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How Health Care Reform Will Affect Independent Restaurateurs

How will your restaurant have to adapt its business practices to abide by the newly passed Health Care Reform Bill? What costs will you incur?

What is the Goal of This Law? 

Regulators, including the U.S. Department of Health & Human Services (HHS), and the courts will be required to look to the "legislative intent" (i.e., the purpose) of this law when attempting to apply it and/or respond to the inevitable litigation that will challenge the ambiguities of its provisions. Indeed, there is a great deal of ambiguity in the language of this law, with more being discovered each day. This is not necessarily a criticism of the law, but rather a comment on the nature of new legislation as complex, controversial and sweeping as the PPACA.
The purpose of this law is to extend health care coverage to about 32 million people who did not have health insurance. Part of this notion is that not only will this legislation extend health care insurance coverage to low-income individuals who are unable to afford it, but, in addition, part of the cost of covering needy persons will be borne by individuals who are not presently covered by health insurance because they are currently in good health and don't want to spend the money on it.
In short, the idea is that we will spread the burden of health care to more individuals and perhaps lower the cost. While various economists have theories on how this will affect the economy and the quality of health care, nobody really knows how this will play out in practice.
How does Congress intend for this goal to be accomplished? The short answer is, as of January 1, 2014, all U.S. citizens and permanent legal residents who are not incarcerated will be required to have health insurance, and those who do not obtain health insurance will be penalized. Beginning January 1, 2014, the penalties will be low (about $35 or so) and they will incrementally increase until 2016 to $695 a year for individuals or $2,085 for families, or 2.5 percent of household income. Those figures will be adjusted upward over time.
There will be some exemptions from this penalty, including those who have certain financial hardships, have religious objections, or are American Indians. Once the requirement to obtain coverage is triggered, individuals will have a 90-day grace period to get insurance.
Employers with more than 50 employees will be assessed a fee of $2,000 per full-time employee beyond 30 employees if they do not offer coverage and have at least one employee who receives a premium credit through a "state health benefit exchange" (as explained later). Employers with more than 200 employees will be required to enroll employees into the employer's lowest-cost premium plan if the employee does not sign up for employer coverage or is not otherwise qualified to opt out of employer-sponsored coverage.
Immediate Changes
If you've been listening to the news, you have heard there will be immediate changes that will apply within six months from the signing of this legislation. For one, employer-provided health insurance policies will be required to offer participation in the insurance plan to adult children of employees up to age 26. Currently, most insurance policies provide that beneficiaries of covered employees who might be full-time students up to age 24 or similar provisions are eligible to participate in a group coverage.
Note that this provision does not require that employer-provided health insurance policies offer participation to the spouses or children of those adult children. Furthermore, this provision does not apply if the adult children are eligible for insurance benefits that are available through their own employees.
If you're providing insurance to your employees, you (or your insurance broker, most likely) will have to have a new process to determine whether these adult children are in fact eligible to receive benefits through some other policy. This will impose added administration on the health care insurance enrollment process.
Also, eliminated are lifetime dollar limits on insurance. Many policies have a $1 million lifetime limit, or might have other types of limitations on the benefits that the beneficiary can receive over their lifetime. Those will have to be eliminated within six months, in addition to pre-existing condition exclusions applied to minors, i.e., individuals who are 18 or younger.
Of particular interest to smaller restaurants is another change that also comes in almost immediately. It's a tax credit for businesses with no more than 25 employees, and an average wage under $50,000. If your business falls under this category and you provide health insurance to your employees, your business is eligible for a tax credit (not tax deduction, mind you) of up to 35 percent of the contribution if you pay 50 percent of what's called a "benchmark premium" that has yet to be determined. If you have 10 or fewer employees and their wages are $25,000 or less, it's a full credit for the cost of providing that insurance.
This tax credit won't last forever, and it will decrease as your number of employees increases, and this only lasts until 2014. Beginning in 2014, the credit will rise to 50 percent of the premium cost that you pay, again if you meet those same thresholds, but it only lasts for two years. And in the case of the smallest employers - those with 10 or fewer employees - it remains a full credit, but again, it's only limited to the first two years.
What Type of Coverage Must You Offer?
