5 Obamacare questions for hoteliers
21 MAY 2014 6:37 AM
Hoteliers should look at the short- and long-term effects of their decisions when it comes to health care reform.
One of the most contentious pieces of enacted legislation in generations is the Affordable Care Act of 2010, also colloquially known as “Obamacare.” One thing is sure: It cannot be ignored, particularly in an industry like hospitality where a sizable percentage of the employee population holds positions that are paid at or relatively near the minimum wage.
The basic premise of the ACA is simple enough. Beginning in 2015, Applicable Large Employers must offer full-time employees and their dependents (but not necessarily spouses) a health care insurance plan with minimally credible coverage that is affordable. If employers fail to offer this, they will face a penalty. The seemingly straightforward statute language and definitions developed by regulation are, however, what makes the application of the law to many employment situations far from simple.
Knowing how your organization fits into these definitions is key in helping you define what steps to take. Answer these questions.
1. Are you an Applicable Large Employer?
An Applicable Large Employer is an employer with 100 or more full-time equivalent employees for 2015. The full-time equivalent number goes down to 50 or more in 2016. A “full-time” employee is one who works 30 or more hours per week on average or 130 hours per month. So the easy way to figure out if a company is an applicable large employer in 2015 is to multiply the total number of employees on the payroll by 1,560 hours (30 hours a week). If the total number is more than 156,000, then the company is covered by the ACA in 2015. If the total is more than 78,000, then the ACA will apply to that company in 2016.
2. What is minimally credible coverage?
Minimally credible coverage is a health care plan design that is structured to cover at least 60% of the total cost of health care that a covered employee is likely to incur in a year. Using the same precious metal adjective modifiers that apply to frequent-traveler plans, these minimally credible plans are called Bronze Plans. And this coverage must be affordable, which defined by the statutes means that the cost to an employee for his/her coverage (not including dependents) cannot exceed 9.5% of the employee’s household income. Because an employer won’t know the employee’s household income, the safe substitute is to calculate the maximum cost to the employee at no more than 9.5% of his/her W2 wages. There are certain grandfathering provisions relating to health care plans in effect and unmodified since 2010, but they will not be generally applicable to most companies.
3. Which employees are offered coverage?
Because industries like hospitality are seasonal and therefore have extreme swings in employee population numbers depending on the time of year, once having determined that a company is covered by the ACA the next challenge is figuring out who must be offered coverage. For this, the law offers a series of complicated look-back tests, measuring averages of hours worked by an employee in several different time periods to determine if an individual is working more than an average of 30 hours a week. If a company has not figured out these calculations yet, it would be best to consult an expert.
4. What are the resulting penalties for non-compliance?
The penalties for employer non-compliance are reasonably clear. If a covered company fails to offer the required health insurance to at least 70% of its full-time employees in 2015 (95% in 2016), and at least one employee receives subsidized coverage from one of the state exchanges or the federal insurance exchange (the one that had the online access issues) there is a tax penalty of $2,000 multiplied by the number of full-time employees in excess of 80 (over 30 beginning in 2016). There is also a $3,000 penalty if the company does offer coverage but it is either determined not to be minimally credible or is found to be unaffordable, multiplied by the number of employees who receive subsidized coverage through an exchange.
The hotel industry has a lengthy and spotty record on the issue of health insurance coverage. While the branded hotel management companies and vast majority of large third-party managers have offered health insurance for decades, there are more employers in our industry who do not offer coverage than who do offer it. At a macro level, according to the Bureau of Labor Statistics 2013 survey, 72% of all employees in reporting U.S. companies were offered health benefits last year, but in the services industries, including hospitality, only 40% of workers were offered coverage.
Thus, while there is a presumption in most industries that health coverage is a necessary element of the employment condition, that is not necessarily the case in hospitality. Numerous employers who have traditionally not offered health coverage to their hotel employees seem intent on continuing that practice after the mandates take effect. One has only to google the ”ACA and Hospitality” to find virtually countless articles written by or about hotel executives extolling the purported virtues of minimizing full-time employment, gaming the measuring periods or pushing coverage premiums to unaffordable limits on the theory that the affordability penalty is a cheap alternative to actually providing meaningful insurance.
