THE EMPLOYER SHARED RESPONSIBILITY (ESR) provisions of the Affordable Care Act (ACA) are at Internal Revenue Code §4980H and are also known as the “Employer Mandate” or the “Play-or-Pay” rules. Under these rules, “applicable large employers” (ALEs) face potential penalties if at least one full-time employee qualifies for a subsidy and buys health insurance in the Health Insurance Marketplace. Most ALEs are already well aware of these rules (since they have been in effect since 2015) but might find it helpful to review this article. See below for details on the two potential penalties and for definitions of the above terms.
- Small Employers: Small employers (fewer than 50 employees) who are in growth mode may be unaware of these rules and should review this summary and determine in advance when they will be considered ALEs and will be subject to these rules.
- Note: The ESR/ Employer Mandate provisions and penalties continue to apply, even though the Individual Mandate penalty is reduced to zero as of January 1, 2019.
WHAT ARE AN ALE’S OBLIGATIONS?
In a nutshell, the two obligations are:
- Offering coverage
- Reporting (after year-end) on coverage offered.
1- Offering coverage.
There are two separate coverage obligations and two alternative penalties that might apply. Note that an ALE will not be subject to both penalties. In fact, it will not be subject to either of the two potential penalties unless at least one full-time employee qualifies for a subsidy and buys health insurance in the Marketplace. The two potential penalties are referred to as the “A” and “B” penalties because they apply under Code § 4980H(a) or Code § 4980H(b).
- The “A” penaltyapplies if an ALE fails to offer “minimum essential coverage” (MEC) to at least 95% of “full-time” employees and their dependents. An ALE is not required to actually cover at least 95% of full-time employees, but only to offer coverage to at least 95%. For 2018, the penalty amount is $193.33/month, which equates to $2,320 for all 12 months.
- The penalty calculation is: $193.33 x (the total number of full-time employees minus 30). This includes full-time employees who are enrolled in coverage. The “A” penalty is also known as the “sledgehammer” penalty.
- When the ESR first applied in 2015, the penalty amount was $177.33/month ($2,080 annually) with an offset of 80 full-time employees.
- The “B” penaltyapplies if an ALE does offer MEC to at least 95% of full-time employees, but for at least one of them the coverage is either not “affordable” (see definition later in this article) or does not provide “minimum value” (defined as at least 60% actuarial value). The 2018 amount is $290/ month, which equates to $3,480 annually.
- The penalty calculation is: $290 x each full-time employee who qualifies for a subsidy and for whom the employer coverage offered was either not affordable or did not provide at least minimum value. An important difference from the “A” penalty is that the “B” penalty calculation does not include all full-time employees, but only those specific ones. The “B” penalty cannot be more than the “A” penalty would have been if it applied. The “B” penalty is also known as the “tack hammer” penalty because it is usually much less than the “A” penalty.
- The original penalty amount in 2015 was $260/month for each full-time employee for whom coverage was either not affordable or did not provide at least minimum value. (12 x $260 = $3,120).
Since neither fine is tax deductible, the impact is much higher than just the face amount, especially since amounts the employer would have paid for employee health benefits (if the employer had “played” rather than “paid”) are tax-deductible.
2- Reporting on Coverage Offered
The ACA requires insurance companies, the Marketplace, large employers and self-insured small employers to annually file information returns with the IRS using forms 1094 and 1095, and also to annually furnish the 1095 forms to individuals. The forms provide specific identifiable information including but not limited to: who was offered coverage, who purchased coverage, the level of coverage, the cost of coverage, and who received a subsidy.
The IRS automatically matches the information reporting required of the employer, the Marketplace and the insurance companies. If that match shows that a full-time employee of an ALE qualified for a subsidy and bought health insurance in the Marketplace, it will trigger an employer penalty of $290/month in 2018 ($3,480 for 12 months). This is the “B” penalty noted above. If the ALE did not offer at least “minimum essential coverage” to at least 95% of its full-time employees, the “sledgehammer” or “A” penalty will apply, which in 2018 is $193.33/month times the total number of full-time employees minus 30 employees.
For example, if an employer has 100 full-time employees and did not offer coverage to at least 95% of them for all 12 months, if even one full-time employee qualifies for a subsidy and buys health insurance in the Marketplace, the potential fine would be $162,400 annually ($2,320 x (100-30)). As noted above, the fine is calculated monthly so would be $193.33 x 70 employees for each month the employer did not offer coverage to at least 95% of full-time employees.
An employer may not realize until at least six months after the end of the year at issue that they were out of compliance during the prior year, for two reasons: 1) information reporting is not done until after the end of the year at issue, and 2) it takes several months before the IRS reconciles the information reports and sends proposed penalty assessments to employers (these are called “226J letters”). In fact, the first year the employer mandate applied was 2015, and the IRS did not send notices of proposed penalties for 2015 until November 2017. We do not expect the lag time to be that long for 2016 and later.
In addition to the proposed penalty letters the IRS is currently sending, it is also sending separate letters to employers who have not filed any 1094-C and 1095-C forms but who are identified as potential ALEs. The IRS is currently sending these letters for the 2015 and 2016 calendar years. The IRS gleans enough information from the 1094 and 1095 forms filed by insurance companies and the Marketplace to identify employers it believes are large employers who should have filed.
ALEs are defined as employers who employed on average at least 50 full-time employees and/or “full-time equivalent” employees on business days in the prior year. The ACA regulations prescribe a specific method to calculate the average number of full-time employees during a calendar year, so employers must use this particular method in determining the average number of full-time employees. The ALE determination includes all employees in the control group and also includes contingent workers (i.e., from staffing companies) who fall under the legal definition of “common law” employee.
