The Patient Protection and Affordable Care Act (the "ACA") added a new Section 4980H to the Internal Revenue Code of 1986, as amended, which generally requires employers to offer health coverage to their employees or face a penalty (the "Employer Mandate"). Following are Q&As discussing this provision. These Q&As are designed to address some of the more commonly asked questions, including which employers are subject to the mandate, who must be offered coverage to avoid a penalty, the type of coverage that must be offered to avoid that penalty, and the penalties that apply for not offering coverage. These Q&As were initially prepared based on proposed regulations but have been updated to reflect the final regulations issued on February 12, 2014.
- What is the Employer Mandate?
- Who is Eligible for a Premium Tax Credit or Cost-Sharing Reduction?
- When is the Employer Mandate Effective, and What Transition Rules Apply?
- Which Employers are Subject to the Employer Mandate?
- Who Must Be Offered Coverage?
- What are the Methods for Determining "Full-Time" Status?
- What Health Coverage Satisfies the Employer Mandate?
- What is the Penalty for Noncompliance and How is it Collected?
Q&A 1: What Is the Employer Mandate?
On January 1, 2015, the Employer Mandate will change the
landscape of health care in the U.S. by requiring large employers
to offer health coverage to full-time employees and their natural
and adopted children up to age 26 or risk paying a penalty. Large
employers will be forced to make a choice: to either
"play" by offering affordable health coverage that
provides minimum value or "pay" by potentially owing a
penalty to the Internal Revenue Service if they fail to offer such
coverage. This "play or pay" scheme, called "shared
responsibility" in the statute, has become known as the
Employer Mandate. Although the effective date of the Employer
Mandate has generally been deferred until January 1, 2015, the
effective date is further deferred for employers with non-calendar
year plans that meet certain requirements, as well as for certain
smaller employers.
Only "large employers" are required to comply with the
Employer Mandate. Generally speaking, "large employers"
are employers that had an average of 50 or more full-time and
full-time equivalent employees on business days during the
preceding year. However, this threshold is 100 full-time and
full-time equivalent employees for the 2015 calendar year only.
"Full-time employees" include all employees who work at
least 30 hours on average each week. The number of "full-time
equivalent employees" is determined by aggregating the hours
worked by all non-full-time employees. In determining large
employer status, certain related employers under common control are
considered to be a single employer. (However, as discussed below,
while large employer status is determined based on counting the
full-time employees and full-time equivalents of all members of a
group of related employers under common control, whether any
penalty is owed and the amount of such penalty is calculated
separately for each related employer.)
To "play" under the Employer Mandate, a large employer
must offer health coverage that is "minimum essential
coverage," is "affordable," and satisfies a
"minimum value" requirement to its full-time employees
and their children. "Minimum essential coverage" includes
coverage under an employer-sponsored group health plan, whether it
be fully insured or self-insured, but does not include stand-alone
dental or vision coverage, employee assistance plans, or flexible
spending accounts. For this purpose, employer-sponsored group
health coverage may include coverage offered on behalf of an
employer by a multiemployer plan, Multiple Employer Welfare
Arrangement ("MEWA"), or staffing organization (provided
certain requirements are satisfied). Coverage is
"affordable" if an employee's required contribution
for the lowest-cost self-only coverage option offered by the
employer does not exceed 9.5 percent of the employee's
household income. Coverage provides "minimum value" if
the plan's share of the actuarially projected cost of covered
benefits is at least 60 percent. More detail about these
requirements is included in later Q&As.
If a large employer does not "play" for some or all of
its full-time employees, the employer will have to pay a penalty in
two scenarios.
The first scenario occurs when an employer does not offer health
coverage to "substantially all" of its full-time
employees and any one of its full-time employees both
enrolls in health coverage offered through a state insurance
exchange, which is also called a marketplace (an
"Exchange"), and receives a premium tax credit or a
cost-sharing reduction (an "Exchange subsidy"). In this
scenario, the employer will owe a "no coverage penalty."
The no coverage penalty is $2,000 per year (adjusted for inflation
after 2014) for each of the employer's full-time employees,
excluding the first 80 employees for the 2015 calendar year and the
first 30 for years thereafter. This is the penalty that an employer
should be prepared to pay if contemplating not offering group
health coverage to its employees.
The second scenario occurs when an employer does provide health
coverage to its employees, but that coverage is deemed inadequate
for Employer Mandate purposes, either because it is not
"affordable," it does not provide at least "minimum
value," or the employer offers coverage to substantially all
(but not all) of its full-time employees, and one or more
of its full-time employees both enrolls in Exchange coverage and
receives an Exchange subsidy. In this second scenario, the employer
will owe an "inadequate coverage penalty." The inadequate
coverage penalty is $3,000 per year (also adjusted for inflation
after 2014) and is calculated based not on the employer's total
number of full-time employees (as is the case for the no coverage
penalty) but only on each full-time employee who receives an
Exchange subsidy. Furthermore, the penalty is capped by the maximum
potential "no coverage penalty" discussed
above.
Because Exchange subsidies are available only to individuals with
household incomes of at least 100 percent and up to 400 percent of
the federal poverty line (in 2015, a maximum of $46,680 for an
individual and $95,400 for a family of four), employers that pay
relatively high wages may not be at risk for the penalty, even if
they fail to provide coverage that satisfies the affordability and
minimum value requirements. Likewise, because Exchange subsidies
are not available to individuals who are eligible for Medicaid,
employers may be partially immune to the penalty with respect to
their low-wage employees, particularly in states that elect the
Medicaid expansion. To be sure, Medicaid eligibility is based on
household income. Because an employee's household may have more
income than the wages he or she receives from the employer, the
employee might not be Medicaid eligible, even though the employer
pays a very low wage. Thus, it may be difficult for an employer to
assume its low-paid employees will be eligible for Medicaid and not
eligible for Exchange subsidies. But for employers with low-wage
workforces, examination of the extent to which the workforce is
Medicaid-eligible may be worth exploring.
