By Megan Ryan, CPA
To avoid penalties, employers should take steps now to ensure that they are in compliance with the ACA requirements by the time open enrollment begins during the latter part of 2014. The penalty will be assessed on employers that do not offer health insurance to employees that meets the minimum requirements for coverage as outlined in the ACA.
The good news is that the coverage requirements and penalty for noncompliance, originally scheduled to begin in calendar year 2014, are delayed for one year and won’t be enforced until calendar year 2015. The terms of the mandate remain, however, and employers who have not already planned ahead for this mandate should begin doing so during 2014. Failure to comply may result in an insufficient coverage penalty and/or a no coverage penalty. While the penalty is commonly referred to as such, it is actually named the “employer shared responsibility payment” in the ACA. For organizations that provide health insurance on a calendar year basis, open enrollment periods generally occur during the fall and early winter (no later than December), prior to the beginning of the new coverage period. Organizations should decide now whether to offer health insurance coverage or pay the penalty, ensure that health insurance coverage meets the minimum requirements required in the ACA, and adjust the plan offerings as needed to meet those minimum requirements.
Who Does the Employer Mandate Apply to?
The mandate only applies to “large employers.” In the context of the ACA, a large employer is one that, on average, has 50 or more full-time employees or full time equivalents during the prior calendar year. For employers offering health insurance coverage on a calendar year basis, this means your status as a large employer in 2015 is based on a review of full time employees and FTEs during calendar year 2014. Organizations with an international workforce should seek additional guidance to understand which employees to include in this FTE count, as an analysis of this topic is beyond the scope of this article. For employers offering health insurance coverage on a fiscal year basis, your status as a large employer also is based on calendar year 2014. This means that your requirement to comply with the employer mandate does not begin until your first coverage period beginning during calendar year 2014. There are certain restrictions in place for fiscal year plans in this situation, so employers with fiscal year plans are encouraged to seek professional advice.
If an organization is newly formed, it must estimate its average number of full-time employees and full-time equivalents for the current year (not the preceding year, as is the case for other organizations). This unfortunately means there is no “free pass” for newly formed organizations.
For purposes of the employer mandate, a full time employee is an individual who averages, on a monthly basis, at least 30 hours of service per week or 130 hours of service per month. Hours of service equates to each hour that an employee is paid or entitled to pay, regardless of whether s/he actually worked. This means employers must include vacation, sick, and holiday hours, amongst others, in determining the total hours of service for each employee.
Employers who are close to, but do not meet, the 50 employee requirement should be careful to review individuals currently classified as independent contractors, contingent workers, or contract employees. A thorough review of the independent contractor versus employee requirements should be performed for organizations in this potentially perilous situation. While your organization may be currently treating an individual as a contractor (issuing a 1099 rather than a W-2 to the individual), the IRS may determine otherwise. A reclassification of a contractor to an employee may push your organization over the 50 employee threshold, triggering the employer mandate. Depending on when this reclassification occurs, the organization may miss the window of opportunity to comply with the employer mandate, resulting in assessment of employer mandate penalties.
A group of organizations that might be related to each other through common control, common membership, or other means may need to consider the entire group in determining full time employee and FTE counts. Related organizations should seek professional advice for assistance with these aggregation rules.
Are there any exceptions?
Any employer who does not meet the definition of large employer is exempt from paying the employer mandate penalties. This is determined by number of employees in the preceding year on an annual basis, so a startup organization may be exempt from the penalties in its first few years, but finds itself subject to the employer mandate once it has hired enough employees to provide its services and is fully operational.
A second exception to the mandate is organizations that rely on seasonal workers. An example might be an organization that offers summer camp opportunities to low income children, which by their nature would only occur during the short period of time when children are not enrolled in school. In order to qualify for this exception, the organization must have more than 50 full-time employees for 120 days or less during the calendar year, and certify that the employees in excess of 50 during that 120-day period are seasonal workers. A seasonal worker is one who provides labor or services on a seasonal basis as defined by the Secretary of Labor.
Who must be offered coverage?
In order to satisfy the requirement to offer health insurance, organizations must offer employees and their dependents (but not spouses) the opportunity to enroll, or decline enrollment, in a medical plan at least once a year. Plans can include self-insured medical plans, employer-sponsored medical plans, multi-employer plan coverage, and leasing company coverage if offered on behalf of the employer.
Dependents include children under the age of 26, including an adopted child, stepchild, and foster child. Employers may rely on the employee’s representation of his/her dependents. Organizations are not required to obtain proof from employees of dependents.
What if my organization elects not to provide coverage, or fails to meet all of these requirements?
There are two penalties assessed on employers who do not offer the appropriate level of coverage to an adequate amount of employees. Both penalties are calculated on a monthly basis, allowing for fluctuations in headcount and employees enrolled in employer-sponsored plans.
