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CRS explains mechanics of employer mandate and associated penalty

CRS Report R43981, The Affordable Care Act’s (ACA) Employer Shared Responsibility Determination and the Potential Employer Penalty.

The Congressional Research Service (CRS) has issued a report that explains the Affordable Care Act’s (ACA’s) “shared responsibility” provisions, also referred to as the employer mandate, and the potential employer penalties that can apply if employers subject to these provisions fail to offer adequate, affordable coverage.

Background. The Code provides that, for months beginning after Dec. 31, 2013 (but subject to postponement, see below), an applicable large employer (ALE) is liable for an annual assessable payment if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, and either the employer:

1. fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (Code Sec. 4980H(a)); or
2. offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that, for a full-time employee who has been certified as having enrolled in qualified health plan for which an applicable premium tax credit or cost-sharing reduction, either is unaffordable or doesn’t provide minimum value as these terms are defined in Code Sec. 36B(c)(2)(C). (Code Sec. 4980H(b)).

Together, Code Sec. 4980H(a) and Code Sec. 4980H(b) are called “employer shared responsibility” provisions or the “employer mandate.”

The payment under Code Sec. 4980H(a), also referred to by the CRS as the “employer penalty,” is equal to the number of all (excluding the first 30) full-time employees multiplied by one-twelfth of $2,000 for each calendar month, while the payment under Code Sec. 480H(b) is equal to the number of full-time employees who are certified to receive an applicable premium tax credit or cost-sharing reduction multiplied by one-twelfth of $3,000 for each calendar month. The $2,000 and $3,000 figures are annually adjusted for inflation and are, for 2016, $2,160 and $3,240.

Determining “large employer” status. An ALE for a calendar year is an employer that employed an average of at least 50 full-time employees (see below) on business days during the preceding calendar year. For determining whether an employer is an ALE, “full-time equivalent employees” (FTEs) are also taken into account. In doing so, the overall hours worked by part-time employees during a month are added up, and the total is divided by 120 (i.e., four weeks multiplied by 30 hours per week) and added to the number of full-time employees for purposes of determining ALE status. (The actual penalty, however, is applicable solely to the health coverage status of full-time workers.)

Determining large employer status can be complex. Special rules apply in a variety of situations, including those involving franchise owners, independent contractors, temporary staffing firm workers, seasonal workers, and workers covered by TRICARE or Veterans Assistance.

Determining an employee’s “full-time” status. The ACA provided that working 30 hours or more per week is considered full-time, but didn’t specify what time period employers use to determine if a worker is full-time. IRS issued final regs (T.D. 9655) that addressed, among other things, how to identify full-time employees for purposes of the employer mandate, setting out three distinct periods in determining full-time status:

…The measurement period is a defined period of between three and 12 consecutive months when an employer calculates the total number of hours worked by the employee to determine whether the employee must be considered full-time under the ACA (i.e., worked on average at least 30 hours per week per month). (See exception for 2015, below.)
…The administrative period is the amount of time an employer may take to identify and enroll full-time employees into the health care coverage. This period is generally up to 90 days, but subject to certain limitations.
…The stability period is the amount of time during which an employer is required to treat all employees who were determined to be full-time during the measurement period as full-time under the ACA. An employer may be subject to an ACA penalty during this stability period if those designated as full-time employees (from the hours worked during the measurement period) qualify for a health coverage subsidy during this period (regardless of hours worked during the stability period).

The application of each period to an employee depends on whether the employee is an ongoing employee, a new employee reasonably expected to work full-time, or a new “variable hour” or seasonal employee. An ongoing employee’s status as full-time is determined by looking back at the employer’s standard measurement period. An employer must offer a new employee reasonably expected to work full time affordable health coverage within three calendar months of the worker’s start date or potentially face a penalty. Seasonal workers are hired into positions for which the customary annual employer (i) is six months of less, and (ii) begins each year in approximately the same part of the year (e.g., summer), and employers are allowed to use a look-back measurement period of 12 months for determining full-time status of seasonal workers—which effectively means that they’re not considered full-time.

Pending the issuance of further guidance, a “reasonable method” standard applies to determining whether certain categories of employees, including adjunct faculty and employees with layover hours, are full-time. There are also a number of exclusions from determining hours of service for an employer for purposes of either employer size or full-time status, including for volunteers, student workers, and members of certain religious orders subject to a vow of poverty.

Coverage requirements. To fulfill the shared responsibility requirements, large employers must provide health insurance coverage that is both: (i) affordable, meaning that an individual’s required contribution toward the plan premium for self-only coverage cannot exceed 9.66% of his household income in 2016; and (ii) adequate, meaning that the health plan must pay for at least 60%, on average, of covered health care expenses of full-time employees and their dependents (i.e., children of employees under 26 years old). The fact that affordability is determined at the individual level, for both individuals and families, is referred to by the CRS as the “family glitch,” as using individual-only coverage doesn’t take into account that a family plan often costs significantly more.

Implementation and transition relief. As noted above, the employer shared responsibility provisions were to be implemented in 2014, but were then delayed by IRS. Transition relief for employers in 2015 included: (i) determining large employer status based on a measurement period as short as six consecutive months; (ii) allowing an additional year for employers to expand their 2015 health plans to include the required dependent coverage; and (iii) delaying, until 2016, the employer mandate for “midsize” employers with fewer than 100 full-time employees (with rules to ensure that an employer didn’t reduce its workforce in order to qualify for this relief and generally maintained the same level of health care coverage in 2015 that it had in 2014). IRS also provided a “phase-in” rule for large employers (with 100 or more full-time employees) under which the employer won’t owe an employer penalty so long as it offers coverage to at least 70% of its full-time employees in 2016, and 95% in 2016. There were corresponding delays in employer reporting requirements.

Employer reporting, etc. requirements. In general, Code Sec. 6056 annual information reporting by ALEs relating to the health insurance that the employer offers (or does not offer) to its full-time employees. In addition, Code Sec. 6051(a)(14) requires ALEs to furnish similar statements to each full-time employee by January 31 of the following calendar year (this information—the “aggregate cost of applicable employer-sponsored coverage”—is reported to employees on Form W-2).

The CRS report also noted that, once certain regs are finalized, if an employer’s workers are covered by the Fair Labor Standards Act and the employer has more than 200 full-time employees, the employer will also be required to: (i) automatically enroll new full-time employees in one of their health coverage plans and continue the enrollment of current employees; and (ii) provide adequate notice and the opportunity for an employee to opt out of any automatically enrolled coverage.

References: For the excise tax imposed on large employers not offering affordable health insurance coverage, see FTC 2d/FIN ¶  H-1175  et seq.; United States Tax Reporter ¶  49,80H4; TaxDesk ¶  812,301  et seq.; TG ¶  7318.

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