In addition, Exchange subsidies will not be available to any
employee whose employer offers the employee affordable coverage
that provides minimum value. Thus, by "playing" for
employees who would otherwise be eligible for an Exchange subsidy,
employers can ensure that they are not subject to any penalty, even
if they don't "play" for all employees.
Q&A 2: Who Is Eligible for a Premium Tax Credit or Cost-Sharing Reduction?
As noted in Q&A 1, merely failing to offer full-time
employees minimum essential coverage, or coverage that meets the
affordability or minimum value requirements, is not enough to
trigger liability under the Employer Mandate. Two additional things
must occur before any penalty will be assessed. First, one of the
employer's full-time employees must enroll in health coverage
offered through an Exchange. Second, that full-time employee must
receive an Exchange subsidy (a premium tax credit or cost-sharing
reduction). Thus, an employer should consider which of its
employees are potentially eligible for an Exchange subsidy when
deciding how to comply with the Employer Mandate. Premium tax
credits are claimed on a single Form 1040 for the taxpayer and all
tax dependents; receipt of an Exchange subsidy by an employee's
dependent who is not a tax dependent of the employee will not give
rise to an Employer Mandate penalty.
Coverage Through an Exchange
In order to be eligible to receive an Exchange subsidy, an
individual must enroll in health coverage offered through an
Exchange. Under the ACA, an Exchange has been established in each
state, either by the state or by the federal government (or a
combination of the two). An Exchange is a governmental entity or
nonprofit organization that serves as a marketplace for health
insurance for individuals and small employers. Health insurance
offered through the Exchanges must cover a minimum set of specified
benefits and must be issued by an insurer that has complied with
certain licensing and regulatory requirements.
Eligibility for an Exchange Subsidy
There are two Exchange subsidies available: the premium tax credit
and the cost-sharing reduction. The premium tax credit is intended
to help individuals and families purchase health coverage through
an Exchange. The credit is available only to legal U.S. residents
whose household income is 100 percent to 400 percent of the federal
poverty line ("FPL"). Legal resident aliens also qualify
for the credit if their household income is below 100 percent
of the federal poverty line and they are not eligible for Medicaid
because they are aliens. Individuals who are eligible for Medicaid
or Medicare, or certain other government-sponsored coverage like
the Children's Health Insurance Program ("CHIP")
– a Medicaid-like program for children, or veterans'
health care, are not eligible for premium tax credits.
The FPL is set annually by the U.S. Department of Health and Human
Services ("HHS") and is based on household size. For
2015, the FPL in the continental U.S. is $11,670 for an individual
and $23,850 for a family of four; 400 percent of the FPL is $46,680
for an individual and $95,400 for a family of four. The amounts are
slightly higher in Alaska and Hawaii.
An individual is not eligible for a premium tax credit if the
individual is either (i) enrolled in an employer-sponsored
plan or (ii) eligible for an employer-sponsored plan that
meets the affordability and minimum value requirements.
Cost-sharing reductions, which reduce cost-sharing amounts such as
copays and deductibles, are available to individuals who have a
household income no greater than 250 percent of the FPL and enroll
in "silver-level" coverage through an Exchange. An
individual whose household income is, for example, 200 percent
of the FPL may therefore be eligible for a premium tax credit to
help defray the cost of monthly insurance premiums, and a
cost-sharing reduction to help reduce the amount of out-of-pocket
copays and deductibles to which the Exchange-enrolled individual
otherwise would be subject.
"Certification" of Eligibility for an
Exchange Subsidy to Employer
The Employer Mandate penalty applies only when the employer has
first received "certification" that one or more employees
have received an Exchange subsidy. The IRS will provide this
certification as part of its process for determining whether an
employer is liable for the penalty, which will occur no earlier
than the calendar year following the year for which the employee
received the Exchange subsidy. Under procedures to be issued by the
IRS, employers that receive one or more certifications will be
given an opportunity to contest the certification before any
penalty is assessed.
In addition, Exchanges are required to notify employers that an
employee has been determined eligible to receive an Exchange
subsidy. The notification, provided contemporaneously with the
determination, will identify the employee, indicate that the
employee has been determined eligible to receive an Exchange
subsidy, indicate that the employer may be liable for an Employer
Mandate penalty, and notify the employer of the right to appeal the
determination. (It appears that most Exchanges did not send these
notices during the first open enrollment period.) These notices
will be useful in giving employers an opportunity to correct
erroneous Exchange information and protect against erroneous
penalty notices from the IRS. These notices also will be useful in
budgeting for any penalties that may be owed. However, employers
should be aware that because the standard for what is affordable
coverage is different for employees than it is for employers, it is
possible for an individual to be eligible for a premium tax credit,
even though the employer's coverage is "affordable"
under the Employer Mandate rules. Therefore, employers should be
wary of contesting an employee's premium tax credit
eligibility. If, on the other hand, an employee receives this
notification regarding a person who is not an employee (for
example, an independent contractor), the employer would be well
served to correct the error.
Planning Consideration
The Employer Mandate penalty applies only to an employer
failing to offer health coverage if one or more of its full-time
employees enrolls in insurance coverage through an Exchange, and
actually receives an Exchange subsidy. Unless a full-time employee
enrolls in coverage through an Exchange and obtains an Exchange
subsidy, the employer is off the hook. This can lead to some
surprising exemptions from the penalty.
Assume Employer X is a software development company with 50
full-time employees—40 are software developers whose annual
income exceeds $120,000, and 10 are administrative assistants with
annual income, after overtime, of no more than $40,000. None of the
40 software developers will be eligible for an Exchange subsidy;
they are too highly compensated. Thus, Employer X is in a position
of being able to avoid the penalty merely by offering health
coverage to 10 of its 50 employees, which it should be able to
obtain on a small business (SHOP) Exchange. It may exclude its 40
highly compensated employees from eligibility for this coverage (or
require them to pay the full cost of coverage) without being
exposed to the Employer Mandate penalty. And by either narrowing
the eligibility for health coverage only to its 10 administrative
assistants, or passing on the full cost of coverage to its software
developers, it considerably reduces the risk of having to bear the
inflation in health costs associated with providing health coverage
to the entire workforce.
