Starting January 1, 2014, employers employing a certain number of employees will be subject to the Employer Shared Responsibility provisions under Section 4980H of the Internal Revenue Code, which subjects an employer to an assessment for the failure to offer its full-time employees health coverage that is affordable and provides a minimum value. These provisions will generally apply to “applicable large employers.”
The Code and Regulations define how an “applicable large employer” and full-time employee status will be determined, and how an assessable payment will be calculated and assessed. The regulations also provide a number of new safe harbors for employers who offer coverage to their full-time employees, as well as transition relief for the first year of application.
Full Time Employee
A full time employee is defined by the statute as an individual employed on average at least 30 hours per week (half time would be 15 hours per week).
Applicable Large Employers
An “applicable large employer” is an employer that employs:
- at least 50 full-time employees, or
- a combination of full-time and part-time employees that equals at least 50
For example, 40 full time employees (those employed 30 or more hours per week on average) plus 20 half time employees (those employed 15 hours per week on average) are equivalent to 50 full time employees.
To see whether an employer meets the large employer threshold, an employer can average their number of employees for the year. The averaging helps take into account fluctuations employers may experience in their work force numbers for the year. Employers with employees working abroad generally will take into account only work performed in the United States.
Liability
An “applicable large employer” generally will be liable for an Employer Shared Responsibility payment only if:
- they do not offer health coverage, or
- if coverage is offered 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 Exchange.
The employer could also be liable if they offer health coverage to at least 95% of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange.
Coverage
If an employee’s share of the premium for employer-provided coverage costs the employee more than 9.5% of their annual household income, the coverage is not considered affordable for that employee. When multiple healthcare coverage options are offered, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement. A minimum value calculator can be used to 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.
Under 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 on the employees Form W-2, or
- if the coverage satisfies either of two other design-based affordability safe harbors.
Delinquent Coverage
If an employer employs enough employees to be an “applicable large employer” and does not offer coverage to at least 95% of its full-time employees, it owes an Employer Shared Responsibility payment equal to the number of full-time employees the employer employed for the year (minus 30) multiplied by $2,000, as long as at least one full-time employee receives the premium tax credit.
If coverage is offered for some months but not all months of the calendar year, the payment is computed separately for each month for which coverage was not offered. The amount of the payment for the month equals the number of full-time employees the employer employed for the month (minus up to 30) multiplied by 1/12 of $2,000. The payment for the calendar year is the sum of the monthly payments computed for each month for which coverage was not offered.
The 30-employee exclusion noted in the computations above is allocated among all related employers among a group of related entities. After 2014, these rules apply to employers that do not offer coverage or that offer coverage to less than 95% of their full time employees and the dependents of those employees.
Payment
The IRS will contact employers to inform them of their potential liability and provide them an opportunity to respond before any liability is assessed or a notice is sent and demand for the payment is made.
- The contact for a given calendar year will not occur until after employees’ individual tax returns are due for that year claiming premium tax credits, and
- after the due date for employers that meet the 50 full-time employee (plus full-time equivalents) threshold to file the information returns identifying their full-time employees and describing the coverage that was offered (if any)
Payment is due after the IRS notice is sent. The notice will have instructions for payment.
Employers are not required to include payment on any tax return.
Premium Tax Credits
Premium tax credits generally are available to help pay for coverage for employees who are between 100% and 400% of the federal poverty level and enroll in coverage through an Affordable Insurance Exchange. They are not applicable:
- for coverage through a government-sponsored program like Medicaid or CHIP, and
- coverage offered by an employer unless the employer coverage is unaffordable or does not provide minimum value
These rules are complex and will require employers to analyze the impacts in relationship to their employees, and the current benefits offered.
