Health Care Reform’s Employer Shared Responsibility Penalties: A Checklist for Employers (Revised February 20, 2014)

by Snell & Wilmer
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Welcome to the SW Benefits Update, formerly the Employee Benefits Update.

Historically, employers have had complete discretion in deciding whether to offer group health plan coverage to their employees. If they offered coverage, they had to comply with the requirements of the Employee Retirement Income Security Act (“ERISA”), the Internal Revenue Code (the “Code”), and other applicable laws. However, if they did not offer coverage, they were not subject to penalties. It was simply a business decision whether to offer coverage. Starting in 2015, this will change—employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the employer shared responsibility provisions under Section 4980H of the Code, sometimes referred to as the “large employer play or pay penalties.”

In July 2013, IRS announced that the penalties would not take effect until 2015. The one-year delay was welcome news, but it unfortunately resulted in many employers pushing this issue to the back burner. With the IRS just having published final regulations on February 12, 2014, now is a great time to refocus on this issue.

Under these new rules, “large” employers will be subject to a penalty if they either: (1) fail to offer minimum essential coverage to substantially all full-time employees (and their dependents); or (2) offer employer-sponsored coverage to substantially all full-time employees (and their dependents), but the coverage is either not “affordable” or does not provide “minimum value.” The penalties are due only if at least one of a large employer’s full-time employees receives a premium tax credit for purchasing individual coverage on a Health Insurance Marketplace (hereinafter a “Marketplace”).

Although the rules take effect for most employers on January 1, 2015, what an employer’s workforce looks like in 2014 is determinative of whether the employer may be subject to the penalties in 2015. Also, many employers may need to start counting hours in 2014 in order to take advantage of the look-back measurement safe harbor that permits full-time or part-time status to be locked in for some period rather than having to track full-time status each month. Time is of the essence in understanding these new rules.

This checklist is intended to help employers:

  • Determine whether an employer is a “large” employer (Worksheet #1);
  • Calculate the potential penalties (Worksheet #2);
  • Identify “full-time employees” for purposes of calculating the penalties (Worksheet #3); and
  • Design group health plans to avoid/minimize the penalties (Worksheet #4).

[View the full, printer-friendly checklist here.]

Important Note: This checklist was originally published on March 20, 2013. It has been updated to reflect the final regulations published on February 12, 2014. The purpose of this checklist is to provide general information about the large employer shared responsibility penalties under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “Affordable Care Act” or “ACA”) that apply to employer-sponsored group health plans. The Affordable Care Act and related guidance go into much more detail and should always be consulted when considering its application to any particular plan. More detailed information about these rules may be found in the final regulations and the IRS series of questions and answers on the employer shared responsibility provisions. This summary should not be relied on as legal advice or as a legal opinion on any specific facts or circumstances. You are urged to consult legal counsel concerning your situation and any specific legal questions you may have.

Circular 230 Disclaimer: To ensure compliance with Treasury Regulations governing written tax advice, please be advised that any tax advice included in this communication, is not intended, and cannot be used, for the purpose of: (i) avoiding any federal tax penalty; or (ii) promoting, marketing, or recommending any transaction or matter to another person.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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