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How ACA’s employer shared responsibility rules apply to companies during 2015

This year is pivotal for employers—it’s the year in which the Affordable Care Act’s (ACA’s) employer shared responsibility (ESR) rules under Code Sec. 4980H potentially apply to employers with at least 100 full-time or full-time equivalent employees. These employers (and even those with 50 or more workers under some circumstances) must offer affordable health coverage that provides minimum value to their full-time employees and their dependents, or they will be subject to a per-month penalty. This article surveys the rules that apply for 2015, along with the numerous transition rules that are in effect for this year only.

General employer shared responsibility penalty rule for 2015. For 2015 (and for employers with non-calendar-year plans, any calendar months during the 2015 plan year that fall in 2016), an employer that had at least 100 full-time employees (including full-time equivalents) in 2014, is liable for an ESR payment only if one of the following conditions exist: (FAQ 37)

A. The employer does not offer health coverage or offers coverage to fewer than 70% of its full-time employees and (unless the employer qualifies for the 2015 dependent coverage transition relief covered below) the dependents of those employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on a Marketplace. (This is referred to as Code Sec. 4980H(a) liability.)
B. The employer offers health coverage to at least 70% of its full-time employees and (unless the employer qualifies for the 2015 dependent coverage transition relief covered below) the dependents of those employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on a Marketplace. This may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value. (This is referred to as Code Sec. 4980H(b) liability.)

After 2015, 95% should be substituted for 70% in (A) and (B), above.

Employers who both have more than 50 but less than 100 workers, and don’t qualify for transition relief (see below), also will be subject to the ESR penalty rules. (FAQ 37)

Employers with fewer than 50 workers aren’t subject to the ESR penalty. (Code Sec. 4980H(c)(2)(A); FAQ 34)

The number of employees for purposes of the above rules generally is determined by considering the average of full-time employees (including full time equivalent employees) on business days during the preceding calendar year. (Code Sec. 4980H(c)(2)(A))

Calculating the penalty. A company liable under Code Sec. 4980H(a) must, for each month, make an ESR payment equal to the number of full-time employees the employer employed for the month (minus 80) multiplied by 1/12 of $2,000, provided that at least one full-time employee receives a premium tax credit for that month. (FAQ 38)

A company liable under Code Sec. 4980H(b) must, for each month, make an ESR payment equal to the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000. The amount of the payment for any calendar month is capped at the number of the employer’s full-time employees for the month (minus up to 80) multiplied by 1/12 of $2,000. (FAQ 39)

Transition relief for smaller companies. Employers that employed on average at least 50 full-time employees (including full-time equivalents) but fewer than 100 full-time employees (including full-time equivalents) on business days during 2014, won’t be liable for the ESR penalty under Code Sec. 4908H(a) or Code Sec. 4980H(b), for any calendar month during 2015 if they meet the conditions below. For employers with non-calendar-year health plans, the relief applies to any calendar month during the 2015 plan year, including months during the 2015 plan year that fall in 2016.

1. During the period beginning on Feb. 9, 2014 and ending on Dec. 31, 2014, the employer didn’t reduce the size of its workforce or the overall hours of service of its employees in order to qualify for the transition relief. However, an employer that reduced workforce size or overall hours of service for bona fide business reasons is still eligible for relief.
2. During the period beginning on Feb. 9, 2014 and ending on Dec. 31, 2015 (or, for employers with non-calendar-year plans, ending on the last day of the 2015 plan year), the employer does not eliminate or materially reduce the health coverage, if any, it offered as of Feb. 9, 2014. An employer won’t be treated as eliminating or materially reducing health coverage if:

  • it continues to offer each employee who is eligible for coverage an employer contribution toward the cost of employee-only coverage that either (A) is at least 95% of the dollar amount of the contribution toward such coverage that the employer was offering on Feb. 9, 2014, or (B) is at least the same percentage of the cost of coverage that the employer was offering to contribute toward coverage on Feb. 9, 2014;
  • in the event of a change in benefits under the employee-only coverage offered, that coverage provides minimum value after the change; and
  • it does not alter the terms of its group health plans to narrow or reduce the class or classes of employees (or the employees’ dependents) to whom coverage under those plans was offered on Feb. 9, 2014. (FAQ 34)

Separate rules provide the above transition relief to new employers (those not in existence on any business day in 2014); see FAQ 35.

