ACA:  Employer Shared Responsibility Provision

Understanding "Pay or Play" Rules

Large employers in 2014 will be subject to the Affordable Care Act's (ACA) "pay or play" requirement. Under the ACA's employer shared responsibility provision, large employers may be subject to a penalty if theydo not offer the minimum level of coverage under an employer-sponsored plan ( the "no-offer penalty") or offer coverage that is either not affordable or does not provide minimum value (the "under-offer penalty").  For the purpose of interpreting these rules, a large employer is termed as an "applicable large employer."

On December 28, 2012, the IRS issued a Q&A regarding the shared responsibility penalties ("pay or play") for employers. Further guidance was provided by the IRS on January 2, 2013, with the publication of the Proposed Rule, 26 CFR Parts 1, 54 and 301, 78 Federal Regulation 217. Employers may rely on the proposed regulations pending publication of the final regulations. If the final regulations are more restrictive, they will not be applied retroactively and employers will be given time to comply.  

Key terms and provisions include:  

  • An "applicable large employer" is defined as employing on average of at least 50 full-time equivalent employees (equivalent means full-time employees plus part time employees prorated).

  • For purposes of this test, a full-time employee is defined as employed on average at least 30 hours of service per week.

  • Employer-provided health insurance coverage is deemed "unaffordable" if the employee premium contribution exceeds 9.5% of the employee's W-2 income.

  • Coverage is deemed to provide "minimum value" if it pays for at least 60% of all plan benefits, without regard to co-pays, deductibles, co-insurance, and employee premium contributions.

  • Coverage must also be extended to dependents (children up to age 26); however, there is no requirement that coverage be offered to spouses.

*See the simplified flow chart of the Pay or Play provision on page 6.

"No-Offer Penalty" --   Code § 4980H(a) Liability

The applicable employer fails to offer to all its "full-time employees" (and their dependents) the opportunity to enroll in "minimum essential coverage" under an "eligible employer-sponsored plan." Under this prong, if an employer fails to make an offer of coverage to its full-time employees (and their children up to age 26), an assessable payment is imposed monthly in an amount equal to $166.67 multiplied by the number of the employer's full-time employees, excluding the first 30. Annual this penalty equals $2,000 per full-time employee.

- OR -

"Under-offer penalty" --  Code § 4980H(b) Liability

The employer offers its full-time employees (and their children up to age 26) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that, with respect to a full-time employee who qualifies for a premium tax credit or cost-sharing reduction, either is (i) "unaffordable" or (ii) does not provide "minimum value."  If the employer makes the requisite offer of coverage, the assessable payment is equal to $250 per month multiplied by the number of full-time employees who qualify for and receive a premium tax credit or cost-sharing reduction from a health insurance exchange.  The amount of the Code § 4980H(b) Liability is capped at the Code § 4980H(a) Liability amount.

As a result, an employer that offers group health coverage can never be subject to a larger assessable payment than that imposed on a similarly situated employer that does not offer group health coverage.

To fully understand how an applicable employer may be subject to the "under-offer penalty" it is important note that effective January 1, 2014, individuals and employees will be able to sign up for coverage through the Federal or State Insurance Exchanges.  Depending upon the financial circumstances of that individual or employee he/she may qualify for and receive a premium tax credit or cost sharing reduction to offset the cost of purchasing coverage through the Exchange.  This event will trigger the assessment of the employer "under-offer penalty" if the employer's coverage is deemed to be unaffordable or not of "minimum value".  

Q&A on Health Care Reforms Employer Shared Responsibility Penalties

How do I determine if my company is subject to the employer shared responsibility provisions?

These proposed regulations apply to all applicable large employers. An applicable large employer is one that has an average of 50 full-time employees including full-time equivalent employees (FTEs) excluding employees who work outside the U.S.  A full-time employee is defined as an employee who works an average of 30 hours or more per week (an employer may elect to use 130 hours per month as an equivalent). The number of full-time equivalents is determined by totaling the hours of all the non-full-time employees. (For example, 30 part-time employees who work an average of 15 hours per week are equivalent to 15 FTEs.)