“Full-time” is defined for ESR purposes as working on average at least 30 hours per week or 130 hours per month over the prior calendar year. This applies slightly differently for two different purposes: 1) determining if an employer is an ALE, and 2) determining whether and when a particular employee of an ALE is considered to be “full-time.”
- For purposes of determining whether an employer is an ALE, the employer also must add all hours worked by part-time employees to calculate the total number of “full-time equivalent” employees in a month (which is total hours worked by all part-time employees, divided by 120). The employer also must count seasonal workers, but may disregard those who worked full-time for fewer than four months if counting them is the reason the employer would be considered an ALE.
- For purposes of determining whether a particular employee of an ALE is considered to be “full-time,” an employer can select a measurement period and track each employee’s hours of service during that period. For this purpose, the “average 30 hours per week or 130 hours per month” rule equates to at least 780 hours during a six-month look-back period or 1,560 during a 12-month look-back period.
Large employers are not required to offer coverage to employees who do not meet the above criteria, but they can offer coverage to part-time and seasonal employees if they wish.
Small employers are not subject to the Employer Mandate nor to penalties for not offering health coverage to any employees or not offering coverage that meets affordability and minimum value requirements, but small employers may choose to offer coverage to some or all employees.
A small employer who grows and employs at least 50 full-time employees or “full-time equivalent” employees does not immediately become an ALE subject to the ESR rules. However, it does become an ALE as of the January 1 following the calendar year in which it meets the above 50-employee threshold. Thus, growing employers should keep track of this and determine before the end of the year whether or not they will be subject to these rules in the next calendar year. Small employers who grow into ALEs will not be subject to a penalty during the first three months (January – March) of the first year they are an ALE. This three-month period is called a “limited non-assessment period” (LNP).
Small employers who have off-calendar plan years should consider in advance whether they want to comply with the ESR rules as of the open enrollment period before the January 1st that they will be considered an ALE and the rules apply, or whether they want to have a special open enrollment period to be effective as of the April 1st of their first year as an ALE, when their LNP ends.
Additionally, small employers who grow into ALEs should plan to start tracking—as of January 1st—which full-time employees were offered coverage, which employees enrolled, and what the lowest-cost option was. This is because by the end of the following January they will have to do employer information reporting for the prior calendar year (i.e., furnish 1095-Cs and file 1094-Cs). See above for details on information reporting obligations.
AFFORDABILITY AND MINIMUM VALUE REQUIREMENTS
The coverage an ALE must offer to avoid the “A” penalty is defined under ACA as “minimum essential coverage” (MEC), and just about any health coverage is sufficient. The law does not specify what benefits or levels of coverage must be provided by MEC, except that “excepted” benefits will not be considered MEC. Examples of excepted benefits are limited scope dental and vision benefits, most health FSAs, and fixed indemnity insurance policies.
If an ALE wants to ensure it will not be subject to the “B” penalty described above, it must offer at least 95% of its full-time employees coverage that meets “Affordability” and “Minimum Value” (MV) requirements.
- The Affordability test is met if the employee cost for self-only coverage under the lowest-cost option offered by the employer is not more than 9.5% (indexed annually) of the employee’s “household income.” Since employers generally will not know their employees’ household incomes, ACA regulations allow employers to use the following three “safe harbors” instead of household income:
- W-2 method: The employee’s W-2 (Box 1) income from the employer for the current year.
- Rate of pay method: 130 x the lower of the employee’s hourly rate of pay as of the first day of the plan year or the hourly rate during any subsequent month. For salaried employees, use the monthly pay as of the first day of the plan year, not multiplied by 130.
- Federal poverty line: 100% of Federal Poverty Line (FPL) for an individual. For 2018, this is $12,140 (up from $12,060 in 2017).
- The Minimum Value (MV) requirement is met if the plan pays on average at least 60% of the total cost of allowed benefits under the plan. This means that employee cost-sharing – deductibles, coinsurance, co-payments and out-of-pocket maximums – cannot exceed 40% of the average cost of benefits under the plan.
ACTION STEPS FOR EMPLOYERS
- If you are a large employer:
- Make sure you are offering at least “minimum essential coverage” (MEC) to at least 95% of your full-time employees, if you want to avoid the Code § 4980H(a) penalty.
- Make sure you are offering coverage that is affordable and provides at least minimum value if you want to avoid the Code § 4980H(b) penalty.
- If you have a very low participation rate, you might want to investigate why. Are employees truly given a reasonable offering of coverage, and is the employee cost affordable?
- Have employees decline in writing (for online enrollment, keep electronic records), so you can document if employees have have other insurance (e.g., through a spouse) or are simply declining coverage
- Make sure the cost is affordable under one of the safe-harbors above
- Make sure employees are being given enough time and information to make a decision
- Make sure you have a measurement method in place and are tracking employees’ hours of service, to properly determine who are “full-time” employees and as of what dates.
- Make sure you are reporting (after year-end) on the coverage you offered – Forms 1094-C and 1095-C.
- If you did not report for prior years and you should have, talk with your legal counsel about whether or not to file now, or wait for an IRS letter.
- If you get an IRS letter pertaining to prior years, respond timely and seek legal advice if needed.
- If you are a small employer:
- If you are growing, be sure to calculate your size during the year, using the ACA method described above, so you will know in advance if you will be considered an ALE for the next calendar year.
- Save this article and read it again before the date you will need to comply!