Health care reform and the hospitality industry
By Bruno Katz and Robert Harrison
The Patient Protection and Affordable Care Act of 2010, which was upheld by a narrow 5–4 margin by the U.S. Supreme Court in July 2012, will have some immediate and major ramifications on the nation’s health care system, as well as the actions of both federal and state governments. Though the issue is federal, it will even effect how California faces its growing budget crisis.
It’s important to note that Chief Justice John Roberts Jr., the author of the majority opinion, held that the individual mandate was constitutional as a tax. As a result, instead of regulating existing commercial activity, the individual mandate compels individuals to become active in commerce by purchasing a product on the grounds that their failure to do so affects interstate commerce. So, a business or an individual has the “right” not to purchase insurance coverage; instead they have the “choice.” But under the PPACA, certain businesses and individuals may be subject to a congressional taxing authority if they do not have coverage.
Providing health insurance has become a significant struggle over the past decade, especially for small restaurant and lodging operators. But now that the PPACA is the law of the land, it’s important for restaurant operators to understand the law’s key provisions, when they take effect and what will mean to operated business.
Who is required to provide coverage?
Generally, PPACA applies to employers with 50 or more full-time employees – those who average 30 or more hours per week. Employers are also required to provide so-called “minimum essential” and “affordable” coverage. Because of these general principles, many smaller employers aren’t paying attention to the laws because they have fewer than 50 full-time employees. However, there is more than one way to reach the 50-employee threshold.
Part-time employees are included in the 50-employee calculation as “partial employees” for determining whether the employer has 50 employees, so 50 employees really means 50 full-time equivalents (FTEs). For example, if a company has 25 full-time employees and 50 half-time employees, the company has 50 FTEs and will be subject to penalty if health care coverage isn’t provided. Given that many restaurants and hotels use part-time employees, the new laws may affect them.
In addition, some companies separately incorporate their restaurants and hotel properties for a variety of corporate and liability purposes. For purposes of the health care act in counting employees, IRS and ERISA controlled-group principles apply. Parent, brother and sister companies are counted as one. So, if two restaurants with 25 FTEs are separately incorporated but owned by the same company, person or other “controlled group,” those properties meet the 50-FTE employee threshold. Companies must carefully count the number of actual employees to see if the 50-FTE employee threshold is met.
As to the meaning of “minimum essential” and “affordable” coverage as defined under the Act, minimum means 60 percent of the actuarial value of the cost of the benefits. Affordable means the premium for the coverage paid by the individual employee can’t exceed 9.5 percent of the employee’s household income. Employers who meet the 50-FTE level will have to have very competent accountants to ensure the coverage offered meets the standards under these definitions.
Small employers who have fewer than 50 FTEs aren’t required to offer health insurance coverage. However, those who do offer coverage must comply with several new requirements. For example, health care plans under the Act (1) can’t exclude coverage for preexisting conditions, (2) must cover adult children up to age 26 and (3) must not impose annual or lifetime limits on certain benefits. In addition, rescissions are prohibited by all health plans, even grandfathered plans, except in cases involving fraud, non-payment of premiums or intentional misrepresentation of material facts under the terms of the health plan.
The Act also requires that at least 80 percent of premiums be applied to medical care for subscribers covered by individual health insurance plans and small employers, and at least 85 percent of premiums must be applied to medical care for subscribers covered by large (more than 50 FTEs) employer-based health plans. Insurers who don’t meet these requirements must issue rebates to subscribers. This provision applies to all plans except self-funded plans. California has already put the federal minimum medical loss ratio requirement into California statute by passing SB51 in 2011.
Small businesses with fewer than 25 FTE employees are eligible for a tax break if they cover at least half the cost of health insurance. However, only businesses with fewer than 10 FTE employees and average salaries of $25,000 or less are eligible for the full credit. The full credit is 35 percent of the employer’s contribution toward an employee’s insurance premium. As the operation’s size and average wage amount goes up, the tax credit decreases. Once the business reaches 25 FTE employees or $50,000 in average salaries, the credit is completely phased out.
The Act provides several incentives for small employers who choose to offer coverage. The Act simplifies cafeteria plan rules and provides grants to small employers to establish workplace wellness programs. As to the small employer tax credit, by 2014 all states must open a health insurance exchange program. The purpose of the exchange is to make it easier for small employers to obtain and provide health insurance coverage for employees.
In addition, small businesses that buy through the exchange can get a bump in the tax credit up to 50 percent of an employer’s contribution. However, the small employer tax credit is available only for qualified health plan coverage through an exchange, and an employer may receive the credit only for a maximum period of two consecutive years.