Employers average their employee counts across the months in the year to determine if they have met the criteria for large employer status. The determination for large employer status is made retroactively. So, the employee count in 2013 is used to determine status in 2014. The proposed regulations provide additional information regarding how to determine the average number of employees for a year including guidance on how to address seasonal employees and employees working in educational organizations.

All employers within the same controlled group, due to a common ownership or are otherwise generally combined together, are treated as a single employer. If the combined employee count meets the criteria for large employer status then all entities within the control group are subject to the employer shared responsibility provision. The proposed regulations provide rules on how to handle related companies. Each employer's coverage is analyzed separately for penalty purposes.

Tax-exempt and governmental organizations are not exempt from these provisions.

When will the employer shared responsibility provisions go into effect?

The employer shared responsibility provisions go into effect January 1, 2014 or the first day of the plan year immediately thereafter.

Is there any transition relief for employers?

For 2014, employers will be allowed to choose any conservative six month period in 2013 (instead of the entire calendar year) to determine large employer status for 2014.

How can an employer avoid a "no-offer penalty?

A large employer can avoid the "no-offer penalty" by providing minimum essential coverage under an eligible employer-sponsored plan to at least 95% of full-time employees and their dependents. Per the regulations, "and their dependents" includes children under the age of 26. A transition rule, that applies to plan years beginning in 2014, excuses employers who are not offering dependent coverage if the employer is "taking steps" to add the coverage. An employee enrolled in such a plan is not eligible for a premium tax credit for purchasing coverage through an exchange and therefore cannot trigger a penalty. The regulations prevent employers from requiring mandatory enrollment of their employees on their plans as a strategy to avoid penalties. Employees must be given the opportunity to decline coverage.

How does an employer know if their employer-sponsored plan meets the employer shared responsibility provision's definition of affordable and minimum essential coverage?

If the employee contribution amount is less than 9.5% of any of the following: the employee's form W-2, Box 1 wages, the employee's rate of pay, or the federal poverty level (at 400%) for individuals, then the employer has met one of the proposed regulations affordability safe harbors.

A minimum value calculator is forthcoming from the IRS and Department of Health and Human Services. Employers will be able to input information about their plans, i.e. deductibles and co-pays, into the calculator to see if their plan meets the minimum value of at least 60% of the cost of covered medical expenses required by the regulations.

Calculation of "Pay or Play" Penalty

How is the payment calculated if an employer does not offer coverage or does not offer minimum essential coverage?

If an employer does not offer employer sponsored coverage or the minimum essential coverage and at least one full-time employee receives the premium tax credit for purchasing coverage through an exchange, the employer's shared responsibility payment is equal to number of full-time employees minus 30 multiplied by $2,000. Please note, only full-time employees, not full-time equivalents, are included in this calculation. For example, a company with 100 full-time employees that does not offer coverage, 2 of whom are receiving premium tax credits,  would incur an annual penalty of $140,000. The penalty is calculated and paid on a monthly basis.

The company will not incur a penalty if none of the full-time employees receive the premium tax credit for purchasing coverage through an exchange.

How is the payment calculated if an employer offers minimum essential coverage to at least 95% of its employees but still owes a payment?

If an employer offers minimum essential coverage under an employer-sponsored plan and at least one full-time employee receives the premium tax credit, the employer's shared responsibility payment is equal to the lesser of: number of full-time employees minus 30 multiplied by $2,000 or number of full-time employees who receive credits for exchange coverage multiplied by $3,000. Please note, only full-time employees, not full-time equivalents, are included in this calculation. For example, a company with 100 full-time employees, 2 of whom are receiving premium tax credits, that offers coverage would incur an annual penalty of $6,000. The penalty is calculated and paid on a monthly basis.

The company will not incur a penalty if none of the full-time employees receive the premium tax credit for purchasing coverage through an exchange.

How will an employer know that it owes an Employer Shared Responsibility payment?

The employer will be contacted by the IRS regarding their potential liability. The employer will be given time to respond before any liability is assessed.  The IRS will not contact employers regarding the potential liability until after the due date for the employees' tax return claiming the premium tax credit and after the due date for employers that met the criteria for large employer status to file the information returns identifying their full-time employees and describing the coverage that was offered.

Q & A Link

http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act

Proposed Regulations Link

 http://www.irs.gov/pub/newsroom/reg-138006-12.pdf