The Effect of Obamacare on Open Shop Construction Companies
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Updated as of
September 2014
The Effect of Obamacare
on Open Shop
Construction Companies
Strategies for compliance leading to more
competitive bidding
by Jeffrey Bennett, MBA, QPFC and Thomas Santa Barbara, QPFC
©2014 Jeffrey Bennett trustGCBT.com
The Effect of Obamacare on Open Shop Construction Companies | A
GCBT
Important Update
Implementation of Obamacare’s Employer Mandate Delayed One Year
The U.S. Treasury Department has announced on February 10, 2014 that the implementation
date for the employer mandate provisions of the Affordable Care Act (requirements for
employers with 50 or more full-time employees to provide affordable, minimum value health
coverage or pay a penalty to the federal government) has been delayed for a second time.
The new compliance date for employers of 50–99 full-time employees is January 1, 2016,
but a report must be submitted to the IRS regarding workers and health insurance coverage in
2015. Additionally, the new compliance effective date for employers with 100 full-time employees
or greater is January 1, 2015. However, employers in this category will not incur a penalty if they
can demonstrate that at least 70% of their employees are covered in 2015. A 95% coverage
rate will apply to 2016 and subsequent years.1 The requirements had originally been scheduled
to take effect on January 1, 2014. The Treasury Department stated that the delay was in
response to concerns regarding the complexity of the rules and the administrative challenges
posed by the reporting requirements.
As a result of the delay, employers will not be subject to penalty in 2014 for failing to
meet the mandated coverage requirements. However, other provisions of the ACA are
still scheduled to be fully effective on January 1, 2014 (including the individual mandate,
required employer notices regarding the exchange, 90-day waiting period rules, etc.).
Employers should view the February 2014 delay as an opportunity to do more careful planning
without the pressure of the 2014 effective date.
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | B
GCBT
Why Act Now?
On January 1, 2015 significant aspects of the Affordable Care Act
will take effect. This law could have a major impact on the cost
structure and bidding of large open shop construction companies.
Without careful planning, these companies may be subject to
onerous penalties and may be in jeopardy of losing their existing
health insurance coverage. Open shop construction companies
that regularly work on a significant amount of projects covered by
the Davis-Bacon Act or state prevailing wage regulations have an
opportunity to use the fringe benefit supplements to more easily
comply with the new health care law and significantly lower their
labor burden leading to more competitive bidding.
Table of Contents
ACA Key Provisions and Decision Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3
Davis-Bacon / Prevailing Wage Regulation Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Supplemental Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Potential Concerns for Open Shop Construction Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-8
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
How We Can Help . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 1
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Introduction
The Patient Protection and Affordable Care Act (ACA) was signed into law by President Obama
on March 23, 2010. Together with the Health Care and Education Reconciliation Act of 2010,
new requirements related to health insurance are in the process of being implemented across
the country.
While numerous provisions of the statute were effective shortly
after the bill was approved, the important date that contractors
and other companies must be aware of is January 1, 2014.
Construction companies should pay particular attention to the
ACA as it could have a significant impact on their cost structure
and therefore their bidding.
This paper describes some of the key provisions of the ACA as they apply to large non-union
(open shop) construction companies, and discusses strategies on how these companies can
pragmatically comply with the regulations. Particular strategies are outlined for those companies
subject to the Davis-Bacon Act or state prevailing wage regulations about how to utilize fringe
benefit supplements to comply with the ACA.
ACA Key Provisions and Decision Points
The ACA has some application to small employers, however only large employers (those
with fifty (50) or more full-time and full-time equivalent employees) are subject to penalties.
Under the ACA companies with common ownership will be aggregated for purposes of this
calculation.
• Full-Time Employees – Any individual who has thirty (30) or more hours of service per
week (for seasonal employees, the employee will not be considered “full time” if the
employee works less than 120 days/year, or 4 months/year)2,3
• Full-Time Equivalent Employees – The total number of hours of service in a month
by all part-time employees, divided by 120 hours:
xample: 20 employees work 60 hours per month and 10 employees work
E
80 hours per month or:
(20 employees * 60 hours) + (10 employees * 80 hours) = 2,000 hours
2,000 hours / 120 = 16.67 which results in 16 full-time equivalent employees
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 2GCBT
The ACA is a mandate on individuals to obtain health insurance coverage. Although
employers are not required to offer coverage (called an “employer shared responsibility
payment”), a penalty applies if the employer does not offer minimum essential coverage4 or
they offer such coverage but it is deemed “unaffordable” or not “meeting minimum value”
standards and an employee receives a subsidy on the Health Insurance Exchange.
