Health Care Reform Alert: Feds Delay Employer Shared Responsibility Mandate Until 2015
The Patient Protection and Affordable Care Act (ACA) requires “large” employers of 50 or more to offer full-time employees the opportunity to enroll in an employer-sponsored minimum essential coverage health care plan that meets minimum value and affordability standards or the employer is assessed a penalty for employees receiving a premium tax credit or cost-sharing reduction to obtain health care coverage.
Update: Employers won't be penalized for not offering health care coverage in 2014. With health care reform’s employer shared responsibility mandate mere months away from implementation in 2014, on July 2, 2013, President Barack Obama's administration announced that it is providing an additional year before the ACA mandatory employer reporting requirements begin. Therefore, the employer shared responsibility mandate will not be enforced in 2014, and penalty payments will not apply until 2015.
Citing employer compliance concerns as the basis for the delay, the Treasury Department will issue formal guidance, simplifying the reporting requirements for employers covered by the mandate. Meanwhile, other aspects of the health care law continue to move forward, despite the uncertainty over how the delay will impact the other provisions.
Only “large” employers of 50 or more full-time employees (or full-time equivalents) are subject to the employer shared responsibility mandate. Whether you are a large employer is determined annually and is based on your average number of employees across the months of the previous year. See our article, Health Care Reform Alert: Are You Subject to the Employer Shared Responsibility Mandate? to determine whether you are considered a large employer for purposes of the employer shared responsibility mandate.
Employers can be liable for one of two shared responsibility penalties, computed differently based on whether coverage is not offered to eligible employees or coverage is offered, but it fails to meet affordability and/or minimum value standards. Employers fulfilling the offer and coverage requirements are not liable for penalties even if employees receive premium tax credits or cost-sharing reductions to obtain health care coverage.
Never has the saying “the devil is in the details” been more appropriate than when applied to health care reform compliance. If your small business falls into the large employer category subjecting you to the shared responsibility mandate, it’s virtually certain that you will need to consult with your tax professional and/or benefits administrator to make sure you don’t run afoul of the new law requirements and make the best choices for your business and your employees.
Specific Circumstances Requiring Employer Shared Responsibility
Employers with 50 or more full-time employees (or equivalents) are liable for employer shared responsibility payments beginning in 2014, if one or more full-time employees receive a federal subsidy in the form of a tax credit or cost-sharing reduction to purchase health care coverage through a health care exchange (also known as a marketplace) in either of the following scenarios:
- An employer doesn’t offer minimum essential health care coverage to full-time employees and their dependents. (Spouses are not dependents for purposes of this rule.) Employers offering coverage to 95 percent of their full-time employees meet the requirement to offer coverage.
Employers currently offering health care coverage only to employees but not their dependents can take advantage of a transition rule in effect for 2014. An employer won’t be liable for an assessable payment solely because it doesn’t offer coverage to dependents if it takes steps during its plan year beginning in 2014 toward satisfying this requirement. Therefore, for these employers, the coverage rules include dependents beginning in 2015.
- An employer offers minimum essential health care coverage to at least 95 percent of its full-time employees and their dependents. However, the coverage offered doesn’t provide “minimum value,” or the coverage offered is unaffordable to the employee.
Don’t confuse the requirement that employers offer minimum essential coverage with the requirement that the coverage offered provides minimum value.
Generally, minimum essential coverage includes the health care coverage offered under most employer-sponsored group health plans. Minimum value is determined based on a calculation of a plan’s coverage and cost of benefits (discussed in the latter portion of this article).
To be on the safe side, contact your insurer or plan administrator to be certain that your health care plan meets the minimum essential coverage requirements for purposes of the employer shared responsibility mandate.
Determining Which Employees Are Full-Time and Must Be Offered Insurance
You’re only required to make health care coverage available to your full-time employees under the ACA—part-timers are not included for purposes of the employer shared responsibility mandate. So who are your full-time employees under this law? A full-time employee for required coverage purposes under the employer mandate is calculated on a monthly basis and applies to employees with on average at least 30 hours of service per week. Actual “hours of service” must be calculated for employees paid on an hourly basis using records of hours worked and hours for which payment was made or is due for vacation, holidays, sick time, jury duty and other time-off.
