Treasury and IRS Issue Final Regulations on Employer Shared Responsibility Rules: Are You Prepared?June 3, 2014
The Patient Protection and Affordable Care Act (the "ACA") enacted the employer shared responsibility provisions, which are codified in § 4980H of the Internal Revenue Code and are often referred to as the "employer mandate" or the "play or pay" rules. Under the employer shared responsibility rules, certain applicable large employers (generally employers employing 50 or more full-time equivalent employees) may be subject to certain penalty taxes. In February, the Treasury and the Internal Revenue Service (IRS) issued final regulations implementing the employer shared responsibility provisions. The final regulations delayed the application of the penalties until 2015 (and later for smaller employers with at least 50 but fewer than 100 full-time equivalent employees). However, these rules require substantial planning and preparation to ensure that an employer has appropriate policies and record-keeping mechanisms in place. An understanding of these provisions and the potential penalties is crucial for any employer making decisions about its employment and compensation strategies for upcoming years.
There are two types of penalties that can be imposed on employers under the employer shared responsibility rules. The 4980H(a) penalty tax applies if an employer fails to offer minimum essential coverage to substantially all of its full-time employees and their dependent children and at least one employee enrolls in subsidized coverage under a state or federal health insurance exchange. This penalty is equal to $2,000 per full-time employee (minus the first 30 full-time employees). The definition of "minimum essential coverage" is very broad and includes almost any coverage under a group health plan or group health insurance coverage offered by an employer to an employee that satisfies the other applicable health care reform requirements (e.g., no lifetime or annual limits, no cost-sharing for preventive services, etc.). An applicable large employer is treated as offering coverage to its full-time employees and dependents for a calendar month if for that month, it offers coverage to all but 5% (or, if greater, five full-time employees). For the 2015 plan year, this 5% threshold has been increased to 30%.
Even if an employer offers minimum essential coverage to substantially all full-time employees and their dependent children, the employer may still be liable for the 4980H(b) penalty tax, the second type of penalty that can be imposed on employers under the employer shared responsibility rules. This tax is imposed if an employer's plan fails minimum value or affordability requirements. This monthly penalty is equal to 1/12 of $3,000 for each employee who receives a subsidy from a health insurance exchange, but will not exceed the amount the employer would pay under the 4980H(a) penalty tax. A plan provides "minimum value" if the plan's share of the total allowed costs of benefits provided under the plan is at least 60% of those costs. The plan is considered to be "affordable" if the employee's premium does not exceed 9.5% of the employee's household income. If the plan does not provide minimum value or is not affordable, employees may qualify for subsidized coverage through a health insurance exchange, and, if obtained, the 4980H(b) penalty tax would be imposed on the employer. In order to receive subsidized coverage available on an exchange, an employee must decline to enroll in the employer's coverage and purchase coverage through the exchange.
Section 4980H defines full-time employees as those who, with respect to any month, work at least 30 hours per week, or 130 hours in a calendar month. The 4980H(a) penalty tax is based on employees' hours on an ongoing monthly basis during the current plan year, which creates a practical problem for employers when employees have varying hours or employment schedules. It can be difficult for an employer to determine which employees should be classified as full-time employees for purposes of the employer shared responsibility rules. In response to the administrative challenges created by monthly determinations, the IRS has created a "measurement period" that allows employers to identify full-time employees by averaging employees' hours during a specified period of months on a look-back basis (ranging from 3-12 months, selected by the employer). Employees who average at least 30 hours per week (130 hours in a calendar month) during the measurement period must be considered full-time employees for the subsequent "stability period," which is no shorter than the measurement period. It is recommended that employers consider developing detailed policies and procedures for evaluating the full-time status of employees. These policies should be developed now to ensure that employers are tracking employee hours in advance of the date that the rules become effective.
Circular 230 Legend: Internal Revenue Service regulations provide that, for the purpose of avoiding certain penalties under the Internal Revenue Code, taxpayers may rely only on formal opinions of counsel that meet specific requirements set forth in such regulations. Any tax advice that may be contained in this writing does not constitute a formal opinion that meets the requirements of the regulations. Accordingly, the Internal Revenue Service requires that we advise you that (1) any tax advice contained in this communication was not intended or written to be used, and may not be used, for the purpose of avoiding penalties that the IRS might attempt to impose on a taxpayer, (2) no one, without express prior written permission, may use any part of this communication in promoting, marketing, or recommending an arrangement relating to any federal tax matter to any person or entity, and (3) there is no limitation by this Firm on the disclosure of the tax treatment or tax structure of the transaction(s) or matter(s) discussed herein by the intended recipient of this communication.