• If a large employer does not offer minimum essential coverage to 95% of its full-time
employees, the penalty is $2,000 per year times the number of full-time employees less 30.5
• If coverage is not affordable (single person coverage cost more than 9.5% of monthly
gross pay) or does not meet “minimum value” standards (pays for at least 60% of typical
health care expenses) the penalty is $3,000 per year for each employee that obtains a
subsidy for coverage on the exchange. For purposes of this analysis it is assumed all
coverage meets minimum value standards.6
• An employee is eligible for a subsidy if the employer does not offer affordable minimum
value coverage, and it is estimated that the employee will have income equal to 138 –
400% of the Federal Poverty Level.7 Based upon 2012 FPL information, 138% - 400%
household income eligibility range for a subsidy would be $31,809 - $92,200. For an
individual living alone with no dependents, the range would be $15,414 - $44,680.
Example: Large Company (100+ Full-Time or Full-Time Equivalent Employees)
with No Employer Provided Health Insurance:
If the company does not offer health insurance and at least one employee obtains a health
insurance subsidy through the Health Insurance Exchange, the company will be assessed
the following penalty on a monthly basis:
(# of Full-Time Employees – 30) * (1/12 * $2,000)
If the company has 100 employees, the penalty assessment is as follows:
(100 – 30) * (1/12 * $2,000) = $11,667 per month (penalty will increase each year)
If individual coverage costs less than 9.5% of an employee’s income and the employer
offers dependent/family coverage, then both the employee and their dependents are ineligible
for subsidies.
ending final regulations, employers with greater than 200 full-time equivalent employees
P
must auto-enroll employees in health insurance coverage if the employer offers coverage
(employees would have the option to opt-out if they are required to contribute to the cost).
n individual’s penalty for not obtaining insurance is $95 in 2014 – prorated monthly.
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The penalty increases each year, up to $2,085 per family in 2016 (with limitations).*
*Furrow, Barry R; Greaney, Thomas L; Johnson, Sandra H; Jost, Timothy S; and Schwartz, Robert L.
Health Law: Cases, Materials and Problems. West Publishing. 2013.
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 3GCBT
Davis-Bacon / Prevailing Wage Regulation Background
Contractors and subcontractors must pay the prevailing rate of wage and supplements (fringe
benefits) to all laborers, workers or mechanics employed under a public work contract. The Davis
Bacon Act8 is the federal law that applies to contractors on federally funded or assisted contracts
for the construction, alteration, or repair of public buildings or public works. Section 8, article
220 of the New York State labor law is a similar law that applies to NY state-funded public works
projects. All of the states surrounding New York have similar laws in place. The prevailing rates for
wages and benefits are published by the federal and state government on a periodic basis.
Supplemental Benefits
Compliance with the supplements (fringe benefits) portion of the law can be accomplished in the
following ways:
he hourly amount can be provided in cash in the employee’s weekly paycheck when
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working on a public work project; or
Contributions can be made to a bona fide benefit plan on behalf of the employee for all hours
worked, both public and private.
Contractors who choose to comply with the law by paying the hourly prevailing benefit
supplements as cash wages will be subject to the labor burden (payroll taxes, workers
compensation premiums, etc.) on those payments. This typically amounts to an additional
25% - 30% of the wages. In addition, these payments are treated as fully taxable income
to employees.
Contractors who choose to comply with the law by making contributions to a bona fide benefit
plan avoid paying labor burden on the benefit supplements. Many benefits provided to
employees such as medical insurance, dental insurance, apprentice training, etc. are not
taxable to the employees.
Contractors participating in a collective bargaining agreement
typically make payments to a union benefit fund (bona fide
benefit plan) which gives them a significant cost advantage over
contractors who make supplemental benefit payments as
cash wages.
