Like many businesses, Omaha's Cutchall Management is grappling with portions of the 2010 federal health care overhaul that determine how many of its 1,400 employees — 300 full-time and 1,100 part-time — will be eligible for health insurance next year.
At Cutchall's 50 restaurants in five states, 28 hours is the new weekly limit for newly hired part-timers. At some other businesses, part-timers used to being scheduled more than 30 hours a week now are being held to a maximum of 29 hours.
Beginning next Jan. 1, companies with 50 or more full-time workers or their equivalent — and Cutchall falls into that category — must offer affordable health care coverage to full-time employees or face penalties.
Supporters of health care reform say that extending affordable insurance coverage to more Americans — particularly younger, healthier individuals who now often go without it — will add to the pool of consumers, which should reduce premium and medical costs for everyone. The Affordable Care Act also includes incentives and penalties for hospitals and other medical institutions to cut costs and improve patient care.
To the surprise of many business people, the 2010 law also defines full-time employees as those who clock in an average of 30 or more hours a week. Many businesses and the U.S. Labor Department classify part-time employees as those who log no more than 34 hours a week.
The discrepancy makes the health care law particularly sticky for restaurant, retail and hospitality employers, nonprofit groups and labor-intensive industries that rely on part-time help to minimize payroll costs. And it's painful for the employees who now face smaller paychecks or the prospect of juggling two jobs to make up lost hours.
“That part of the law is a big deal,” said Sean McGuire, principal of E.D. Bellis Healthcare Consultants in Omaha. “A lot of businesses still think they are OK with their part-time employees working 34 to 35 hours.”
Nearly 13 million workers — 10 percent of the U.S. workforce — are employed in the restaurant industry, and about half are age 30 or younger. Another 16 million are in retail. In Nebraska, 4,288 food and drinking establishments employ 71,955 workers, according to the State Department of Labor's most recent data.
To curb the costs of insuring more workers, some companies and nonprofits are shifting people to a maximum of 28 hours a week, McGuire said. “Or they've joined the '49ers' club and are cutting the number of full-time workers to 49,” he said.
Greg Cutchall, the restaurant company's founder and chief executive, said he doesn't plan to cut the hours of full-time salaried or full-time hourly workers who have been with the company for at least a year. His restaurants include Burger Star, Sonic Drive-In, Domino's Pizza, Famous Dave's and Paradise Bakery & Cafe.
But going forward, he said “we're not going to be offering part-time employees more than 28 hours a week.”
Cutchall currently offers health insurance to about 150 office and management employees, but only 65 have opted for coverage. The monthly premium for an individual plan is $400. Depending on their position, some workers pay half the premium, others pay 25 percent, and a handful pay nothing. Employees pay any additional premiums for family members.
Each month, Cutchall Management pays about $20,000 in insurance premiums for the 65 employees with health insurance, or $240,000 a year.
“The worst-case scenario is next year I'm going to have to insure another 300 people,” Cutchall said. He expects to pay half the $400 premium on those plans.
“I've been afraid to do the math. I'm afraid the numbers would scare me,” he said.
If all 300 enroll, the company will pay an additional $60,000 a month, or $720,000 a year in premiums.
“That's a large amount of our profits,” Cutchall said. “We would have no choice but to increase our prices.”
But he expects to insure fewer workers than his worst-case scenario. He thinks a majority of his employees who are under age 32 are covered by a parent's or spouse's insurance. And when the company went from paying 100 percent of the premium for managers to 80 percent, more than half declined the coverage. “I was surprised at how many opted out — they're young or don't have a family or they think they're invincible.”
So based on that experience, Cutchall said he would be surprised if more than 20 percent take the coverage to be offered next year.
“I expect a lot of people will just pay the penalty,” he said.
Individuals who do not carry health insurance will pay a $95 penalty in 2014, which rises to $325 or 2 percent of gross income, whichever is greater, in 2015, and then $695, or 2.5 percent of gross income, in 2016.
Many national restaurant chains are saying they can't afford to insure more employees and remain in business.
“A restaurant is a penny profit business and operates on thin margins,” said Kevin Simmonds, who employs 218 people, including 39 full-time employees, at 12 Jimmy John's restaurants in Omaha, Council Bluffs and Bellevue.