The first penalty is an insufficient coverage penalty. Two events must occur before an employer is subject to this penalty. First, at least one of the three requirements outlined below – affordable coverage, minimum value, and substantially all – is not met. In addition to the failure to meet one of these requirements, the employer must have a full-time employee enrolled in a health insurance exchange, either offered through the federal government or a state, and that employee has received a premium tax credit or cost-sharing reduction (“premium subsidy”) as a result.
The insufficient coverage penalty is assessed based on the total number of employees who receive a premium subsidy through the exchange. The penalty is $250 per month for each employee receiving a subsidy, resulting in a $3,000 per year penalty assuming the employee remains enrolled in the exchange plan for an entire year. The penalty cannot exceed what would be assessed under the no coverage penalty, if that penalty applied to the employer. This penalty applies separately to each member of a related group of employers.
Similar to the insufficient coverage penalty, the no coverage penalty requires two events to occur before the penalty applies. First, the employer does not satisfy the substantially all requirement discussed above. Second, the employer has at least one full-time employee receiving a premium subsidy through the federal or a state exchange.
While the insufficient coverage penalty is calculated based on the number of employees receiving a subsidy, the no coverage penalty is calculated based on all full-time employees, regardless of whether they are enrolled in an employer plan or not. The penalty is $166.67 per full-time employee per month, or $2,000 per year. Employers can exclude the first 30 full-time employees from the calculation. For example, if the organization has 70 full-time employees, then penalty is assessed on 40 employees rather than all 70. The 30 employee reduction must be shared ratably amongst a group of related organizations (using the rules under IRC Section 414).
Employers are not responsible for determining whether the penalties apply. The Internal Revenue Service will collect information provided by employers, individuals, and exchanges. The IRS will estimate the penalty and send notices to employers. Employers will have an opportunity to object to or adjust the calculation; after doing so, the IRS will issue an assessment. This assessment is the final determination of the amount owed.
Amounts paid for the insufficient coverage penalty and the no coverage penalty are not deductible for income tax purposes. This means that an exempt organization may not deduct any portion of these payments on Form 990-T. In addition, if an exempt organization has a for-profit subsidiary or joint venture that pays a penalty, it may not deduct the penalty on its income tax return filing.
What are the requirements to avoid penalties?
In order to avoid penalties, organizations must ensure that the health insurance coverage offered to employees meets certain minimum thresholds. Violation of any one of the three requirements triggers one or both of the employer mandate penalties. The requirements are:
- Offer affordable coverage. First, organizations must offer health insurance coverage that is affordable. The determination of the affordability of coverage relates to the amount an employee pays for the coverage. The default rule is that the employee’s required contribution for the lowest cost, self-only coverage option offered by the organization must not exceed 9.5% of the employee’s household income. Applying the 9.5% threshold to household income allows an organization to include a spouse’s income in the calculation, potentially making the threshold higher for applicable employees. Obtaining that information, however, may be difficult and organizations may face resistance from employees in providing this information.
Acknowledging that obtaining information about employees’ household income raises numerous concerns, there are three safe harbors available to organizations to ensure that coverage meets the affordability standard. The 9.5% threshold still applies in each safe harbor; however, the dollar amount this 9.5% is applied to differs in each safe harbor and in each case should be information readily available to the organization. First, affordability can be calculated based on the employee’s Form W-2 wages. Second, affordability can be calculated based on the employee’s rate of pay multiplied by 130 hours. Third, affordability can be calculated based on the federal poverty line for a single individual for the applicable calendar year, divided by 12. The trade off with each of the safe harbor options is potentially a lower 9.5% threshold than organizations may find using the household income option.
- Offer coverage that provides minimum value. If an employer-sponsored plan does not require the plan to cover at least 60% of the allowed costs of benefits provided under the plan, the plan does not provide minimum value. In order to satisfy the minimum value requirement, plans must cover 60% of the allowed costs of benefits.
- Cover substantially all full-time employees and dependents up to age 26. Organizations must offer minimum essential coverage to at least 95% of full time employees and their dependents in order to satisfy this requirement. This means that 5% or less of full-time employees and dependents may not be offered coverage. If the 5% or less group that is not offered coverage results in fewer than 5 employees falling into this category, then the 5% threshold is removed and replaced by 5 employees. For example, if an organization has 60 full-time employees, the 5% group would be 3 employees. In this case, the organization is allowed to increase that headcount to 5 full-time employees who may be excluded from the offer of minimum essential coverage. Organizations may exclude newly-hired full time employees who are in their first three calendar months of employment from this calculation.
As is abundantly clear from the details described in this article, the employer mandate provisions are complicated. Organizations should consult with advisors to ensure compliance with the requirements, with adequate time to make adjustments before open enrollment season begins.
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