Last week in my article “The Affordable Care Act: A look under the hood to see how it works,” I described how the Individual Mandate would affect American taxpayers. This week, I will describe the “Employer Mandate” – what the Personal Protection and Affordable Care Act (PPACA) requires of “Applicable Large Employers” (ALE).

The PPACA does not require employers to offer healthcare insurance coverage to its employees, but “Applicable Large Employers” are subject to a shared-responsibility mandate effective January 1, 2014.

Applicable Large Employers

An Applicable Large Employer (ALE) is an employer that employed an average of at least 50 full-time employees during the past year. However, some employers may be exempt if their workforce exceeded 50 full-time employees for 120 or fewer days during the calendar year or the employees in excess of 50 were seasonal workers. Therefore, an employer’s employee population in 2013 will determine whether it will be subject to the employer penalties in 2014.

According to the Act, a full-time employee is one that is employed an average of at least 30 hours per week. A seasonal worker maintains the same definition that is used in the Department of Labor in its Migrant and Seasonal Agricultural Worker Protection Law.

Labor is performed on a seasonal basis where, ordinarily, the employment pertains to or is of the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year. A worker, who moves from one seasonal activity to another, while employed in agriculture or performing agricultural labor, is employed on a seasonal basis even though he may continue to be employed during a major portion of the year.

In addition, workers employed exclusively during holiday seasons are also included in the definition of seasonal worker for purposes of the ALE exemption.

To determine the total number of full-time and full-time equivalent employees for a particular month for purposes of determining if the employer is a “large employer,” the employer must add together (a) the total number of full-time employees for the month, plus (b) a number that is equal to the total number of hours worked in a month by part-time employees, divided by 120.

Reporting Requirements

The PPACA imposes additional reporting requirements on ALEs. Additional information about the employer heath plan, or its absence, must be reported to the IRS each year. The ALE must also notify each employee of the information disclosed about that employee in that IRS health insurance report. The special reporting requirement of an ALE under PPACA include: 1) The name and employer ID number of the employer; 2) A certification as to whether the employer offers its full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan; 3) The number full-time employees for each month during the calendar year; 4) The name, address, and tax ID number of each full-time employee during the calendar year and the number of months each employee was covered by a health plan; and 5) Any other information the IRS may later require. Employers that offer coverage are also required to disclose the details regarding coverage offered, including waiting periods, the lowest cost option for employees, and the total cost of benefits allowed under the plan.

An eligible employer-sponsored plan is defined as a group health insurance plan offered by an employer to an employee, which is 1) a governmental plan under the Public Health Act; 2) Any other plan or coverage offered in a group market within a state; or 3) A grandfathered health insurance plan. Some group health insurance plans and health insurance coverage existing as of the enactment of PPACA (March 23, 2010), are grandfathered plans that are not subject to many of the PPACA provisions and can continue in place. Grandfathered plans must include a statement notifying the enrollees that they have grandfathered status as permitted by the PPACA. Making certain changes to a grandfathered plan can result in termination of its grandfathered status.

Written Statements to Employees

Employers who are subject to the health insurance coverage reporting requirement must also furnish to each employee named in the report a written statement indicating 1) the name, address, and telephone number of the person compiling the report; and 2) The particular details about the employee that are shown in the report. These disclosures are due to the employees on January 31of the year following the calendar year for which the health insurance report was made to the IRS.

Penalties

The health insurance report that employers are required to file with the IRS is considered an “information return.” The written statements the employer is required to provide employees are also considered “information returns”. Information returns carry potential penalties under IRC §6721. Generally the amount of the penalty is related to the amount of information returns that were not filed on a timely basis. Depending on circumstances, the maximum penalties for small employers (less than $5 Million in gross receipts) can range from $75,000 to $500,000 depending on number of returns not filed, or filed late. Larger employers (greater than $5 Million in gross receipts) may be subject to maximum penalties f $250,000 to $1.5 Million depending on number of returns not filed, or filed late. Intentional disregard to file carries a $250 per information return penalty or the statutory percentage, which can be 5% or 10% of the dollar amount shown on certain specified information returns when filed correctly.