This method of avoiding the Employer Mandate penalty can also
be used with employees of larger employers whose income is too high
for them to qualify for a premium tax credit. It should be noted
that it is possible to avoid the Employer Mandate penalty but, at
the same time, incur liability under certain nondiscrimination
rules. Therefore, any new structure should be reviewed for
compliance under both sets of rules.
Q&A 3: When Is the Employer Mandate Effective, and What Transition Rules Apply?
The Employer Mandate was originally scheduled to take effect as
of January 1, 2014; however, the IRS granted transition relief
under which no Employer Mandate penalty will be assessed through
2014. Large employers are generally now subject to the Employer
Mandate beginning on January 1, 2015. The effective date is further
deferred for employers that sponsor non-calendar year health plans
if certain requirements are met, and for certain smaller employers.
There are also special transition rules for offering coverage for
January 2015, offering coverage to dependents, offering coverage
through multiemployer plans, determining large employer status, and
determining who is a full-time employee.
Non-Calendar Year Health Plans
An employer with a health plan maintained on a non-calendar year
basis faces unique challenges in complying with the Employer
Mandate. Because terms and conditions of coverage may be difficult
to change mid-year, a January 1, 2015 effective date would, in many
cases, force employers with non-calendar year plans to be compliant
for the entire fiscal 2014 plan year. Recognizing the potential
burdens, the IRS has granted special transition relief for
employers that maintained non-calendar year health plans as of
December 27, 2012 and did not modify the plan year after December
27, 2012 to begin at a later date. These transition relief rules
apply separately to each employer in a group of related employers
under common control.
The first transition rule applies just to full-time employees who
are eligible for coverage under the pre-2015 plan terms.
Specifically, under the first transition rule, an employer will not
be subject to a penalty for the period prior to the first day of
the 2015 non-calendar plan year based on any full-time employee
who, under the terms of the plan as in effect on February 9, 2014,
would be eligible for coverage as of the first day of the 2015 plan
year. The transition rule applies only if that employee is offered
coverage no later than the first day of the 2015 plan year that
otherwise meets the requirements of the Employer Mandate.
The second transition rule is broader and applies to all full-time
employees, even those who are only eligible for coverage due to a
change in eligibility effective for the 2015 plan year. The second
transition rule applies for employers that have covered (or offered
coverage to) a significant percentage of their employees. A
separate threshold is used depending on whether the test is applied
with reference to all employees or restricted only to full-time
employees. This transition rule applies if an employer has one or
more non-calendar year plans (that each have the same plan year as
of December 27, 2012) and, collectively, either:
a) actually covered at least one quarter of the employer's employees (or one third of the full-time employees) as of any date in the 12 months ending on February 9, 2014, or
b) offered coverage to at least one third of the employer's employees (or one half of the full-time employees) during the most recent open enrollment period that ended prior to February 9, 2014.
If one of these prerequisites is met, the employer will not be
subject to a penalty for the period prior to the first day of the
2015 non-calendar year plan year on the basis of any full-time
employee who (i) is offered coverage, no later than the first
day of the 2015 plan year, that otherwise meets the requirements of
the Employer Mandate, and (ii) would not have been eligible
for coverage under any calendar year group health plan maintained
by the employer as of February 9, 2014.
Employers With Fewer Than 100 Full-Time and Full-Time
Equivalent Employees
The final regulations provide that no Employer Mandate penalty will
be assessed for the 2015 plan year for employers with at least 50,
but fewer than 100, full-time employees or full-time equivalent
employees, if the following conditions are met: (i) the
employer does not reduce the size of its work force during 2014 in
order to qualify for this relief, (ii) the employer generally
maintains the same level of coverage it provided as of February 9,
2014, and (iii) the employer certifies to the IRS that it
meets the eligibility requirements for this relief.
Offers of Coverage for January 2015
To be treated as offering coverage for the month, a large employer
must, in general, offer coverage to a full-time employee on all of
the days of a calendar month. Solely for purposes of January 2015,
if a large employer offers coverage to a full-time employee by the
first day of the first payroll period beginning in January 2015,
the employer will be treated as having offered coverage to the
individual for January 2015.
Coverage of Dependents
To avoid the Employer Mandate penalty, large employers must offer
coverage not just to their full-time employees but also to their
employees' dependents. A "dependent" for this purpose
is defined as a full-time employee's natural or adopted child,
or a child placed with the employee for adoption, but only through
the end of the month in which the child turns age 26. A
dependent does not include a spouse or domestic partner, a
stepchild, or a foster child. It also does not include a child who
is not a citizen or national of the U.S. unless the child is either
a resident of the U.S., Canada, or Mexico, or is a tax dependent
due to being placed for adoption. Because this requirement may
result in changes to eligibility for some employer-sponsored plans,
the IRS is providing transition relief for 2015. As long as
employers "take steps" during the 2015 plan year to
comply and offer coverage that meets this requirement no later than
the beginning of the 2016 plan year, no penalty will be imposed
during the 2015 plan year solely due to the failure of the employer
to offer coverage to dependents. This relief, however, is not
available to the extent dependent coverage was offered for the 2013
and 2014 plan years and subsequently dropped.
Multiemployer Plans
Multiemployer plans represent a special circumstance because their
unique structure complicates application of the Employer Mandate
rules. These plans are operated under collective bargaining
agreements and include multiple participating employers. Typically,
an employee's eligibility under the terms of the plan is
determined by considering the employee's hours of service for
all participating employers, even though those employers generally
are unrelated. Moreover, contributions may be made on a basis other
than hours worked, such as days worked, projects completed, or a
percentage of earnings. Thus, it may be difficult for some
participating employers or the plan to determine how many hours a
particular employee has worked over any given period of time or
whether a given employee is eligible for coverage under the
plan.
