November 08, 2015

a. Employers Considered “Large Employers.”  

The Shared Responsibility penalties only apply to an employer that is a “large employer” for the calendar year in question. In other words, if an employer is not a ” for the particular calendar year, the employer is not potentially subject to the Shared Responsibility penalties for that year.

Beginning January 1, 2015, an employer will be considered a “large employer” if the employer has a monthly average of 50 or more full-time equivalents (“FTE”) for the previous calendar year.28 In determining the number of FTEs an employer has for a given month, each employee who is employed on average “at least 30 hours of service per week” in that month is counted as 1 FTE.29 Also, for this purpose, the Treasury Regulations allow an employer to treat any employee with at least 130 hours of service in a calendar month as an FTE for that month.30 For employees employed for less than 30 hours of service per week in the given month, the employer counts all hours of service for such employees and divides by 120 to determine the total full-time equivalents related to part-time employees.31 An “hour of service” is defined as an “hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.”32 In other words, it is clear that an “hour of service” for purposes of the large employer calculation includes a paid hour of service as well as paid vacation, paid holidays, paid sick time, paid disability, etc.

In performing the large employer calculation for a given calendar year, the employer must look at each month separately and count the number of employees with at least 30 hours of service per week in the given month (or use the optional 130 hours of service per month threshold) and each such employee will count as one FTE for the month. For each employee who is not a full-time employee for the given month under this standard, the employer will count all of the hours of service in the month for all such employees and divide the result by 120 in order to determine the amount of FTEs related to part-time employees. The employer must repeat this process for each month in the calendar year. Finally, the employer must add up all of the FTEs for each month in the calendar year and divide by 12. If the result is not a whole number, the employer rounds down to the next lowest whole number.33 If the result is 50 or more, the employer is a “large employer” for the upcoming calendar year. If the result is less than 50 (49.9, for example), the employer is not a “large employer” for the upcoming year and is not subject to the Shared Responsibility payments for the upcoming year.

b) The Eligibility Penalty.

If a employer is a “large employer,” the Eligibility Penalty will apply to the employer if: (a) the employer fails to offer “substantially all” of its “full-time” employees and their dependents health insurance coverage and (b) at least one or more of the employer’s employees purchases health insurance on the new health insurance exchange and receives the new federal subsidy to do so.34 A “dependent” means an employee’s child but does not include an employee’s spouse, stepchild or eligible foster child.35 If the Eligibility Penalty applies, the employer will have to pay a penalty, on an annual basis,36 of $2,000 multiplied by the total number of full-time employees over 30. An employer will be considered to offer “substantially all” of its full-time employees and their dependents health insurance coverage provided it offers such coverage to all fulltime employees except the greater of: (i) 5 full-time employees or (ii) 5% of all of its fulltime employees.37 For example, if a employer has 70 full-time employees, and it fails to offer health insurance coverage to six or more of these full-time employees and one or more these employees instead purchases health insurance on the exchange and qualifies for federal subsidy to do so, the employer would pay an annual penalty of $80,000, or $2,000 multiplied by 40 (or the number of full-time employees, here 70 full-time employees, over 30).38

c) The Affordability Penalty.

i. The Mechanics of the Penalty

Unlike the Eligibility Penalty, which penalizes employers for not offering health insurance coverage, the Affordability Penalty penalizes employers that offer coverage that is either unaffordable or does not provide minimum value. Specifically, if a employer is a “large employer,” the Affordability Penalty will apply to the employer if:

a) it offers health insurance to one or more of its “full-time employees” that is either “unaffordable” or does not provide “minimum value” and

(b) the employee offered the unaffordable or low value insurance instead purchases health insurance on the Exchange and qualifies for a federal subsidy.39

If the Affordability Penalty applies, the amount of the penalty is the lesser of:

(a) $167.67 per month (or $2,000 on an annual basis) per full-time employee in excess of 30 or

(b) $250 per month (or $3,000 on an annual basis) for each full-time employee who is offered the unaffordable/low value health insurance and instead purchases health insurance on the exchange and receives a federal subsidy for the insurance.40 For example, if in a given month a employer has 70 full-time employees, it offers all those employees the opportunity to purchase health insurance for themselves and their dependents, but for 7 of these employees the insurance was considered “unaffordable” and all 7 employees instead purchase their health insurance on the exchange and qualify for the federal subsidy to do so, the employer would pay a penalty of $1,750 for the month. The Affordability Penalty would be calculated as $250 for each of the 7 employees who was offered unaffordable health insurance and who instead purchased health insurance on the exchange and qualified for the federal subsidy to do so. Note that the same $1,750 penalty would apply if the facts in this example were the same except that the health insurance offered to the 7 employees was affordable but did not provide “minimum value.”

ii. Minimum Value:

A health insurance plan will provide “minimum value” if “the plan’s share of the total allowed costs of benefits provided under the plan” is at least 60% of such costs.41 For example, a health insurance plan would not provide minimum value if the plan provided that insurance would cover 55% of the insured’s medical costs and the insured was responsible for the balance. In that case, the insurance policy would cover less than 60% of allowable medical costs and so the insurance would not provide minimum value. Obviously, most health insurance plans are not structured so simplistically and instead include various co-payments for office visits/medications and co-insurance rates on -standard features such that using the minimum value calculator or HHS/IRS safe harbor plan is not practical, the employer can obtain an actuarial certification regarding minimum value, or (iv) for plans in the small group market, complying with the requirements for a level of metal coverage (bronze, silver, gold, or platinum as published at 45 C.F.R. 156.140(b)).

