Use 2014 to Prepare for ObamaCare Penalties
Originally slated to be effective January 1, 2014, the “Pay or Play Mandate” or “Employer Shared Responsibility Mandate” of the Patient Protection and Affordable Care Act was delayed until 2015. That means that beginning in 2015, the employer mandate and its penalties will take effect. While many employers are enjoying this brief compliance respite, employers need to use 2014 to implement processes and procedures that will be up and running on January 1, 2015. The postponed implementation of the mandate has given employers an extra year to figure out their coverage plan and staffing strategy—time that can’t be wasted.
Under the mandate, large employers will be faced with the decision whether to offer full-time employees affordable health coverage that provides “minimum value” or pay a penalty. Employers need to start evaluating the potential costs to their organization now to determine whether they will pay the penalty or offer coverage to full-time employees and their dependents in 2015.
Which Employers Are Subject to the Employer Mandate?
As a preliminary matter, employers must determine whether they are subject to the mandate and its penalties. Employers with an average of at least 50 full-time employees (and full-time equivalent employees) are subject to the mandate. Under the mandate, a full-time employee is an employee who is employed for an average of at least 30 hours per week (or 130 hours per month).
For purposes of determining whether an employer is subject to the mandate, employers must also account for full-time equivalent employees. To do so, employers must add the monthly hours worked by all part-time employees (all employees working less than 30 hours per week) and divide the total hours by 120. The end result is the employer’s total number of full-time equivalent employees for a given month.
Additionally, employers must account for all employees on a controlled group basis. This means that employees working for members of a controlled group of corporations must be aggregated.
How are the Penalties Calculated and Assessed?
Under the mandate, large employers may be subject to one of two different types of penalties.
“No Offer Penalty” The first type of penalty applies if an employer fails to provide “minimum essential health coverage” (described below) to substantially all full-time employees and their children, and one or more of those full-time employees obtains subsidized coverage from a healthcare Exchange. The penalty is calculated as follows:
$2,000 * (total number of full-time employees – 30)
“Insufficient Coverage Penalty” The second type of penalty applies if the employer provides minimum essential health coverage to full-time employees, but that coverage is either (i) not affordable or (ii) does not provide minimum value, and one or more full-time employee obtains subsidized coverage from a healthcare Exchange. The penalty is calculated as follows:
$3,000 * (number of full-time employees who receive subsidized coverage through an Exchange)
Employers are treated as having offered coverage to substantially all full-time employees if coverage is offered to 95% of full-time employees.
The IRS will impose penalties by contacting the employer after the end of the year with an estimated penalty amount. Employers will have the opportunity to respond to and appeal the initial determination if they believe it is inaccurate.
Which Employees are Eligible for Subsidized Exchange Coverage?
As a preliminary matter, employers will only be subject to the above penalties in the event an employee receives subsidized coverage from a healthcare Exchange. Under health care reform, individuals with household income between 100 percent and 400 percent of the Federal poverty level are eligible for premium assistance from an insurance Exchange if they do not have access to adequate, affordable employer-sponsored coverage. According to current Federal poverty levels, single individuals will be eligible for a credit if their annual income is between approximately $11,490 and $45,960. Families of four will be eligible for a credit if their annual income is between approximately $23,550 and $94,200.
NOTE: In order to best assess exposure to the Pay or Play penalties, employers should examine their workforce to determine the extent to which their employees may be eligible for subsidized insurance coverage from healthcare Exchanges.
What Kind of Health Coverage Must I Offer to Avoid the Penalty?
In order to avoid the above penalties, employers must offer “minimum essential coverage” to substantially all full-time employees and their dependents (other than spouses) that is “affordable” and satisfies a “minimum value” requirement.
- Minimum Essential Coverage: Most employer-provided group health coverage will meet the very broad definition of “minimum essential coverage.” Specifically, minimum essential coverage includes health coverage under the following types of plans:
- Government-sponsored programs (Medicare, Medicaid, CHIP, etc.);
- Employer-sponsored plans (including governmental plans);
- Coverage purchased on the Exchanges; or
- Grandfathered health plans.
Minimum essential coverage does not include excepted benefits such as flexible spending accounts or stand-alone dental or vision plans.
- Affordable Coverage: Coverage is considered “affordable” if the employee’s cost for employee-only coverage does not exceed 9.5% of the employee’s household income. Because employers do not likely know employees’ household income, the IRS has issued three safe-harbor methods for determining affordability based on information the employer has available.
