An employer who employed an average of 50 or more full-time employees during the previous calendar year is an “Applicable Large Employer” under the Shared Responsibility provisions of the Affordable Care Act (ACA). The Shared Responsibility provisions, outlined below, become effective January 1, 2014, and may subject Applicable Large Employers to an excise tax if they fail to comply with these mandates. Certain reporting obligations are also noted below.

In contrast, under the Qualified Health Plan and Health Insurance Exchange provisions of the ACA, the term “large employer” is defined as one that employed an average of at least 101 employees on business days during the preceding calendar year and employs at least one employee on the first day of the plan year. The term “small employer” is defined as one that employed an average of at least one but not more than 100 employees on business days during the preceding calendar year and employs at least one employee on the first day of the plan year. As a result, an Applicable Large Employer for purposes of the Shared Responsibility provisions of the ACA may be a “small employer” under the Qualified Health Plan provisions of the ACA.

Shared Responsibility Provisions: Imposition of Excise Tax

Under the ACA, Applicable Large Employers are expected to “share responsibility” for their employees’ health care, and if they fail to do so, they may be liable for an excise tax. To assess exposure to this potential tax, employers need to be aware of the following.

The Employer/Employee Relationship. Only an employer can be a large employer. Whether an individual performing work for an employer is an employee of that employer is determined using the common law standard for the employer/employee relationship. Generally, an employer/employee relationship exists where the employer has the ability to control and direct the services performed by the individual in question as well as the method by which the service is completed. This element of control is what generally distinguishes an employer/employee relationship from one with an independent contractor. Also, where an employer is part of a “controlled group” with a common owner, all employees of the group are combined to assess the number of employees and all employers in that group are considered a single employer for purposes of meeting the definition of large employer. However, only the actual employer is liable for any potential excise tax.

“Full-time” Employees. A “full-time” employee is defined as an individual who has averaged at least 30 hours of service per week in a given month. Several factors must be examined in determining the number of full-time employees that an employer has. Employers who have employees with varying levels of hours and service must take account of each type of employee in order to accurately assess the number of full-time employees. As set forth in the newly proposed rule issued by the Treasury Department and the Internal Revenue Service (IRS rule), employers need to calculate “hours of service” based upon one of the methods set forth in the rule. Additionally, the employer needs to determine whether to use a month-to-month procedure in reviewing the number of its employees or whether to use the “look-back” method permitted by the rule. If the look-back method is used, the employer must evaluate whether the employee is an “ongoing,” “new” or “seasonal” employee, as different rules apply to each of these types of employees. Special rules apply for different types of occupations, including teachers and employees of educational organizations.

Minimum Essential Coverage. Once an employer determines that it is an Applicable Large Employer, it becomes potentially subject to the excise tax in two different situations. If the Applicable Large Employer fails to offer minimum essential coverage to its full-time employees and their dependents, and any full-time employee is certified as having enrolled in health insurance through a State Health Insurance Exchange where a premium tax credit or cost-sharing reduction is granted, the employer may be subject to a penalty. Additionally, even if an Applicable Large Employer does offer full-time employees minimum essential coverage and one or more full-time employees is certified to receive premium tax credit, a penalty may still be levied against the employer. Such an assessment will typically occur where the coverage was not “affordable” or does not provide “minimum value.”

Affordability. Under the IRS rule, coverage is considered “affordable” if the employee’s contribution for employee-only coverage does not exceed 9.5 percent of the employee’s household income. The IRS rule contains three safe harbors for employers to use in meeting this standard: the Form W-2 Safe Harbor, the Rate of Pay Safe Harbor and the Federal Poverty Line Safe Harbor.

Minimum Value. The IRS rule provides that a health insurance plan fails to have “minimum value” if the plan’s share of the total allowed costs of benefits is less than 60 percent of total cost. The IRS rule outlines three methods of calculating minimum value and the Department of Health and Human Services is expected to issue regulations specifying actuarial procedures for making this determination.

Excise Tax. If an Applicable Large Employer does not offer minimum essential coverage to at least 95 percent of its full-time employees, it may be subject to an excise tax. The amount of this tax is generally equal to the number of full-time employees, minus 30 full-time employees, multiplied by $2,000. Where an Applicable Large Employer offers minimum essential coverage but it is not affordable or does not provide minimum value, the amount of the tax for a given calendar month will be equal to the lesser of (1) the number of full-time employees who received an applicable tax credit or cost-sharing reduction, multiplied by $3,000 or (2) the amount of the penalty that would have been imposed under the other excise tax provision if the employer had failed to offer coverage.

Reporting Obligations

Notice of Coverage. The ACA mandates that employers notify their employees of the existence of the State Health Insurance Exchange and certain information relative to the Exchange. The effective date of this requirement has been delayed until the Department of Labor issues sample notices and/or further guidance relative to this matter.

W-2 Reporting. With certain exceptions, employers are required to provide the value of health insurance coverage for tax year 2012.

Information Reporting. Beginning in 2015, Applicable Large Employers will need to file a return with the IRS reporting the terms and conditions of health care coverage provided to full-time employees along with certain other employee information. Additionally, Applicable Large Employers need to provide notice to their employees by January 31 of the calendar year following such return that the employer provided employees with notice of information submitted to the IRS.

Scope of Compliance

The information set forth above provides a general overview of the factors that an employer needs to consider in determining whether it is an Applicable Large Employer. The IRS rule includes additional provisions and transition rules that may impact your particular business, including but not limited to fiscal-year plans, multi-employer plans, applicability of the provisions to foreign employees, retired employees and seasonal employees. Application of the IRS rule must be performed on an employer-by-employer basis based upon each employer’s discrete circumstances.