Although Simmonds employs only 39 full-time workers, it's likely he will be classified as a large employer because of the government's formula: Two employees working 15 hours each count as one full-time employee.
“We already offer medical benefits and fund 50 percent of the premium for all management personnel,” Simmonds said. “Whether our government determines you to be a large employer or not, the Affordable Care Act adds up to more red tape and a distraction for everyone.”
What isn't clear to some employees is why businesses are cutting hours or staff now instead of waiting until next year, when the insurance actually will be offered.
The answer lies with the rule that requires businesses to provide the government with a “look back” report at the end of this year. That information will be used to determine a company's characteristics: Large employer or small? Number of full-time employees?
It's up to the company to pick the “look back” period, which can range from three to 12 months.
If a company's goal is to exclude as many people as possible, “then the 12-month window is your best bet,” said John Schembari, partner with the Omaha law office of Kutak Rock LLP. A longer “look-back period” is more likely to yield a lower hourly average.
“This is particularly true with restaurants where some employees may work more than 30 hours a week during peak times and under 30 hours a week during slow times,” Schembari said.
That would explain why some businesses have already begun cutting workers' hours.
Last month, the owner of a string of Wendy's franchises in the Omaha area told media outlets that he planned to reduce the hours of 300 workers to 28 per week so that he wouldn't have to provide them with health care coverage.
Gary Burdette, vice president of operations, said the company could not keep its doors open if it had to cover those workers. He declined to comment for this article.
These kinds of cuts have hurt workers such as one 30-year-old woman who in November landed a job working 30 hours a week at an Omaha-area Wendy's after she had searched for a job for months.
“I wanted full time, but you can't turn that down,” said the woman, who asked that her name not be used to avoid problems with her employer.
She was devastated when the restaurant's manager told her last month that her hours were being cut to 15 hours a week.
“They said the reason was Obamacare,” she said, upset at the prospect of having to look for a second job.
Several part-time retail workers in the Omaha area said their hours were cut in January, but they didn't find that unusual. A longtime part-time employee at an Old Navy store said the retailer regularly scales back her hours in January and then adds them back in the spring. It remains to be seen, however, whether this year's cuts will become permanent.
Grocery retailers also are major employers of part-time workers, and many have begun tracking or adjusting workers' schedules, or finding ways to make them full time.
West Des Moines-based Hy-Vee Inc., which operates 24 grocery stores in Nebraska and 104 in Iowa, offers health insurance to its full-time workers and variable-hour employees who work between 30 and 40 hours per week.
The chain has begun scrutinizing employees who were hired for part-time work — less than 30 hours per week — but who consistently work more hours.
“We're asking 'Do they need their classification changed (to full time), or do we need to move back their hours?'” said Ruth Comer, a company spokeswoman.
In most cases, it's just a few part-timers per store, two to five people, who are averaging more than 30 hours a week, Comer said. About two-thirds of Hy-Vee's store employees are part-timers.
Mike Basch, store director of the Hy-Vee Supermarket at 97th and Q Streets, said part-timers who are working more than 30 hours a week are either being made “full-time here, or we're finding full-time positions for them at other Hy-Vee stores.”
Other establishments are tracking their employees' hours but not making any moves.
“We're just going to proceed as normal,” said Alan D'Agosto, president of Panda Inc. The company employs about 300 workers at 14 Arby's restaurants it operates in Nebraska and Iowa.
“We have employees that have been with us forever. If we were to take any of our full-time people down to 29 hours ... we would end up giving bad service and bad food to our customers,” D'Agosto said. “For now, we're just going to kind of muddle through this.”
Other employers — such as Heartland Food Corp., which owns 51 Burger King restaurants, including locations in Omaha and Council Bluffs — are not only tracking part-time employees' hours but also evaluating the insurance plans now offered to full-time workers, said Christopher J. Ondrula, president and chief executive of Heartland.
Starting next year, an employer's health care plan must pass several tests. It must be affordable (premium costs must not exceed 9.5 percent of a worker's wages based on the previous year's W-2 form). And all plans must meet a “minimum essential coverage” standard, which has not yet been set by the federal government.
“Essentially ... you offer the insurance or you pay the penalty or you manage the hours of your part-time employees,” Ondrula said. The problem is, he said, once you start cutting workers' hours, chances are you'll lose them to another job.
Heartland may be forced to raise prices, Ondrula said. “It's like all the other taxes that are passed on to the consumer.”
