The employer shared responsibility rules under the Patient Protection and Affordable Care Act will go into effect in 2014.  Government guidance was issued earlier this year on an important aspect of these rules – the determination of who is a full time employee.

The employer shared responsibility rules, which apply to “large” employers (generally, those with 50 or more full-time employees), require that such employers provide affordable group health coverage having sufficient value to its full-time employees (generally, employees who on average work at least 30 hours per week) and their dependents.  Noncompliant employers will be subject to a penalty for either (i) failing to offer coverage to all full-time employees or (ii) failing to offer sufficient coverage to such employees.  These penalties will basically work as follows:

  • The “failure to offer coverage” penalty – In general, this penalty applies if at least one full-time employee of the employer obtains subsidized coverage on an exchange, with the potential amount being $2,000 per year for each full-time employee (above 30).   Thus, the penalty amount will be based on the total number of full-time employees that the employer has (regardless of how many employees have subsidized exchange coverage).
  • The “insufficient coverage” penalty – This penalty applies if the employer offers full time employee coverage, but the coverage is either “unaffordable” or does not provide "minimum value."  The potential penalty here is $3,000 per year for each employee who obtains subsidized coverage on an exchange.  For this purpose, coverage (i) is "unaffordable" if the premium cost for individual coverage exceeds 9.5% of the employee's household income (which, per the government, can be determined using the employee's W-2 income only) and (ii) does not provide "minimum value" if the plan pays less than 60% of the covered costs (determined on an actuarial basis). 

One other point on the penalties – both are applied taking into account the IRS “controlled group” rules.  In general, this means that all affiliated employers for which there is 80% or more common ownership will be treated as a single employer in applying the penalties.  In these circumstances, compliance with, and the amount of any penalties under, the employer shared responsibility rules will be determined as if the entire controlled group is one employer.

In sum, the determination of who is a “full-time” employee will be crucial in assessing an employer’s options for complying with the employer shared responsibility rules and designing a group health plan’s eligibility and participation requirements.  Here is an overview of the government guidelines on full-time status to assist you in this process.