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 4GCBT
Potential Concerns for Open Shop Construction Companies
As of January 1, 2015 the ACA’s impact on larger open shop construction companies (those with
more than 50 employees) will be significant. For example:
Many open shop construction companies do not currently offer medical insurance to field
workers. Many companies choose to pay fringe benefit supplements as cash wages to
easily satisfy the federal and state regulations. Those companies will now be faced with a
substantial penalty which is not tax deductible in the likely event that just one employee
obtains coverage on the exchange and receives a subsidy.
Workforce demographics for open shop construction companies are typically made up of
young males who commonly decline medical insurance, even when it is offered.
Insurance companies regularly require minimum participation levels of 75% of all eligible
employees as prerequisite to writing the policy. Segregating coverage according to employee
classification (office workers, superintendents, field workers, etc.) will no longer be permitted.
In order to meet the 75% participation requirements all workers without waivers will need to
be included in the calculation.
n employer who is unable to obtain a policy or keep an existing policy because of the
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coverage requirement will face a penalty as described above. However, employers with
generally fewer than 100 employees can shop for a policy on the exchange. In the event
that an employer is no longer able or willing to offer a policy, those that had previously had
coverage through the employer will need to obtain coverage through other means (the
exchange, etc.).
The February 10, 2014 IRS rules for employers with 50–100 employees require these companies
to report health insurance status for employees in 2015 even though the penalty will not apply
until 2016. Employers should plan now for coverage so the information that will be included on
the report places your business in the compliance category. Employers with greater than 100
employees must work now to get 70% of their employees in a compliant health insurance product
to avoid penalties in 2015.
Solutions
Employers have three broad strategies they can pursue:
1. Not offer any health insurance coverage
2. Offer minimum essential coverage that is not affordable
3. Offer minimum essential coverage that is affordable
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 5GCBT
Option #2 and #3 are complicated by the minimum participation requirements enforced by
insurance companies. These requirements are set not by the ACA ,but by the individual insurance
companies according to their underwriting standards. 75% participation is a common standard
and what we use for our analysis. It is important to note that a company that does not achieve the
minimum participation requirements will not be able to offer coverage and will be subject to penalty.
As referenced earlier in the ACA Key Provisions section of this article (see page 3), a 100 person
company that does not offer coverage to 70% of their workforce will be subject to a monthly
penalty in 2015 (95% of workforce in 2016).
A company may try to avoid this penalty by instead offering minimum essential coverage, but not
meeting the affordability standards limiting employee cost to no more than 9.5% of monthly gross
pay (Option #2).
Example: A large company with 100 full-time employees offers minimum
essential coverage, but contributes $0 to the cost:
Assumptions:
75 employees participate in the plan (minimum participation)
10 employees obtain coverage on the exchange and receive a subsidy
The employer penalty is:
The number of employees that declined coverage with the employer and instead obtained
coverage on the exchange and received a subsidy x $3,000.
10 employees x (1/12 x $3,000) = $2,500 per month ($30,000 per year)
It is difficult to estimate the number of employees that will seek coverage from the exchange.
Our assumption is it will be a low number based on the common demographics of construction
companies and the low penalty ($95 in 2014) that will apply to individuals. However, with each
year that the ACA employer mandate is delayed, more employees will purchase policies on the
Exchange as penalties assessed against individuals rise each year.
Therefore this would appear to be a financially advantageous strategy, however, we believe it is
highly unlikely an employer would be able to achieve the participation requirements (75%) of the
insurance company. Without meeting the participation requirements an employer will lose their
policy and be subject to the $2,000 per employee penalty discussed earlier ($140,000 per year
with 100 employees).
Most construction companies may be best served by providing minimal essential coverage to
eliminate any chance of paying a penalty, assuming the cost of the penalty is greater than the cost
of offering coverage.
At current premium rates, an employer who structures the employee contribution towards the
coverage at 9.5% of compensation will likely find that the cost of providing the coverage is less
than the penalty.
Please see example on the following page.
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 6GCBT
Example: A large company with 100 full-time employees offers minimum
essential coverage:
Assumptions:
The employee cost is capped at 9.5% of monthly compensation
The average employee earns $4,166 per month ($50,000 per year)
The total premium for individual coverage is $500 per month
The employer cost for coverage is:
$500 – ($4,166 * 9.5%) = $104 per employee x 100 = $10,400 per month or $124,800 annually
The employer penalty if they did not provide coverage is:
(# of Full-Time Employees – 30) * (1/12 * $2,000)
(100 – 30) * (1/12 * $2,000) = $11,667 per month or $140,000 annually
This example results in a savings of $1,267 per month or $15,204 annually
The concens regarding minimum participation requirements outlined above remain the same.
