Under the Patient Protection and Affordable Care Act, beginning in 2015, certain large employers who do not offer affordable health insurance that provides minimum value to their full-time employees may be subject to significant penalties. These penalties are explained below.
In a nutshell, in 2015,“applicable large employers” (explained below) will be subject to an annualized employer “shared responsibility” penalty of $2,000 (indexed) per full-time employee (less the first 80 full-time employees in 2015) if the employers do not offer health insurance to at least 70% (95% after 2015) of their full-time employees and their dependents.
Even if an applicable large employer offers insurance coverage to full-time employees, the employer still could be subject to an annualized penalty of $3,000 (indexed) per employee who receives an Exchange subsidy to the extent the coverage does not provide minimum value or is not affordable. This penalty is capped at the amount that would apply if the $2,000 penalty described above were to apply.
What should an employer do now to prepare for these penalties?
(A) Determine if they are an “applicable large employer” To do this, employers should count both full-time employees and part-time employee hours as follows:
1) Count the employer’s full-time employees for each month in the prior year.
2) Count the employer’s full-time equivalents for each month in the prior year.
a) Add total hours for non-full-time employees but count no more than 120 hours per month for any one non-full-time employee.
b) Divide the number obtained in (a) by 120. This is the full-time equivalent number.
3) Add the numbers obtained in (1) and (2) above (i.e., the full-time employee and full-time equivalent numbers) for each month.
4) Add the 12 sums obtained in (3) and divide by 12. This is the average number of full-time employees and full-time equivalents.
5) If this number obtained in (4) is under 50 (or under 100 for the 2015 determination for certain employers), the employer is not an applicable large employer for the year being determined.
Note: The applicable large employer is determined on a controlled group basis. For example, if there are three companies, each of which is wholly owned by the same parent company, the companies are all considered one employer for this calculation. Also note that, special transition rules apply in determining applicable large employer status for 2015 and that a special seasonal employee exception may apply even if the threshold in (5) is exceeded.
(B) If an employer will be an applicable large employer in 2015, it should determine whether it could be subject to penalties in 2015. For example, it should review its group health plan to determine if the insurance coverage is “offered” to full-time employees within the meaning of applicable regulations, provides minimum value, and is affordable.
(C) An employer also will need to address how it will determine the full-time status of employees – will it use the “monthly measurement period” or the “look back measurement period.” This is particularly important for employers who have many variable-hour employees or seasonal employees.
(D) If the employer’s group health plan does not meet the threshold tests to avoid the penalties noted above, the employer should evaluate whether it wants to restructure its health care offerings or pay the penalties (which are non-deductible).
(E) Finally, employers should review their data collection procedures to ensure that they will be able to report the healthcare information required to be reported for 2015 (the actual reporting will occur in 2016). Insurers, sponsors of self-insured plans, and other entities that provide minimum essential coverage during a calendar year will be required to report certain information to the Internal Revenue Service and to participants. In addition, applicable large employers will be required to report about the coverage they provide to both the IRS and to their employees. Draft IRS forms to be used in reporting this information have recently been published by the IRS (Form 1095-B, Form 1095-B Transmittal, Form 1095-C, Form 1095-C Transmittal). Employers should review these forms to understand the data that will need to be reported.
Key Takeaway: It is not too late for employers to take action now to avoid penalties in 2015.