Potential Employer Penalties Under the
Patient Protection and Affordable Care Act (ACA)
Summary of important items and definitions to know:
1. ACA imposes penalties on “large” employers, if at least one full-time employee obtains a premium credit through the newly established exchange. Employers are not subject to a penalty if their full-time employees are eligible for Medicaid or CHIP.
2. ACA sets out a two-part calculation for determining, first, which firms are subject to the penalty and, second, which workers within the firm the penalty is applied.
A. Full-time employees are employees that work 30 hours or more a week.
B. Part-time employees are included in what is called a full-time equivalent
calculation to determine if an employer has at least 50 full-time equivalent employees (FTEs) and is thus considered large for the purpose of applying the penalty.
1. Example: A firm with 35 full-time employees and 20 part-time employees who work 24 hours per week (equaling 104 hours per month) would equal the equivalent to 51 total FTEs, making this firm a “large” employer. (20 part-time employees X 104 hours) = 2080 hours divided by 130 = 16
C. Independent Contractor: An individual who controls what will be done and how is will be done and the contract dictates the desired result of the work.
D. Temporary Worker: A worker that is not an employee of the firm he or she is “leased” to but rather an employee of the temporary agency.
E. Seasonal Worker: Seasonal worker differs across the two-part calculation. The seasonal worker definition varies depending on whether it is used in the first part of the calculation, which determines whether an employer is considered “large”, or the second part of the calculation, which determines how many employees are considered full-time for purposes of setting the dollar amount of the penalty.
1. First Part Calculation: If a seasonal employee works less than 120 days during a year, he or she is not included in the FTE calculation. In this definition, the seasonal worker is not limited to agricultural or retail workers.
2. Second Part Calculation: The 120 day period is not used to determine whether someone is a seasonal worker. Instead, IRS Notice 2012-58 provides that at least in 2014, employers are permitted to use instead a reasonable, good faith interpretation of the term “seasonal employee”. However, the notice further states that it is not a reasonable, good faith interpretation of the term “seasonal employee” to treat an employee of an educational organization, who works during active portions of the academic year, as a seasonal employee.
F. Controlled Groups: An employer of multiple entities (such as a franchise owner with several restaurants) is treated with respect to the 50-FTE requirements, as all of those franchises are essentially considered one entity. More specifically, for the purposes of the 50-FTE rule, employees in each of the franchises must be added together to determine the number of FTEs.
G. The proposed regulations provide employers some flexibility to designate certain “measurement” or look back periods (up to 12 months) during which they will calculate whether a worker is full-time or not.
1. Administrative Period: Period of identification and enroll full-time employees
2. Stability Period: Period in which penalty may be due relative to employees found to be full-time during the “measurement” period.
In order for employers who provide health insurance coverage to avoid paying a penalty, health insurance coverage that is both “affordable” and “adequate” must be offered to the employee and his/her dependents.
1. A dependent is defined as a child of an employee who has not attained age 26. A dependent does not include a spouse.
2. Coverage is considered “affordable” if the employee’s required contribution to the plan does not exceed 9.5% of the employee’s household income for the taxable year.
3. A health plan is considered “adequate” if the actuarial value (i.e., the share of the total allowed costs that the plan is expected to cover) is at least 60%.
4. Penalty for large employers offering coverage: The “monthly” penalty assessed to an employer for each full-time employee who receives a premium credit will be one-twelfth of $3,000 for any applicable month but is limited to the “total” number of the firm’s full-time employees minus 30, multiplied by one-twelfth of $2,000 for any applicable month.
Penalty for Large Employers Not Offering Coverage
A. Individuals who are not offered employer-sponsored coverage and who are not eligible for Medicaid or other programs may be eligible for premium tax credits for coverage through an exchange. Eligible individuals will generally have income of at least 100% and up to 400% of the federal poverty level (FPL).
B. For 2014, the “monthly” penalty assessed to an employer who does not offer coverage will be equal to the number of its full-time employees minus 30 (penalty waives the first 30 full-time employees) multiplied by one-twelfth of $2,000 for any applicable month
Effective Dates for Employer Penalty
A. Under the ACA, the employer penalty is effective for months beginning after December 31, 2013. Employers that intend to utilize the look-back measurement period for determining full-time status for ongoing employees for 2014 will need to begin their measurement period in 2013 to have a corresponding stability period for 2014.
B. Guidance states that employers who use a full 12 month measurement period are not required to begin the measurement period before July 1, 2013
Reporting and Other Requirements
A. The Department of Labor has delayed release of regulations requiring employers to provide employees written notice concerning:
1. The existence of an exchange (including services and contact information)
2. The employees potential eligibility for premium credits and cost sharing subsidies
3. The employers potential loss of an employer contribution if the employee purchases a plan through the exchange.
B. The Department of Labor expects the timing for distribution of notices will be late summer or fall of 2013 which will be coordinated with the open enrollment period for the Exchanges
C. Beginning in 2014, large employers will have certain reporting requirements with respect to their full-time employees:
1. Provide return including the name, address, and employer identification number
2. Certification as to whether the employer offers its full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under the eligible employer-sponsored plan
3. The length of any waiting period
4. Months coverage was available
5. Monthly premiums for the lowest-cost option
6. The employer plans share of covered health care expenses
7. The number of full-time employees
8. The Name, address, and tax identification number for each full-time employee
9. Additionally, an offering employer will have to provide information about the plan for which the employer pays the largest portion of the costs (and the amount for each enrollment category).
10. The employer must also provide each full-time employee with a written statement showing contact information for the person required to make the above return, and the specific information included in the return for the employee.
D. Firms with more than 200 full-time employees that offer coverage must automatically enroll new full-time employees in a plan (and continue enrollment of current employees). Automatic enrollment programs will be required to include adequate notice and the opportunity for an employee to opt out. The Department of Labor has concluded that it’s automatic enrollment guidance will not be ready to take effect until 2014.