The Employer Shared Responsibility rules are set forth in new Code Section 4980H and are often referred to as the “Employer Mandate” or the “Play or Pay Rules.” Under Code Section 4980H, large employers (more than 50 full-time equivalent employees) face penalties if they do not offer their full-time employees and their dependents affordable, minimum value health care coverage, but only if just one employee purchases health insurance on a state health insurance exchange (including a federally run state exchange) and the employee receives a premium tax credit or reduced-cost health insurance.
The Affordable Care Act (ACA) also sets forth reporting requirements under Code Sections 6055 and 6056. Under Section 6055, health insurers and sponsors of self-insured health plans must report to the IRS information on each full-time employee who is provided health insurance coverage. Under Section 6056, employers must report to the IRS information on how they complied with the Employer Shared Responsibility rules (i.e., to whom health insurance has been offered) and information about the specific health care coverage offered to each employee.
Proposed regulations under Section 4980H were issued in late 2012. Final regulations were issued on the Employer Shared Responsibility rules in February 2014 and on the reporting requirements in March 2014. There were a number of transition rules included with the regulations that provide special transition provisions.
The General Employer Shared Responsibility Rule
The Employer Shared Responsibility rule applies to any employer with at least 50 full-time equivalent (FTE) employees. Any employer is subject to the rule, including private employers, public employers, churches, and nonprofit employers.
50-FTE Standard: The IRS has indicated that the 50-FTE standard is an average number of employees determined by averaging the number of employees in each month over the course of the year. To determine 50 FTEs, you add the number of full-time employees in a month to the number of FTE part-time employees in that month.
- A full-time employee is anyone who works an average of 30 hours per week or 130 hours in the month.
- An hour of service is generally an hour for which an employee is paid, including hours actually worked, along with other paid hours for vacation, holiday, illness, layoff, jury duty, military duty, or leave of absence. The IRS recognizes it may be difficult to determine hours for certain types of employees; the regulations provide for employers to use any reasonable method as long as it is consistent with the Employer Shared Responsibility rule (i.e., interpret hours by methods that favor the employee, not help the employer cover fewer employees).
- FTEs for part-time employees are calculated by starting with the total number of hours for the month (but not more than 120 for any one employee) for all employees who are not full-time. Divide the total by 120, and the result is the number of FTEs for the month. Do not drop any fractional FTEs.
- Total FTEs are calculated for each month by adding the number of full-time employees to the number of FTEs for part-time employees. Add the numbers for each month together and divide by 12 months to determine the average FTEs. You can drop any fractional FTEs at this point. If the result is 50 or more, the employer is subject to the Employer Shared Responsibility rule.
The General Rule:
An employer subject to the rule has the potential to be subject to one of two penalties. The first penalty applies if an employer does not offer “minimum essential coverage” to “substantially all” full-time employees and their dependents (spousal coverage is not required), but only if just one employee obtains federally subsidized health insurance on a state exchange. The penalty is $2,000 (indexed) for all full-time employees who should have been offered health coverage, less the first 30 employees.
The second penalty could apply if the employer DOES offer “minimum essential coverage” to “substantially all” full-time employees and their dependents (and thus avoids the $2,000 penalty), but the insurance is not “minimum value coverage” and/or it is not “affordable” and at least one employee purchases federally subsidized health insurance on a state exchange. The penalty is $3,000 (indexed), times the number of employees who actually purchase subsidized health insurance on a state exchange.
Note that the penalty amounts are adjusted for the rate of medical inflation each year. Also, note that the penalties are determined on a month-by-month basis, so a lesser penalty may apply for an individual if the coverage rule fails for only a portion of the year.
Employees can purchase federally subsidized health insurance on a state exchange if their household income is between 100% and 400% of the federal poverty level and, if they are full-time employees, their employer does not offer them “minimum essential coverage” that provides “minimum value coverage” or whose self-only coverage is not “affordable.”