- W-2 Income Safe Harbor: Coverage is affordable if the premium for lowest cost self-only coverage does not exceed 9.5% of the employee’s Form W-2 wages from the employer for the calendar year. This amount is determined after the end of the calendar year and is made on an employee-by-employee basis.
- Rate of Pay Safe Harbor: Coverage is affordable if the monthly premium for the lowest cost self-only coverage does not exceed 9.5% of an amount equal to 130 hours multiplied by the employee’s hourly rate of pay.
- Federal Poverty Line Safe Harbor: Coverage is affordable if the lowest cost self-only coverage does not exceed 9.5% of a monthly amount determined as the Federal poverty line for a single individual for the calendar year divided by 12. For example, if the Federal poverty line for a single individual is $11,490 for 2015, the affordability threshold will be $90.96 per month (($11,490 * 9.5%) / 12).
Most employers are electing to utilize the W-2 income method.
- Minimum Value: Coverage provides “minimum value” if the plan’s share of the projected cost of covered benefits is at least 60%. This can be determined by utilizing the services of an actuary or by using the IRS’ minimum value calculator.
How Do I Determine Who is a Full-Time Employee and When Do I Have to Offer Coverage?
One of the most significant implications of the mandate is that employers will need to implement processes to identify full-time employees. Most notably, these processes will need to be in place in 2014 in order to identify employees who must be offered coverage beginning January 1, 2015.
IRS regulations provide detailed guidance on how to identify full-time employees for purposes of offering coverage and calculating penalties. An employee is considered full-time if he or she is employed, on average, at least 30 hours per week. The IRS regulations establish a system consisting of three separate periods employers can use to identify full-time employees and determine when to offer full-time employees health insurance coverage. Different rules apply depending upon the type of employee at issue (e.g., ongoing, variable hour, seasonal, etc.). The following is a summary of how the rules apply to ongoing employees.
Ongoing Employees. An ongoing employee is an employee who has been employed for at least one standard measurement period (described below). With respect to ongoing employees, employers can look back over a standard measurement period to determine whether an employee was employed on average at least 30 hours of service per week. If so, then the employer must treat the employee as full-time for the subsequent stability period (described below). If the employee did not work at least 30 hours per week during the standard measurement period, the employer may treat the employee as part-time for the subsequent stability period and does not have to offer that employee coverage during the stability period.
- Standard Measurement Period: The look-back period for calculating the hours of service of ongoing employees. The period must be at least three (3) but not more than 12 consecutive calendar months during which the employer determines whether an employee is considered a full-time employee based on that employee’s average number of hours of service per week.
- Stability Period: A time period selected by the employer that immediately follows, and is associated with, an applicable measurement period during which an employee who qualified as a full-time employee based on the measurement period is treated as a full-time employee (i.e., is “locked into” full-time status) for purposes of the mandate’s tax penalties. The determination as to whether the individual is a full-time or part-time employee remains fixed for this period, regardless of the employee’s actual number of hours of service during the stability period. The length of the stability period must be the greater of 6 consecutive calendar months or the length of the standard measurement period.
NOTE: For 2014, employers should have their measurement periods in place so that they can ‘look back’ over 2014 to identify full-time employees for purposes of the 2015 stability period.
- Administrative Period: An optional period of no longer than 90 days beginning immediately after the end of a measurement period and ending before the associated stability period. The purpose of this period is to allow an employer to examine the data compiled from the measurement period, identify full-time employees and coordinate health coverage.
NOTE: Special measurement periods and coverage rules apply to new full-time employees and new variable hour employees. Contact your McGrath North attorney if you have questions about the application of these rules to your workforce.
Although the penalties will apply to coverage periods beginning on or after January 1, 2015, employers need to begin implementing measurement systems so they can identify full-time employees and offer them coverage on January 1, 2015. To this end, we recommend that employers implement the following action items:
- Determine whether the employer is a large employer subject to the mandate.
- Determine whether and to what extent employees may be eligible for subsidies or premium assistance on a state health insurance Exchange.
- Determine whether the company’s existing plan(s) provide minimum essential coverage and minimum value.
- Determine whether substantially all full-time employees and their dependents are covered under the company’s group health plan.
- Determine whether to continue to offer health insurance coverage to employees’ spouses, if applicable.
- Determine whether self-only health plan coverage is affordable for full-time employees.
- Establish measurement periods and put policies and procedures in place to track the number of full-time and part-time employees and their hours of service.