The best way to guarantee meeting the coverage requirements
is to auto-enroll all employees and pay 100% of the single person
premium. Paying 100% of the premium will likely eliminate an
employee’s ability to opt-out of coverage (an exception can be
made for those that have coverage from a spouse’s plan).
Clearly the cost of individual coverage paid 100% by the employer is greater than the
cost of the penalty. However, open shop contractors that are working a substantial
amount of public work can utilize the fringe benefit supplements to pay for the coverage.
Fringe benefit supplements contributed to a bona fide plan or trust are employer contributions
and can be used to pay for health insurance coverage. Furthermore, such contributions are not
subject to payroll labor burden and provide a significant savings to the employer.
Below are two examples showing the difference between a company that pays fringe supplements
as cash wages and does not offer medical insurance, and a company that pays fringe
supplements to a bona fide plan and trust and offers affordable medical insurance.
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 7GCBT
Scenario A: Scenario B:
Company with 100 full-time employees Company with 100 full-time employees
paying fringe supplements as cash wages and utilizing a bona-fide plan and trust that includes
does not offer health insurance: employer paid individual medical insurance:
Assumptions: Assumptions:
• The employee base wage is $27 per hour • The employee base wage is $27 per hour
• Supplemental benefits (fringe) is $17 per hour • Supplemental benefits (fringe) is $17 per hour
• An employee works 40 hours per week • An employee works 40 hours per week
• Payroll labor burden is 30% (payroll taxes, • Payroll labor burden is 30% (payroll taxes,
workers compensation, general liability workers compensation, general liability
premiums) premiums)
• The total premium for individual coverage is
$500 per month or $3.13 per hour
Base wage + Fringe = Total wage Base wage + Fringe = Total wage
$27 + $17 = $44 per hour $27 + $17 = $44 per hour
Total wage x labor burden % = Labor burden Base wage x labor burden % = Labor burden
$44 x 30% = $13.20 per hour $27 x 30% = $8.10 per hour
(supplemental benefits are not subject to labor
burden when contributed to a bona fide plan
and trust)
ACA Penalty ACA Penalty
(# of Full-Time Employees – 30) * (1/12 * $2,000) (# of Full-Time Employees – 30) * (1/12 * $2,000)
(100 – 30) * (1/12 * $2,000) = $11,667 per month Does not apply – employer is providing
or $0.73 per hour affordable coverage
Base wage + Fringe + Labor burden + Base wage + Fringe + Labor burden +
ACA Penalty = Bid Labor Cost ACA Penalty = Bid Cost
$27 + $17 + $13.20 + $0.73 = $27 + $17 + $8.10 + $0 =
$57.93 per hour $52.10 per hour
(10.1% savings)
Note: In this example the bona fide plan and trust is being funded with $17 per hour which
is far greater than the full cost of the medical insurance, i.e., $3.13 per hour. The substantial
difference of $13.87 per hour can be used to provide other benefits such as dental
insurance, long-term disability insurance, safety and training benefits, vacation benefits,
supplemental unemployment benefits and/or retirement plan benefits.
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 8GCBT
Summary
The Patient Protection and Affordable Care Act (ACA) will have an
effect on many employers beginning in 2014. Significant penalties
will accrue in 2015 for employers with greater than 100 employees,
and in 2016 for employers with 50-100 employees. Construction
companies must start planning much sooner so they can quantify
how this change will affect cost structures and bidding on
future projects.
