Beginning in 2014, certain large employers may be subject to a penalty tax (also called an “assessable payment”) for failing to offer full-time employees and their dependents minimum essential health coverage or health coverage that is considered “affordable”. As the code is written today, the penalty tax is due if any full-time employee is certified to the employer as having purchased health insurance through an Exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. A proposed safe harbor will likely change this, allowing some employees the ability to enroll in Exchange coverage with a tax credit or cost sharing reduction even when the employer’s health plan has been certified as an “affordable” health plan with “minimum essential coverage”.
The information provided in this guide is intended to help employers to understand what companies are subject to the mandate, the requirements of minimum essential and affordable coverage, the taxes applied if employers do not meet the mandate standards, and the value of the penalties assessed when a full-time employee who is entitled to a tax credit or cost-sharing reduction applies for Exchange coverage. As we would expect, the standard employer aggregation rules will apply to the mandate, so it is important that employers take this into consideration when counting full-time employees. Many employers, especially those that are not part of a commonly controlled corporation and employ more than fifty full-time employees, will be able to skip over Steps 1 and 2 listed below.
Step 1 – Addressing Commonly Controlled Corporations
When determining the size of the employer for the purposes of the “pay or play” mandate, the same aggregation rules used in the qualified plan context will apply. Employees of all persons treated as a single employer are taken into account. Entities that are considered a controlled group or affiliated service group are combined when determining whether the employer is considered a small employer or large employer. It is critical that a business is “sized” properly; business size dictates whether the pay or play penalties can be imposed on the employer beginning in 2014. The Treasury Department intends to issue regulations to prevent business entities from avoiding the purpose of the affiliated service group rules.
Step 2- Determining Whether an Employer is an “Applicable Large Employer”
An applicable large employer for a calendar year is an employer, or controlled group, who employed an average of at least 50 “full-time employees” on business days during the preceding calendar year. A “full-time employee” for any month is an employee who is employed for an average of at least 30 hours of service per week.
Steps 1-3 should be completed for each month during the year:
1. Identify # of employees working 30+ hours per week for month Total FT:_______(X)
2. Add all hours in each month for PT employees then divide by 120 Total Hrs: _____ / 120 = ____ (Y)
3. Then add answer from above (Y) to Total FT (X) Y + X = ___(FT Emps for month)
4. Then total all months for the year Total for all Months ______(T)
5. Divide total all months by 12 to get Average FT Employees per month T / 12 = ______ (AVERAGE)
*If this average is 50 or more, then the employer is a Large Employer.
Note: A special rule enables an employer that has more than 50 full-time employees solely as a result of seasonal employment to avoid being treated as an applicable employer. Under this rule, an employer will not be considered to employ more than 50 full-time employees if (a) the employer’s workforce only exceeds 50 full-time employees for 120 days, or fewer, during the calendar year; and (b) the employees in excess of 50 who were employed during that 120-day (or fewer) period were seasonal workers. “Seasonal worker” means a worker who performs labor or services on a seasonal basis as defined by the DOL, including agricultural workers covered by 29 CFR § 500.20(s)(1) and retail workers employed exclusively during holiday seasons.
Step 3 – Determining Whether Minimum Essential Coverage is Offered
Employers are expected to offer “minimum essential coverage” that is “affordable” to full-time employees. Most employer-provided group health coverage will meet the very broad definition of “minimum essential coverage.” The definition includes any “eligible employer-sponsored plan”, a term that means a group health plan or group health insurance coverage offered by an employer to an employee that is (a) a governmental plan, or (b) any other plan or coverage offered in a state’s small or large group market. Minimum essential coverage does not, however, include certain excepted benefits.
Defining “Minimum Value”
The IRS notes that the determination of minimum value for employer plans will be consistent with previous HHS guidance on “actuarial value,” which is relevant for determining coverage levels for QHPs offered through Exchanges. Among other things, this will allow for including employer contributions to an HSA and amounts made available under an HRA when making the minimum value determination. Specifically, an employer-sponsored plan would be permitted to add to the plan’s value the employer contributions to an HSA and amounts made available under an HRA using a method similar to the methods used by QHPs that are offered through a SHOP Exchange.
HHS and IRS intend to develop an “MV calculator” for use by self-insured plans and insured large group plans. Under this approach, plans with certain standard cost-sharing features (e.g., deductibles, co-insurance, and maximum out-of-pocket costs) will be able to enter information about four core categories of benefits (physician and mid-level practitioner care, hospital and emergency room services, pharmacy benefits, and laboratory and imaging services) into the calculator based on claims data of typical self-insured employer plans. The calculator would also take into consideration the annual employer contributions to an HSA or amounts made available under an HRA, if applicable. Comments are specifically requested on how to adjust for other benefits (e.g., wellness benefits) provided under a plan using the calculator.