To ease the administrative burden faced by employers participating
in multiemployer plans, special interim guidance has been issued.
(Any future guidance that limits the scope of the interim guidance
will be applied prospectively and will apply no earlier than
January 1 of the calendar year beginning at least six months
after the date of such guidance.) The interim rule applies if an
employer is required to contribute to a multiemployer plan with
respect to some or all of its employees under a collective
bargaining agreement or participation agreement, and the
multiemployer plan offers coverage to eligible individuals and
their dependents that is affordable and provides minimum value. If
the interim rule applies, the employer will be treated as offering
Employer Mandate compliant coverage to employees for whom the
employer is required to make contributions regardless of whether
they are in fact eligible under the terms of the multiemployer
plan. To determine affordability, in addition to the safe harbors
discussed in Q&A 7, coverage under a multiemployer plan will be
considered affordable if the employee's required contribution,
if any, toward self-only health coverage under the plan does not
exceed 9.5 percent of the wages reported to the qualified
multiemployer plan (which may be determined based on actual wages
or an hourly rate under the applicable collective bargaining
agreement).
This rule applies only to an employer's employees for whom the
employer makes contributions to the multiemployer plan; the
employer must comply with the Employer Mandate under the general
rules with respect to its other full-time employees. In addition to
this interim guidance, as discussed in Q&A 8, the final
regulations treat an offer of coverage from a multiemployer plan as
an offer of coverage made on behalf of the contributing
employer.
Determining Large Employer Status and Who is a Full-Time
Employee
The IRS has also issued transition rules for determining large
employer status and determining who is a full-time employee. In
general, large employer status is determined based on the number of
employees employed during the immediately preceding year. In order
to allow employers to have sufficient time to prepare for the
Employer Mandate before the beginning of 2015, for purposes of
determining large employer status for 2015 only, employers may use
a period of not less than six consecutive calendar months in 2014
to determine their status for 2015 (rather than using the entire
2014 calendar year). See Q&A 4 for a discussion of the
general rule for determining who is a large employer. Likewise,
employers may use a special transition measurement period for
purposes of determining whether certain employees who work variable
schedules are to be considered full-time employees for the 2015
plan year. See Q&A 6 for a discussion of how worker
schedules can affect the determination of full-time or part-time
status.
Q&A 4: Which Employers Are Subject to the Employer Mandate?
Beginning January 1, 2015, the
Employer Mandate requires "large employers" to offer
health coverage to full-time employees and their children or risk
paying a penalty. The Employer Mandate applies not only to
for-profit employers but also to federal, state, local, and Indian
tribal governmental entities, as well as to tax-exempt
organizations.
Large Employers
An employer is a "large employer" for a calendar year if
it employed an average of at least 50 full-time and full-time
equivalent employees on business days during the preceding calendar
year. The threshold is increased to 100 for the 2015 calendar year
only. The following discussion is intended to help employers
determine the employees who must be counted and how to calculate
the number of full-time and full-time equivalent employees.
Related Employers In a Controlled Group
Groups of related employers that are in a controlled group are
treated as a single employer for purposes of determining large
employer status, although Employer Mandate penalties are determined
separately for each employer. Whether employers are in a controlled
group is determined under the same rules that apply to tax
qualified retirement plans, often called the controlled group
rules, which are found in Sections 414(b), (c), (m), and (o) of the
Internal Revenue Code. Companies in a controlled group include
(i) parent-subsidiary groups (80 percent ownership threshold);
(ii) brother-sister groups (five or fewer persons owning at
least 50 percent of each entity); (iii) groups consisting of
three or more corporations that are a combination of
parent-subsidiary and brother-sister groups; (iv) trades or
businesses (whether or not incorporated) that are under common
control; and (v) affiliated service groups consisting of a
service organization (such as a doctor's practice) and another
related organization that provides services to or with the first
organization (such as the office administrative staff if employed
by a separate organization). In the context of non-profit
organizations, the controlled group rules are applied based on
control of the board, rather than on ownership. Church entities may
be treated as separate if certain requirements are met.
For example, suppose Company A owns 85 percent of the voting stock
of each of Company B and Company C. Company A has 25 full-time
employees, while Companies B and C each have 40 full-time
employees. None of these companies is subject to the Employer
Mandate on its own. However, because Company A owns more than 80
percent of the voting stock of each of Companies B and C, the three
companies are members of a controlled group, and the employees of
all three companies are aggregated to determine large employer
status. Thus, all three companies are large employers subject to
the Employer Mandate because together they employ 105 full-time
employees.
Definition of Employee
Under the Employer Mandate, the term "employee" means a
common law employee. Generally speaking, an individual who provides
services to an employer is a common law employee if the employer
has the authority to direct and control the manner in which
services will be performed by the employee. An employer need not
actually direct and control the work; the mere right to do so
creates the employment relationship. Under the final regulations,
sole proprietors, partners in partnerships, two-percent
shareholders in Subchapter S corporations, qualified real estate
agents, and certain direct sellers are not considered to be
"employees" for purposes of the Employer Mandate. In
addition, the special rule that requires leased employees to be
treated as employees of the service recipient for purposes of
qualified retirement plans does not apply for the Employer Mandate.
Rather, whether the leasing company or the client has the
obligation to offer coverage to a leased employee is based on which
of the two is the common law employee.
Definition of "Full-Time Employee"
In general, a full-time employee is a common law employee who is
credited with an average of at least 30 hours of service each week
or 130 hours of service each calendar month. A more detailed
discussion of who is a full-time employee is provided in Q&A 5
and 6, including treatment of variable-hour employees, seasonal
employees, and rehires.