Hours of service vs. hours worked are specifically used for this calculation. “Hours of service” include not only hours during which work is performed, but also hours for which an employee is entitled to pay when no work is performed—paid time-off, for example.
What about employees not paid hourly? For employees paid on a non-hourly basis, employers may calculate an employee’s hours of service by using the same method allowed for employees paid hourly—by using records of hours worked and hours for which payment was made or is due. However, you also have the option of using one of the following two methods to calculate hours of service for your employees not paid hourly:
- using a days-worked equivalency crediting an employee with eight hours of service for each day for which the employee would be credited with at least one hour of service
- using a weeks-worked equivalency crediting an employee with 40 hours of service for each week for which the employee would be credited with at least one hour of service
You can’t use the days- or weeks-worked equivalency methods if they substantially understate an employee’s hours of service so that the employee is not considered a full-time worker. The number of hours of service calculated by using an equivalency method must generally reflect the hours actually worked and the hours for which payment was made or is due.
For example, Henry works ten hour days Monday, Wednesday and Friday each week, for a total of 30 hours of service per week. Using the days-worked equivalency method to calculate Henry’s hours of service is not permitted because it would result in substantially understating his hours of service at 24 (8 hours of service x 3 days worked) and result in Henry being treated as a part-time employee.
You can use different methods for different classifications of employees who are not paid hourly as long as the classifications are reasonable and applied consistently.
Employers are also permitted to change the method of calculating non-hourly employees’ hours of service for each calendar year.
During 2014, periodically assess the method you chose to calculate non-hourly employees’ hours of service. Doing so will allow you to take advantage of the ability to change the calculation method for 2015 if the method in place isn’t working out for your business.
Employers May Use Look-Back Method to Determine Full-Time Status
Determining which employees are full-time on a monthly basis can make it difficult for employers to comply with coverage requirements. It can be particularly cumbersome for both employers and employees to determine full-time status if employees have hours that vary from month-to-month. Therefore, employers may use an optional look-back measurement method (as an alternative to a month-by-month assessment) to determine the full-time status of employees.
Look-back measurement methods are available for ongoing employees, as well as for new hires.
Ongoing employee look-back. Employers may determine an ongoing employee’s full-time status by looking back at their choice of a “standard measurement period” of a minimum of 3 and a maximum of 12 consecutive months.
Which employees are considered “ongoing” for purposes of the look-back option? Generally, an employee who has been employed by an employer for at least one standard measurement period is considered ongoing.
If an employee averages at least 30 hours of service for each week of the standard measurement period, the employee is a full-time employee for an immediately subsequent “stability period”—the longer of a minimum of six consecutive calendar months or the length of the standard measurement period.
Employees who do not average at least 30 hours of service for each week of the standard measurement period the employer chooses are not full-time employees for the subsequent stability period, which can be shorter but not longer than the standard measurement period.
Therefore, if you use the look-back method, an employee’s full-time status is based on the rules above, regardless of the employee’s actual number of hours of service during the stability period.
To ease your administrative burden, consider taking advantage of the option to adjust the start and end dates of a standard measurement period so that employees’ regular payroll periods are not split. A standard measurement period may begin and end with the beginning and ending of a payroll period if the payroll period is one or two weeks or semi-monthly in duration.
For example, Cool Kicks, Inc. uses the calendar year as the standard measurement period to determine whether employees are full-time. Therefore, Cool Kicks is permitted to exclude the entire payroll period that includes the end of the calendar year—December 31—if it includes the entire payroll period that includes the beginning of the same calendar year—January 1.
