased employee, sole proprietor, partner in a partnership, 2% S corporation shareholder, real estate agent, or a direct seller. Full-time employees are defined as employees that, with respect to a calendar month, average at least 30 hours of service per week.

Internal Revenue Service (IRS) guidance includes the following example: an employer that employs 40 employees employed for 30 or more hours per week on average and 20 employees employed 15 hours per week on average has the equivalent of 50 FTEs and would be a large employer.

As stated above, when the Employer Mandate is implicated (i.e., when an employer is an “applicable large employer”), the employer must offer affordable health insurance meeting the minimum value standard in order to avoid the risk of otherwise-assessable payments described above. In order to be “affordable,” the employee share of the self-only premium must be no more than 9.5% of household income to FTEs. The IRS has clarified that employers are permitted to use the wages they pay, their employees’ hourly rates, or the federal poverty level in determining whether employer coverage is affordable as required under the ACA.

The minimum value standard means providing coverage with an actuarial value of 60% (i.e., it must cover at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan) or more. Impact of Employer Mandate on Small Physician Practices Under the ACA, small employers (including without limitation physician practices) with less than 50 FTEs are not subject to the Employer Mandate and do not need to provide minimal essential coverage (or any other type of health insurance coverage) to their employees. Guidance from the U.S. Department of Treasury recently stated that “[a]pproximately 96 percent of employers are small business and have fewer than fifty workers and are exempt from the employer responsibility provisions.” That being said, those small employers with 50 or fewer FTEs that elect to provide health insurance coverage to their employees will be able to shop for health insurance products to offer to their employees through state or federal Small Business Health Options Program (SHOP) marketplaces.

Further, small employers with fewer than 25 FTEs, with an average annual employee salary of less than $50,000 (adjusted for inflation) and who pay at least 50% of their FTEs’ premium costs are eligible for a tax credit to purchase health care coverage through the SHOP marketplace for their employees.

Final Rule Provides Transition Relief Although the ACA provides that the Employer Mandate was set to become effective during 2014, the IRS Final Rule on the Shared Responsibility for Employers Regarding Health Coverage (i.e., the Employer Mandate), which was published on February 12, 2014, provides for a more-gradual phasing in of such requirements.

Briefly stated, the Final Rule provides that, starting in 2015, the Employer Mandate will generally apply to businesses with 100 or more FTEs and, starting in 2016, will apply to employers with 50 or more FTEs. In order to take advantage of the extension to 2016, employers with at least 50 but fewer than 100 FTEs will need to provide an appropriate certificate on a prescribed form with respect to workforce size, maintenance of workforce, aggregate hours of service, and maintenance of previously offered health coverage as described in the Final Rule. Further, in order to otherwise avoid the risk of being assessed a payment for failing to offer health insurance coverage, the Final Rules provides that large employers only need to offer coverage to 70% of their FTEs during 2015 (instead of the 95% threshold that will apply during and after 2016).

We also note that, in conjunction with the Final Rule, the federal government has promised “to simplify and streamline the employer reporting requirements” that are set forth in the ACA and that are designed to demonstrate and ensure compliance by employers with the Employer Mandate. Employers will be required to make and provide such reports annually to the IRS and their employees. Such reports will include whether the employer offers health care insurance to the employees, and if so, details including plan participation, waiting periods, coverage, premiums, and other information.

Conclusion In general, physician practices that constitute large employers (i.e., those with 50 or more FTEs) will need to either provide a minimal level of health insurance to their FTEs or risk having to pay certain assessments to the federal government as described above. Although small physician practices (i.e., practices with less than 50 FTEs) are not subject to the Employer Mandate, they should be aware of potential tax credits and cost savings available through the SHOP marketplaces. Now that the Final Rule and additional guidance have been issued with respect to the Employer Mandate, health care attorneys and consultants have an opportunity to work with their physician practice clients to develop a definitive strategy for assessing whether the practice is subject to the Employer.

Mandate and, if so, complying in the most advantageous manner possible.

1 Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010), as amended. See 26 C.F.R. § 54.4980H-1(a)(3).

2 Physician professional organizations are often invaluable sources of guidance for physician practices with respect to the Employer Mandate and related requirements. See, for example, “Questions & Answers about Physician Concerns on Affordable Care Act Implementation,” available on the American College of Physicians website at www.acponline.org/advocacy/state_health_policy/aca_enrollment/faq_physician_concerns.htm. Additional helpful websites also include, for example, www.healthcare. gov/ and www.dol.gov/ebsa/healthreform/index.html.

3 Beginning January 1, 2014, individuals who do not have minimum essential health coverage will be required to pay an annual penalty when they file their federal tax return. See www.irs.gov/uac/Questions-andAnswers-on-the-Individual-Shared-Responsibility-Provision.

4 26 U.S.C. § 4980H. See also 26 CFR § 54.4980H-0, et seq. Accordingly, the Employer Mandate is not an explicit mandate and is referred to in the law and elsewhere as the “employer responsibilities” or the “employer responsibility provisions.” The Employer Mandate also is often described as offering employers the option to “pay or play.”

5 For additional information regarding the potential employer penalties under the ACA, see Janemarie Mulvey, Congressional Research Service, “Potential Employer Penalties Under the Patient Protection and Affordable Care Act (ACA)” (July 22, 2013).

6 See www.acponline.org/advocacy/state_health_policy/aca_enrollment/ faq_physician_concerns.htm.

7 26 C.F.R. § 54.4980H-1(4).

8 See 26 C.F.R. § 54.4980H(21). Also note that the Final Rule clarifies that employers may use either a monthly method to determine FTE status or a look-back period to determine whether an employee is considered a FTE and provides additional guidance on such calculations. This guidance is especially important to those employers who have employees with varying hours, on-call hours, and seasonal employees.

9 See www.irs.gov/uac/Newsroom/Questions-and-Answers-on-EmployerShared-Responsibility-Provisions-Under-the-Affordable-Care-Act.

10 79 Fed. Reg. 8544, et seq. (Feb. 12, 2014).

11 By way of clarification, these SHOP exchanges are separate and apart from the individual health insurance marketplace. For additional information regarding the SHOP marketplace, see http://marketplace.cms. gov/getofficialresources/publications-and-articles/key-facts-about-shop. pdf. Also note that, beginning no later than January 1, 2016, the SHOP marketplaces will be available to employers with 100 or fewer FTEs.

12 An abundance of additional guidance regarding the small business health care tax credit is available at www.irs.gov/uac/Small-Business-HealthCare-Tax-Credit:-Questions-and-Answers. See also 26 U.S.C. § 45R and IRS Notices 2010-44 and 2010-82. When determining whether a physician practice has exceeded the $50,000 threshold, consider that the definition of employee often does not include physicians who own their own practices.

13 79 Fed. Reg. 8544, see supra note 10.

14 See www.treasury.gov/press-center/press-releases/Documents/Fact%20 Sheet%20021014.pdf.

15 See 26 U.S.C. § 6056, available at www.treasury.gov/press-center/pressreleases/Documents/Fact%20Sheet%20021014.pdf. IRS Notice 2013-45 provides that “no penalties will be applied for failure to comply with these information reporting provisions for 2014.”