Determination of Full-Time Equivalent
Employees
The term "full-time equivalent employees" reflects the
number of full-time employees an employer would have based on the
hours for all employees who are not full-time employees (under the
definition above). To determine the number of full-time equivalent
employees for a calendar month, you first calculate the aggregate
hours of service (including fractional hours, but not including
more than 120 for any one employee) for all employees who are not
full-time employees for that month. Then, you divide the total
number of hours worked by non-full-time employees by 120.
For example, an employer has 40 employees who each have 90 hours of
service per calendar month during 2014. This means the employer has
30 full-time equivalent employees for each calendar month in 2014
(40 employees x 90 hours = 3,600 hours, which divided by 120 hours
equals 30).
Full-time equivalent employees are counted solely for purposes of
determining whether an employer is a large employer. There is no
penalty for failing to offer coverage to any employee who is not a
full-time employee.
Determining Large Employer Status
To determine whether an employer is a large employer, you add the
number of full-time employees and the number of full-time
equivalent employees for each calendar month of the prior year and
divide the total by 12 to determine the average. If this number is
50 or higher (100 or higher for purposes of 2015 only), the
employer is a "large employer" for the current year and
is subject to the Employer Mandate, unless an exception applies as
discussed below. Remember that for members of a controlled group,
this calculation includes employees of all related employers under
common control.
In determining large employer status for 2015, a transition rule
applies. Under the rule, an employer may use a period of not less
than six consecutive calendar months in 2014 to determine its
status as a large employer for 2015 (rather than using the entire
2014 calendar year). This allows an employer to determine by as
early as mid-2014 whether it is subject to the Employer Mandate for
2015 and, if so, to have sufficient time to assess its response
prior to open enrollment for 2015.
Example of calculation for determining large employer
status for years after 2015: Assume that for each of
the first six calendar months of a year, Company C has 32 full-time
employees and 30 non-full-time employees (whose hours equate to 15
full-time equivalent employees). Company C's business increases
during the last half of that year, and all the persons who were
non-full-time employees during the first half of the year work
enough hours to be full-time employees for each of the last six
calendar months. In other words, Company C has 62 full-time
employees for the last six months of 2015. To determine whether
Company C is a large employer for the next year, add the number of
full-time and full-time equivalent employees it has for each month
of the year and then divide the total by 12, illustrated as
follows:
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Annual Total |
|
Full-time | 32 | 32 | 32 | 32 | 32 | 32 | 62 | 62 | 62 | 62 | 62 | 62 | |
Full-time equivalent | 15 | 15 | 15 | 15 | 15 | 15 | 0 | 0 | 0 | 0 | 0 | 0 | |
Total | 47 | 47 | 47 | 47 | 47 | 47 | 62 | 62 | 62 | 62 | 62 | 62 | 654 |
654 divided by 12 equals 54.5, which is rounded down to the next
lowest whole number. Thus, Company C has an average of 54 full-time
or full-time equivalent employees for the year. Because this number
is at least 50, Company C is treated as a large employer for the
following year.
Example of calculation for determining large employer
status for 2015: Assume that for each of the first
six calendar months of 2014, Company B has 32 full-time employees
and 30 non-full-time employees (whose hours equate to 15 full-time
equivalent employees). Company B's business increases during
the last half of that year, and all the persons who were
non-full-time employees during the first half of the year work
enough hours to be full-time employees for each of the last six
calendar months. In addition, Company B hires an additional 40
employees for each of the last six calendar months of 2014. Thus,
Company B has 102 full-time employees for the last six months of
2015. Under the special transition rule, to determine whether
Company B is a large employer for 2015, you only need to use the
number of full-time and full-time equivalent employees it has for
six consecutive months of 2014, add these amounts together and then
divide by 6, illustrated as follows:
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Annual Total |
|
Full-time | 32 | 32 | 32 | 32 | 32 | 32 | 102 | 102 | 102 | 102 | 102 | 102 | |
Full-time equivalent | 15 | 15 | 15 | 15 | 15 | 15 | 0 | 0 | 0 | 0 | 0 | 0 | |
Total | 47 | 47 | 47 | 47 | 47 | 47 | 102 | 102 | 102 | 102 | 102 | 102 | 894 |
Because Company B had fewer full-time and full-time equivalent
employees in the first six months of 2014, it is more advantageous
to use those six months in determining whether Company B is a large
employer for 2015. Any six consecutive months in 2014 may be used
under the special transition rule. The total for the first six
months is 282 (47 for each of six months) and 282 divided by 6
equals 47. Thus, Company B has an average of 47 full-time or
full-time equivalent employees for the year. Because this number is
less than 100, Company B is treated as not being a large employer
for 2015 and is not subject to the Employer Mandate. However,
because large employer status must be determined every year, if
Company B continues to employ 102 full-time employees throughout
2015, or even a lesser number that is 50 or higher, Company B will
be a large employer and subject to the Employer Mandate in
2016.
Seasonal Worker Exception
Seasonal workers generally are included in the count of full-time
and full-time equivalent employees. However, a special rule applies
to employers that exceed the 50 full-time equivalent employee
threshold for only part of a year, solely because of a seasonal
workforce. If the employer has more than 50 full-time and full-time
equivalent employees for periods totaling 120 days or less (or
totaling four months or less) during a calendar year, and the
full-time and full-time equivalent employees in excess of 50 during
that period or periods were seasonal workers, the employer is not
subject to the Employer Mandate during the following calendar year.
Seasonal workers include individuals employed to do work that is
exclusively performed at certain seasons of the year, for example,
seasonal agricultural workers and retail workers employed only
during holiday seasons. Thus, for example, a summer resort that has
a large work force of full-time employees for a 100-day vacation
season and a small staff that stays year-round would not be a large
employer even if the summer increase caused the average number of
full-time employees for the year to be over 50. Until further
guidance is issued, employers are permitted to make a reasonable,
good-faith determination of who is a seasonal worker.