Up to 90 days permitted for coverage administration. At the end of the measurement period, once you determine which employees are eligible for health care coverage, you’ll likely have various administrative duties, such as notifying and enrolling eligible employees. To allow time for these administrative duties, employers have the option of creating an “administrative period” of up to 90 days between the end of the standard measurement period and before the stability period starts. However, if you choose this option, the following conditions must be met:
- The administrative period cannot shorten or lengthen the standard measurement period and the stability period.
- The administrative period must overlap with the prior stability period so that employees enrolled in coverage because of their full-time status based on a prior measurement period would be eligible for and offered coverage, without any gaps.
Must an employer use the same standard measurement period and stability period for all its employees? The answer is generally, yes, with different measurement, stability and administrative periods permitted for the following employee categories:
- Salaried and hourly employees
- Employees with primary places of employment in different states
- Collectively bargained and non-collectively bargained employees
- Collectively bargained employee groups covered by separate collective bargaining agreements
It’s important to choose a standard measurement period wisely because once the standard measurement period has begun, you generally can’t change it or the stability period for that year. While you can generally make changes for subsequent years, work with your plan administrator, accountant and/or tax advisor to assist you in using the optimum standard measurement period for your business right from the start.
Safe harbor for new full-time employees. If you hire an employee who is reasonably expected to work full-time from the start date and you sponsor a group health plan offering the employee coverage at or before the conclusion of the employee’s first three calendar months of employment, you won’t be subject to the penalty for failing to offer coverage to an eligible employee for that initial period.
The three-calendar-month safe harbor aligns with the ACA requirement that a group health plan or health insurer offering group health insurance coverage cannot apply a coverage waiting period longer than 90 days. A waiting period is the period that must end before coverage for an employee (or dependent) who is eligible to enroll in a group health plan goes into effect.
The 90-day rule applies to plan years beginning on or after January 2014.
Look-back for new variable-hour and seasonal employees. You can use the look-back method for your new variable-hour employees as well as your seasonal employees if that’s the measurement method you use to determine the status of your ongoing employees.
Who is a variable-hour employee? Generally, new employees who don’t meet the “reasonably expected” to be employed full-time standard are variable-hour employees. As for determining which of your employees are seasonal, employers are permitted to use a “reasonable, good faith interpretation” of the definition of a seasonal employee at least through 2014.
Various factors that employers can use as guidance to determine if an employee is “reasonably expected” to be employed full-time (on average at least 30 hours a week) or a seasonal employee are under consideration by the Treasury Department.
Therefore, you can use the same initial measurement period permitted for ongoing employees—between three and 12 months—as well as taking an administrative period of up to 90 days, in order to determine if new variable-hour and/or seasonal employees are full-time for coverage purposes.
In determining whether new variable-hour or seasonal employees are full-time, the combined initial measurement and administrative periods cannot extend past the last day of the calendar month beginning on or after the employee’s one-year start date anniversary.
Employers complying with these requirements are not assessed a penalty for variable-hour or seasonal employees during the initial measurement period or the administrative period.
To determine whether an employee averaged 30 hours of service per week or more (and is, therefore, a full-time employee), an employer must measure the employee’s hours of service during the initial measurement period. As holds true for the standard measurement period, if an employee is determined to be full-time during the initial measurement period, the stability period must be at least six consecutive calendar months long and at least as long as the initial measurement period. The stability period must begin after the initial measurement period and associated administrative period.
What if you determine that a new variable-hour or seasonal employee is not full-time? In that case, you may treat him or her as non-full-time for a stability period following the initial measurement period that can’t be more than one month longer than the initial measurement period. The stability period also cannot exceed the remainder of the standard measurement period and the associated administrative period in which the initial measurement period ends.
Special rule applies to new employees whose status changes. What happens if a new variable-hour or seasonal employee has a change in employment status during the initial measurement period (for example, is promoted to a full-time position) that results in the employee being reasonably expected to be employed on average at least 30 hours a week? If the employee would have been reasonably expected to be a full-time employee if he or she had begun employment in the new position, then the employee is treated as a full-time employee on the earlier of :
- the first day of the fourth month following the change in status; or
- the first day of the first month following the end of the initial measurement period and any associated administrative period, if the employee averages more than 30 service hours per week during the initial measurement period.
