Employer Mandate Countdown 10…9…8
By Philip Dickey, MPH, PHR | July 15, 2014
The Affordable Care Act (ACA) states that large employers and the federal government have a shared responsibility to offer health benefits to employees. Determining if you are a large employer is the first step in understanding your responsibilities under the law. Overall, this continues to be a year of strategy for employers.
In the final regulations issued in February 2014, the Internal Revenue Service (IRS) provided various types of transitional relief to applicable large employers. Beginning in 2015, those employers with 100 or more full-time or full-time equivalent employees who do not offer affordable health insurance that provides minimum value to their full-time employees (and dependents) may be required to pay an assessment if at least one of their full-time employees is certified to receive a Premium Tax Credit in the individual Health Insurance Marketplace. Employers with 50-99 full-time employees (and FTEs) will have until 2016 before becoming subject to the employer mandate and related penalty provisions under ACA. In order to qualify for this extension, these employers will need to certify eligibility for this relief and must meet other requirements, including not reducing the employer’s workforce to qualify for the delay and maintaining previously offered coverage. However, unless there is a further delay, the preparation work in determining minimum essential coverage, affordable coverage of minimum value, large employer status, who must be offered coverage, potential penalties, and IRS reporting, etc., should already be underway.
WHAT IS MINIMUM ESSENTIAL COVERAGE?
Large employers must offer full-time employees (and their dependents) an opportunity to enroll in minimum essential coverage under an employer-sponsored plan. There are two tests that apply:
- Affordability, which evaluates an employee’s ability to pay for the plan
- Minimum value, which evaluates the comprehensiveness of the plan
Coverage Must Be Affordable
Generally, coverage offered to an employee is considered affordable if the employee’s contribution for self-only coverage does not exceed 9.5 percent of the employee’s household income for the taxable year. Because employers do not know their employees’ household incomes, the rules provide for three affordability safe harbors.
Under Form W-2 Safe Harbor, the employee contribution toward self-only coverage for the employer’s lowest cost coverage providing minimum value cannot exceed 9.5 percent of the employee’s Form W-2 Box 1 wages for that calendar year. If this condition is satisfied, the employer will not be assessed a penalty.
Under the Rate of Pay Safe Harbor, a large employer satisfies the safe harbor with respect to an hourly employee for a calendar month if the employee’s contribution for the lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of an amount equal to 130 hours multiplied by the lower of the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) or the employee’s lowest hourly rate of pay during the calendar month.
A large employer satisfies the rate of pay safe harbor with respect to a non-hourly employee if the employee’s contribution for the calendar month for lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of the employee’s monthly salary as of the first day of the coverage period.
Lastly, under the Federal Poverty Line Safe Harbor, a large employer satisfies the safe harbor if the employee’s required contribution for the lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of the federal poverty line for a single individual for the applicable calendar year, divided by 12. The applicable federal poverty line is the federal poverty line for the state in which the employee is employed. Moreover, rather than requiring that the applicable poverty level be determined as of the first day of the plan year, the final rules allow the level to be determined as of any date during the six months preceding the plan year. This will give employers time to calculate the monthly premium cap needed to fall within this safe harbor.
Coverage Must Provide Minimum Value
A health plan is deemed to provide minimum value if the percentage of the total allowed cost of benefits provided under the plan is no less than 60%. Employers may choose one of two methods to determine minimum value:
- Use the MV calculator made available by the Department of Health & Human Services (HHS), or
- Use any safe harbor (a design-based checklist) established by HHS and IRS.
- Obtain Certification by a member of the American Academy of Actuaries.
ARE YOU A LARGE EMPLOYER?
The mandate applies to “large employers,” which are defined as employers with 50 or more full-time and full-time equivalent (FTE) employees.
When determining the number of employees, only common-law employees are counted. Typically, a common-law employee is an employee subject to the will and control of the employer, not only as to what must be done, but also how it must be done. Sole proprietors, partners in a partnership, and more-than-2% S corporation shareholders are not considered employees.
A full-time employee is an employee who is employed on average 30 or more hours per week. For purposes of determining who is a full-time employee, employers may use 130 hours of service in a calendar month or 30 hours per week.