New Employers and Successor Employers
An employer that did not previously exist is a large employer for
the current calendar year if it reasonably expects to employ an
average of at least 50 full-time and full-time equivalent employees
on business days during the current calendar year (100 for purposes
of 2015 only). An employer that is a "successor employer"
must take into account any predecessor employers for purposes of
determining large employer status.
Foreign Employers and Foreign Employees
An employee's hours worked outside of the U.S. for which the
employee does not receive U.S. source income are disregarded, both
for purposes of determining large employer status and for purposes
of determining whether the worker is a full-time employee. Thus,
for example, a U.S. entity that is a member of a multinational
controlled group may, for purposes of determining whether it is a
large employer, exclude individuals who do not work in the U.S. at
all, even if they are U.S. citizens.
Planning Consideration
Employers that are part of a controlled group have a planning
opportunity because the Employer Mandate penalty applies separately
to each related employer in the controlled group. To illustrate,
assume there are three companies in a controlled group that
together have more than 50 full-time employees and full-time
equivalents, so all three companies are subject to the Employer
Mandate. Two of the companies offer coverage to their employees and
the third does not. The Employer Mandate penalty applies only to
the third company and is computed only with respect to the third
company's employees. Because the penalty applies separately to
each related employer, a controlled group can substantially reduce
the aggregate amount of the "no coverage" penalty, in
particular, if it is able to assign employees who are offered
coverage to work under the direction and control of different
subsidiaries from those that do not offer coverage. In considering
this option, however, it is important for employers to be aware
that there are nondiscrimination rules (and penalties) related to
providing health coverage, which apply on a controlled group basis.
The nondiscrimination rules for self-insured plans are already in
force through long-standing regulations. The rules for fully
insured plans have not yet been issued. Additional
nondiscrimination rules apply if employee contributions are paid
through a cafeteria plan. Therefore, employers will want to
evaluate implications under the nondiscrimination provisions before
engaging in any restructuring designed to limit Employer Mandate
penalties.
Q&A 5: Who Must Be Offered Coverage?
Under the Employer Mandate, large employers are required to
offer health coverage to full-time employees and certain of their
dependents. This Q&A describes who falls into the categories of
"full-time employees" and "dependents" who must
be offered coverage, as well as a provision that allows employers
to avoid the "no coverage" penalty if coverage is offered
to "substantially all" full-time employees.
Under the Employer Mandate, the term "employee" means a
common law employee. As described in more detail in Q&A 4,
an individual who provides services to an employer is a common law
employee if the employer has the authority to direct and control
the manner in which services will be performed by the
employee.
Dangers of Worker Misclassification
In the context of employment taxes, employers may be afforded
relief from liability under section 530 of the Revenue Act of 1978
for misclassifying an individual as an independent contractor,
unless the employer had no reasonable basis for not treating the
individual as an employee. The preamble to the final Employer
Mandate regulations, however, makes clear that similar relief is
NOT available with respect to worker misclassification in the
context of liability for the Employer Mandate penalty. Thus, if
workers were treated as independent contractors (or employees of
another entity, like a leasing organization) and not offered health
coverage by an employer, are later reclassified as employees of the
employer for past periods, and those workers had sufficient hours
of service to be full-time employees for such past periods, the
reclassification may impact whether the employer is subject to an
assessable penalty for the failure to offer coverage to
substantially all of its full-time employees for a particular
calendar month. In addition, even if the reclassification does not
result in the employer failing to cover substantially all of its
full-time employees, the employer could still be liable for an
assessable payment for a particular employee if that reclassified
full-time employee received an Exchange subsidy.
Definition of "Full-Time Employee"
For purposes of the Employer Mandate, a "full-time
employee" is a common law employee who is credited with an
average of at least 30 "hours of service" per week for an
employer (including all related employers in a controlled group).
Employers may elect to treat 130 hours of service in a calendar
month as equivalent to 30 hours of service per week. In addition,
as discussed in Q&A 6, if the monthly method is used to
determine who is a full-time employee, a special weekly equivalency
may be applied in order to align the determination with standard
pay periods. Note that this threshold for full-time status is
different from, for example, the 40-hour threshold for overtime
eligibility under the Fair Labor Standards Act.
An employee's "hours of service" include all hours
for which the employee is paid or entitled to payment from an
employer (including all related employers in a controlled group)
for performing services or for holidays, vacation, sick leave, jury
duty, layoff, military duty, or other leave of absence. However,
hours of service performed outside the U.S. are not taken into
account, except in the rare case when the compensation for those
services is considered U.S. source income for tax purposes. Special
rules are provided for determining hours of service for adjunct
faculty to take into account preparation for class as well as for
airline employees and others who have special scheduling
requirements to account for such things as layovers.
Note that an individual who has more than one role (for example, an
employee director) may constitute an employee to the extent, and
for the number of hours, that the individual serves as an employee.
In this case, an employer will need to calculate how many of the
individual's hours of service constitute "employee"
hours when determining whether the individual is a "full-time
employee" entitled to coverage.
Coverage for "Substantially All" Full-Time
Employees
The statutory language of the Employer Mandate applies a penalty if
an employer fails to offer coverage to "its employees."
To avoid the harsh result that would come from reading the language
to require the employer to cover all of its employees, the
regulations treat an employer as having offered coverage to its
full-time employees during any month if it offers coverage to all
but the greater of five full-time employees or five percent of its
full-time employees. This rule applies whether the failure to offer
coverage is intentional or unintentional. However, this rule does
not shield the employer from the penalty for offering inadequate
coverage if any of the full-time employees, including those who are
not offered coverage at all, receive an Exchange subsidy (a premium
tax credit or cost-sharing reduction) for purchasing coverage
through an Exchange. For the 2015 plan year only, the final
regulations provide transition relief under which an employer will
be treated as offering coverage to its employees if the employer
offers coverage to at least 70 percent of its full-time
employees.