This special rule only applies to new variable-hour and seasonal employees.
Special rules also apply for the treatment of or employees rehired after termination or resuming service after other absences including unpaid family and medical leave, military leave, and jury duty and employment break periods for employees of educational organizations.
Defining Minimum Value Coverage
If you are required to offer health care coverage, to avoid the shared responsibility penalty the coverage must provide “minimum value.” What does this mean? The general rule is that a plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.
The Center for Consumer Information & Insurance Oversight (CCIO) has released a minimum value calculator employers can use to determine if their health insurance plans meet the standard.
Determining if a plan provides minimum value in accordance with the employer shared responsibility mandate may require the interpretation of complex regulations. Contact your insurer, plan administrator, or tax advisor for assistance.
What Constitutes Affordable Coverage?
If you’re required to provide health care coverage under the employer shared responsibility mandate, the coverage must meet the affordability standard required by the ACA. Employer-provided health care coverage is not considered affordable if an employee’s share of the premium for self-coverage costs more than 9.5 percent of an employee’s annual household income. For purposes of the affordability standard, household income is defined as the modified adjusted gross income of the employee and family members (including dependents) who are required to file a federal income tax return.
You may be wondering how an employer can be expected to know what its employees’ household incomes are in order to determine whether the coverage offered is considered affordable? Recognizing the issue in making this determination, the IRS has provided three optional affordability safe harbors for employers to use with calculations based on wages paid, rate of pay, or the federal poverty line.
Wages paid safe harbor. If the cost of healthcare coverage to an employee for a calendar year does not exceed 9.5 percent of the wages paid by the employer to the employee (Form W-2, Box 1 wages) for that year, the affordability requirement is met.
This safe harbor is applied after the end of the calendar year and on an individual employee basis, using the employee’s W-2 wages and required health care coverage contributions for the year.
Bobby’s Sporting Goods employs Ava for the 2015 calendar year (January 1 through December 31) and offers Ava and her dependents qualifying health care coverage during that period. Ava’s wages from Bobby’s Sporting Goods for 2015 are $50,000, and her contribution for health care coverage (for herself only) is $2,400 for the year ($200 a month).
Ava’s contribution of $2,400 for her 2015 health care coverage is less than 9.5 percent of her wages for the year ($50,000 x 9.5 = $4,750). Therefore, the coverage offered is considered affordable for purposes of the safe harbor.
If an employee is offered health care coverage for a period shorter than an entire calendar year, the wages safe harbor can still be used, but the wage amount must be adjusted to reflect the period for which coverage was offered. The wage amount is adjusted by multiplying the wages by a fraction equal to the number of calendar months for which coverage was offered over the number of calendar months of employment. For purposes of this equation, the entire calendar month is counted in determining the applicable fraction if for at least one day of the month:
- the employee is employed, or
- health care coverage is offered
In 2015, Mick is employed by Bobby’s Sporting Goods for nine calendar months, from April 1 through December 31. Mick’s wages for those nine months are $36,000 and his health care self-only coverage contribution is $200 per month or $1,800 for nine months. In order to determine if the coverage meets the safe harbor for affordability, the wage amount, $36,000 is multiplied by the number of calendar months of coverage over the number of months of employment (in this case, 9/9 =1).
Mick’s contribution of $1,800 for the nine months of health care coverage in 2015 is less than 9.5 percent of his wages for the nine months he was employed with Bobby’s Sporting Goods ($36,000 x 9.5 = $3,420). Therefore, the coverage offered is considered affordable for purposes of the safe harbor.
The wages paid safe harbor is determined after the end of the calendar year. Therefore, an employer would determine whether it met the safe harbor for the year 2014 for an employee by comparing 9.5 percent of the employee’s Form W-2 wages (reported in Box 1) for 2014 with the employee’s coverage contribution for 2014.