The calculation for “large employer” also takes full-time equivalent (FTE) employees into account. In order to determine the number of FTEs for each month during the previous calendar year, the employer must look at all employees who were not full-time employees during each month. The number of FTE employees for a given month is then determined by:
- Calculating the aggregate number of hours of service (but no more than 120 hours of service for any employee) for all non-full-time employees for that month. For example, disregard hours above 120 for any employee who may have worked overtime. Again, this must be done for every month in the prior calendar year. In addition, the government has indicated that service hours rather than work hours must be used for this calculation. Therefore, if an employer pays a part-time employee vacation time, those hours of service would count toward the calculation, and
- Dividing the total hours of service calculated above by 120.
The resulting number, which may be rounded off to the nearest hundredth, is the number of FTE employees for that calendar month.
Then, to determine large employer status, the employer adds the number of full-time and FTE employees together for each month in the preceding calendar year as described above and divides that number by 12. For this calculation, fractions are taken into account when determining the number of FTE employees for each month; however, after adding together the 12-month full-time and FTE employee totals, any resulting fraction is rounded down. If the monthly average exceeds 50 full-time and FTE employees, the employer is considered a large employer.
For the 2015 calendar year, employers are allowed to determine their status as a large employer by using any period of at least 6 consecutive calendar months, as chosen by the employer, during the 2014 calendar year. Thereafter, employers must make the determination based on the entire preceding calendar year.
WHO MUST BE OFFERED COVERAGE?
Large employers that are subject to the mandate in 2015 (generally employers with 100 or more full-time and FTE employees) will be required to offer minimum essential coverage to 70% of their full-time employees and their dependent children. Thereafter, in 2016, all large employers must offer minimum essential coverage to 95% of their full-time employees and their dependent children.
Hours of Service to Determine Full-time Status
Once an employer determines that it is a large employer, it must identify its full-time employees for purposes of who should be offered insurance coverage. An employer identifies its full-time employees based on each employee’s hours of service (at least 30 hours per week or 130 hours per month). Do not confuse this full-time calculation to determine who must be offered coverage with the prior full-time calculation to determine large employer status. They are two separate calculations.
Generally, “hours of service” include any hour for which an employee is paid or is entitled to payment. This includes periods for which no actual services are performed, such as vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
Hours of service for non-hourly employees can be calculated under any of the following three methods:
- Actual hours – counting hours worked and hours for which payment is due, even if duties are not performed (i.e., paid time off for vacation, holiday, illness, or other leave of absence; or
- Days-worked equivalent – crediting employees with eight hours of service for any day during which the employee would be due one hour of service for an actual hour worked or for which payment is due (e.g., if the employee worked for one hour on Monday, the employee would be credited with eight hours of service for Monday); or
- Weeks-worked equivalent – crediting employees with 40 hours of service for each week the employee is credited with at least one hour of service or for which payment is due (e.g., if the employee worked for one hour on Monday, the employee would be credited with forty hours of service for that week).
- An employer may not use the days-worked or weeks-worked equivalent method if doing so would result in a substantial understatement of an employee’s hours, causing the employee not to be considered full-time, or understate the service hours of a substantial number of employees.
Timeframe to Determine Full-time Status
For the purpose of determining whether employees are considered full-time employees (and should be offered coverage), employers are permitted to use either the “monthly measurement method” or the “look-back measurement method.”
Under the Monthly Measurement Method, a large employer will determine each employee’s status by counting that employee’s hours for each calendar month. If an employee has 130 or more hours of service in a given month, then that employee is considered a full-time employee.
Under the Look-Back Measurement Method, an employer may determine the status of an employee as a full-time employee for a future period (referred to as a stability period) based upon the hours of service of the employee in a prior period (referred to as a measurement period).
A measurement period allows employers an opportunity to look back at the hours worked by an employee to determine health plan eligibility. If an employee is determined to have averaged at least 30 hours per week during a measurement period, that employee must be treated as a full-time employee for the following stability period so long as he or she remains employed and pays premiums, regardless of the number of hours worked. If an employee is determined not to average at least 30 hours per week during a measurement period, the employer may treat the employee as a non-full-time employee for the following stability period, unless the employee has a change in employment status that would otherwise make the employee eligible for coverage.
