For the past three years, employers have been very concerned about the employer “shared responsibility” provision of the Patient Protection and Affordable Care Act of 2010 (the “ACA”). This specific provision is often referred to as the “employer mandate” or the “pay or play rule.” While full implementation of this provision is still almost a year away, employers are preparing themselves for the impact of this new mandate on their business operations and administration and, perhaps most importantly, their financial bottom line.
Effective in 2014, “large” employers that do not offer to “substantially all” of their full-time employees (and their dependents) the opportunity to enroll in “minimum essential” coverage will be subject to a hefty penalty. This penalty – or excise tax – is triggered even when just one full-time employee is denied coverage. Additionally, the excise tax is triggered where the employer offers all of its full-time employees health coverage, but the coverage is either not “affordable” or does not provide “minimum value.” In either situation, the nondeductible excise tax is only imposed when the employer receives a certification from the Department of Health and Human Services that one or more of its full-time employees has received a federal premium tax credit or cost-sharing reduction in connection with the purchase of health insurance through a state exchange.
On December 28, 2012, the Internal Revenue Service released its highly-anticipated proposed regulations governing the employer mandate, along with a set of helpful Q&A’s. The new guidance gives employers some direction as they begin to prepare for 2014. Furthermore, the IRS specifically states in the proposed regulations that employers may rely on the proposed regulations pending publication of the final regulations.
Newly Defined Terms
Perhaps most helpful to employers, the proposed regulations define a number of previously undefined terms used in the statute and rectify ambiguities regarding other already defined terms.
In general, an employer is considered a “large” employer subject to the shared responsibility provision for a given calendar year if the employer employed 50 or more full-time employees during the preceding calendar year. A full-time employee is defined as one employed on average for at least 30 hours of service per week, as calculated on a monthly basis. Additionally, the employer must include in its calculation of full-time employees all full-time equivalent employees represented by the employer’s part-time employees. To calculate the number of full-time equivalent employees, the employer will take the total monthly hours of all of its regular part-time employees and divide by 120. The proposed regulations further provide that, in determining the number of full-time employees, the employer must include all full-time and full-time equivalent employees of all entities within its controlled group.
In order to know whether an employer is a large employer heading into 2014, employers would be best advised to start keeping track of their employees’ hours of service as soon as possible.
The proposed regulations have adopted a new, limited definition of “dependent” that includes only children under 26 years of age and excludes spouses. Accordingly, employers can comply with the employer mandate without offering coverage to spouses of full-time employees, imposing a spousal surcharge or implementing some form of the working spouse rule. This revised definition of “dependent” could be very helpful to employers who currently do not offer dependent coverage since they will not be required to begin providing spousal coverage. Furthermore, the proposed regulations provide employers with transition relief in 2014. Any employer that begins in 2014 to satisfy the employer mandate requirement to provide minimum essential coverage to all full-time employees and their dependents will not be liable for any excise tax solely on account of failure to offer coverage to dependents during 2014.
“Substantially All” Full-Time Employees
The proposed regulations provide that, when determining whether or not an employer is subject to an excise tax, “substantially all” full-time employees means 95% of full-time employees (or, if greater, 5 employees). This clarification is extremely beneficial to employers as it lessens the burden of accuracy in tracking and offering coverage to every full-time employee employed throughout the course of the year. However this provision does not fully exempt an employer from the employer mandate excise tax. If an employer does not offer coverage to a full-time employee, the employer may still be subject to a lesser penalty (discussed below).
Under previously published guidance, the IRS clarified that, to satisfy the requirement of “affordable coverage,” the premium for employee-only coverage cannot exceed 9.5% of any employee’s household income. The IRS received many comments regarding the difficulty of complying with this provision without knowing the income(s) of other member(s) of the employee’s household. In response, the IRS published a safe harbor for employers that allows employers to set the employee-only premium based on the employee’s Form W-2 income as opposed to the employee’s “household income.” The proposed regulations now provide employers with two additional safe harbors:
- Employers may choose to use a safe harbor based on an employee’s rate of pay if the premium does not exceed 9.5% of an amount equal to 130 hours of service multiplied by the employee’s hourly rate of pay as of the first day of the period of coverage; or
- Employers may elect to use the federal poverty level as a safe harbor in determining affordability of coverage.
Employer Penalty for Noncompliance
Employers that fail to comply with the employer mandate and the new proposed regulations will be subject to the above-mentioned excise tax, if one or more full-time employees receives a premium tax credit or a cost-sharing reduction to obtain health insurance coverage through a state-sponsored insurance exchange. The excise tax for failure to offer minimum essential coverage to all full-time employees is equal to $2,000 multiplied by the number of all full-time employees minus 30 employees and is calculated on a monthly basis. The excise tax for failure to offer affordable coverage or coverage that provides minimum value is equal to the lesser of a $3,000 annual excise tax for each full-time employee receiving a federal premium tax credit (calculated on a monthly basis) or $2,000 multiplied by the number of all full-time employees minus 30 employees.
If an employer does not offer coverage to a full-time employee but still satisfies the 95% threshold for offering “substantially all” full-time employees the required minimum essential coverage, the employer may still be subject to a lesser excise tax. The excise tax for this type of failure is calculated by adding the number of those employees who were employed full-time plus those employees not offered coverage plus those employees who received a federal premium tax credit or cost-sharing reduction and multiplying the sum by $3,000.
Finally, an employer will not be subject to the excise tax imposed by the proposed regulations for any employee whose coverage under the plan is terminated during the coverage period on account of his or her failure to make a timely payment of the employee portion of the premium.
Implications for Employers
Although the proposed regulations provide employers with a degree of clarity regarding the employer mandate, specifically with respect to triggers of the excise tax, employers must continue to prepare for the full implementation of the ACA and are still awaiting further guidance. While some questions regarding the ACA’s effect on employers remain open, employers should be able to take some comfort in the transition rules and safe harbors issued by the IRS in these proposed regulations. Nevertheless, employers will continue to face significant changes and difficult questions in the months to come and should not hesitate to consult with a benefits attorney.