In early January, the Internal Revenue Service published proposed regulations on “Shared Responsibility for Employers Regarding Health Coverage.” These regulations incorporate the provisions of many previous Notices with some modifications, and also propose guidance on additional issues under the Patient Protection and Affordable Care Act. The regulations provide rules and examples for determining: status as an applicable large employer, full-time employees, assessable payments under the employer shared responsibility mandate, and the administration and assessment of assessable payments.
Applicable Large Employers. Applicable large employers (employers who employ 50 or more full-time equivalent employees) are subject to the employer mandate and must offer minimum essential health coverage to their full-time employees or pay a penalty. The proposed rules adopt the common law employee standard for the 50-employee threshold for applicable large employers. Leased employees are not treated as employees; nor are sole proprietors, partners in a partnership, or 2% S corporation shareholders. The identification of full-time employees for purposes of determining applicable large employer status is performed on a look-back basis using data from the prior year, taking into account the actual hours of service of all employees employed in the prior year (full-time and non full-time). All employees in a controlled group or affiliated service group are taken into account when determining whether members of the controlled or affiliated service group together constitute an applicable large employer.
Watch for my upcoming blog post (I’m not an applicable large employer under the ACA…or am I?) for more information on how to determine if you are an applicable large employer.
Determining full-time employees who must be offered coverage. Once an employer has determined it is an applicable large employer, the next step is identifying which employees must be offered health coverage. A full-time employee, for this purpose, is an employee who was employed on average at least 30 hours of service/week. Hours of service include each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer., including vacation, holiday, illness, layoff, jury duty, military duty or leave of absence. For employees not paid on an hourly basis, employers can use one of three methods to count hours of service: counting actual hours of service, using a days-worked equivalency method, or using a weeks-worked equivalency method. Hours of service generally do not include services performed outside of the United States.
The proposed regulations provide guidance on how to calculate hours of service for teachers and other employees of educational organizations, employees compensated on a commission basis and adjunct faculty.
The regulations adopt the look-back measurement method for determination of full-time employee status described in earlier guidance as an alternative to a month-by-month method of determining full-time employee status. The regulations describe different look-back periods for ongoing and new employees. Watch for my upcoming blog post (Who must be offered health coverage under the pay or play rules?) for more in-depth information on how applicable large employers can identify which employees must be offered minimum essential health coverage.
If an applicable large employer does not offer health coverage, and at least one employee receives a premium tax credit on the exchange, the penalty is $2000 x number of full-time employees (less the first 30). If an employer offers coverage but it is unaffordable or doesn’t provide minimum value and at least one employee receives a premium tax credit on the exchange, the penalty is $3000 x number of employees that receive a premium tax credit on the exchange. The Department of Health and Human Services will be developing a process whereby an employer will be notified if its employees purchase coverage on an exchange and receive a premium tax credit. Employers will be provided an opportunity to respond (for example to show that the employee is eligible for the employer’s affordable, minimum essential coverage), before the issuance of any notice and demand for payment.
The Affordable Care Act requires that employers offer minimum essential health coverage to substantially all of their full-time employees and dependents. A dependent is defined in the proposed regulations as a child under age 26, and does not include a spouse. The regulations state that if an employer offers health coverage to all but 5% (or 5, if greater) of its full-time employees, they will be treated as offering coverage to all of its full-time employees.
Although common ownership is taken into account when determining whether an employer is an applicable large employer, shared responsibility requirements are applied separately to each member of the controlled group. Each member of the controlled group is also allocated its proportionate share of the 30 employees that can be deducted from the number of employees who lack coverage in computing the pay or play penalty.