Effective January 1, 2015, you could face tax penalties under the employer shared responsibility rules of the Affordable Care Act (ACA) if you fail to offer health care coverage to your full-time employees and their dependents. These 10 questions will help you determine your company’s risk.
1. What is the employer mandate?
Nothing in the ACA requires an employer to offer its employees group health coverage. However, certain large employers will have to pay tax penalties in 2015 under the employer shared responsibility rules if they fail to offer coverage to their full-time employees and their dependents. A large employer will either elect to "play" by providing affordable minimum essential health coverage to full-time employees and their dependents or will "pay" a penalty.
2. When is the employer mandate effective?
Final rules issued in February 2014 say that the employer mandate is effective on January 1, 2015, for calendar year plans of employers with 100 or more full-time equivalent employees. The employer mandate is delayed until 2016 for employers with 50 to 99 full-time equivalent employees.
3. Who is subject to the mandate?
The new rules will apply in 2015 to employers with at least 100 full-time employees or an equivalent combination of full-time and part-time employees. As noted above, the rules will apply in 2016 to employers with 50 to 99 full-time equivalent employees. To determine whether an employer is a large employer for the current year, look at all hours worked by all employees of the employer in the prior year.
In determining whether a company is a large employer, add together employees of entities that are part of a group of trades or businesses considered a single employer under the controlled group rules of the Internal Revenue Code. All employers with a common owner or which are otherwise related under the controlled group rules must be counted together to determine large employer status.
4. Who must be offered coverage?
Large employers will need to offer coverage to full-time employees and their dependents in order to avoid penalties. No penalty applies for failing to offer coverage to part-time employees or to spouses.
5. Which employees are considered full-time employees?
The ACA generally treats anyone employed by an employer for an average of 30 or more hours a week as a full-time employee. An employee's hours of service include hours when the employee actually performs duties, as well as hours for which the employee is paid but does not actually perform duties, such as vacation, disability and leaves of absence.
6. Who are considered dependents?
A dependent is an employee's child under age 26. The term dependent does not include the spouse of an employee. An employer does not have to contribute toward dependent coverage.
7. How does an employer handle variable hour employees?
For companies with employees who work a variable schedule, the IRS has provided some optional safe harbors to use to determine whether an employee is full time. The IRS safe harbor approach involves a look-back period during which you measure an employee's hours of service; an administrative period during which you identify which employees qualify as a full-time; and a stability period during which those employees must be offered coverage. The way an employer applies the safe harbors differs slightly depending on whether the employee is a new employee or an ongoing employee.
8. What penalties will apply to large employers who do not provide adequate coverage?
One penalty applies to large employers that do not offer minimum essential health coverage to substantially all full-time employees and their dependents. Final rules issued in February 2014 indicate that large employers with 100 or more full-time equivalent employees will need to offer coverage to at least 70 percent of full-time employees and their dependents in 2015, and 95 percent in 2016 and beyond. The no coverage penalty is equal to $2,000 annually for each full-time employee, not counting the first 30 full-time employees (80 in 2015), if at least one full-time employee receives a subsidy to buy coverage on a government insurance exchange.
Another, smaller penalty applies to large employers that offer coverage, if the coverage is unaffordable or does not provide minimum value. The inadequate coverage penalty is $3,000 annually for each full-time employee who actually receives a premium tax credit to purchase coverage through a government insurance exchange.
9. What kind of coverage must a large employer provide to comply with the employer mandate?
Coverage must provide minimum value and must be affordable. To provide minimum value, a plan must provide for at least 60 percent of the covered health expenses for a typical population. Coverage is affordable if the employee portion of the premium for self-only coverage does not exceed 9.5 percent of the employee's income.
10. What steps should an employer take now?
Figure out whether your business is subject to the employer mandate, and if so, whether it applies in 2015 or 2016.
If your company decides to offer coverage, figure out whether your plan offers coverage to substantially all full-time employees and their dependents.
Figure out whether your coverage is affordable and provides minimum value.
Review plan terms for 2014 compliance, because new insurance protections became effective for 2014.
Amend plan documents to reflect plan design, and review and update service provider agreements.
Prepare and distribute employee communications about your decision.
Pay required fees applicable to health plans.
Keep good records and plan for new health care reporting to the government and to employees.
Involve interested constituencies within your company in ACA planning (such as payroll, benefits, legal, HR, finance).