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IRS Gives Employers Guidance on the Employer Shared Responsibility Provisions of the Affordable Care Act

Posted in Labor Law, New Legislation and Regulations

By:  Shauna N. Correia

Employers should be planning ahead for the January 1, 2014 implementation of the “Employer Shared Responsibility” provisions of the Affordable Care Act. That is because the average number of workers a company employed during 2013 will determine whether an employer is a “large employer,” and must offer minimum levels of health insurance to its employees, for 2014. The Internal Revenue Service has now issued a 144-page proposed rule and added a “Q&A” section to the IRS website (found here) geared toward explaining how it will decide whether an employer is required to offer affordable health insurance and what levels of coverage must be provided.

Under the provisions of the Act, a company employing 50 full-time workers must offer affordable health insurance that provides a minimum level of coverage to its full-time employees. If it does not, the company may be subject to an Employer Shared Responsibility payment if at least one full-time employee receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges. Non-profits, for-profit, and government entities alike are subject to the new regulations.

How Will the IRS Count Employees in Determining Whether a Company is A “Large Employer” Subject to These Rules?

A hot topic in this arena has been how the IRS will count employees in determining whether a company is a “large employer” subject to these rules. A company will need to take the average number of employees for each month in the calendar year to determine whether it meets the large employer threshold. The IRS has clarified that a large employer is one that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee is an individual employed, on average, at least 30 hours per week. Half-time would be 15 hours per week. So, for example, a company employing 10 employees working 30 hours per week, 50 employees working 20 hours per week, and 50 employees working 10 hours per week is a large employer. However, under this example, only the 10 actual "full time” employees must be offered health insurance coverage. The proposed regulations provide additional information about how to determine the average number of employees for a year, including information about how to take account of salaried employees who may not clock their hours and a special rule for seasonal workers.

Also of note: if two or more companies are related (parent/subsidiary) or have a common owner, the IRS will consider them one company for purposes of counting full-time employees or full-time equivalents. However, only work performed in the United States is considered for the determination, so companies with employees outside the U.S. do not need to count employees who perform no work in the United States.

Which Employees are “Full Time”?

Another concern has been how a company will determine which individual employees must be offered health coverage. Many companies employ workers with variable schedules, seasonal employees, and employees (like teachers) who have breaks during the year. The IRS regulations clarify that employers will use a “look back” system for existing employees: if an employee works at least 30 hours per week during the “measurement period” (a defined time period of not less than three but not more than 12 consecutive months, as chosen by the employer), that employee will be considered full time for the next “stability period” regardless of how many hours he or she works during the “stability period” (which must be at least six months and not less than the length of the measurement period).

For those employers that may be close to the 50 full-time employee (or equivalents) threshold and need to know what to do for 2014, special transition relief will be available to help them count their employees in 2013.

What Type Of Insurance Must Be Offered?

The health insurance coverage must be “affordable” and must provide minimum value. “Affordable" coverage is coverage that does not cost a single employee over 9.5% of his or her income, although the amount may be more for family coverage. So, if an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement. A minimum value calculator will be made available by the IRS and the Department of Health and Human Services (HHS). Employers will be able to input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value by covering at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.

Because employers generally do not know their employees’ household incomes, affordability safe harbors are set forth in the proposed regulations. Under the safe harbors, an employer can avoid a payment if the cost of the coverage to the employee would not exceed 9.5% of the wages the employer pays the employee that year, as reported in Box 1 of Form W-2, or if the coverage satisfies either of two other design-based affordability safe harbors.

In 2014, if an employer meets the 50 full-time employee threshold, the employer generally will be liable for an Employer Shared Responsibility payment only if: (a) The employer does not offer health coverage or offers coverage to less than 95% of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an insurance exchange; or (b) the employer offers the required health coverage, but at least one full-time employee receives a premium tax credit, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value. The coverage need only be offered to actual full-time employees.

After 2014, the rule in part (a) applies to employers that do not offer health coverage or that offer coverage to less than 95% of their full time employees and the dependents of those employees.

For 2014, there is a 30-employee exclusion. Large employers who do not provide health insurance coverage may be subject to a penalty of $2,000 per employee per year if more than 30 employees are subsidized by the tax credits. After 2014, the 30-employee exclusion will go away under the proposed regulations.

Need More Guidance?

The IRS stated that employers may rely on the proposed regulations for guidance until final regulations are issued.

A public hearing will be held on the proposed regulations on April 23 and the IRS is accepting written or electronic comments until March 18.

Please refer to the full proposed regulations for the full details, and contact your Weintraub employment attorneys with questions.