Planning Consideration
The news media have highlighted stories about employers
considering limiting employee hours to less than 30 per week to
keep their employees from being treated as full-time for purposes
of the Employer Mandate. Based on current guidance, this may be a
viable option for reducing the potential Employer Mandate
liability. Of course, employers will need to consider whether this
is a realistic strategy from a business perspective. In addition,
employers should be aware that certain nondiscrimination laws may
impact whether and how employee hours can be limited. First, ERISA
section 510 (29 U.S.C. § 1140) prohibits "discrimination
against a participant ... for the purpose of interfering with the
attainment of any right to which such participant may become
entitled under the plan...." At present, there is no
regulatory guidance on how this section may apply to employer
actions to limit employee hours when they would cause the affected
employees to lose eligibility to participate in the employer's
group health plan. Second, under current nondiscrimination rules
for self-insured health plans, employees who work at least 25 hours
per week may need to be taken into account in determining whether
the health coverage improperly discriminates in favor of highly
compensated individuals. Therefore, in making decisions about
limiting hours or limiting coverage to employees with certain
hours, employers should consider the impact of applicable
nondiscrimination rules.
Estimation of Hours for Salaried Employees
In general, an employer must calculate an employee's hours of
service based on the actual number of hours for which the employee
is paid or entitled to pay. However, in the case of salaried
employees (where hours typically are not tracked), employers can
estimate an employee's hours of service using one of two
methods: the "days-worked method" and the
"weeks-worked method."
Under the days-worked method, each salaried employee is treated as
having eight hours of service for each day on which the employee
has at least one actual hour of service. Under the weeks-worked
method, each salaried employee is treated as having 40 hours of
service for each week during which the employee has at least one
actual hour of service.
An employer may apply a different estimation method to different
categories of salaried employees, as long as the categories used
are reasonable and applied consistently. However, an estimation
method may be used only if it generally reflects the employee's
actual hours of service. For example, if an employee generally
works three 10-hour days per week (30 hours of service per week),
the days-worked method could not be used because it would
understate the employee's hours of service by crediting the
employee with only 24 hours of service (3 days x 8 hours of
service). This would cause the employee to be treated as a
part-time employee rather than a full-time employee. In addition,
the estimation method may not be used if the result is to
understate the hours of service of a substantial number of
employees (even if no particular employee's hours of service
are substantially understated).
Nonresident Alien Employees
Employers with a global presence need not offer coverage to
employees who work abroad and have no U.S. source income.
Generally, income is not considered to be from a U.S. source if the
services to which it relates are performed outside of the U.S.
Accordingly, large employers generally do not need to offer
coverage to nonresident aliens and U.S. citizens working in another
country.
Resident aliens who are paid for services performed in the U.S.,
however, do receive U.S. source income. Further, such individuals
are eligible for a premium tax credit if their household income is
at or below 400 percent of the poverty line and they are not
eligible for coverage provided by their home country. Therefore,
resident alien employees who work in the U.S. may have to be
considered when determining whether an employer owes an Employer
Mandate penalty.
Definition of "Dependent"
The Employer Mandate requires large employers to offer coverage not
only to full-time employees, but also to their
"dependents." Significantly, the regulations exclude
spouses from the definition of dependent; thus, employers need not
offer coverage to the spouses of employees in order to avoid a
penalty.
The definition of "dependent" instead includes only an
employee's children who are below the age of 26. A child
includes a natural child, an adopted child, and a child placed with
the employee for adoption. The term does not include a stepchild or
a foster child. In addition, it does not include a child who is not
a citizen or national of the U.S. unless such child is a legal
resident of the U.S., Canada or Mexico or a tax dependent due to
being placed for adoption.
Large employers that currently offer coverage to their employees,
but not to all individuals who meet this definition of
"child," will need to expand the eligibility provisions
of their plans in order to avoid a penalty. Recognizing the
magnitude of this change for employers, the IRS has issued
transition relief to the effect that such employers will not incur
a penalty for the 2015 plan year due solely to the failure to cover
dependents, provided that they "take steps" during the
2015 plan year to comply with the requirement to offer coverage to
dependents, and dependent coverage is offered no later than the
beginning of the 2016 plan year. This relief is not available to
the extent the employer offered dependent coverage during either
the 2013 or 2014 plan years.
Delinquent Premium Payments
The final regulations provide that an employer will be deemed to
have offered coverage (and not be subject to a penalty) if an
employee was initially enrolled for the year but then terminated
due to the employee's failure to timely pay premiums. The
employer will be deemed to have offered coverage for the remainder
of the "coverage period," which generally is the
remainder of the plan year. Thereafter, the employer will again
have to offer coverage to the employee. The final regulations
incorporate the COBRA rules governing the timeframes for payment of
premiums to determine when this rule applies.
Planning Consideration
To comply with the Employer Mandate and avoid a penalty, a
large employer must offer coverage to full-time employees and their
dependents. "Dependent" is defined as a child of an
employee who is under age 26, meaning an employee's natural or
adopted child. Spouses, however, are not included in the definition
of dependent. Due to the increasing cost of coverage, some
employers are revising eligibility rules to limit spousal coverage
to those spouses who are not eligible for coverage through their
own employer. Because employees are likely to prefer having all
family members enrolled in the same coverage when possible, if many
employers in a geographic area have this restriction on spousal
coverage, the employers who do not may find more spouses enrolling,
and more dependents as well. Employers should consider whether
changes to their own eligibility rules are warranted.
Q&A 6: What Are the Methods for Determining "Full-Time" Status?
As discussed in Q&A 5, for purposes of the Employer Mandate,
a "full-time" employee is an employee who is credited
with on average at least 30 hours of service per week, or 130 hours
of service in a calendar month. The final regulations provide two
methods that employers may use to determine who is a
"full-time" employee: (i) the monthly method and
(ii) the look-back method.
