How Does it Affect You?
Currently Do Not Offer Coverage
The most impactful provision on large groups (the employer mandate) may have been delayed but that doesn’t mean that employers don’t have issues to address heading into 2014. Call (800) 693-3420 to speak with an agent about becoming compliant with healthcare reform.
Learn about impactful ACA topics:
· To learn more about the impacts of reform: Click Here »
· Employer Mandate Delay: Click Here »
· What is A Large Group? Click Here »
Pay Or Play Penalty (Delayed until 2015)
Effective January 1, 2014, the Affordable Care Act (ACA) imposes a penalty on large employers that do not offer minimum essential coverage to full-time employees and their dependents. Large employers that offer this coverage may still be liable for a penalty if the coverage is unaffordable or does not provide minimum value.ACA’s employer penalty is referred to as an employer shared responsibility payment. It requires large employers to either “play” by offering health coverage that meets certain standards to full-time employees and their dependents OR “pay” a substantial excise tax. ACA’s pay or play penalty provisions are contained in Internal Revenue Code section 4980H.
On January 2, 2013, the Internal Revenue Service (IRS) released long-awaited proposed regulations on ACA’s employer shared responsibility provisions. Although the proposed regulations are not final, employers may rely on them until further guidance is issued.
The IRS’ proposed regulations address who a large employer must offer coverage to in order to avoid an ACA penalty. Under the proposed regulations, the requirement to offer coverage to full-time employees is relaxed to a “substantially all” standard. Also, the proposed regulations identify the dependents who must be offered coverage to avoid an ACA penalty.
Employer Penalties (Delayed until 2015)
Under the proposed regulations, the amount of the excise tax generally depends on whether or not an employer offers coverage to substantially all full-time employees and their dependents.
- In 2014, the monthly penalty assessed on employers that do not offer coverage to substantially all full-time employees and their dependents will be equal to the number of full-time employees (minus 30) multiplied by 1/12 of $2,000. This penalty is called the 4980H(a) penalty.
- In 2014, the monthly penalty assessed on employers that offer health coverage to substantially all full-time employees and their dependents will be 1/12 of $3,000 for each full-time employee who receives a premium tax credit or cost-sharing reduction under an insurance exchange for any applicable month. However, the total penalty would be limited to the total number of full-time employees (minus 30) multiplied by 1/12 of $2,000 for any applicable month. This penalty, which is called the 4980H(b) penalty, is triggered when a full-time employee is not offered coverage or when the coverage is unaffordable or does not provide minimum value.
Substantially All (Delayed until 2015)
Under the proposed rules, the 4980H(a) penalty will not apply to a large employer that intends to offer coverage to all of its full-time employees but fails to offer coverage to a few of these employees, regardless of whether the failure to offer coverage was inadvertent.
The proposed regulations provide that an employer will satisfy the requirement to offer minimum essential coverage to “substantially all” of its full-time employees and their dependents if it offers coverage to at least 95 percent of its full-time employees and dependents.
Under the regulations, an employer will not be liable for a penalty for a calendar month if it offers coverage to all but 5 percent (or, if greater, five) of its full-time employees and dependents for that month. According to the IRS, the alternative margin of five full-time employees is designed to accommodate relatively small employers because a failure to offer coverage to a handful of full-time employees might exceed 5 percent of the employer’s full-time employees.
Dependents
The proposed regulations define “dependents” for purposes of ACA’s employer penalty to include only an employee’s child (that is, son, daughter, stepchild, adopted child or child placed for foster care) under the age of 26. Employers may rely on employees’ representations regarding the identity and ages of their children.Under the proposed regulations, “dependent” does not include an employee’s spouse. Thus, an employer is not required to offer minimum essential coverage to employees’ spouses in order to avoid ACA’s pay or play penalty.
In addition, the proposed regulations contain a transition rule for employers that currently offer coverage only to employees. Any such employer that takes steps during its 2014 plan year to satisfy ACA’s requirement to offer coverage to full-time employees’ dependent children will not be liable for a penalty based solely on the failure to offer coverage to dependent children for that plan year.