Practically speaking, for employers that offer fully insured plans, it should be expected that the health insurance issuer would issue a plan that provides the requisite level of minimum value. A report released by the U.S. Department of Health and Human Services concluded that 98% of employer sponsored plans it surveyed would be considered to provide minimum value.42 Nonetheless, employers should consider requiring the health insurance issuer to make a certification of minimum value in writing and agree to indemnify the employer for its expenses, including any taxes/penalties assessed by the IRS, if the certification is not met.

iii. Measuring Affordability

For purpose of the Affordability Penalty, an employee’s health insurance will be considered “unaffordable” if the employee is required to pay more than 9.5% of his “household income’ for self-only coverage.43 This creates a problem for employers because most employers have no way of easily determining each employee’s household income, which would include earnings of the employee’s spouse and dependents, as well as income from sources other than wages.44 However, the regulations include two separate affordability safe harbors that are particularly helpful to many large employers. If an employer meets either safe harbor, the employer’s health insurance will be deemed affordable and the Affordability Penalty will not apply with respect to that employee. An employer can choose to utilize either safe harbor for any reasonable category of employees.45 If an employer meets either safe harbor with respect to an employee, the employer will be deemed to be offering the employee affordable health insurance coverage for purposes of avoiding penalty, however the safe harbor will not effect the employee’s ability to qualify for a premium reduction tax credit. In other words an employee may be offered affordable coverage under a safe harbor and still be eligible for IRS premium reduction tax credits for coverage purchased on the health insurance exchange if the cost of coverage is still greater than 9.5% of the employee’s household income.

a. Rate of Pay Safe Harbor:

The first safe harbor, referred to as the “Rate of Pay Safe Harbor” provides that an employee’s health insurance will be considered affordable provided the employee has an opportunity to elect self-only coverage that would not cost the employee more than 9.5% of his monthly rate of pay for his/her share (with the employer paying the balance).46  For hourly employees, the employee’s monthly rate of pay is equal to his/her hourly rate of pay multiplied by 130.47  For salaried employees, the employee’s monthly rate of pay is equal to the employee’s annual salary divided by 12.48  For example, for a full-time hourly employee that is paid $14 per hour, the employer could avoid paying the Affordability Penalty on that employee provided the employee’s monthly cost for selfonly coverage is no more than $172.90 ($14 x 130, multiplied by 9.5%).  For an administrator earning a salary of $30,000 per year, an employer could avoid paying the Affordability Penalty on that employee provided the administrator’s monthly cost for self-only coverage is no more than $237.50 ($30,000 divided 12, multiplied by 9.5%).    

b. Form W-2 Safe Harbor:    

The second safe harbor, referred to as the “W-2 Safe Harbor” provides that an employer will not be subject to the Affordability Penalty with respect to an employee provided the employee is provided the opportunity to purchase self-only coverage at an annual cost of not more than 9.5% of his/her wages, as reported in Box 1 of Form W-2.49  For example, if self-only coverage costs $6,000 and the employee received $20,000 of wages, as reported in Box 1 of his Form W-2, the coverage would be deemed affordable provided the employee was not made to pay more than $1,900 for his share of self-only coverage for the year (9.5% of $20,000 equals $1,900).  In this example further assume the employee’s contract calls for him to pay 30% of the cost of self-only coverage and that the total cost of self-only coverage is $6,000.  In this example, the employee would be required to pay $1,800 for his share of self-only coverage (30% of the $6,000 total cost) and the coverage would be deemed affordable because his required contribution of $1,800 does not exceed 9.5% of his wages as reported in Box 1 of W-2.

One potential complication with the Form W-2 Safe Harbor is that an employer does not finalize the Form W-2 until after the end of the year so it will be difficult to know for sure if the employer is complying with the Form W-2 safe harbor until the year is over and the Form W-2 is issued.  By then it would be too late to make adjustments to the cost of the employee’s health insurance.  Also, wages reported in Box 1 of Form W-2 are the employee’s “taxable wages” or gross wages, less tax-free contributions to tax qualified employee benefit plans such as 401(k) plans.  Therefore, two employees holding the same position with the same salary could have very different taxable wages depending upon the amount each decides to contribute to their respective 401(k) plan or other tax qualified employee benefit plan.  As a result, most employers will find the Rate of Pay Safe Harbor more useful in avoiding the Affordability Penalty than the Form W-2 Safe Harbor.