Part-time employees may be eligible for federally subsidized exchange insurance without being offered employer health coverage, and they cannot trigger penalties for the employer. Only full-time employees can trigger penalties, so only full-time employees need to be offered health coverage if an employer wishes to avoid the penalties. It is possible for an employer to design its health plan so that it never has to pay the Employer Shared Responsibility penalty. However, employers may need to change their plan design to avoid penalties entirely, and the cost of doing so may be more expensive than paying a penalty. A cost analysis can be very important.
Minimum essential health coverage for purposes of this rule is an eligible employer-sponsored plan that includes:
- A governmental plan;
- Any major medical plan or coverage offered in the small or large group market within a state;
- A grandfathered health plan offered in a group market; or
- A self-insured group health plan under which coverage is offered by an employer to employees.
In general, it is any group health plan considered a welfare benefit plan as defined by ERISA to the extent the plan provides medical care to employees or their dependents. Most major medical health plans offered by employers meet these requirements.
Substantially all full-time employees and their dependents must be offered minimum essential coverage. Employers must offer coverage to 95% of their employees. Note that this requirement is only for avoiding the $2,000-per-employee penalty. Any employees in the 5% who may not be offered coverage could trigger a $3,000 penalty if they obtain federally subsidized health coverage on a state exchange.
Minimum value coverage is provided to employees when the plan covers at least 60% of the total cost of claims under the plan. Most employer-sponsored health plans are expected to satisfy the minimum value requirement. Bronze metal coverage on the state exchanges will automatically meet the minimum value requirement. Insurers may have actuaries certify that their health plans meet the minimum value requirement. An employer’s contributions to a health reimbursement arrangement (HRA) or health savings account (HSA) can also help the employer meet the minimum value requirement.
Affordable coverage means that the amount an employee is required to pay toward a self-only health insurance premium does not exceed 9.5% (indexed) of the employee’s household income. An employer has no way of knowing an employee’s household income. The IRS has therefore provided three safe harbors that an employer can choose from to define household income in their design of the premium cost sharing with employees for self-only health insurance. (The affordability rule does not apply to family or other non-self-only coverage.) The safe harbors include:
- Rate of Pay – One hundred thirty hours times the employee’s rate of pay on the first day of the coverage period or the employee’s lowest rate of pay during the calendar month. Monthly salary is used for salaried employees. The IRS notes that this rule cannot be used for tipped employees or commission-only employees.
- Federal Poverty Level – Using the poverty level for a single individual in effect for the calendar year in the state of residence of the employee (Alaska and Hawaii are higher).
- Form W-2 – Wages to be reported on Form W-2, but an employer will not know wages for sure until after the end of the year. The IRS has said that an employer is not allowed to meet the safe harbor by making adjustments to the employee portion of the premium after year-end. Employers are allowed to adjust premium cost sharing proportionately if the employee does not work the entire calendar year.
Note that this definition of affordable applies only for the employer’s ability to avoid the penalty. It is not the same definition for employees when they go to a state exchange and purchase coverage. In other words, the employee could still purchase federally subsidized health insurance on a state exchange using their actual household income, but the employer can avoid a penalty on those employees using a safe harbor definition of household income.
The delay of the effective date of the Employer Shared Responsibility rule and the reporting rules to 2015 does not affect the other ACA provisions that were effective in 2014. If an employer does not qualify for any transitional relief, the compliance date was January 1, 2015. There were some important transition rules:
- Midsized employers’ (50-99 FTEs) compliance date was January 1, 2016.
- For 2016 and later years, there is a “limited nonassessment period,” so when an employer becomes “large” for the first time for a year, there is no penalty for January, February, and March if minimum value coverage is offered by April 1 (if no coverage was offered in a prior year). This only applies once, regardless of whether an employer goes up and down in size.
For large employers’ (i.e., 100+ FTEs) noncalendar year plans, the effective date was the first day of the 2015 plan year.
The regulations provide significant detail that may affect only certain types of employers, certain types of employees, or certain work force structures, so you may want to seek assistance in determining application of the Employer Shared Responsibility rules.