This recitation is not intended to disparage those companies but rather to note that not providing coverage has been the way they have traditionally done business. Companies that have not provided coverage are reluctant to give up the marginal cost advantage that they have enjoyed, and probably are more reluctant to explain to the investors in their properties the declines in operating margins that would result from providing insurance. And in truth, if a company that wants to avoid providing coverage to its employees cannot find another way, it is most likely that the penalties by themselves are not enough to warrant compliance.
Reviewing a series of private insurance options suggests that a typical Bronze Plan for a group of employees of mixed genders averaging 35 years of age is going to cost an average of +/-$350 per employee per month (this does not include the experience rated premiums of the major companies that have had plans for years). If an average plan splits the premium 60/40 between the employer and the employee, the cost to the employer of $2,520 is 20% higher than the potential penalty, before the deductible number of employees who are not counted toward the penalty (80 in 2015). Certainly an employer with fiduciary obligations to the investors in its hotels might take a hard look at this cost differential, as the short-term profit impact at least seems attractive.
5. Are you ready for the long-term effects of your decisions?
There are other questions of a longer-term nature that warrant consideration by the employer. One of the premises of not providing health coverage in our industry has been that because most employers have not provided it, most prospective and current employees don’t expect it. Given that anyone who has not heard about the ACA has been living under a rock for the last four years, is it reasonable to expect that employees will continue to be relatively indifferent on the issue? Most likely, the jury is still out on that question.
Traditionally, the job candidates who value health insurance as part of the employment package have been limited to people who need it, older candidates and people with families (younger candidates sometimes get the proposition after their parents beat it into them). Hotel employers who seek stability in their workforces and who want better candidates providing guest service would do well to monitor employee sentiment with respect to health care expectations and be prepared to react accordingly.
There also has been a general expectation among hotel employers who do offer health coverage that the same employees who find it to be unaffordable now will find it unaffordable in 2015, and therefore will not enroll for coverage. For next year, that might be true as the maximum tax penalty for not having coverage is $295 ($95 each for the employee and his/her spouse and the balance for the first uncovered child).
In the example above, the employee’s share of the annual premium would be $1,680 which is $1,585 more than the single employee penalty for non-enrollment. An employee who feels he/she cannot afford the coverage has a much less painful penalty option. However, the maximum penalty jumps to $625 in 2016, and gets close to $1,000 the following year. At some point do these employees conclude that they would be better off to invest what they had been spending on penalties in health insurance? At a minimum, it would seem logical that as the penalties increase, so will discontent and frustration over wages that are insufficient to allow these employees to afford health coverage that the government requires them to obtain.
And that leads to what is potentially a much larger question. If expectations do change over time so that prospective and current employees have a reasonable expectation that health insurance will be available from hotel employers, and if discontent and frustration grow over wage levels that make mandated coverage unaffordable, will we not, as an industry, be creating an environment that is perfect for union-organizing efforts?
The major collective bargaining organizations that represent hotel employees have long maintained health insurance trusts that provide health coverage with either low employee contributions or which in many major cities are non-contributory. At some point, if employers continue along a path that includes significant non-participation in their business analyses of health insurance costs, it will become inevitable that uninsured and tax-penalized employees will turn to the unions for assistance.
There is an old adage that the ability of a union to be successful in organizing has less to do with the union pitch than it does with management’s failure to listen to its employees. That is a question that none of us can afford not to think about.
Peter D. Connolly, executive vice president of operations and development, has had a distinguished career in a variety of legal and business roles with prestigious travel and hospitality organizations. He was of counsel to Jeffer, Mangel, Butler & Marmaro in its global hospitality practice, where he designed and documented hotel financial structures, including hotel condominium and traditional hotel structures, and negotiated management agreements, hotel purchase and hotel finance agreements on behalf of various developer and management company clients. From 1982 to 2000, Connolly was with the Hyatt organization as general counsel, where he was responsible for hotel operating legal issues, acquisitions, divestitures, financings, management arrangements and owner relationships. In 1996 and 1997, Connolly ran Hyatt’s development department, and was responsible for the acquisition and/or development of a number of Hyatt properties. Connolly retired from Hyatt in 2000 as Senior Vice President, General Counsel and Chief Information Officer of the company. He is a member of the bars of Illinois, the District of Columbia, the United States Court of Appeals for the D.C. Circuit and the United States Supreme Court. He is a graduate of Providence College and Catholic University Law School.
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