Many employers who are not currently offering health insurance to employees realized months ago that complying with the Affordable Care Act was going to cost them a lot of money and could put some of them out of business completely. Many began trying to find ways to continue to operate their businesses by minimizing the cost of the Affordable Care Act. Entrepreneurs are generally creative, resourceful people who aren’t going to let their business go down without a fight – so many creative, resourceful solutions quickly developed. Now, only nine months away from January 2014, many of those initial “solutions” have been addressed in regulations and as it turns out, they aren’t solutions after all. Whatever your personal belief about health insurance for all or the requirement that that health insurance be provided primarily through employers, the fact is that many businesses are spending a lot of time and effort right now trying to figure out how to comply with the ACA without breaking the bank.
The first “solutions” developed often focused on ways to avoid classification as a “large employer” with 50 employees under the ACA. If an employer is not a large employer, the employer is not required to provide health insurance under the ACA to its employees. Most of these solutions were short lived however. (For more information see my previous blog post: “Am I a Large Employer under the Affordable Care Act?” https://www.mwblawyers.com/employmentblog/?p=119). Most employers who have more than 50 full time employees or are on the edge of having 50 full time employees have accepted the fact they are not going to be able to make all of their employees part-time in an effort to avoid the cost of complying with the Affordable Care Act. This is because the regulations make clear that employers add full time equivalents to determine whether they have 50 full time employees. Most employers have also accepted the fact that they can’t just divide their companies in several mini-employers each with less than 50 full time equivalent employees. This is because the regulations also make clear that the control group test under the Internal Revenue Code will be used to determine if employers are all one entity for purposes of qualifying as a large employer under the ACA. While this tactic may work in limited corporate structures and circumstances, it certainly is not an inexpensive and easy way to avoid qualification under the ACA.
However, even if an employer qualifies as a “large employer,” the employer is still only required to provide health insurance to its employees who work more than 30 hours a week. So, the next logical “solution” has focused on minimizing the number of employees who qualify for health insurance by restructuring the workforce so that the employer has fewer employees who work 30 hours or more a week. Unfortunately, a new concern has developed regarding this approach—many attorneys have suggested that changes in hours to preclude health insurance coverage may violate Section 510 of ERISA. So far, governmental agencies have refused to take a position on this issue, leaving it instead to be fought out in the federal courts likely years from now. Thus, how much risk is associated with this restructuring is unknown right now; although some plaintiff attorneys are using the words “class action” when discussing the risk. The purpose of this post is to make you aware of the risks so that you can consider it when making decisions about ACA issues.
Section 510 of ERISA makes it unlawful for an employer to interfere with employee benefits and protects the right to present and future benefit entitlements. Especially important here, Section 510 prohibits an employer from using an adverse employment action to interfere “with the attainment of any right to which such participant may become entitled” under the applicable benefit plan. The classic example of prohibited activity would be an employer terminating an employee one week before the employee’s pension vests to prevent the employee from obtaining the pension. However, reducing hours can also be considered an adverse employment action and under the ACA, arguably, reducing hours would be to “interfere” with the employee’s rights to health insurance. Thus, say some attorneys, a reduction in hours to keep an employee from qualifying for health insurance benefits is a violation of ERISA. The primary defense to this argument, at this point, appears to be that because the ACA imposes a tax on employers who do not provide insurance, the reduction in the employee’s hours would be to avoid a tax, not to interfere with a benefit. Further, the employee’s current entitlement (or lack thereof) to the benefit would likely be considered by courts. Consider the difference in an employee who has had insurance but whose hours are reduced so that he no longer has the benefit and an employee who is hired into a position for which the hours were reduced prior to his hire so that he would not qualify for insurance under the ACA.
As you can see, the answer is less than clear. But, if you decide to reorganize your workforce due to ACA costs, you should be aware of this potential risk. I would suggest that you consider the risk along a continuum. You likely face the most risk for an employee who is currently receiving health insurance whose hours are cut such that the employee is no longer eligible. The next largest amount of risk is for an employee who is not currently eligible for health insurance, but who currently works 30 hours a week and would become eligible on January 1, but whose hours are cut before then so that the employee is not eligible. Farther along the continuum, the lesser risk is for an employee who is hired into a new position that has been cut to less than 30 hours a week, such that the employee was never eligible for health insurance. Finally, the least risk is for an employee who has always held a position that worked less than 30 hours a week, so that the employee is not eligible for insurance currently or following January 1 pursuant to the ACA.
Finding a solution for ACA compliance involves the calculation of many risks, factors, and expenses, both in hard dollars and in human capital. Potential ERISA litigation is just another factor to weigh in determining the best option for your company. Given the many legal challenges that continue to develop with each of these options, businesses should be in close consultation with legal counsel throughout the decision process.