A measurement period may be from three months to twelve months in length. The measurement period may be followed by an administrative period of no more than 90 days in length. The administrative period is an optional period that can be used by the employer to perform administrative duties related to counting hours and, where applicable, making an offer of coverage. The stability period follows the measurement period (and administrative period, if applicable).
Additional Transition Relief for Non-Calendar Year Plans
The analysis of the non-calendar year transition rule for 2015 is as follows:
The mandate applies in 2015 if the employer has 100 or more full-time employees and full-time equivalents as determined during 2014.
To avoid a January 1, 2015 compliance date, the employer has to meet the terms of the new transition rule for non-calendar plans. It says:
- For employees offered coverage on a 2014 renewal date, there is no requirement to re-offer for January 1, 2015; you may wait until the 2015 renewal date.
- The employer’s non-calendar year plan must have been in effect prior to December 27, 2012. Non-calendar year plans created after December 27, 2012, cannot use this relief and must comply.
- For employees not offered coverage prior to January 1, 2015, the employer will have to offer employees coverage for January 1, 2015, unless (1) the non-calendar year plan was in place prior to December 27, 2012 (when proposed guidance was released), and (2) the employer can verify any one of four criteria:
- Employer offered coverage to at least 33% of total employees (full and part-time) at some point during the 12 months prior to February 9, 2014;
- Employer enrolled at least 25% of total employees (full and part-time) at last renewal prior to February 9, 2014 (2013 renewal);
- Employer offered coverage to at least 50% of full-time employees at some point during the 12 months prior to February 9, 2014; or
- Employer enrolled at least 33% of full-time employees at last renewal prior to February 9, 2014 (2013 renewal).
If any of the four criteria in are met, the effective date is the non-calendar 2015 renewal date for all full-time employees. If none of the four criteria is met, the employer will need to prepare to offer coverage as early as January 1, 2015, or face potential penalties.
PENALTIES UNDER HEALTHCARE REFORM
There are two types of penalties for failure to comply with the employer mandate. The first is for failing to offer minimum essential coverage. The second is for failing to offer coverage that is affordable and provides minimum value.
Failure to Offer Minimum Essential Coverage
Large employers that do not offer substantially all full-time employees minimum essential coverage (70% in 2015 and 95% in 2016) will be subject to a significant penalty if just one full-time employee is eligible for the premium tax credit and enrolls for health coverage through a Marketplace.
For employers that are subject to the mandate in 2015, the annualized penalty for failing to offer minimum essential coverage will be equal to the number of full-time employees minus 80, multiplied by $2,000. Starting in 2016, all large employers will be subject to a penalty for failing to offer minimum essential coverage equal to the number of full-time employees, minus 30, multiplied by the inflation-adjusted penalty. Note that the $2000 penalty is an annualized penalty. The penalty is assessed on a monthly basis. It has become known as the “sledge hammer tax.”
Offering Coverage that is Unaffordable or Fails to Provide Minimum Value
If the employer-sponsored minimum essential coverage offered to the employee is considered unaffordable to the employee and/or the coverage does not meet the minimum value requirement, a penalty may apply.
The annualized penalty for each employee certified for coverage through a Marketplace is $3,000 for 2015. As with the penalty for failing to offer coverage, this penalty is applied on a monthly basis (1/12 of $3,000 equals a $250 penalty per month) and is multiplied by the number of months each employee is determined eligible for a premium tax credit (excluding the first three months of full-time employment). However, this penalty is capped and cannot be greater than the penalty that would have been assessed if the large employer did not offer coverage. It has become known as the tack-hammer tax.”
The Internal Revenue Service (IRS) released final rules implementing final regulations regarding employer reporting requirements under the mandate. The first reports must be filed by large employers with 100 or more full-time employees in early 2016 for the 2015 calendar year, and for large employers with 50-99 full-time employees the first reporting date will be early 2017 for the 2016 calendar year. Consequently, there is a lot of preparation required by affected employers. The reporting will take place on forms provided by the IRS. A return will be filed with the IRS for each affected employee, and a copy of the form (statement) will be provided to each of these employees for their use in completing their tax return. The IRS has not yet released the forms. Once the forms are released employers will have a better understanding of how the information must be reported.
These reporting requirements pertain to you if you are a plan sponsor of a self-insured health plan of any size, a large employer offering a group health plan, or have a multiemployer plan.
