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The final regulations address some questions posed by employers trying to figure out how to practically apply the ACA’s employer shared responsibility requirements.

Navigating health reform

IRS Publishes Final Rules on ACA Employer Responsibility Penalties

  • 4/18/2014

Nothing related to the Patient Protection and Affordable Care Act (ACA) is as simple as the media makes it out to be. This is also true for the final regulations published by the IRS regarding shared responsibility requirements.

The final regulations, while similar to the proposed rules, address questions posed by employers trying to figure out how to practically apply the ACA’s employer shared responsibility requirements. This ACA provision focuses on requiring “large” employers to either offer health insurance coverage to their full-time employees or pay a penalty if one or more of their staff enrolls in an exchange plan and receives subsidies to pay a portion of their premiums. These rules also include new examples of how the look-back measurement period will work in practice for determining which employees are to be treated as full-time.

The following questions and answers will address some of the broad issues addressed by the final rule published on February 9, 2014.

Will the large employer shared responsibility penalties apply to my business in 2015?

To answer this question, employers must first determine how many workers (full-time employees plus full-time equivalent employees (FTEs)) it has. Although Congress has been talking about changing this standard, the ACA still defines full-time employees as those working an average of 30 hours or more per week or 130 hours per month. FTEs are calculated by adding all of the hours for the remaining part-time employees in a month and dividing by 120. An employer is considered a large employer if, after adding full-time employees and FTEs together, it has 50 or more employees.

Typically, an employer will total the number of workers it has each month and calculate an average by looking at the prior 12-month period to determine its status. However, for 2015, the IRS rules permit an employer to select any consecutive six-month period in 2014 to determine its large employer status.

Employers with 100 or more workers will be required to offer insurance to full-time employees or be subject to a penalty beginning January 1, 2015.

Employers who have 50 – 99 workers will not need to comply with this section of the ACA until January 1, 2016, as long as they meet the following criteria:

  • They have not reduced their workforce by size or hours between February 9, 2014, and December 31, 2014, for non-business reasons; or
  • They have not made changes to their previously-offered employer-sponsored health insurance since February 9, 2014, that results in:
    • A reduction in the employer’s contribution toward premiums such that the employer no longer contributes at least 95 percent of what it contributed as of February 9, 2014, or the same or higher percentage of the premium cost as it was on February 9, 2014
    • A loss of minimum value
    • A narrowing of eligibility to cover fewer employees

These employers need to certify to the IRS that they met the required criteria, and certification will be submitted as part of the required information return on January 31, 2016.

Contrary to media reports, mid-sized employers who don’t meet these criteria will need to comply with the employer shared responsibility provisions of the ACA starting January 1, 2015. For example, if an employer of this size stopped offering employer-sponsored insurance after February 9, 2014, it would be subject to the penalties on January 1, 2015.

Employers who average 50 or more workers for 120 days or fewer (due to seasonal workers) can use the seasonal worker exception if they determine their large employer status by looking at a full calendar year.

Employers with fewer than 50 workers are not required to offer insurance to employees under the ACA but may be eligible for a small business health care tax credit.

How do I determine who is a full-time employee? What if the employee has variable hours or is a new hire?

The final IRS rules provide further clarification and examples about the two methods that employers may use to determine which of their employees are full-time and, therefore, must be offered affordable, minimum value health care coverage or be subject to a penalty.

The two methods are a monthly measurement period and the look-back measurement period. Those interested in using the look-back measurement period for the 2015 employer shared responsibility penalties will need to start their measurement period no later than July 1, 2014. (See below for more details.) The final rules provide examples for applying both of the measurement methods.

Is there transition relief if I want to use the look-back measurement period?

The IRS offers some transitional relief for employers using the look-back measurement period to determine an employee’s full-time status. Employers can use shortened “measurement and stability periods” by selecting a 6 – 12 consecutive month measurement. The measurement period cannot start after July 1, 2014, and cannot end earlier than 90 days prior to the employer’s 2015 plan year.

There is additional clarification on when employees must be treated as continuing employees versus new hires following an absence under the look-back measurement period only. In general, employees can be treated as new hires after 13 weeks with no hours of service. There is an exception to this application for educational organizations.