Construction companies utilizing union labor will be largely unaffected by the ACA providing a
possible competitive advantage over open shop construction companies. However, open shop
construction companies that work a significant amount of public work can level the playing field
by utilizing a bona fide benefit plan and trust funded with required supplemental benefit payments
which can:
Provide sufficient funds to pay the entire cost of health insurance coverage and
assure compliance with the ACA
Provide a method to bank funds to pay premiums during seasonal layoffs
Provide funding for other benefits such as dental, long-term disability, apprentice and safety
training, vacation, supplemental unemployment and/or retirement benefits
Substantially reduce labor burden cost for more competitive bidding
Maintain regulatory compliance with federal and state laws
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 9GCBT
References
1
U.S. Dept. of the Treasury. Regulations Implementing Employer Shared Responsibility Under the Affordable Care Act for
2015. Feb. 10, 2014. http://www.treasury.gov/press-center/press-releases/Documents/Fact%20Sheet%20021014.pdf
2
26 USCA §4980H; 78 F.R. 218 et seq.. There is an optional look-back period that may be applied to determine if an
employee who works variable hours works 30 or more hours of service per week, on average.
3
he February 10, 2014 Fact Sheet issued by the U.S. Treasury Department defines “seasonal employees” as “those
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in positions for which the customary annual employment is six months or less generally will not be considered full-time
employees.”
4
Section 5000A(f) of the IRS regulations defines minimum essential coverage as one of the following: (1) coverage under
a specified government sponsored program, (2) coverage under an eligible employer-sponsored plan, (3) coverage
under a health plan offered in the individual market within a State, (4) coverage under a grandfathered health plan, and
(5) other health benefits coverage that the Secretary of Health and Human Services, in coordination with the Secretary,
recognizes for purposes of section 5000A(f).
5
ased on the February 10, 2014 delay, large employers must offer minimum essential coverage to 70% of its full-time
B
employees in 2015. The 95% health insurance coverage requirement has been delayed until 2016.
6
he Fact Sheet from the U.S. Treasury states “like the proposed regulations, the final rules provide safe harbors that
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make it easy for employers to determine whether the coverage they offer is affordable to employees” and “these safe
harbors permit employers to use the wages they pay, their employees’ hourly rates, or the federal poverty level in deter-
mining whether employer coverage is affordable under the ACA.”
7
The Federal Poverty Level published on January 26, 2012 for a family of four is $23,050. See Federal Register
Volume 77, No. 17, Jan. 26, 2012, pp. 4034-4035.
8
40 US Code Sec 3141-314840 US Code Sec 3141-3148
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 10GCBT
How We Can Help
Direct Retirement Solutions consults with some of the largest construction companies throughout
the northeast regarding prevailing wage benefit plans. We provide third party administration
services to the Government Contractors Benefit Trust, a bona fide third party VEBA trust organized
under IRS 501(c)(9).
In 2013, our construction company clients contributed over $33 million in fringe supplements for
thousands of employees. Each of our clients has an individual customized plan designed to best
meet the needs of the owners and their employees. There are no requirements to use specific
insurers or products.
Jeffrey Bennett is a principal of Direct Retirement Solutions. He has worked with
construction companies for over twenty years including three years as the
Director of Human Resources for a large construction company. He holds a
B.S. in Accounting and an M.B.A. and has earned the Qualified Plan Financial
Consultant designation from the American Society of Pension Professionals
and Actuaries (ASPPA).
Thomas Santa Barbara is a principal of Direct Retirement Solutions. He has also
worked with construction companies for over twenty years including ten years
with two very large insurance and bonding agencies. Tom has also earned the
Qualified Plan Financial Consultant designation from the American Society of
Pension Professionals and Actuaries (ASPPA).
Consulting Inquiries: Direct Retirement Solutions
Administrators of the Government Contractors Benefit Trust
jeff.bennett@directretirement.net 421 Loudon Road, Albany, NY 12211
(866) 796-1173
tom.santabarbara@directretirement.net (518) 362-2119
www.trustGCBT.com
Media Inquiries:
media@directretirement.net
Speaking Inquiries:
Member of:
speaking@directretirement.net
The content of this analysis regarding the applicability of the Patient Protection and Affordable Care Act (Affordable Care Act) to contractors
engaged in public works projects reflects our best professional judgement of the implications of the law as of the date of circulating the
document (September 2014). Readers are cautioned that federal and state rules and regulations regarding the implementation of PPACA
are still evolving and not all final rules have been promulgated to date. Please be advised that all individuals should consult with their legal
and accounting professionals before relying upon the information contained herein.
©2014 Jeffrey Bennett The Effect of Obamacare on Open Shop Construction Companies | 11You can also read
