After much ado, the employer healthcare mandate, under The Patient Protection and Affordable Care Act (“The Act”), will finally go into effect on January 1, 2014. That gives affected employers less than a year to ensure they are in compliance, or face penalties. The time is now to assess whether your business will be affected.
The Act requires “large employers” to offer health insurance to their employees or else incur monetary penalties. The employer mandate further provides that “large employers” who offer health insurance to their employees may nevertheless incur penalties if the insurance is not “affordable” or fails to provide “minimum value.” Employers who employ fewer than 50 employees are not subject to the employer mandate but are nevertheless incentivized to provide health insurance for their employees by way of the small business health care tax credit.
The Act defines “large employer” as “an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.” Notably, the hours worked by part-time employees (i.e., those working less than 30 hours per week) are included in the calculation of a large employer by dividing the total number of hours worked in a month by part-time employees by 120. Thus, for example, if an employer has 35 full-time employees and 20 part-time employees who each work 24 hours per week (or, in other words, 96 hours per month), these part-time employees would be treated as the equivalent of 16 full-time employees, thus bringing the employer’s total of full-time employees to 51 and thus making the employer a “large employer.”
A “full-time employee” is, “with respect to any month, an employee who is employed on average at least 30 hours of service per week.” Apparently recognizing that this definition is broad and leaves many questions unanswered as to its application, the Act also provides that, “[the Secretary [of the Treasury], in consultation with the Secretary of Labor, shall prescribe such regulations, rules, and guidance as may be necessary to determine the hours of service of an employee, including rules for the application of this paragraph to employees who are not compensated on an hourly basis.” Although final regulations have not been adopted, proposed regulations were recently published which clarify how to determine whether an employee is a “full-time employee” under the Act.
Perhaps most notable is the fact that the Act incorporates the “aggregation rule” with respect to the calculation of the number of an employer’s employees, thus requiring that all of the full-time and full-time equivalent employees within a “controlled group” must be counted in determining whether an employer is a large employer subject to the employer mandate. The aggregation rule applies to “parent-subsidiary controlled groups,” “brother-sister controlled groups,” and any combination of the two. A parent-subsidiary controlled group exists when a parent organization owns 80% or more of the equity in a subsidiary organization. A brother-sister controlled group exists when the same five or fewer persons (including individuals, estates, and trusts) own 50% or more of the stock of two or more entities. Thus, the emphasis with respect to “controlled groups” is ownership, not the location of the entities or the goods or services they provide.
The controlled group rules are made more difficult to avoid by “special rules” which attribute constructive ownership to one’s spouse (with limited exceptions), one’s minor children, and under certain circumstances, one’s adult children and grandchildren. The special rules also contain expansive rules regarding constructive ownership not involving family ties.
Beginning on January 1, 2014, a large employer will be subject to a penalty if: (1) it fails to offer health insurance to its full-time employees and their dependents; and (2) any of its full-time employees obtains coverage through an exchange and receives a premium tax credit. Individuals who are at or below 400% of the federal poverty level will be entitled to premium tax credits toward the cost of coverage obtained via an exchange. The penalty will be the number of full-time employees minus 30 multiplied by one-twelfth of $2,000 for any applicable month.
A large employer who does offer health insurance to its full-time employees and their dependents is nevertheless subject to a penalty if any of its full-time employees obtain coverage through an exchange and receives a premium tax credit because the coverage offered by the large employer is not “affordable” or fails to provide “minimum value.” Coverage is considered not “affordable” if a full-time employee’s required contribution toward the plan premium for self-only coverage exceeds 9.5% of his household income; coverage fails to provide “minimum value” if the plan pays for less than 60% of the actuarial value of covered health care expenses. The penalty will be the lesser of the penalty discussed in the previous paragraph or one-twelfth of $3,000 for each full-time employee who receives a premium tax credit.