Stop and Consider Before Cutting Back to Save on Affordable Care Act Costs
ACA alternatives can yield a significant cost savings, but consider the legal and human resources impact before you decide
Restaurant operators of all sizes are analyzing how to comply with the pay or play rules under the Affordable Care Act (ACA) without breaking the bank. Under these rules, covered employers must offer qualifying health coverage to certain employees or pay a penalty to the IRS. Three alternatives that have increased in popularity are reducing workers' hours, classifying workers as "variable hour," and excluding or charging more for coverage of spouses and other family members. These alternatives can yield a significant cost savings, but if you are thinking about pursuing any of them, you should be careful to first consider the legal and human resources impact.
The reason that employers, especially those in the restaurant and hospitality industries, are taking proactive steps to reduce employee work hours is that the ACA only requires "applicable large employers" to provide affordable, minimum value health coverage to their full-time employees. The ACA does not require that any offer of coverage be made to independent contractors or to employees who do not work enough hours to qualify as full-time. Only employees averaging 30 hours or more per week, or 130 hours per month, are considered full-time. By limiting employee hours to less than 30 hours per week on average, the employer avoids the need to offer that employee any health coverage and saves the related cost of paying the employer's share of the premium cost if the employee elects to enroll or the cost of the penalty for failing to offer that employee health coverage.
If you are thinking about reducing hours in this manner, you should beware of the legal risks. Section 510 of the Employee Retirement Income Security Act of 1974 (ERISA) generally prohibits employers from taking employment actions intended to interfere with a worker’s benefits. ERISA Section 510 does not prevent you from limiting the hours of your existing part-time employees to a safe level of 26 or 28 hours per week in order to make sure they do not exceed the 30-hour threshold or prohibit you from moving employees to part-time when you have a valid business reason and do not have the intent to deny or interfere with the employee's benefits. Instead, ERISA Section 510 is intended to prevent you from reducing hours in order to cause that previously-eligible employee to lose eligibility for your employer-sponsored health coverage.
We expect to see increased Department of Labor scrutiny on employers who reduce employees' hours. Plaintiffs' lawyers will likely see potential for a significant dollar recovery, especially where a large class of employees is impacted by a reduction of hours. Recovery could include retroactive reinstatement to full-time status, lost wages, and unreimbursed health care costs. One very sick employee in your impacted workforce pool could significantly drive up the potential judgment. In addition, plaintiffs may gain additional negotiating power from the fact that retroactive reinstatement of employees to full-time status might cause you to fall below the 95 percent offer of coverage threshold that must be met to avoid penalties under the ACA’s pay or play rules.
You can take steps to lessen these legal risks. For example, rather than decreasing hours of full-time employees immediately, a lower risk approach would be to replace full-time employees as they voluntarily leave or retire with one or more part-time employees.
Classifying Workers as "Variable Hour”
In most cases where it is not obvious that an employee is full-time at date of hire, the employer will be permitted to measure the employee's hours over a one-year period ending 30 to 60 days before the start of the employer’s plan year so that the employer has time to identify, and then enroll, employees who turn out to be "full-time."
A significant number of employers are taking a short-cut and classifying their employees as full-time based upon their status as management or non-management, rather than going through the steps of determining what hours are reasonably expected. For example, you might decide that all managers and assistant managers are full-time, and everyone else in the restaurant is not, calling them "variable.” This is a dangerous practice because, if audited, you have no evidence that you used a reasonable, good faith decision-making process. What's more, if non-management employees in your restaurant location are historically averaging 30 or more hours per week, or 130 per month, or you have advertised the position as requiring 30 or more hours per week, you are likely to have a very difficult time trying to convince an IRS auditor that your classification was correct. If the IRS disagrees with you, the employee may be reclassified as full-time back to his date of hire, and you would then have failed to offer coverage in a timely manner. If enough employees are reclassified, you could fall below the 95 percent offer of coverage threshold that must be met to avoid penalties under the ACA's pay or play rules. If the employee is found to be eligible, but you did not offer him coverage within his initial 90 days of employment, you might also be in violation of the 90-day waiting period rule and be subject to additional penalties.
While you can use job categories as a means of classifying your employees as full-time, you should make sure to have the analysis and backup to support this decision, and have consistent advertising and job descriptions.
Limiting Spousal Coverage
Many employers are limiting or charging more for health coverage offered to spouses or other family members. The ACA does not require that employers offer health coverage to spouses. The ACA only requires that coverage be offered for employees and their dependent children. What’s more, the ACA “affordability” requirement applies to the employee-only coverage offered by the employer, not to the cost of coverage for children or the spouse. As a result, employers may charge higher premiums for the family portion of health coverage, exclude spouses from health coverage, or limit spousal health coverage to spouses who do not have coverage offered through their own employers. In fact, for the past decade a significant number of employers have moved away from subsidizing non-employee coverage, especially where coverage is being offered by a spouse’s employer.
In addition to legal risks, before adopting any of the above alternatives you should also ask yourself a number of non-legal questions about how the alternative impacts your ability to attract and retain quality employees, as well as the continued ability of your employees to earn a living wage. If hours are limited or health coverage will be delayed, will you be able to fill positions as easily? And if you do fill those positions, how much turnover will there be? Will employees with limited hours be able to have only one job, or will they be forced to take several part-time jobs, making your scheduling more difficult and lessening employee morale? If you deny spousal coverage to spouses with employer-provided coverage, will this have a disparate impact on lower earning employees whose spouses must work in order for them to meet their bills?
If you are trying to minimize the cost impact of the ACA on your restaurant operations, before making any decision you need to carefully consider the legal ramifications and, possibly more importantly, the potential human resources impact.