To keep workers' hours where the company wants them, Ondrula has mulled the idea of employee sharing. A Heartland Burger King employee might work 15 hours for Heartland and then work another 25 hours for another Burger King owner, he said.
The costs associated with providing health care coverage could turn some full-time jobs into part-time or contract positions, said Burt P. Flickinger III, managing director of the Strategic Resource Group, a New York City-based retail consulting firm.
Twenty years ago, a retailer's staff might have consisted of 70 percent to 80 percent full-time workers, Flickinger said. That's flipped, and now part-timers represent “at least 70 percent” of retail employees, he said — and that percentage is likely to rise.
“Most employees won't be able to get beyond 22 to 28 hours a week,” Flickinger said.
In short, the pool of part-timers and self-employed contract workers could grow. Already, the U.S. Labor Department says, 8 million of the nation's approximately 26 million part-time employees desire full-time work but can't find it.
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The Game Plan
Q. Which employers must offer health insurance to employees under the Affordable Care Act? A. Businesses that employ 50 full-time workers or their equivalent must offer all full-time employees health insurance or face penalties. Health insurance policies must meet the federal government's minimum standard for coverage, which is not yet determined.
Q. What is the penalty if an employer fails to offer health insurance to full-time employees? A. A large employer — defined as at least 50 full-time employees or their equivalent — can be fined $2,000 per employee less 30 if it fails to offer health insurance to all full-time workers. A company with 50 employees that doesn't offer health insurance would pay $40,000 in penalties if even one employee obtains insurance from a state or federal exchange: 50 minus 30, times $2,000, equals $40,000.
Q. How does that compare with the average cost of providing health insurance for employees? A. The cost of the average individual health insurance policy is roughly $5,000 per year. Thus, a large employer with 50 full-time workers that paid 100 percent of the premium would pay $250,000; if it paid 50 percent of the premium, the company's cost would drop to $125,000, assuming the coverage is affordable to all employees. A company may deduct the cost of annual premiums. A $3,000 nondeductible penalty may apply to each employee who purchases subsidized coverage on a health insurance exchange because the employee can't afford the company's plan.
Q. Are there ways around being considered a large employer? A. Employers who try to skirt the 50 full-time workers rule by breaking up their company into separate divisions won't have much luck. It's unlikely that a retailer who operates 10 locations employing 25 people each, for example, will be able to duck the regulations and claim the locations as separate businesses.
Q. How is affordable health insurance defined? A. Health insurance premiums cannot cost more than 9.5 percent of a worker's wages, based on the previous year's W-2s. If insurance costs more, the employer can be fined $3,000 for every worker who purchases coverage from a state or federal exchange and receives a subsidy.
Q. Are there expected to be cases in which the fine is less expensive than providing the coverage? A. In many cases, the employer may find that it is less expensive to pay the fines than provide health insurance. But companies need to factor in their reputation, the kind of employees they wish to hire and retain, and other matters. “If you want to attract and hire good employees, you'll want to offer those benefits,” said Juliana Reno, partner with Kutak Rock LLP in Omaha.
Q. Does the law have any effect on smaller businesses? A. Businesses that have fewer than 25 full-time or equivalent employees, pay average annual wages below $50,000 and contribute 50 percent or more toward employee health insurance premiums may qualify for a small group tax credit on a health insurance exchange. Businesses with 25 to 49 employees also can go onto the exchange, but there is no specific tax credit for those companies.
Q. How does the law treat seasonal employees? A. The law makes allowances for seasonal employees. A restaurant that adds workers during the summer, for example, could see its full-time employee count rise above 50. As long as those additional employees work fewer than 120 days, they aren't part of the large employer formula.
Q. What are an individual's penalties for not having health insurance? A. The annual penalty in 2014 will be $95 a person. In 2015 the penalty will be $325 a year or 2 percent of income, whichever is greater. In 2016 the penalty will rise to $695 or 2.5 percent of income, whichever is greater. The Kaiser Family Foundation has a subsidy calculator at http://healthreform.kff.org/subsidycalculator.
Sources: Kutak Rock LLP of Omaha; BP Benefit Professionals Inc.; Kaiser Family Foundation; ConsumerReports.org; U.S. Department of Treasury
Editor's note: This article is one in a series on Obamacare and its impact on people.