12/05/2012 06:39 pm ET Updated Feb 04, 2013

Big Business and Health Reform: What's Really at Stake?

With the Affordable Care Act (ACA) going into full effect in 2014, the future of health insurance coverage at major corporations has received a high level of media attention lately. Several large, nationally recognized companies have indicated that they are mulling over other drastic measures to combat the increased costs of compliance with these new requirements.

Throughout the coming year, other large businesses are sure to announce intentions for their employee-sponsored health insurance plans. Let's take a look at what they will need to consider.

What makes a business "large?"

According to the provisions of the ACA, a large business is one with over 50 full-time equivalent employees. Under the law, large businesses are not technically required to provide health insurance. However, large businesses that do not provide adequate coverage will have to pay a penalty if any one of their employees receives a tax credit for buying insurance through a health insurance exchange.

What are the penalties?

The penalties, which the Supreme Court officially ruled are "taxes," are imposed against large businesses that do not offer affordable group health insurance coverage options to employees. A large business that offers no employer-sponsored coverage will be penalized $2,000 per employee beyond the company's first 30 employees, provided that at least one employee obtains insurance through a public Exchange and qualifies for a government subsidy. If a large business does offer group coverage, however, the coverage option must also be affordable in order to avoid penalties. If a plan is deemed unaffordable to one or more employees, then the employer will be penalized $3,000 per employee for each employee who purchases individual coverage through a public Exchange and qualifies for a government subsidy.

For employer-sponsored coverage to be deemed adequate under the law, it must cover at least 60 percent of health care expenses. In addition, the insurance has to cost the employee less than 9.5 percent of his or her family's annual salary.

What does the future hold?

Businesses will need to weigh their options carefully and consider the potential risks. In addition to maintaining group coverage, some employers may look to one of the three options described below:

Option One: Transition to part-time staff

For large businesses looking to avoid increased health insurance costs, transitioning to mostly part-time staff (less than 30 hours a week) seems like an obvious loophole. But remember -- the ACA defines a large business as one with over 50 full-time equivalent employees. The word "equivalent" is important here. This means that both full and part-time workers factor into the equation when determining the size of the business.

Here is how the calculation works: Employers must add the aggregate monthly hours of all part-time workers and divide that number by 120. The resulting figure determines how many full-time equivalent employees a business has in addition to their regular full-time staff. Provided this number is under 50, a business could avoid the "large business" moniker.

Option Two: Drop all health care coverage

For some businesses, paying the tax assessment will be cheaper than providing coverage. In that case, they may opt to just stop offering health insurance all together. Companies considering this route risk looking less attractive as their competitors when trying to recruit prospective employees.

Option Three: Change the way coverage is offered

In order to keep health care spending down, businesses have been gravitating towards a new model -- the defined contribution plan. Unlike a defined benefit plan which provides specific group health plan benefits, a defined contribution plan involves giving employees a fixed sum of money annually to purchase their own health insurance coverage. There are several benefits to the defined contribution model, including allowing employees to manage spending for health care the same as they would a 401(k) retirement account and allowing employees who qualify for subsidies to benefit from their subsidies while still receiving tax free funds from their employers to purchase health insurance.

The ACA is fueling this trend toward defined contribution models by transforming the individual health insurance marketplace. For smaller businesses that do not face penalties, the defined contribution model's benefits offer cost savings and predictability in health care expenditures. The model is increasingly becoming preferred by large businesses too. The online exchanges are expected to make choosing and purchasing comprehensive health insurance a straightforward, simpler task. More importantly, employers in the past may have been concerned about the ability of their employees to secure their own affordable coverage on the individual market, however, as of 2014 they can confidently know that this will not be an issue due to guaranteed issue and community rating rules contained in the ACA.

As 2014 rapidly approaches, undoubtedly, there will be more publicity surrounding how businesses, both big and small, intend to adapt in order to comply with the new rules. It is likely that employers faced with increasing health insurance costs will look to the options described above.

If you are interested in receiving more information on health care reform and defined contribution, visit