The Affordable Care Act (ACA) requires applicable large employers (ALEs) to offer affordable, minimum value health coverage to their full-time employees (and dependents) or pay a penalty. This employer mandate is also known as the “employer shared responsibility” or “pay or play” rules.
An ALE will face a penalty if one or more full-time employees obtain a subsidy through an Exchange. An individual may be eligible for a subsidy either because the ALE does not offer coverage, or offers coverage that is “unaffordable” or does not provide “minimum value.”
Offer of Coverage
In general, the employer shared responsibility rules require an ALE to offer an effective opportunity to accept coverage at least once during the plan year. If an employee has not been offered an effective opportunity to accept coverage, the employee will not be treated as having been offered the coverage for purposes of these rules.
The employee must also have an effective opportunity to decline an offer of coverage that is not affordable or does not provide minimum value at least once during the plan year. An employee’s election of coverage from a prior year that continues for every succeeding plan year unless the employee affirmatively elects to opt out of the plan constitutes an offer of coverage for purposes of these rules.
However, an effective opportunity to decline is not required for an offer of coverage that provides minimum value and is either affordable (determined based on the federal poverty level safe harbor) or no cost to the employee. Thus, an ALE may not render an employee ineligible for subsidized coverage by providing an employee with mandatory coverage (that is, coverage which the employee is not offered an effective opportunity to decline) that does not provide minimum value.
For an employee to be treated as having been offered coverage for a month (or any day in that month), the coverage offered, if accepted, must be applicable for that month (or that day). If an ALE fails to offer coverage to a full-time employee for any day of a calendar month during which the employee was employed, the employee is treated as not being offered coverage during that entire month. However, a full-time employee who terminates employment in a calendar month will be treated as having been offered coverage during that month as long as the employee would have been offered coverage for the entire month, if he or she had been employed for the entire month.
If an employee enrolls in coverage but fails to pay his or her share of the premium on a timely basis, the ALE is not required to provide coverage for the period for which the premium is not paid on time, but will still be treated as having offered that employee coverage for the remainder of the coverage period (typically, the remainder of the plan year) for purposes of these rules.
Minimum Essential Coverage
For purposes of the employer shared responsibility rules, an ALE is not treated as having offered coverage to an employee unless the coverage qualifies as “minimum essential coverage” (MEC). The definition of MEC under the ACA is very broad, and includes coverage under an eligible employer-sponsored plan. An “eligible employer-sponsored plan” is, with respect to any employee:
- Group health insurance coverage offered by (or on behalf of) an employer to the employee that is either:
- A governmental plan;
- Any other plan or coverage offered in the small or large group market within a state; or
- A grandfathered health plan offered in a group market; or
- A self-insured group health plan under which coverage is offered by (or on behalf of) an employer to the employee.
In general, most employer-sponsored coverage will qualify as MEC. However, MEC does not include coverage consisting solely of excepted benefits (as defined by HIPAA). MEC also does not include specialized coverage, such as coverage only for vision or dental care, workers’ compensation, disability policies or coverage only for a specific disease or condition.
If the coverage offered by an ALE fails to provide minimum value (MV), an employee may be eligible for an Exchange subsidy (and thus, the ALE may be subject to a penalty). A plan fails to provide MV if:
- The plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of those costs; and/or
- The plan does not provide coverage for in-patient hospitalization or physician services.
In addition, an eligible employer-sponsored plan must provide substantial coverage of inpatient hospitalization and physician services to qualify as providing MV.
An employee may also be eligible for an Exchange subsidy (and thus, an ALE may be subject to a penalty) if the coverage offered by the ALE is not affordable. Eligible employer-sponsored coverage is generally affordable if the employee’s required contribution for the lowest cost self-only coverage does not exceed 9.5 percent (as adjusted annually) of the taxpayer’s household income for the taxable year. The affordability contribution percentage is adjusted annually, as follows: 9.56 percent for 2015 plan years, 9.66 percent for 2016 plan years, 9.69 percent for 2017 plan years, or 9.56 percent for 2018 plan years.
Because an employer generally will not know an employee’s household income, the following three optional affordability safe harbors are available for ALEs to determine affordability based on information that is available to them:
- The employee’s W-2 wages from that employer that are required to be reported in Box 1;
- The employee’s rate of pay (for salaried employees, using the employee’s monthly salary, or for hourly employees, using the employee’s hourly rate of pay multiplied by 130 hours per month); or
- The FPL for a single individual in effect within six months before the first day of the plan year.
Individual eligibility for Exchange subsidies is still based on household income. However, the ALE will not be subject to a penalty for that employee, even if he or she ultimately receives a subsidy.
Employees Who Have Other Coverage
Under these rules, an ALE is not exempt from liability for failing to offer coverage to full-time employees who have coverage from other sources (such as Medicare, Medicaid or a spouse’s employer). The IRS noted that this type of rule would be inconsistent with the employer shared responsibility rules and would require the ALE to verify alternative coverage in a manner not contemplated by the ACA (for example, requiring an ALE to question its employees as to Medicaid eligibility or a spouse’s eligibility for and purchase of employer-sponsored coverage).
Regardless of whether or not an ALE offers coverage, it will be potentially liable for a penalty only if at least one of its full-time employees receives a subsidy for coverage purchased through an Exchange. A full-time employee includes only those individuals working 30 hours or more per week. Part-time workers are not included in penalty calculations, even though they are included in the determination of whether an employer is an ALE. An ALE will not pay a penalty for any part-time worker, even if that part-time worker receives a subsidy.
