Beginning January 1, 2015, the Patient Protection and Affordable Care Act (ACA) will impose taxes on employers with 50 or more full-time equivalent employees and which do not offer their full-time employees access to health coverage.

Whether an employer is subject to the mandate in 2015 and, if so, how the mandate applies will be determined by the employer’s 2014 operations. The sections that follow provide a summary of the most material provisions of the employer mandate.

The Employer Mandate

The employer mandate imposes significant obligations on applicable large employers starting in 2015, when such employers will be required to either offer health coverage to 95 percent of their full-time employees (and dependents) or pay potentially significant tax penalties. The mandate does not require employers to offer health coverage to their part-time employees.

For purposes of determining which employees are eligible for health coverage under the mandate, an applicable large employer generally will be required to look back to a prior period ranging from 3 to 12 months. Any employees with an average of at least 30 hours of service per week during the look-back period would be considered full-time employees for whom the employer would be required to offer health coverage. As a result, employees’ 2014 work history will be determinative in most cases of whether they are eligible to receive health coverage under the mandate in 2015.

Tax Penalties

Applicable large employers will be required to pay one of two taxes if they fail to comply with the employer mandate.  The first tax applies where an applicable large employer: a) fails to offer coverage to at least 95% of its full-time employees (and their dependents); and b) at least one full-time employee receives a subsidy through a federal or state insurance exchange.  In that case, the applicable large employer will pay a $2,000 tax per full-time employee, minus the first 30 full-time employees.  An employer, for instance, with 100 full-time employees would pay $140,000 in taxes (100 FTEs – 30 = 70, 70 x $2,000 = $140,000).  The tax liability is triggered only if one or more full-time employees receive a subsidy through the insurance exchange; liability will not arise in any other circumstance (e.g., an employee secures coverage through a spouse).

Alternatively,  the second tax applies where the applicable large employer: a) offers coverage to at least 95% of its full-time employees (and their dependents); but b) the coverage is not affordable, lacks minimum value or is not otherwise minimum essential coverage; and c) one or more full-time employees receive subsidies through the insurance exchange.  In that case, the applicable large employer will pay a $3,000 tax for each full-time employee who receives a subsidy.  This tax likewise is triggered only if a full-time employee receives a subsidy through the insurance exchange.  

Affordable, Minimum Value and Minimum Essential Coverage

Health coverage generally is “affordable” if the employee contribution to the premium for an individual-only policy does not exceed 9.5 percent of the employee’s household income. The affordability test must be administered for each eligible employee’s household income, which is the total modified adjusted gross income of the employee and any other members of the household (spouses and dependents) who are required to file an income tax return.  Recognizing that employer’s generally lack the necessary information to verify an employee’s household income, the  guidance sets forth safe-harbor calculations for making the household income determination for each employee . Employers should ensure that they are making their calculations in compliance with the safe harbors, particularly to safeguard against the potential taxes an employer could incur in the event of noncompliance.

Health insurance generally meets the “minimum value” standard if it provides coverage for at least 60 percent of the claims that are covered under the plan. The federal government has developed tools designed to assist employers in their effort to calculate minimum value and continues to develop minimum-value safe harbors. Employers should consider whether their plan designs satisfy the minimum-value standard.

“Minimum essential coverage” has not yet been defined in a meaningful way. Instead, the ACA sets forth a list of types of insurance that will not qualify as minimum essential coverage, such as accident-only insurance, fixed-indemnity insurance (fixed per diem payment), hospital-only insurance, specific-disease insurance and other types of limited coverage. The federal government will likely issue guidance on the meaning of “minimal essential coverage.” Employers should bear in mind, however, that in any case they are not required to comply with the more expansive “essential health benefit” standards that apply only to the individual and small-employer markets. The essential health benefit standard requires comprehensive coverage that is far more costly than the coverage that large employers are required to offer.

Calculating Employer Size

The employer mandate and its obligations turn on whether an employer is covered or not. The method for determining this threshold question is summarized below.

An employer is an applicable large employer if it employs, on average, 50 or more full-time employees, including FTEs, during the entire preceding year. An employer’s status as an applicable large employer for a calendar year is determined by taking the sum of the total number of full-time employees (including any seasonal employees) for each calendar month in the preceding calendar year and the total number of FTEs (including any seasonal employees) for each calendar month in the preceding calendar year, and dividing by 12. The result, if not a whole number, is then rounded to the next lowest whole number. If the result of this calculation is less than 50, the employer is not a applicable large employer for the current calendar year.

