This is the second of a three part series on the Affordable Care Act (“ACA” or “Act”), commonly known as “ObamaCare.” This post discusses the Employer Mandate, which takes effect January 1, 2015, and certain reporting requirements that will also take effect beginning in 2015.
The Employer Mandate
On January 1, 2015, the so-called “Employer Mandate” goes into effect, requiring large employers to offer health coverage to full-time employees and their dependents (children up to age 26, but not spouses) or risk paying a penalty. As a result, large employers will be forced to make a choice — to either “play” by offering health coverage, or potentially “pay” a penalty to the IRS for failing to offer such coverage. This “play or pay” scheme, called “shared responsibility” in the statute, has become known as the Employer Mandate.
Although the Act defines a large employer as an employer with 50 or more full-time employees, implementation of the Employer Mandate is being phased in. The Employer Mandate takes effect for employer with 100 or more full-time employees on January 1, 2015 and will apply to employers with 50-99 full-time employees beginning January 1, 2016.
To determine whether a business is a “large employer” under the Act, the employer must determine whether it employs an average of at least 100 full-time employees on business days during the preceding calendar year. As previously mentioned, beginning in 2016, the threshold drops to the equivalent of 50 full-time employees during the preceding calendar year. A full-time employee is any employee who is employed, on average, 30 hours or more a week or 130 or more hours each month. Employers with part-time workers must also count “full-time equivalencies” in determining large employer status. “Full-time equivalent employees” are the number of full-time employees an employer would have, based on the hours worked by all employees who are not full-time. To determine the number of full-time equivalent employees for a calendar month, an employer must calculate the aggregate hours of service (including fractional hours, but not including more than 120 for any one employee) for all employees who are not full-time employees for that month. The employer must then divide the total number of hours worked by its non-full-time employees by 120. The number of full-time equivalent employees is then added to the number of full-time employees to determine applicable large employer status. Hours of service include paid time for services performed as well as time for which the employee is paid but does not perform any services due to vacation, holiday, illness, disability, layoff, jury duty, military duty or paid leave of absence.
In addition to counting full-time employees and hours worked by employees who are not full-time, in certain circumstances, the number of employees of “controlled groups” and “affiliated service groups,” as defined by the Internal Revenue Code and applicable Internal Revenue Service (IRS) regulations, will be aggregated toward the full-time employee threshold. Seasonal employees must also be considered in determining large-employer status.
A large employer under the Act is subject to the Employer Mandate, which requires that the employer offer health coverage to its full-time employees and certain of their dependents. The coverage must: (1) provide “minimum essential coverage;” (2) be “affordable;” and (3) satisfy a minimum value requirement. “Minimum essential coverage” typically includes most private health insurance plans and includes coverage under an employer-sponsored group health plan. Coverage is considered “affordable” if the employee’s contribution or premium for self-only coverage is less than 9.5 percent of the employee’s household income. Because most employers do not know their employee’s household income, the act provides a safe-harbor for the employer which requires that the cost of the employee-only coverage does not exceed 9.5 percent of the wages reported in Box 1 on the employee’s W-2. The offered coverage must also meet a minimum value requirement. This generally means that the plan must pay at least 60 percent of the expected health care costs, and the employee is responsible for the remaining 40 percent through copayments, deductibles and coinsurance. While the terms of the specific benefits will vary, essential health benefits (such as annual physicals) must be provided without any annual limits.
If a large employer does not provide benefits for some or all of its full-time employees, the employer will have to pay a penalty in two scenarios. The first scenario occurs when an employer does not offer health coverage to “substantially all” of its full-time employees, and any one of its full-time employees both enrolls in health coverage offered through a State Insurance Exchange and receives a premium tax credit or a cost-sharing subsidy. In order to be eligible for a subsidy, an employee must have an income between 100 and 400 percent of the federal poverty line and not be offered affordable, minimum value coverage. In the second scenario, an employer will have to pay a penalty when it provides health care to its employees, but such coverage is deemed inadequate because: (1) it is not “affordable;” (2) does not provide at least “minimum value;” or (3) the employer offers coverage to substantially (but not) all of its full-time employees, and one or more of its full-time employees enrolls in exchange coverage and receives a tax subsidy. In this second scenario, the employer will owe an “inadequate coverage penalty.” The inadequate coverage penalty is $3,000 per person and is calculated based on each full-time employee who receives an exchange subsidy. This penalty amount is only for 2015 and will increase based on premium inflation.
Reporting Requirements Pursuant to Sections 6055 and 6056 of the ACA
On March 5, 2014, the U.S. Department of the Treasury and the IRS released final rules to implement the information reporting provisions for certain employers under the ACA. These rules are available here. Beginning in 2015, all employers affected by the Employer Mandate are subject to yearly reporting requirements. On August 28, 2014, the IRS released draft instructions for Forms 1094-C and 1095-C, and other forms required by the ACA. Employers that are subject to the Employer Mandate will use the new forms to report health insurance coverage offered under employer-sponsored plans in accordance with the Act.
Under the ACA, employers subjected to the Employer Mandate must report certain information including: (1) information about the entity providing coverage, including contact information; and (2) which individuals are enrolled in coverage, with identifying information, and the months for which they were covered (Section 6055). Employers will also have to report: (1) information about the employer offering coverage (including contact information and the number of full-time employees; and (2) information about the coverage (if any) offered to each full-time employee (by month) including the lowest employee cost of self-only coverage offered.
Final versions of the forms are not yet available. Drafts of the forms (as of October 5, 2014) are available at the following links: 1094-C and 1095.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.