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January 15, 2015

Affordable Care Act’s Employer Shared Responsibility Penalty Takes Effect in 2015

Under the Affordable Care Act,1 large employers may have to pay a tax known as the employer shared responsibility penalty.2 In general, the penalty took effect on January 1, 2015.3

This Capital Checkup reminds employers about the criteria for paying the penalty, describes safe harbors for affordability and explains how the penalty is calculated. The discussion concludes with a list of action steps that employers should consider as they determine whether they may need to pay a penalty. (Another Capital Checkup discusses a transition rule for certain non-calendar-year plans that delays the penalty’s effective date until the start of the plan year beginning in 2015.)

Criteria for Paying the Penalty

For the employer shared responsibility penalty to apply, at least one full-time employee must receive subsidized Marketplace coverage.4 In 2015 only, the penalty applies to employers with at least 100 full-time employees5 (those who work on average 30 or more hours per week) on business days during the previous year. Starting in 2016, the penalty will apply to employers with at least 50 full-time employees.

Large employers are subject to the penalty if they do not offer health coverage to their full-time employees (and those employees’ dependent children6). A large employer will be treated as having offered coverage to its full-time employees and their dependent children for a calendar month if, for that month, it offers coverage to 95 percent (70 percent in 2015) of its full-time employees (and to their dependent children through the end of the month in which they turn 26).

The employer shared responsibility penalty will also apply to large employers that offer health coverage to their full-time employees that does not provide minimum value — defined as paying, on average, at least 60 percent of expected claims costs — or is not affordable, as discussed in the next section.

A large employer that contributes to a multiemployer plan will be treated as offering minimum essential coverage to employees for whom the employer makes contributions to the multiemployer plan. The contributing employer is responsible for identifying its full-time employees based on hours of service. Whether an employee is a full-time employee or not is determined under the counting rules described in Sibson’s Capital Checkup, “Identifying Full-Time Employees Under the Affordable Care Act’s Employer Shared Responsibility Penalty.” The multiemployer plan is responsible for demonstrating that it provides affordable and minimum value coverage to eligible participants and their dependent children (up to the end of the month in which they turn 26).

Affordability Safe Harbors

In general, coverage is considered affordable under the employer penalty rule if the employee’s required contribution for employee-only coverage for the lowest-cost minimum value coverage option does not exceed 9.5 percent of an employee’s household income. The cost of spousal or dependent coverage is irrelevant for this test.

Because an employer generally does not know the household income of its employees, it may rely on any of three voluntary safe harbors to test affordability:

  1. W-2 Safe Harbor  Coverage is affordable if the employee’s annual cost for employee-only coverage does not exceed 9.5 percent of an employee’s wages as reported in Box 1 of the W-2 form. For coverage offered during 2015, the relevant W-2 would be the 2015 W-2 issued in January 2016.
  2. Rate-of-Pay Safe Harbor  This safe harbor differs for hourly and salaried employees, as noted in the table below.

    Rate-of-Pay Affordability Safe Harbor
    Employee Pay Category

    Safe Harbor
    Hourly The employee’s monthly cost for employee-only coverage is affordable if it does not exceed 9.5 percent of the employee’s hourly rate* — for hours actually worked — as of the first day of the coverage period (generally the first day of the plan year) multiplied by 130.
    Salaried Coverage is affordable if the monthly cost of employee-only coverage does not exceed 9.5 percent of the employee’s monthly salary as of the first day of the coverage period.
        *
    During any month in which the employee is paid a lower hourly rate, affordability is tested using the lower hourly rate.
  3. Federal Poverty Line (FPL) Safe Harbor This safe harbor does not require any knowledge of an employee’s actual wages. Coverage is affordable if the employee’s monthly cost for employee-only coverage does not exceed 9.5 percent of a monthly amount determined as the annual FPL for a single individual divided by 12.7

An employer does not have to use the same safe harbor for all of its employees. The employer may use different safe harbors based on reasonable employment categories, as long as the employer applies the safe harbors on a uniform and consistent basis to all employees in the same category. For example, safe harbors may vary by job category, nature of compensation (e.g., hourly wage or salary), geographic location, or other similar bona fide business criteria.