Employers with Employees Working Abroad
A company that employs U.S. citizens working abroad generally will be subject to the pay or play rules only if the company had at least 50 full-time employees (including FTEs) determined by taking into account only work performed in the United States.
Employers with Seasonal Workers
If an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that time were seasonal workers, the employer does not qualify as a large employer. The proposed regulations allow an employer to apply either a period of four calendar months (whether or not consecutive) or a period of 120 days (whether or not consecutive) to determine if it qualifies for the seasonal worker exception.
New Employers
An employer not in existence during an entire preceding calendar year is a large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during the current calendar year.
Counting Full-Time Employees, FTEs and Hours of Service
(Delayed until 2015)
Employers average their number of full-time employees and FTEs across the months in a year to determine if they meet the large employer threshold. The averaging method takes into account fluctuations that many employers experience in their workforce numbers each year.
A common law standard applies to define the terms “employee” and “employer.” Under this standard, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services with respect to the result to be accomplished, along with the details and means by which it is done.
Leased employees are not considered employees of the service recipient for purposes of ACA’s shared responsibility provisions. Also, a sole proprietor, a partner in a partnership and a 2-percent S corporation shareholder are not counted as employees.
However, aggregation rules apply for companies under common ownership. All employees of a controlled group of businesses under Internal Revenue Code (Code) sections 414(b) or (c) or an affiliated service group under Code section 414(m) are taken into account to determine if an employer is subject to the pay or play rules. If the combined total meets the threshold, each separate member of the group is subject to the pay or play rules, even those companies that on their own do not have enough employees to meet the threshold.
Full-time Employees
Under ACA, a full-time employee is an employee who was employed on average at least 30 hours of service per week. The proposed regulations treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours per service per week.
FTEs (Delayed until 2015)
An employer must calculate the number of FTEs it employed during the preceding calendar year and count each FTE as one full-time employee for that year. The proposed regulations provide a calculation method for FTEs. Under this method, all employees who were not full-time employees for any month in the preceding calendar year are included in calculating the employer’s FTEs for that month by:
- Calculating the aggregate number of hours of service (but not more than 120 for any employee) for all employees who were not employed on average at least 30 hours of service per week for that month; and
- Dividing the total hours of service determined above by 120.
The result is the number of FTEs for a calendar month.
Fractions are taken into account in determining the number of FTEs for each calendar month. However, after adding the 12 monthly full-time employee and FTE totals and dividing by 12, all fractions would be disregarded. For example, 49.9 full-time employees (including FTEs) would be rounded down to 49 full-time employees and FTES and the employer would not meet the large employer threshold.
Hours of Service
To determine an employee’s hours of service, an employer must count:
- Each hour for which the employee is paid, or entitled to payment, for the performance of duties for the employer; and
- Each hour for which an employee is paid, or entitled to payment by the employer, on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military leave or leave of absence.
Under the proposed regulations, all periods of paid leave must be taken into account; there is no limit on the hours of service that must be credited.
Also, all hours of service performed for all entities treated as a single employer under the Code’s controlled group and affiliated service group rules must be taken into account. However, if compensation for hours of service is foreign source income, those hours of service should not be included in an employee’s hours of service.
Hourly Employees
For employees paid on an hourly basis, an employer must calculate hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
Non-hourly Employees
For employees not paid on an hourly basis, employers are permitted to calculate hours of service by:
- Counting actual hours of service from records of hours worked and hours for which payment is made or due;
- Using a days-worked equivalency method under which an employee is credited with eight hours of service for each day with an hour of service; or
- Using a weeks-worked equivalency method under which an employee is credited with 40 hours of service per week for each week with an hour of service.
Employers may use different methods for non-hourly employees based on different classifications of employees if the classifications are reasonable and consistently applied. Employers may change methods each calendar year. However, employers may not use the days-worked or weeks-worked equivalency methods if those methods would substantially understate employees’ hours of service.