If you are required to offer health care insurance to your employees, you must offer a plan that provides a comprehensive set of services. Again, regulation will define a "comprehensive set of services," however, it will probably include ambulatory patient services, emergency health care services, hospitalization, maternity and newborn care, mental health and substance use disorder, prescription drugs, rehab services and devices, and - this is the big catchall - prevention and wellness services, chronic disease management, and pediatric service to include oral and vision care.
Employers will be required to offer plans that cover at least 60 percent of the "actuarial value" of the covered benefits. The actuarial value of a health insurance policy is the percentage of the total covered expenses. For example, a plan with a 70 percent actuarial value means that consumers would, on average, pay 30 percent of the cost of health care expenses through features like deductibles and co-insurance. Employees' out-of-pocket health care expense will be limited to the amount of the health spending account limits, which right now are $5,950 per individual or $11,900 per family.
Based on these requirements, if you offer insurance to your employee, you may be required to rewrite your existing insurance plans, however, the legislation allows for "grandfathering" current plans. It remains to be seen how much you can change the plans over time and still receive grandfathering benefits, but the grandfathered plans will be exempt from certain requirements including, but not limited to, 100 percent coverage of preventive health services, having to cover certain treatments, being prevented from discriminating in favor of highly compensated employees. Again, your insurance broker should be able to help you navigate this aspect of the law in tailoring your current insurance plan to comply with the legislation.
The Health Benefit Exchange
A public option (i.e., a government-run health insurance agency, which competes with other health insurance companies) is not part of the final bill, however, the bill provides for something called a "state health benefit exchange," which is supposed to be created by states although regional compacts are permissible. The notion of the health benefit exchange is that it provides a central point in which insurance companies can compete with each other for the business of individuals and certain businesses, and where those individuals and certain businesses can go to obtain insurance coverage. The exchanges will offer packages that comply with the health bill.
Access to these exchanges will initially be limited to individuals. There will be several plan tiers available, from what have been deemed bronze, silver, gold and platinum. A platinum plan is one that covers 95 percent of the benefit cost with relatively low out-of-pocket limits; a gold plan covers 80 percent of the benefit cost, and so on. For younger individuals, the exchanges will offer a catastrophic plan, recognizing that younger individuals may not necessarily need an expensive insurance plan. The only people who would be able to purchase through these health benefit exchanges will be U.S. citizens and legal immigrants, and permanent residents who are not incarcerated.
How might these health benefit exchanges directly affect your businesses? As of 2017, a business with 100 or fewer employees can start purchasing insurance through these exchanges. These policies will most likely be standardized and limited in choice of provisions.
What's in Store for Larger Restaurants?
Again, if you have 50 or fewer employees, you'll be exempt from those penalties. On the other end of the spectrum, if you have 200 full-time or full-time equivalent employees, you would be required to automatically enroll employees into your lowest-cost premium plan if they do not sign up for coverage and don't opt out.
As noted, if you have more than 50 employees, you will be assessed a $2,000 fee for each full-time employee beyond 30 employees if, one, you do not offer insurance coverage to the employee and two, if at least one full-time employee takes advantage of a government subsidy through an exchange. So, if you do not offer insurance coverage and you're an employer who is covered under this provision, then you'll have to pay a fee of $2,000 per full-time employee to the extent that you have full-time employees in excess of 30 employees. Employers are not required to provide dependent coverage, only required to provide coverage of the employee.
For example, if an employer fails to offer minimum essential coverage and has 70 full-time employees, 10 of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe $2,000 for each employee over the 30-employee threshold, for a total annual penalty of $80,000 ($2,000 multiplied by 40 (i.e., 70 minus 30). This penalty will be assessed on a monthly basis.
The employee's share cannot exceed 9.5 percent of his adjusted gross income for the employer's lowest-cost option plan, or if the plan doesn't cover at least 60 percent of the benefits. Otherwise, the employer would be penalized.
For employers who provide coverage to their employees, there's another type of interaction here with the benefit exchange. After 2013, if an employee's income is less than 400 percent of the federal poverty level, and the cost to the employee of his premium is in excess of 9.8 percent of his adjusted gross income, and he opts out of his employer's plan, then the employer has to provide what's called a "voucher," to be applied to the purchase of insurance through the state exchange. The voucher is in the amount of the cost to the employer providing insurance coverage to the employee under the plan offered by the employer. Employers who provide vouchers will not be fined, as long as they offer coverage to their employees.