Beginning in 2014, an applicable large employer will pay a penalty tax for any month that—
- the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and
- at least one full-time employee has been certified to the employer as having enrolled for that month in a QHP for which health coverage assistance is allowed or paid. This means that at least one full-time employee who is entitled to a premium tax credit or cost sharing reduction has applied for coverage via an Exchange plan.
Step 4 – Calculating the Tax if the Penalty Applies
The penalty tax is equal to the product of the “applicable payment amount” and the number of individuals employed by the employer (less the 30-employee reduction) as full-time employees during the month. The “applicable payment amount” for 2014 is $166.67 with respect to any month (that is, 1/12 of $2,000). The amount will be adjusted for inflation after 2014.
This essentially means that employers will pay a $2,000 annual penalty for each employee who is employed for the entire year (12 months) less the 30-employee reduction. This penalty applies if the employer fails to offer its full-time employees “minimum essential coverage” and at least one full-time employees who is entitled to a premium tax credit or cost sharing reduction applies for coverage in an Exchange plan.
Example of Annual Penalty:
Employer employs 65 full-time employees on average for the entire year. Let’s assume all employees work for the entire twelve month period. The Employer may subtract 30 employees for the 30-employee reduction. Employer responsible to pay the penalty (or tax) for the remaining 35 employees. Remember – This penalty only applies if at least one full-time employee who is entitled to a premium tax credit or cost sharing reduction has applied for coverage via an Exchange plan.
35 x $2,000 = $70,000 annual penalty applies
Step 5 – Determining Whether “Affordable” Coverage is Provided
Beginning in 2014, an applicable large employer will pay a penalty tax for any month that –
- the employer offers to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” that does not provide minimum value or is considered “unaffordable” for some employees; and
- at least one full-time employee who has claimed a premium tax credit and has been certified to the employer as having enrolled for that month in a QHP for which health coverage assistance is allowed or paid.
As the code is written now, if an employee is offered affordable minimum essential coverage under an employer-sponsored plan, then the individual generally is ineligible for a premium tax credit and cost-sharing reductions for health insurance purchased through an Exchange. Employees will be eligible for the premium tax credit if their premium exceeds 9.5% of the employee’s household income. When the premium contribution towards coverage exceeds 9.5% of the employee’s household income, the coverage is considered “unaffordable”. The employee must seek an affordability waiver from the Exchange. The penalty tax applies for employees receiving an affordability waiver. In order to get the premium tax credit and cost-sharing reduction, however, an employee must decline to enroll in the coverage and purchase coverage through the Exchange instead.
Anticipated Safe Harbor
Under an anticipated safe harbor, an employer that offers its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an eligible employer-sponsored plan, and the employee portion of the self-only premium for the employer’s lowest-cost coverage does not exceed 9.5% of the employee’s W-2 wages as opposed to “employee’s household income”, would not be subject to a penalty for that particular employee even if that employee receives a premium tax credit or cost-sharing reduction.
According to the IRS, because affordability is determined by reference to household income and because household income is determined by reference to variables that are generally unknown to an employer, employers may encounter practical difficulties in assessing whether the coverage they are offering is affordable to certain employees. The safe harbor would address this concern by providing employers with a more workable option for determining the affordability of their health coverage.
Safe Harbor Impact on Premium Tax Credit Availability
Assuming the safe harbor is passed, it is important to note that an employee’s eligibility for a premium tax credit will continue to be based on the affordability of employer-sponsored coverage relative to the employee’s household income. The safe harbor will apply ONLY for purposes of determining whether an employer’s coverage satisfies the 9.5% affordability test for purposes of the assessable payment (employer penalty tax).
Step 6 – Calculating the Penalty Tax if Affordable Coverage is Not Offered
The penalty tax is equal to $250 (1/12 of $3,000, adjusted for inflation after 2014) times the number of full-time employees for any month who receive premium tax credits or cost-sharing assistance (this number is not reduced by 30). This penalty tax is capped at an overall limitation equal to the “applicable payment amount” (1/12 of $2,000, adjusted for inflation after 2014) times the employer’s total number of full-time employees, reduced by 30.
The Treasury and IRS have released several FAQs to date, and have communicated their intent to issue more regulations and guidance. Additional information will be provided as soon as it is released.
Please note that the information contained in this document is designed to provide authoritative and accurate information, in regard to the subject matter covered. However, it is not provided as legal or tax advice and no representation is made as to the sufficiency for your specific company’s needs. This document should be reviewed by your legal counsel or tax consultant before use.
Additionally, the messages and content within the Pittsburgh Health Care Reform group do not reflect the advisory services of Henderson Brothers, Inc.