The Affordable Care Act includes an employer mandate and penalties for employers that do not satisfy the mandate. While the employer mandate may not come as a surprise, the following four aspects of the Affordable Care Act are not commonly known and could be pitfalls for the unprepared employer.
Both Large and Small Employer Are Subject to the Section 4980D Affordable Care Act Penalties
Code Section 4980D imposes a $100.00 per day per employee excise tax on employers for failure to meet certain group health plan requirements. Most employers and their advisors paid little attention to this portion of the law until the Department of Labor issued an FAQ stating that employers reimbursing employees for their purchase of individual policies could trigger the excise tax in section 4980D. This was followed by IRS Notice 2013-54 adopting the DOL’s interpretation and further stating that the plan would be a discriminatory plan under section 4980D even when the reimbursement was included in the employees’ taxable income.
Earlier this year, the IRS issued Notice 2015-17 reiterating that reimbursing employees for the cost of individual health insurance plans may subject employers to the excise tax under section 4980D. However, in the same guidance, the IRS provided temporary relief for small employers. The excise tax will not be asserted against employers for 2014 if they were not an applicable large employer in 2014, and it will not be asserted against employers for January 1 through June 30, 2015 for employers that are not applicable large employers for 2015. After June 30, 2015, the section 4980D excise tax may be applicable to any employer that reimburses employees for purchasing individual health insurance.
Part-Time Employees Matter for Purposes of Applicable Large Employer Status
Much has been said and written in general news outlets about large retailers limiting employees to thirty-hour workweeks to avoid ACA penalties. While limiting employees to thirty hours of service per week may allow applicable large employees to avoid penalties under Section 4980H, part-time employees can negatively impact employers near the threshold for applicable large employer status. An applicable large employer is defined in section 4980H as an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) during the preceding calendar year. The average is determined by taking the sum of full-time and full-time-equivalent employees during each calendar month of the preceding year and dividing by 12. Each full-time employee counts as one employee no matter how many hours of service credited to the employee during the month. All hours of service credited to part-time employees during the month (up to 120 per part-time employee) are summed and divided by 120 to determine the number of full-time equivalent employees during the month. Thus, 360 hours of service in a month performed equally by two full-time employees will result in two employees towards the 50-employee threshold. However, the same 360 hours of service performed equally by three part-time employees results in three employees towards the 50-employee threshold.
Applicable Large Employers May Be Subject to Affordable Care Act Penalties Even if They Offer Employees the Opportunity to Enroll in Group Health Insurance.
Employers may mistakenly believe that offering employees the opportunity to enroll in health insurance satisfies the requirements of the Affordable Care Act; however, this is not true. To avoid penalties, applicable large employers must offer at least 95% of their full-time employees, and their dependents, the opportunity to enroll in minimum essential coverage that provides minimum value and is affordable. Compliance is determined monthly and a full-time employee is defined as any employee that averages 30 hours of service per week during the month. Generally, any small or large group health plan qualifies as minimum essential coverage. Health insurance coverage provides minimum value if the plan’s share of the allowable costs of benefits is at least 60% of such costs. And, the health insurance coverage is affordable if the employee’s required contribution for the lowest cost self-only coverage does not exceed 9.5% of the employee’s household income.
Transitional Relief is Available for Employers Subject to the Affordable Care Act Requirements for 2015
In the preamble to the final regulations under section 4980H, the IRS provided transitional relief for employers for 2015. The following transitional relief is provided for all employers for 2015: (1) applicable large employer status can be determined by reference to any six consecutive calendar months in 2014 rather than the full year required by the statute, (2) an employer can offer coverage to 70% of full-time employees rather than the 95% required by statute, and (3) the first 80 employees are excluded from penalties under section 4980H(a) rather than the 30 provided by the statute. The preamble also provided penalty relief for mid-size employers for 2015. For an employer with fewer than 100 employees, penalties under section 4980 will not be imposed on the employer for any calendar month during 2015 if (a) the employer’s workforce size is 50 to 100 employees, (b) the employer did not reduce its workforce size (other than for a bona fide business reason) after the transitional relief was announced, (c) the employer continued to maintain its previously offered health coverage after the transitional relief was announced, and (d) the employer certifies eligibility on a prescribed form.
With knowledge of the above potential pitfalls, you can spot potential issues. However, identification of one of the above issues may not be fatal; the code, regulations and other IRS guidance provide an number of safe harbors and exceptions that employers may utilize to minimize the exposure to employers penalties under the Affordable Care Act.