It is important to note that employer size is calculated with prior-year data, regardless of any workforce reductions or increases that might occur during the current year. For instance, if an employer employs 75 full-time employees throughout 2015, it would be considered an applicable large employer in 2016 even if it terminated the employment of 26 or more full-time employees at the start of 2016 and had no more than 49 full-time employees at any time during 2016. The prior-year calculation is controlling.

The prior-year calculation for 2015 likely will be slightly different. The guidance currently available suggests that to calculate for 2015, an employer can use any consecutive six-month period within 2014 (rather than the full calendar year) to determine whether it maintained an average of 50 full-time employees. Consequently, it is essential for employers to determine at the earliest possible time whether they are covered or not for purposes of the employer mandate and, with that information, begin the process of investigating insurance plans, negotiating coverage, and the most strategic manner in which to make changes to employee staffing levels – whether through mergers, acquisitions or traditional hiring.

Identifying and Counting Full-Time Employees 

A full-time employee for purposes of determining employer size generally is any person who, with respect to a calendar month, is employed by the employer for an average of at least 30 hours of service per week. This is different from the calculation discussed above to determine those employees for whom coverage is required under the mandate.

Similarly, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, provided the employer applies this equivalency rule on a reasonable and consistent basis. Any employees who are not full-time employees under these standards are considered part-time employees who must be considered to determine the total number of FTEs the employer employed during the calendar month.

Identifying and Counting FTEs

The number of FTEs for each calendar month in the preceding calendar year is determined by calculating the aggregate number of hours of service for that calendar month for employees who were not full-time employees (but exclude hours in excess of 120 for any employee) and dividing that number by 120. Take, for example, an employer that for each calendar month of 2015 has 20 employees, each of whom averages 45 hours of service per month. In that case, total hours of service of the employees are aggregated and divided by 120. The result is that the employer has 15 FTEs for each month (20 x 45 = 1,800, and 1,800 ÷ 120 = 15).

Employees Outside the United States

The calculation to determine employer size excludes employees working outside the United States, even in cases where the nonresident employees are U.S. citizens. For example, if an employer has 60 full-time employees who are all U.S. citizens, and 15 of those employees work in Mexico while the other 45 work in the United States, the employer would be not be covered under the employer mandate.

Seasonal Employees

Seasonal employees are defined as those who perform services on a seasonal basis as defined by the Department of Labor (DOL) and “retail workers employed exclusively during holiday seasons.” The DOL generally defines seasonal employment for agricultural workers as labor (1) that is performed, ordinarily, at certain periods of the year and (2) that, from its nature, may not be continuous or carried on throughout the year. Until further guidance is issued, employers may, using the DOL definition, apply a reasonable, good-faith interpretation of “seasonal employees” to any employment context. For instance, using these standards, it appears that employees of an outdoor amusement park that is open only during the summer season could be considered seasonal employees.

Seasonal employees can be excluded from the calculation to determine employer size in the following limited way: If an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year (the days can be nonconsecutive) and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal employees, the employer is not an applicable large employer. For example, an employer that has 160 seasonal employees in January, November and December and 40 full-time employees for each calendar month of the year would not be an applicable large employer. The seasonal employees are excluded from the calculation, leaving the employer with an average of only 40 full-time employees for the calendar year.

Hours of Service

In all calculations in the context of the employer mandate, the federal government requires the use of “hours of service,” a phrase that includes all hours in a calendar month for which an employee is entitled to receive wages. For instance, if an employee works 90 hours in a calendar month and receives 30 hours of paid time off for that month, then the employee would be considered to have a total of 120 hours of service for that calendar month.

Hours of service do not include those that occur outside the United States. For example, if an employee works 30 hours in Canada in a calendar month and works 90 hours the rest of the month in the United States, then that employee would be considered a part-time employee for purposes of the employer mandate. The employee’s hours of service averaged less than 30 hours per week for the month.

Controlled Group Counting 

The Internal Revenue Service rules regarding controlled groups apply for purposes of determining employer size under the employer mandate. This means separate employers that have a common owner or are otherwise related generally will be combined for purposes of determining whether or not they employ collectively at least 50 FTEs (or an equivalent combination of full-time and part-time employees). If the combined total meets the 50 FTE threshold then each separate employer is considered an applicable large employer under the employer mandate, even if one or more of those employers individually does not employ 50 FTEs.

The federal government continues to issue guidance for compliance with the ACA, particularly the employer mandate.