Beginning in 2014, the Affordable Care Act will require employers employing 50 or more full-time equivalent employees to offer full-time employees affordable, minimum essential health coverage. If such health coverage is not offered, and if at least one employee receives a premium tax credit on a state or federal exchange, the employer will be assessed a penalty. You may see this referred to as the employer mandate, employer shared responsibility, or the employer pay-or-play mandate.
50 or more full-time equivalent employees – part-time employees’ hours are considered for the purpose of determining whether a company is above or below 50 employees. Calculating this number can be complex – IRS Notice 2012-58 explains in great detail the safe harbor methods, administrative periods, and look-back measurement periods, as well as how to count ongoing employees, new employees, and variable hour and seasonal employees.
Affordable – An employee’s share of the health plan premium for employee-only coverage does not exceed 9.5% of the employee’s household income.
Minimum essential coverage (also referred to as minimum value) – The health plan is designed to pay at least 60% of the covered health expenses for a typical person.
Premium tax credit – The Affordable Care Act creates subsidies for people with incomes of up to 400% of the federal poverty limit. For 2012, individuals whose adjusted gross income is less than $45,000 and families of 4 whose adjusted gross income is less than $92,000 would be eligible for these subsidies. The premium tax credit can be used on an exchange to purchase health coverage.
Employers are NOT required to offer health coverage to part-time employees (those working fewer than 30 hours/week). Employers with fewer than 50 full time equivalent employees are not subject to the employer mandate but still must provide certain notices to their employees and may need to comply with other specified requirements that will be detailed in additional guidance.
Options in 2014 for employers with 50 or more full time equivalent employees
Employers have choices to make before 2014. They can offer health coverage, or not offer coverage and pay the penalty. Employers need to be aware that simply offering a health plan does not satisfy the employer mandate – as mentioned above, the health plan must be affordable and offer minimum essential coverage. Employers can choose one of these four options:
Offer no health coverage. If at least one full-time employee uses a premium tax credit to access coverage on the exchange (which means the employee has an income of less than 400% of the federal poverty level), the employer will be subject to a penalty of $2,000/year/full time employee, excluding the first 30 employees.
Offer minimum essential health coverage that is not affordable. If any employee is required to pay more than 9.5% of his or her household income for health coverage, and if at least one full-time employee uses a premium tax credit to access coverage on the exchange, the employer will be subject to a penalty of $3,000/year for each full-time employee who accesses coverage through the exchange. The maximum penalty cannot be greater than what employer would be liable for if it did not offer coverage at all ($2,000/year/full time employee excluding the first 30 employees).
Offer affordable health coverage that doesn’t meet the minimum essential coverage definition. If an employer’s health plan doesn’t pay at least 60% of the covered health expenses for a typical person, and if least one full-time employee uses a premium tax credit to access coverage on the exchange, the employer will be subject to a penalty of $3000/year for each full time employee who accesses health coverage through the exchange, up to a maximum amount of $2,000/year/full time employee excluding the first 30 employees.
Offer health coverage that is affordable and meets the minimum essential coverage definition. An employer meets its obligation under the Affordable Care Act, and no penalty will be assessed.
Controlled group rules. If an employer has multiple companies, each may or may not be considered separate employers under the Affordable Care Act. For purposes of health care reform, a single employer is defined by the “common control” test under Internal Revenue Code sections 414(b), (c), (m) and (o). In general, this test focuses on direct or overlapping ownership rather than actual control. If a parent owns 80% or more of the equity in a subsidiary, or if the same 5 or fewer persons own 80% or more of the equity in another company or collectively own more than 50% of both companies, the companies will be considered controlled groups and all employees of the controlled group must be combined together for purposes of calculating whether an employer is above or below the 50 full-time equivalent employee threshold discussed earlier.
Employers need to determine if health coverage is a part of their organization’s value proposition – is offering health coverage important to the employer? Does the employer need to offer a group health plan to attract and retain productive employees? Employers with 50 or more full-time equivalent employees must decide whether to continue offering group health coverage to their employees, or pay the penalty and have employees purchase coverage through the state or federal exchange. In addition to the penalty the employer would pay, employees might pay more on the exchange than they would for the employer’s group health coverage…if this is the case, will employers cover this additional cost by increasing their employees’ pay?
I’ll be posting a timeline soon that should assist employers in understanding the due dates of upcoming health care reform requirements.