The Full-time, Part-time Employee Conundrum
For the purposes of this law, a full-time employee is anyone who on average works at least 30 hours per week. This is pretty straightforward. Now, there is something that is called a "full-time equivalent." Seasonal workers sometimes come into play in this regard and, as you know, a lot of restaurants employ lots of part-time employees. (In fact, the National Restaurant Association dropped its support for the bill because of the way it addressed seasonal and part-time employees.)
You will not be considered to have 50 full-time employees if you only exceed the 50 limit for fewer than 120 days, and if during that 120-day period you exceed the 50 full-time employee limit and those people are considered "seasonal workers." So, if you have a temporary spike and it is seasonal, then you may not have to count those toward your 50-employee limit, again, assuming that your season is fewer than 120 days.
That begs the question: What is a seasonal worker? The law only says it is somebody who provides services on a seasonal basis, as the labor secretary will define, which may take some time. For now, we have to use the common-sense definition of seasonal worker, and hope that the secretary of labor does the same.
With the new legislation, you take the number of employees who do not work 30 or more hours on average a week, add up their hours, and divide the total by 120. The calculation is:
Number of Full-time Employees
+ (Hours Worked by All Part-time Employees/120 Hours)
= Number of Full-time Equivalents
Thus, if you have 40 full-time employees (again, anyone who on average works at least 30 hours per week), and your part-time employees work 360 hours a month, the equation would be:
40 + (360/120)
= 43 Full-time
Equivalent Employees
Looked at another way, if a business has 80 part-time workers (working at the equivalent of 40 full-time employees) and 40 full-time employees, the employer either provides coverage or pays the penalty because the firm has more than 50 full-time equivalents but only has to cover or pay for the actual full-time workers. In this case, the employer would pay for 10 full-time employees (40 full-time employees minus the 30 full-time-employee discount illustrated above) = $20,000 penalty for not providing coverage.
Calculating Number of Employees for Multiunit Concepts
What if a restaurant operator has a multiunit concept? How are the 50 employees calculated? It's not uncommon for restaurant owners to perhaps be partners or shareholders in a number of units, with different partners or shareholders in each unit. Whether operated as limited liability companies or corporations, restaurants have many combinations of ownership.
The law is going to look at the "controlled group" and "common ownership." (If you offer employee health insurance and you have COBRA [as in the "Consolidated Omnibus Budget Reconciliation Act of 1985," a federal law that, among other things, mandates that an insurance program gives some employees the ability to continue health insurance coverage after leaving employment], you're already going to be familiar with this idea of controlled group because that's from where this concept is derived.)
For the purposes of this new legislation, the definitions of "controlled group" and "common ownership" are derived from the tax code, however, it is not clear how these definitions will translate to these laws. In essence, if restaurateurs A and B each own 50 percent of Restaurant X, and then they each own 40 percent of Restaurant Y because they have a third investor who owns 20 percent of Restaurant Y, then those two restaurants or locations would then be part of a controlled group, and all of the employees, the full-time and full-time equivalent employees would be added together in that controlled group to determine whether you have met the 50-employee threshold.
So, they will have to look at those issues of control and the issues of ownership. Obviously, if you've got two or three individuals, and you have a holding company that owns 100 percent of each location, then that's a parent/subsidiary relationship, clearly controlled.
Where it may be more difficult to look into this issue of control is where each location is separately incorporated and there's overlap in the investors, but no single ownership company. It could even become more interesting where you might have some individuals who form and run a management company, and you have overlapping investors in the various restaurants or locations that are managed by that management company.
Without belaboring this issue further, it is safe to say you may need a CPA or tax lawyer to sort out these issues, since they are based on the tax code. Just don't expect a quick answer. As noted, even experienced tax advisers will be entering uncharted waters when determining controlled group issues for the purpose of this new legislation. In some cases, the courts and regulators may have to provide authority.
New Day, Same Old Story
Hospitality, and especially the restaurant sector, is subject to more regulations than perhaps any other U.S. industry. This legal environment keeps the restaurant business challenging and frustrating. As an independent operator, the best you can do is stay well-informed on the changes, seek the counsel of experts when needed, and voice your opinion at the ballot box and through your local associations. Again, as this new legislation unfolds, we will try to keep you abreast on the way it is interpreted and how other businesses adapt to it.