Do the final rules include transition relief for employer penalties in 2015?

Surprisingly, the final IRS rules provide transition relief that is more extensive than originally proposed.

  • Some non-calendar year plans are exempt from penalties until the start of the 2015 plan year. 
    If your employer-sponsored plan begins in any month but January, you have a non-calendar year plan. Employers who had non-calendar year plans as of December 27, 2012, and who haven’t changed their plan year to start on a later date since that time, will not be assessed penalties for months between January 2015 and the beginning of the plan year, if any of these circumstances apply:
    • They offer all eligible employees (based on the final rule plan terms) affordable, minimum value coverage by the first day of the employer’s 2015 plan year
    •  If the employer covered at least 25 percent of all part-time and full-time employees within the 12 months prior to February 9, 2014, or offered coverage to at least one-third of employees during the open enrollment period prior to February 9, 2014; or
    • If at least one-third of full-time employees were covered in 12 months prior to February 9, 2014, or offered coverage to 50 percent or more of full-time employees during open enrollment period prior to February 9, 2014.
  • Employers can avoid the $2,000 penalty per full-time employee as long as they offer coverage to at least 70 percent of their full-time employees for the 2015 plan year.
    This transition relief conceivably allows employers to phase in coverage between 2015 and 2016. For example, an employer could cover all employees who worked more than 35 hours per week and then add those who work between 30 to 35 hours per week in 2016. However, while employers who meet this 70 percent threshold avoid the penalty in plan year 2015, they could still be hit with the $3,000 penalty if any of the uncovered full-time workers buy an exchange plan with subsidies. In addition, employers can only count employees as covered if their dependent children under age 26 were also offered coverage.
  • Relief for dependent coverage expansion
    The IRS will not penalize employers who either don’t currently offer minimum essential coverage to dependents or only offer it to some dependents in 2013 or 2014, but are taking steps to add dependent coverage in 2014 or 2015. This only applies to those who did not previously offer dependent coverage.
  • Employers with more than 100 full-time employees and FTEs that do not offer coverage will get a $100,000 penalty relief in 2015.
    The ACA assesses a $2,000 annual penalty when an employer fails to offer minimum essential and minimum value coverage to its full-time employees. This penalty is not assessed on the first 30 full-time employees. Employers who have 100 or more employees and do not offer coverage to at least 70 percent of their full-time employees and dependents will not be assessed this penalty on the first 80 full-time employees in 2015 — this reduces the employer’s total penalty by $100,000. In 2016, the penalties will apply to all full-time employees after the first 30.

There are several other circumstances where no penalties will apply in 2015. In the first year that an employer is considered a large employer, it has until April 1 of that year to offer affordable, minimum value coverage to previously uncovered full-time employees to avoid the $3,000 penalty for the first three months. If the employer fails to offer any coverage by April 1, the annual $2,000 penalty will be applied retroactively starting January 1. This transition relief is only available once. If an employer drops below 50 employees for a year and then exceeds that number in subsequent years, coverage will need to begin immediately.

If coverage is offered to a full-time employee by the first day of the first payroll period that begins in January 2015, the employee will be treated as covered in January. (Those with non-calendar year plan years do not have similar relief.) For new employees, there will be no penalty for an employee’s first month when the employee starts after the first of that month.

What other changes should employers plan for?

It is not often discussed, but the IRS will adjust the employer penalties based upon the prior-year’s insurance premium trend increase. Over the past five years, the trend for individual coverage has averaged 4.5 percent. If this trend were applied to the penalty for 2015, the no insurance penalty would be about $2,090 and the unaffordable insurance penalty — paid when full-time workers receive exchange subsidies — would be $3,135.

The final rules also establish that entities required to report to the IRS under the ACA will use Form 1095-C. There are two sections of this form. One must be completed by health insurance issuers, plan sponsors of self-insured plans, and government agencies that administer government-sponsored health insurance (Section 6055 of the ACA). Large employers (50 or more full-time plus FTE employees) will complete the other half. Large employers who are also plan sponsors of a self-insured plan(s) will complete both parts of the form. This form will need to be submitted in January 2016 for the first time.