How Affordable Care Act (ACA) Work

ACA or Affordable Care Act or Obamacare or Patient Protection and Affordable Care Act or PPACA, is a US federal law which mandates, that Employers with 50 or more full time employees must offer affordable healthcare to those of their employees who work more than an average of 30 hours a week or 130 hours a month.

Will break it down into 5 sections:

1. Who the law is applicable to ?
2. How does it work ?
3. What type of healthcare is offered ?
4. Year End filing
5. Penalties if fail to comply

Who the law is applicable to?

Let's assume, there is an employer with 70 employees. Out of these, 20 are salaried full time who work 40 hours a week. From remaining 50, 35 are hourly, who work on an average 30 hours a week, and 15 are hourly who work 20 hours a week.

So, number of employees who work at least 30 hours a week, are 55, which is more than minimum required 50, hence, this employer is subject to ACA regulations. Such employers are also considered as Applicable Large Employer or ALE. 

How does ACA work ?

Will first understand the ACA Periods, and those are, Measurement, Administrative and Stability period.

Employer, during administrative period, would measure the working hours of each of their employees for measurement period to determine their eligibility for affordable healthcare for stability period. Now let's look at the length of these periods.

• Measurement Period can be up to 12 months long but not less than 3 months.
• Administration Period can be up to 90 days long.
• Stability period can be up to 12 months long but not less than 6 months and certainly not less than the corresponding measurement period.

For administrative ease, most employers prefer to coincide these periods with their health coverage periods. And for our ease of understanding, we will do the same.

Consider this, an employer has an annual Apr to Mar health coverage for their employees. So, for the coverage period Apr 2020 to Mar 2021, the enrollments would most likely be conducted in Mar 2020. In this scenario, if employer wants to coincide the ACA periods, this is where the measurement and administrative period would appear. 

But, how does it works for an employee ?

During the Administration Period, which is March 2020 in this case, employer will look back 1 year all the way since Apr 2019 and measure the working hours of their employees and determine if they have been full time (at least average 130 hours) or part time(less than average 130 hours)  each month and if an employee have maintained FT status throughout the measurement period then he or she is eligible for affordable health plan for 12 months of stability period. Employer cannot drop them from the health plan during this period regardless of whether they maintain Full Time status or not.

 

However a question worth asking, is ACA law ensuring employee has the affordable healthcare during measurement period ? The answer would be, Yes,  it would be part of pervious ACA cycle, which means, this measurement period will actually be stability period of pervious ACA cycle, hence, employee must be offered affordable healthcare during this period too. 

Anyway, Let us now see how will it look like when employer decides to keep measurement period and stability periods 6 months long. So in this case, there will be administrative period every 6th month. If you notice, ACA is ensuring the affordable healthcare is offered to employee over the entire cycle  as the stability period is covering every single month.

Well, we saw how it works for existing employees. But what about new hires ? 

For new hires, there is something called Initial Measurement, Initial Administrative and Initial Stability period which runs in parallel with standard periods. Assuming employee is hired on July 2019, the administrative period would be on Dec 2019, he or she would be measured starting from the hire month. The initial stability period would be from Jan 2020 to Jun 2020. However, This new hire need to be switched into standard period at some point, but the question is when ? If you notice, there is a 3 months of gap between when initial stability period is ending and when the next standard stability period is starting so in this circumstance, new hire would get his or her initial stability period extended by 3 months and we call it as extended stability period.

What type of health coverage should be offered?

As per ACA guidelines, it should have three characteristics:

• It should be affordable
• It should offer Minimum Essential Coverage (MEC)
• It Should be of minimum value (MV)

First, Affordability, which indicates if the health plan offered is affordable as per ACA guidelines. And to determine this, employer can use three methods or safe harbors- Rate of Pay, W-2 and Federal Poverty Line (FPL).

The first one, Rate Of Pay, uses employee's hourly rate, multiply it with 130 which is monthly average working hours required to attain FT status, and then multiply it with 9.78 %. The value it gives would be the maximum an employee should pay for their group health coverage in order to deem it as affordable. If they pay anything more than that then it would lose the affordability tag.

Second, W-2, which uses the gross income mentioned in the W-2 form, multiply it with 9.78 % and then divide it by 12 which gives maximum monthly cost that employee can co-pay for the group healthcare plan in order to deem it as affordable.

Third, Federal Poverty Line, which uses the Federal Poverty Line for the corresponding year, multiply it with 9.78 % and then divide it by 12 which gives maximum monthly cost that employee can pay for the group healthcare plan in order to deem it as affordable.

Employers are at their liberty to use any of these safe harbors but there are some factors basis on which they decide this.

Next, minimum essential coverage, so, the health coverage must offer at least 10 essential health benefits to be considered minimum essential coverage. 

And finally, When the plan is of minimum value:

if the health plan 

• Pay at least 60% of the total cost of medical services
• Includes substantial coverage of physician and inpatient hospital services

If it meets both of these criteria's then its deemed to be of Minimum Value.

How Year End Filing works

At the end of the year, IRS needs the information from individuals who enrolled in health insurance coverage through the Health Insurance Marketplace, as well as Applicable Large Employers about whether they have complied with ACA regulations and it's done via 1095 forms. We call this whole process Year end filing or Reporting.

According to the IRS, employers must send employees their 1095-C forms by the end of January each year. 1095-C forms should be sent to the IRS by the end of February if paper filed, or by the end of March if it's filed electronically.

Employers with fewer than 250 forms to be send to the IRS can file paper 1095-C forms, however, they can also file electronically. Whereas, Employers with 250 or more forms must transmit the information electronically.

There is another form, 1094-C.This form is essentially a “cover sheet” for the 1095-C forms. It provides information about:

• the employer—including address, phone number, employer identification number

• how many employees it has

• the name of a contact person

• and how many 1095-C forms are being sent

Penalties

The IRS needs information from 1095-C forms because it has a central role in enforcing the Affordable Care Act. Companies that are required to offer insurance but don’t, may have to pay a penalty. By collecting 1095-C forms, the IRS can track who is and isn't making coverage available to workers.