Individuals who are not offered employer-sponsored coverage (and who are not eligible for Medicaid or other programs) may be eligible for a premium tax credit for coverage purchased through an Exchange if they have income between 100 percent and 400 percent of the federal poverty level (FPL). Individuals who are offered employer-sponsored coverage can only obtain subsidies for Exchange coverage if, in addition to the other criteria above, they also are not enrolled in their employer’s coverage and their employer’s coverage is either unaffordable or does not provide minimum value.
Other ACA provisions will also affect whether full-time employees can obtain a subsidy for Exchange coverage. For example, Exchanges have “screen and enroll” procedures in place for all individuals who apply for subsidies, which means that individuals who apply for subsidies must be screened for Medicaid and the state Children’s Health Insurance Program (CHIP) eligibility and, if found eligible, are to be enrolled in those programs. Exchange subsidies will not be an option for these individuals. This could affect whether any of an ALE’s full-time employees obtain an Exchange subsidy.
Penalty for ALEs Not Offering Coverage—The 4980H(a) Penalty
Under Section 4980H(a), an ALE will be subject to a penalty if it does not offer coverage to “substantially all” full-time employees (and dependents) and any of its full-time employees receives an Exchange subsidy. However, the 4980H(a) penalty will not apply to an ALE that intends to offer coverage to all of its full-time employees, but fails to offer coverage to a few of these employees, regardless of whether the failure to offer coverage was inadvertent.
An ALE satisfies the requirement to offer coverage to “substantially all” of its full-time employees and their dependents if it offers coverage to at least 95 percent—or fails to offer coverage to 5 percent (or, if greater, five)—of its full-time employees (and dependents). The alternative margin of five full-time employees is designed to accommodate relatively small ALEs, because a failure to offer coverage to a handful of full-time employees might exceed 5 percent of the ALE’s full-time employees.
Under Section 4980H(a), the monthly penalty assessed on ALEs that do not offer coverage to substantially all full-time employees (and their dependents) is equal to the ALE’s number of full-time employees (minus 30) x 1/12 of $2,000, for any applicable month. However, ALEs are not required to include any employees who are in a limited non-assessment period in the penalty calculation. A “limited non-assessment period” is a period during which an ALE will not be subject to an employer shared responsibility penalty for a full-time employee, regardless of whether that employee is offered health coverage during that period. These periods include:
- January through March of the employer’s first year as an ALE, for an employee who was not offered coverage by the employer during the prior calendar year;
- A permitted waiting period under either the look-back measurement method or the monthly measurement method;
- A new employee’s initial measurement period under the look-back measurement method;
- The period following an employee’s change in employment status that occurs during his or her initial measurement period under the look-back measurement method; and
- An employee’s first calendar month of employment, if he or she begins employment on a day other than the first of the month.
After 2014, the $2,000 penalty amount is indexed by the premium adjustment percentage for the calendar year. The IRS confirmed the adjusted Section 4980H(a) penalty amounts, as follows:
|$2,080 for 2015||$2,160 for 2016||$2,260 for 2017||$2,320 for 2018|
Penalty for ALEs Offering Coverage—The 4980H(b) Penalty
ALEs that do offer coverage to substantially all full-time employees (and dependents) may still be subject to penalties if at least one full-time employee obtains a subsidy through an Exchange because:
- The ALE did not offer coverage to all full-time employees; or
- The ALE’s coverage is unaffordable or does not provide minimum value.
Under Section 4980H(b), the monthly penalty assessed on an ALE for each full-time employee who receives a subsidy is 1/12 of $3,000 for any applicable month. However, the total penalty for an ALE would be limited to the Section 4980H(a) penalty amount.
After 2014, the $3,000 penalty amount is indexed by the premium adjustment percentage for the calendar year. The IRS confirmed the adjusted Section 4980H(a) penalty amount, as follows:
|$3,120 for 2015||$3,240 for 2016||$3,390 for 2017||$3,480 for 2018|
Application to Commonly owned Companies
The ACA’s employer shared responsibility rules apply to companies that are treated as a single employer under Internal Revenue Code (Code) Sections 414(b), (c) or (m) because they form a controlled group of businesses or an affiliated service group. To determine whether a company is an ALE, aggregation rules apply for companies that are related or commonly owned. Under these rules, all employees of a controlled group of businesses or an affiliated service group are taken into account to determine whether an employer is subject to the employer shared responsibility rules. If the combined total meets the ALE threshold, each separate member of the group is subject to the employer shared responsibility rules, even those companies that, on their own, do not have enough employees to meet the threshold.
For a full-time employee who is employed by two or more companies that are treated as a single employer under the Code’s aggregation rules, an offer of coverage by one company to an employee is treated as an offer of coverage by all other members of the controlled group or affiliated service group. Thus, if one member of the group offers coverage to the employee for a calendar month, every other member of the same ALE group is considered to have made the same offer of coverage to that employee for purposes of determining liability under the employer shared responsibility rules, if any, of each member. For example, in the case of a group of ALEs operating a single plan intended to offer coverage to employees of all the ALE members, any employee offered coverage under the plan would be treated as receiving an offer of that coverage from each ALE member.
Please contact Lau & Lau Associates, LLC for more information on the ACA’s employer shared responsibility rules.
This overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
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