Transition relief for those nearing the number-of-employees threshold. Employers that are close to the 50 full-time employee threshold in determining if they are subject to the ESR provisions don’t have to use the full twelve months of 2014 to measure whether they cross the threshold. Instead, they may measure during any consecutive six-month period (as chosen by the employer) during 2014. For example, an employer could use a period of at least six months through August, 2014, to determine its status and, if it is covered by the ESR rules, under technical rules detailed in T.D. 9655, 02/10/2014, the period from September through December 2014 to make any needed adjustments to its plan (or to establish a plan). (FAQ 31)

Transition rule for January 2015 coverage. In general, if an employer subject to the ESR rules fails to offer coverage to a full-time employee for any day of a calendar month, that employee is treated as not offered coverage during that entire month. (Reg. § 54.4980H-4(c))

Solely for purposes of January, 2015, a transitional rule provides that if an employer offers coverage to a full-time employee no later than the first day of the first payroll period that begins in January, 2015, the employee will be treated as having been offered coverage for January, 2015. (Reg. § 54.4980H-4(c); FAQ 32)

Transition relief for non-calendar-year plans. Pre-2015 eligibility transition relief for non-calendar-year plans provides that for any employees (whenever hired) who are eligible for coverage on the first day of the 2015 plan year under the eligibility terms of the plan as of Feb. 9, 2014 (whether or not they take the coverage), and who are offered affordable coverage that provides minimum value effective no later than the first day of the 2015 plan year, the employer will not be subject to a potential ESR payment until the first day of the 2015 plan year.

Other transition relief—called significant percentage transitional relief—generally addresses employees that have not been eligible to participate in the non-calendar year plan. If the employer meets certain requirements generally related to the portion of the employer’s employees already eligible for or participating in the non-calendar year plan, the relief may be extended to those employees that have not been eligible to participate.

All of the above transition relief applies for the period before the first day of the first non-calendar year plan year beginning in 2015 (the 2015 plan year) but only for employers that maintained non-calendar year plans as of Dec. 27, 2012, and only if the plan year was not modified after Dec. 27, 2012, to begin at a later calendar date. (T.D. 9655, 02/10/2014; FAQ 30)

Transition rules for dependent coverage. To avoid a potential ESR payment under Code Sec. 4980H, employers must offer coverage to full-time employees and their dependents. To provide employers sufficient time to expand their health plans to add dependent coverage, proposed regs provided that any employer that takes steps during its plan year that begins in 2014 (2014 plan year) relating to offering coverage to full-time employees’ dependents will not be liable under Code Sec. 4980H, solely on account of a failure to offer coverage to the dependents for that plan year. This relief was extended to plan years that begin in 2015 (2015 plan years).

This extended transitional relief applies to employers for the 2015 plan year for plans under which (1) dependent coverage is not offered, (2) dependent coverage that does not constitute minimum essential coverage is offered, or (3) dependent coverage is offered for some, but not all, dependents.

This transition relief is not available to the extent the employer offered dependent coverage during either the plan year that began in 2013 (2013 plan year) or the 2014 plan year (meaning the relief is not available to the extent the employer had offered dependent coverage during either of those plan years and subsequently dropped that offer of coverage). The transition relief, as extended, applies only for dependents who were not offered coverage at any time during the 2013 or 2014 plan year and only if the employer takes steps during the 2014 or 2015 plan year (or both) to extend coverage under the plan to dependents not offered coverage during the 2013 or 2014 plan year (or both). (T.D. 9655, 02/10/2014; FAQ 33)

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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