Employers Not Offering Coverage

The PPCA does not require employers to provide coverage to employees. It requires shared-responsibility payments if 1) the employer fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month, and 2) at least one-full-time employee has been certified to the employer as having enrolled in a state exchange and receives a premium adjustment credit (PAC) or qualifies for cost sharing.

The employer is subject to a shared-responsibility payment, which is calculated on a monthly basis using the following steps: 1) Subtract 30 employees from the total number of FTE employees for the month, and 2) multiply that reduced number by $166.67. This is referred to as the §4980H(a) penalty.

EXAMPLE:

An employer has 50 FTE employees and does not offer health insurance for the entire year and at least one employee purchases health insurance from an exchange and receives a premium assistance credit (PAC). The employer would be subject to the penalty for each month it did not provide healthcare. They would take 50 employees, subtract 30, and multiply by $166.67 times the number of months, for a penalty of about $40,000. (50-30 = 20 times $166.67 time 12 months = $40,000.80)

Employers Offering Coverage

Employers that offer coverage to employees have specific requirements that must be met under the PPACA. Three of the most important include: 1) The employer must provide insurance that covers at least 60% of the employee’s healthcare costs. This means that the employees costs co-payments, deductibles, and other out of pocket costs cannot exceed 40% of the total benefit cost under the plan offered by the employer; 2) The employer cannot offer coverage to some employees and not others; 3) The employer must offer affordable coverage to employees. Unaffordable coverage occurs when full-time employees spend greater than 9.5% of their household income on healthcare coverage.

If the employer offers a plan but it does not meet the minimum coverage requirements or is not affordable, the employer may be subject to a shared-responsibility payment. If the coverage that is offered does not meet the minimum coverage or it is deemed not-affordable, employees may be eligible to purchase coverage on a state exchange and be eligible for premium assistance credits (PAC) and or cost-sharing reductions. If the employee is eligible, and purchases coverage from the exchange and receives PAC or a cost-sharing reduction, the employer may be subject to a shared-responsibility payment.

ALEs that offer coverage are also subject to the shared-responsibility payment if: 1) They offer full-time employees the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month, but 2) they have one or more fulltime employees who have been certified for the month as having enrolled in a qualified health plan offered through a state exchange, which makes that employee eligible for a PAC or cost-sharing reduction.

An employee offered affordable minimum essential coverage by an employer is not eligible for PAC or cost-sharing reduction. Medicaid eligible employees can also leave the employer’s insurance program and enroll in Medicaid without exposing the employer to the shared-responsibility payment.

The shared responsibility payments are calculated for only those full-time employees that qualify for PAC or cost-sharing. The §4980H(b) penalty is $250 per month for each employee who qualifies for the PAC or cost-sharing reduction. The $250 penalty cannot be larger than the penalty assessed if the employer had not offered any insurance, and therefore the penalty is capped at the amount of the §4980H(a) penalty.

EXAMPLE:

During 2014, XYZ Corp has 80 full time employees. The company offers minimum essential coverage only to some of its employees. Eight employees receive PAC because they enrolled in a plan through the state healthcare exchange. All eight employees qualified for PAC and / or the cost-sharing reduction for all 12 months in 2014. For each of these 8 employees, XYZ Corp owes the §4980H(b) penalty of $250 per month per employees, or $24,000 for 2014. ($250 times 8 employees times 12 months = $24000). However, the annual penalty is capped to the amount if no insurance had been provided. (80-30 = 50 times $166.67 times 12 months = $100,000. Thus the penalty is $24,000 under §4980H (b).

Mandatory Notice to Employees

Effective March 1, 2013, employers must provide written notice to employees regarding upcoming state exchanges and the employees’ potential eligibility to purchase coverage through the state exchange in the event the employer’s coverage does not meet the requirements. This notice must also be given to all newly hired employees in subsequent years.

Implementation

Implementation of the Affordable Care Act relies heavily on state healthcare exchanges. Employers will have to understand their role in the act, as well as any responsibility. As with any regulatory program, compliance assistance or assurance will become another functional area for development. The PPACA has a wide potential for changing public policy in the areas of healthcare, labor, and taxation. Next week, I will post some of the policy shifts that I believe are likely under the PPACA.