Timeline of key PPACA provisions
- Employer reporting of insurance costs on Form W-2. Some believe this is a preamble to taxing health benefits.
- High medical bills tax. Currently, those facing high medical bills are allowed a deduction for medical expenses to the extent those expenses exceed 7.5 percent of adjusted-gross income (AGI). Under the Act, the deduction applies to expenses that exceed 10 percent of AGI.
- Flexible spending account (FSA) cap (special-needs kids tax). The Act imposes a cap on FSAs of $2,500 (currently unlimited) on the amount that can be deposited into these accounts. The cap will be indexed for inflation after 2013. Under tax rules, FSAs can be used to pay for education of special needs children, which many families with special needs children do. The tuition cost of such schools can easily exceed $15,000 per year. Also, the Act will exclude use of FSAs for over-the-counter drugs, unless the drug is prescribed or is insulin.
- Elimination of tax deduction for employer-provided retirement prescription drug coverage in coordination with Medicare Part D. The change increases the employer’s cost of providing prescription drug coverage to retirees. Note: Even with 2013 implementation, employers today must include the present value of future taxes as a current liability charged against earnings, immediately affecting employer finances.
- A $500,000 annual executive compensation limit for health insurance executives.
- Individual mandate tax. Anyone not purchasing qualifying health insurance must pay income surtax. In 2014, an individual will pay 1 percent of AGI or $95. In 2015, 2 percent or $325. In 2016, 2.5 percent or $695 ($2,085 for families).
- Employer-mandate tax. This applies to employers with more than 50 FTEs. Businesses with 51 or more FTEs will be fined $2,000 per employee (excluding the first 30 employees) if they don’t offer coverage for employees who average 30 or more hours per week. Note: There is no penalty for part-time employees not offered coverage. As a practical matter, this means that the penalty is not based on the FTE but rather on actual full-time employees. This means a 50-FTE employer could be exempt from the penalty tax if it has only 30 actual full-time employees and the rest are part-time employees.
As an example, a restaurant has 25 full-time employees and 50 part-time employees, equaling the trigger of 50 FTEs. The restaurant would be subject to the penalty if it does not provide health care coverage. However, the penalty cost would likely be $0 because the $2,000 per-employee tax does not start until the 31st actual full-time employee is hired, and the restaurant only has 25 actual full-time employees. This could mean that some 50-FTE employers that are subject to penalty may end up owing nothing in penalty tax.
- Excise tax on comprehensive health insurance plans. There is a 40 percent excise tax on employer-paid premiums for “Cadillac” plans that typically are fully or largely paid by employers. The 40 percent excise tax will apply to the aggregate value of employer-sponsored health plan coverage that exceeds $10,200 for self-only coverage and $27,500 for family coverage. This is applicable to both insured and self-insured plans. Also, the thresholds could be increased in 2018 if the actual growth in U.S. health care costs exceeds expected growth or adjusted to reflect age and gender of the population covered; for retired, non-Medicare-eligible individuals; and where the majority of the employees in the plan are engaged in certain high-risk professions.
In 2010, California passed legislation and developed the California Health Benefit Exchange, identified as a “new marketplace” authorized by the Act. The California exchange is its own, self-supporting entity within the state government, governed by a five-member unpaid board of directors.
The exchange became operational in January 2011 and has been working to design and develop the infrastructure necessary to implement the new health coverage marketplace that will support the enrollment of millions of Californians. In August 2011, the California Exchange received a $39 million federal establishment grant to continue in the initial planning phases for this effort. Since then, the exchange:
- has hired 36 permanent staff
- began creating a web-based eligibility and enrollment portal in collaboration with the Department of Health Care Services and the Managed Risk Medical Insurance Board that will help consumers shop for insurance online with tools to compare plan benefits and costs, starting with open enrollment in October 2013
- developed a marketing, outreach and public education program that will launch in 2013 to raise awareness about coverage expansion that will begin in 2014
- created a process to select qualified health plans to be offered to individuals and small businesses through the Exchange starting in 2014.
- worked to finalize an application to the federal government for its next cycle of federal funding, that will support continued startup work between August 2012 and June 2013.
With the PPACA not subject any further judicial challenges as to constitutionality, the Act is the law of the land and its key provisions will be slowly implemented over the next few years. While the election may see some legislative changes or attempts to repeal depending on which party controls the White House and Congress, hospitality companies need to be proactive and implement preventative strategy. This would mean a compliance plan, including audits, that should be synergized with other practices, procedures and policies.
This report was reviewed for legal accuracy and updated in 2013 by Wilson Elser Moskowitz Edelman & Dicker LLP.