Different Methods for Different Categories of
Employees
An employer does not have to use the same measurement method for
all employees. It may use either the monthly method or the
look-back method for different categories of employees as long as
those different categories are based on the following parameters:
(i) collectively bargained and non-collectively bargained
employees, (ii) each group of collectively bargained employees
covered by a separate bargaining agreement, (iii) salaried and
hourly employees, and (iv) employees employed in different
states. Likewise, each related employer in a controlled group does
not have to use the same method that is used by other members of
its controlled group. (See Q&A 4 for a brief overview of the
controlled group rules.) The employer, however, is not free to
develop its own customized categories of employees. In particular,
the preamble to the final regulations makes clear that the employer
may not adopt the look-back method for variable-hour and seasonal
employees while using the monthly method for employees with
predictable hours of service.
The Monthly Method
Employers may identify full-time employees by counting their hours
of service each month, either based on the calendar month or in
connection with their payroll period under the weekly rule.
Weekly Rule. As an alternative to counting
employees' hours each calendar month, the final regulations
allow employers to align the recordkeeping requirements for the
monthly method with the employer's payroll periods. Under the
weekly rule, an employer can determine an employee's status for
a calendar month based on hours of service over successive one-week
periods (i.e., any consecutive seven-day period). The determination
of an employee's full-time status may be based on hours
credited over four-week periods for some calendar months and
five-week periods for the remaining calendar months. An employee is
treated as full-time if he or she is credited with at least 120
hours of service in a four-week period or at least 150 hours of
service in a five-week period.
Even if an employer chooses to determine an employee's status
as full-time or non-full-time based on weekly periods, the employer
must offer the employee coverage for the entire calendar month to
avoid the Employer Mandate penalties.
Rehires and Breaks in Service. An employee who
resumes active employment after at least 13 consecutive weeks
(26 consecutive weeks if the employer is an educational
organization) during which he or she is not credited with any hours
of service may be treated as a new hire for purposes of determining
the employee's full-time status. An employer also may treat an
employee as a new hire if he or she has no hours of service for a
period that continues for at least four consecutive weeks and is
greater than the number of weeks of the employee's prior
employment (known as the "rule of parity"). Special rules
apply for employees on international assignments. This rule can be
useful in reducing the penalty amount because new hires are not
included in calculating the Employer Mandate penalty (a) for the
first three calendar months of employment if they are offered
coverage at the end of such period, and (b) for the month that
includes their start date if they start after the first of the
month.
Planning Consideration
The monthly method allows an employer to identify a full-time
employee after the calendar month has ended; it cannot be used to
determine whether an employee should be treated as full-time in
future months for purposes of avoiding a penalty. Consequently,
this method may not be helpful in determining whether coverage
should be offered if an employee's hours of service may vary
from month to month (including due to unpaid leaves of
absence).
However, while the monthly method does not allow an employer to
determine in advance whether an employee should be treated as
full-time, an employer who has already decided whether to offer
health coverage to certain groups of employees may prefer the
monthly method to avoid the more burdensome recordkeeping
requirements and complex software implementation that would likely
be required to document compliance with the look-back method
described below.
The Look-Back Method
The look-back method allows an employer to determine in advance
whether an employee will be considered "full-time" for a
later fixed period of time, regardless of the hours actually worked
in that later period. In other words, this method allows employers
to predict an employee's "full-time" status for
periods of time, allowing them to know whether they must offer
coverage or anticipate a penalty for that period. The determination
is made by looking at hours of service during a "measurement
period" and applying the result to a later "stability
period."
This method is valuable where an employee's schedule may not be
predictable. For example, an employer would not need to use the
look-back method for an employee who always works 35 hours per
week, because that employee meets the Employer Mandate's
definition of "full-time" employee without the need for
further analysis. However, if an employee's hours vary from
week to week, or if the employee works only a few months each year,
then an employer may choose to use the look-back method so that the
employer can know whether the employee is treated as full-time in
deciding who should be offered coverage. There are different rules
for applying the look-back method to ongoing employees and to new
employees. Due to the administrative burden involved in using the
look-back method, it will be of primary interest to large employers
that have a lot of variable-hour, part-time or seasonal employees
and either (i) want to offer coverage only to full-time
employees or (ii) do not offer coverage and want to limit the
amount of their Employer Mandate penalty. It is important to note,
that the look-back method, if chosen, cannot be applied just to
seasonal, variable-hour, or part-time employees, but must be
applied for all employees in a particular permitted category, as
discussed above.
Rule for Ongoing Employees Under the Look-Back
Method. Under the rule for ongoing employees, an employer
looks back to hours of service during a "standard measurement
period" of three to 12 months (the length of which is selected
by the employer) to determine an ongoing employee's status as a
full-time or non-full-time employee. For administrative ease, the
beginning and ending dates of a standard measurement period may be
coordinated with an employer's weekly, biweekly, or
semi-monthly payroll periods. For example, a measurement period
could begin the day after the last day of the payroll period that
includes January 1 of a year and end on the last day of the
payroll period that includes December 31 of that year.
An employee's status (as full-time or non-full-time),
determined based on hours of service during the standard
measurement period, remains in effect for a "stability
period." The stability period, also selected by the employer,
must be at least six consecutive calendar months and at least as
long as the related measurement period (but no longer than the
related measurement period if the employee is determined to be
non-full-time). The employee will retain the same full-time or
non-full-time status throughout the stability period, even if the
employee's actual hours of service during the stability period
would produce the other status. If an employee who is treated as
full-time terminates employment during the stability period, the
employer is not required to continue to offer the employee
coverage, except as required by COBRA or similar state law.
However, there are special rules that apply to terminated employees
who are rehired, which are discussed later in this Q&A.
An employer can choose to have an "administrative period"
of not more than 90 days. The administrative period gives the
employer time to determine which employees are eligible for
coverage based on the standard measurement period and to complete
any required employee notifications and enrollments prior to the
beginning of the stability period. The three periods must
(measurement, stability, and administration) overlap in a way that
ensures that employees who are consistently treated as full-time
employees do not have a break in coverage.
To view the full article please click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.