Minimum Essential Coverage Reporting – Form 6055
If your plan is fully insured by an insurance carrier, the health insurance carrier is generally responsible for filing the 6055 return. The report is needed by the government to administer the individual mandate. If any of your plans are self-insured then the employer is responsible for filing the 6055 return.
Large Employer Reporting – Form 6056
If you employ an average of at least 50 full-time employees, you are considered a large employer and must file a 6056 annual return with the IRS for every full-time employee (even those that are not offered or waive coverage). This manner of reporting is referred to as the “general reporting method.” It does not include full-time equivalents but on full-time employees working 30 or more hours in a week. The report is needed by the government to administer the employer mandate. Your return must show the following:
- Your company’s name and EIN, date and the calendar year for which the information is reported;
- The name and telephone number of your contact person;
- A certification as to whether you offered your full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under your plan by calendar month;
- The number of full-time employees for each calendar month during the calendar year, by calendar month;
- For each full-time employee, the months during the calendar year for which minimum essential coverage under the plan was available;
- For each full-time employee, the employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee under your plan, by calendar month; and
- The name, address, and taxpayer identification number (SSN) of each full-time employee during the calendar year and the months, if any, during which the employee was covered under your plan.
The return will also include indicator codes (rather than having you provide specific or detailed information) for you to report additional required information.
To streamline reporting for self-insured large employers who must report under both 6055 and 6056, a combined form will be provided.
A Simpler Way
If you offer coverage to all of your full-time employees, the final rule provides several simpler ways to satisfy the 6056 reporting requirement under certain circumstances.
- First, an employer need not report month-by-month details about any employee who receives a “qualifying offer” of coverage for all 12 months of the year. A qualifying offer is defined as an offer of coverage to the employee and his or her spouse and dependents that meets the ACA’s minimum value standard with a premium for self-only coverage not exceeding 9.5 percent of the federal single poverty level (for 2014, a premium of $1,109 or less). If only a portion of an employer’s workforce receives a qualifying offer, those full-time employees not receiving a qualifying offer must be reported under the general reporting method addressed above.
- A second alternative, for 2015 only, an employer providing qualifying offers to 95 percent or more of its full-time employees will have reduced reporting obligations for all employees, including any employees who do not receive a qualifying offer for all 12 months.
- Lastly, certain employers can avoid the obligations to both identify full-time employees and report monthly details about the health coverage offered to those employees. This simplified reporting approach is available to any employer that offers 98 percent of all employees (including part-time and temporary employees) the option to purchase coverage for themselves and their dependents (but not necessarily spouses) that meets the ACA’s minimum value and affordability standards.
Employers Must Provide Full-Time Employees with a Copy of the 6056 Return
You will have to provide a written statement to each full-time employee named in your 6056 return that includes the name, address and contact information of the entity that filed the return and the information in the return pertaining to that individual. You can either provide a copy of the return filed with the IRS or a substitute statement that includes the information that was included on the return.
The statement to your full-time employees must be furnished to them on or before January 31 of the year following the calendar year in which you provide them with minimum essential coverage.
You are permitted to mail it separately to the employee’s last known permanent address or, if no permanent address is known, to the employee’s temporary address. Alternately, it can be included in the same mailing as the Form W-2. If you wish to distribute the health care statements electronically, you must obtain specific consent for electronic receipt from each employee in advance.
The regulations do allow employers to transfer their responsibilities to report to a third party (TPA), but the employer is responsible for the report being complete and correct.
The form for filing the 6056 return may be made on IRS Form 1095-C for every full-time employee. The return will be filed with a single transmittal form, Form 1094-C. These forms will be created by the IRS and released once finalized.
The return must be filed with the IRS on or before February 28th of the year following the calendar year in which you provided minimum essential coverage regardless of your plan year. The return can be filed electronically. If filing electronically, you have an additional month until March 31st to file the 6056 return.
Larger employers with non-calendar year plans are not permitted an alternative report filing date.
The penalty for failing to file correct returns and statements will be $100 per return or statement, subject to a maximum of $1.5 million for the calendar year. Enforcement relief is available for incorrect and incomplete reporting for 2015 if the employer has made a good faith effort to comply.