How to Calculate the Amount of the Penalty

There are two ways to calculate the employer shared responsibility penalty, as described below. The two penalties serve different purposes, and only one will apply:

  1. The 4980H(a) Penalty for Failure to Offer Health Coverage to the Required Percentage of Individuals If a large employer fails to offer health coverage to the required percentage of its full-time employees (and their dependent children), and at least one full-time employee obtains subsidized Marketplace coverage, the 4980H(a) penalty is $166.67 per month ($2,000 per year, indexed8) times the employer’s total number of full-time employees. When calculating the 4980H(a) penalty, the number of full-time employees in 2015 is reduced by 80. (For counts of full-time employees starting in 2016, the reduction for the calculation decreases to 30.)
  2. The 4980H(b) Penalty for Failure to Offer Coverage that Is Affordable and Provides Minimum Value  A large employer that offers health coverage to a sufficient percentage of its full-time employees (and their dependent children) to avoid the 4980H(a) penalty may still be penalized under 4980H(b) for any full-time employee who was not offered coverage or who was offered coverage that was not affordable or did not provide minimum value, if that employee obtains subsidized Marketplace coverage. For each full-time employee who receives subsidized Marketplace coverage, the penalty is $250 per month ($3,000 per year, indexed).

Penalties are calculated on a monthly basis. In any month, an employer can be assessed the 4980H(a) penalty or the 4980H(b) penalty, but not both. Moreover, the 4980H(b) penalty cannot exceed what the 4980H(a) penalty would have been if it had been assessed.

Individual entities that are considered with other controlled group members to be one employer for purposes of determining whether the penalty applies are each assessed penalties, if any, on a member-by-member basis.9

Action Steps

Employers should make sure to take the following steps, if they have not already done so:

  • Put in place the ability to track hours actually worked.
  • Determine whether coverage is offered to the required percentage of full-time employees.
  • Consider the affordability of coverage.
  • Assure that dependent coverage is offered to children until the end of the month in which they turn 26.10
  • Make changes to workforce planning and/or eligibility, as needed. For some employers, the rules may also allow for savings such as requiring a higher contribution for spousal coverage and/or changing or eliminating coverage for employees who work fewer than 30 hours per week.
  • If part of a group of related entities, work with legal counsel to determine whether and how the IRS controlled group rules apply, including determining which entities will be responsible for potential penalty assessments and for complying with IRS reporting requirements applicable to large employers.

• • •

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related guidance, including the guidance summarized in this Capital Checkup. Sibson Consulting can be retained to work with plan sponsors and their attorneys on compliance issues.

1
The Affordable Care Act is the abbreviated name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-148, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)
2
A final rule implementing the employer shared responsibility penalty was published by the Treasury Department and Internal Revenue Service (IRS) in the February 12, 2014 Federal Register. (Return to the Capital Checkup.)
3
The penalty was originally set to begin in 2014, but was delayed by one year. A final rule from the Treasury Department and Internal Revenue Service (IRS) implementing the penalty was published in the February 12, 2014 Federal Register. (Return to the Capital Checkup.)
4
The term “subsidized Marketplace coverage,” as used in this publication, refers to coverage under a Qualified Health Plan that a full-time employee receives from a public Exchange or Marketplace with a premium tax credit or cost-sharing reduction. An employee may obtain subsidized Marketplace coverage when their household income is less than 400 percent of the FPL, and the individual is not eligible for other federal programs, such as Medicaid or Medicare, or for employer-sponsored coverage that is affordable (costs less than 9.5 percent of FPL for employee-only coverage) and minimum value (60 percent). (Return to the Capital Checkup.)
5
This includes full-time equivalent employees. (Return to the Capital Checkup.)
6
Under a transition rule, an employer will not be penalized in 2015 solely for failing to offer dependent coverage if it is taking steps to offer this coverage in 2016. (Return to the Capital Checkup.)
7
The current FPL for a single individual in the 48 contiguous states is $11,670 (based on the 2014 FPL). As a result, the employee’s cost for employee-only coverage could not exceed $92.39 per month [($11,670 divided by 12) x 9.5 percent]. (Return to the Capital Checkup.)
8
The Internal Revenue Services has not yet published indexed penalty amounts for 2016. (Return to the Capital Checkup.)
9
Similarly, each group member is responsible for its own reporting under Section 6056 (and plan reporting under Section 6055, if self-insured). And, under draft reporting forms and instructions, each member must have its own employer identification number (EIN) [The following sentence is only for the public sector version.] Under certain circumstances, a government employer can designate a related government entity to be the reporting entity following a process set out in applicable regulations. For more information about the reporting requirements, see Sibson’s October 9, 2014 Capital Checkup, “IRS Releases Draft Instructions for Large-Employer Reporting under the Affordable Care Act.” (Return to the Capital Checkup.)
10
For purposes of the employer penalty, coverage must be offered to sons, daughters and adopted children (including children placed for adoption with the employee) through the end of the month in which the child turns age 26. Coverage does not have to be offered to stepchildren or to foster children. (Return to the Capital Checkup.)

Capital Checkup is Sibson Consulting’s periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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