The Employer Insurance Mandate Under the Affordable Care Act – What Employers Need to Know
This is the first in a series of Alerts intended to prepare employers to comply with the mandate to offer affordable health coverage to employees beginning in 2014 or pay a “shared responsibility penalty” to the Federal government. This requirement is sometimes referred to as the “play or pay” mandate. This Alert provides an overview of the new rules. Subsequent Alerts will describe methods for counting full-time employees for purposes of the shared responsibility penalty, address transitional rules and special situations (such as employee leasing), and describe what employers can do now to prepare for implementation of the new requirements.
Which Employers are Required to Offer Affordable Coverage? The requirement to offer affordable health coverage applies to “applicable large employers.” Generally, an “applicable large employer” means any employer that employed an average of 50 full-time employees (including full-time equivalents) on business days during the preceding calendar year. Accordingly, an employer that has an average of 50 full-time employees / equivalent employees during 2013 will be subject to the requirement to offer affordable health care coverage effective January 1, 2014. The IRS has issued detailed rules describing methods for counting full-time employees and full-time equivalents. These rules will be discussed in a subsequent Alert.
To Whom Must Coverage be Offered? An applicable large employer must offer an opportunity to enroll in qualifying coverage to every full-time employee and to every dependent child of a full-time employee up to age 26. Employers are not required to offer coverage to an employee’s spouse.
What Coverage Must be Offered? An applicable large employer must offer its employees (and their dependent children) an opportunity to enroll in “minimum essential coverage” under an employer-sponsored plan. Minimum essential coverage is defined to include what most employers consider group health insurance coverage or coverage under a self-insured health plan. Minimum essential coverage does not include certain excepted benefits, such as disability income, workers’ compensation or accident insurance that also covers medical costs. Also excluded from minimum essential coverage are limited-scope coverages such as vision and dental programs and employer-sponsored flexible spending accounts. An employer may offer these benefits, but they do not satisfy the employer’s obligation to offer minimum essential coverage.
What Happens if the Employer Does Not Offer Coverage? An applicable large employer that fails to offer minimum essential coverage to its employees may be subject to a penalty. This penalty is sometimes referred to as the “a” penalty, after the Code Section which imposes the penalty (Code Section 4980H(a)). The “a” penalty applies only if the employer does not offer coverage to its employees, one or more its employees purchases individual coverage on one of the new insurance exchanges, and the IRS notifies the employer that the employee qualifies for a premium assistance tax credit or cost-sharing reduction from the Federal government.
If an applicable large employer is notified by the IRS that one or more of its employees qualifies for a premium assistance tax credit or cost-sharing reduction, the employer must pay the “a” penalty for every month during the year that the employer failed to offer coverage to its full-time employees. The amount of the “a” penalty is $2,000 per year (or $166.67 per month) multiplied by the number of full-time employees (including full-time equivalents) in excess of 30 who were not offered coverage. In other words, the penalty amount is based on all full-time employees of the employer, but is subject to a “free pass” on the first thirty employees.
For example, under the current regulations, if an employer has 65 full-time employees and fails to offer minimum essential coverage to any of them, the employer would be subject to a monthly “a” penalty computed as follows (assuming that the IRS notifies the employer that at least one of its employees qualifies for a premium assistance tax credit or cost-sharing reduction):
Number of Full-Time Employees: 65
Minus Employees Subject to "Free Pass": (30)
Employees Used to Compute the "a" Penalty: 35
Times Monthly "a" Penalty Amount: $166.67
Equals Monthly Penalty: $5,833.45
What Happens if the Employer Offers Health Coverage, but the Employee Declines the Offer? An applicable large employer that offers minimum essential coverage to its employees and the employees’ dependent children will not be subject to the “a” penalty because one or more employees declines the coverage. However, as discussed below, the employer could be subject to a different penalty (the “b” penalty), if that employee purchases coverage on the exchange and qualifies for a premium assistance tax credit or cost-sharing reduction.
What is the “b” Penalty? An applicable large employer that offers minimum essential coverage may be subject to the “b” penalty (named after Code Section 4980H(b)), if the offered coverage (i) does not provide “minimum value,” or (ii) is not “affordable” to the employee.
Coverage provides “minimum value” if the group health plan or group insurance policy pays at least 60% of the total allowed costs of health benefits provided under the plan. For insured plans, the insurance carrier should be able to certify to the employer whether its policy provides minimum value. With respect to self-insured plans, the Department of Health and Human Services (“HHS”) has established alternative methods to measure the percentage of allowed costs covered by the plan, including an on-line calculator recently added to the HHS website.
The employer may also be subject to the “b” penalty if the coverage is “unaffordable” to the employee. Generally, coverage is unaffordable if the employee’s share of the premium for single coverage exceeds 9.5% of the employee’s household income. Recognizing that employers may not know their employees’ total household income, the IRS regulations include a number of safe harbors to determine whether coverage is unaffordable. Under one safe harbor, coverage will be deemed to be affordable if the employee’s share of the premium for single coverage does not exceed 9.5% of the wages reflected in box 1 of the employee’s form W-2 from that employer.
If the employer receives a notice from the IRS that any employee qualifies for a premium assistance tax credit or cost-sharing reduction, the employer must pay the “b” penalty for that employee for every month that the employer provided coverage offered to the employee either fails to provide minimum value or is unaffordable to that employee. The amount of the penalty is $3,000 per year (or $250 per month) multiplied by the number of employees receiving a premium assistance tax credit or cost-sharing reduction. However, in no event will the amount of the “b” penalty exceed the amount of the “a” penalty the employer would be liable for if the employer did not offer coverage.
As noted above, this is the first of a series of legal alerts on the Affordable Care Act and its requirements. If you have any questions or require our assistance in implementing the new requirements, please contact the Hiscock & Barclay lawyer with whom you normally work or any attorney in our Labor & Employment practice area.