Employers can use this safe harbor prospectively by setting the employee contribution at the beginning of the year at a level that will not exceed 9.5 percent of the employee’s W-2 wages for the year.
Rate of pay safe harbor. The affordability requirement is met if the cost of healthcare coverage to an employee for a calendar month does not exceed 9.5 percent of an amount equal to 130 hours multiplied by the employee’s hourly rate of pay as of the first day of the coverage period.
For salaried employees, monthly salary is used instead of 130 hours multiplied by the hourly rate of pay.
Bobby’s Sporting Goods employs Ava for the 2015 calendar year (January 1 through December 31) and offers Ava and her dependents qualifying health care coverage during that period. Ava is paid $10 per hour, making her monthly pay amount $1,300 ($10 x 130 hours of service). Ava’s contribution for her health care coverage is $1,200 for the year ($100 a month x 12 months).
Because Ava’s contribution of $100 per month for her health care coverage is less than 9.5 percent of her pay per month ($1,300 x 9.5 = $123.50), the coverage offered is considered affordable for purposes of the safe harbor.
If an employee is offered health care coverage for a period shorter than an entire calendar year, the rate of pay safe harbor can still be used. For purposes of this equation, if for at least one day of the month health care coverage is offered, the entire calendar month is counted in determining the assumed income for the calendar month as well as for determining the employee’s share of the premium for the calendar month.
If an employee’s rate of pay changes during the year (or part of the year), for the safe harbor calculation the lowest hourly rate of pay for the calendar year is multiplied by 130 hours of service.
Federal poverty line safe harbor. The affordability requirement is met if the cost of healthcare coverage to an employee for a calendar month does not exceed 9.5 percent of a monthly amount determined as the federal poverty line for the state in which the employee is employed, for a single individual for the year, divided by 12.
For purposes of the federal poverty line safe harbor, the entire calendar month is counted in determining the assumed income for the calendar month as well as for determining the employee’s share of the premium for the calendar month if health care coverage is offered even for only one day of the month.
Employer Mandate Effective Date Differs For Certain Fiscal Year Health Care Plans
The general effective date for the employer shared responsibility provisions is January 1, 2014. However, if you had a non-calendar health care plan in place as of December 27, 2012, you won’t be subject to the employer shared responsibility penalty until the first day of the plan year in 2014, if you meet at least one of the following conditions:
- Plan coverage was offered to at least one-third of your full- and part-time employees during the last enrollment period.
- The plan covered at least one quarter of your employees (employers can use any day between October 31, 2012, and December 27, 2012 to make this determination).
Penalties for Employer Shared Responsibility Non-Compliance
Employers may be liable for one of two penalties depending on whether coverage is not offered to at least 95 percent of full-time employees, or coverage is offered but it doesn’t meet the minimum value or affordability standards and at least one employee is eligible for a premium tax credit or cost-sharing reduction to purchase health care coverage through a health care marketplace.
Coverage not offered. The penalty for not offering health care coverage to at least 95 percent of your full-time employees is calculated by multiplying the number of your full-time employees for each month minus 30 by $166.67 or $2,000 per year. The payment for the calendar year is computed by adding up the monthly penalties computed for each month for which coverage wasn’t offered.
Coverage offered doesn’t meet minimum value or affordability standards. The penalty for offering health care coverage to your full-time employees that is unaffordable or not of minimum value is the lesser of:
- the number of full-time employees per month who receive a premium tax credit multiplied by $250 or 1/12 of the $3,000 annual penalty (note that this penalty is calculated per employee actually receiving a subsidy to purchase coverage through a health care marketplace)
- the number of full-time employees for each month minus 30 multiplied by $166.67 (or 1/12 of the $2,000 annual penalty for not offering coverage)
Therefore, the penalty for offering inadequate coverage is capped at $2,000 and cannot exceed the penalty owed by employers not offering coverage.
Now that you have an understanding of what is required of employers under health care reform, contact your trusted advisors as soon as possible so that together you can successfully prepare for the sweeping changes ahead.