Understanding The ACA Employer Mandate
By Scott Dondershine, CPA, Esq.
For better or worse it is now time to take stock and learn of your obligations as an employer under the Patient Protection and Affordable Care Act (“ACA”). This Client Alert cannot possibly pretend to cover all provisions of the ACA. Rather, the purpose is simply to prompt clients, friends and advisors to begin to understand the requirements of the employer mandate. It explains the employer mandate in generic terms providing general guidance only and should not be relied upon for legal advice.
Failure to act soon may have significant repercussions later. Many provisions have already been implemented and two key deadlines are coming up in the next six months (first on July 1, 2013 and then on October 1, 2013).
By July 1, 2013, employers should have in place a strategy for addressing their rights and responsibilities under the ACA. Why July 1? The answer is simple but you first need to understand some of the basics of the ACA.
In broad generalities, beginning in 2014 “large employers” can be penalized for failing to offer adequate and affordable coverage to their full-time employees. This is the so called mandate. A large employer is defined as a company (including related entities) that has fifty or more (1) full-time employees (30 or more hours per week or 130 or more hours per month) plus (2) full-time equivalents (FTE). The test is relaxed a bit for seasonal workers.
The number of full-time equivalents is basically determined using the hours of all non-full time employees, e.g., part-time employees. The hours for each part-time employee up to 120 per month are added and then divided by 120 to determine the number of FTEs.
The computation is performed each month of the “testing year” which is the calendar year before the applicable year for determining whether coverage is required. For instance, 2013 is the testing year for determining whether an employer is “large” for 2014 and is subject to the employer mandate. Each month’s total is then averaged to determine the total for the testing year. Note that an employer can be large (subject to the mandate for one year) but then small for the next. A small employer is not subject to the mandate but is subject to certain other rules that are beyond the scope of this Client Alert.
Now you can see why 2013 is important. But why July 1, 2013? The answer is that for determining whether an employer is large or small for 2014, a special transition rule requires the use of only six months. While it is any six consecutive month period in 2013, for employers who have not planned yet it can be the six month period beginning July 1 and ending December 31. Employers may have an opportunity to plan to stay “small” for 2013 thus avoiding the mandate in 2014.
An employer that cannot plan around the mandate will be large. The next question is whether to pay the penalty or provide the coverage. This is known as “pay or play”. Employers facing this choice should immediately begin to explore the cost of coverage that complies with the requirements.
There are three requirements. First, a plan must offer certain minimum benefits- there are ten different types of minimum benefits. Second, the plan must cover at least 60% of the cost of medical/health needs of a standard population (actuarially determined) to all full time employees and their dependents (note not spouses). Finally, the plan must meet an affordability test. Affordability is met if an employee’s premium or co-pay is not greater than 9.5% of his or her household income. The third prong will require that good record-keeping and reporting systems be in place by employers and the government.
Failure to comply with the above rules will result in a penalty, i.e., the “pay” element of the choice to “pay” or “play”. Two potential penalties can apply. The first penalty applies to a “large” employer offering a plan with the 10 types of “minimum essential coverage” but that fails either the 60% cost coverage test or 9.5% affordability test. The penalty, infamously referred to as the “tack-hammer penalty”, is $250 for each month for each full-time employee receiving a subsidized plan from the marketplace. The gross amount of the tack-hammer penalty cannot exceed the amount of the second penalty described below.
The second penalty applies to a large employer that offers no coverage at all if one or more employees receive subsidized coverage. The penalty, infamously called the “sledgehammer penalty”, in this instance is $2,000 per each full-time employee beyond the first thirty.
You should note that the regulations allow for a five percent margin of error and only apply with respect to full-time employees. This means that an employer will not be subject to a penalty for a particular month if adequate coverage is provided for at least 95% of all full-time employees and all other requirements are met. Also, both penalties only apply if at least one-full time employee receives coverage from the marketplace that is subsidized by the government (generally applicable to employees with household income of less than 400% of the applicable federal poverty level). Finally, the penalties are not deductible for federal tax purposes.
What can an employer do? The starting point is to determine if an employer is “large” or “small” based upon 2013 data. It may be possible to closely monitor an employer’s workforce in 2013 to make sure that the monthly average of employees (full-time and FTEs) is not 50 or more.
An employer that cannot be considered “small” has a different set of alternatives. The first option is, of course, to comply with the intent of the statute and provide coverage meeting all of the above tests. Another option is to simply pay the sledgehammer penalty of $2,000 for each full-time employee in excess of thirty. An employer can pay the penalty and offer no benefits or a limited benefit such as an allowance. Employees can then use the allowance as they desire, including purchasing individual coverage.
A variation of the approach is for an employer to provide a plan meeting the test of “minimum essential coverage” but failing either the 60% cost coverage test or 9.5% affordability test. The tack-hammer penalty described above applies to this type of offering.
A middle-ground approach that may be useful is to offer affordable coverage that meets all of the requirements to all full-time employees and to limit part-time employment to workers working less than 30 hours per week. The Commonwealth of Virginia announced this strategy for its state employees. Other strategies may also be possible but employers must be mindful of the impact and restrictions of other laws (such as ERISA and Section 1558 of the ACA itself) in designing and implementing any such practices.
Decisions probably need to be made soon since the last six month testing period for determining whether an employer is large for 2014 begins (from a practical perspective) on July 1, 2013. It may be difficult to design a strategy after said date.
The second deadline for 2013 is October 1, 2013. The ACA requires employers that are subject to the Fair Labor Standards Act (most employers) to notify all full or part-time employees of their coverage options through the marketplace. Additional guidance to employees is also required in the notice. On May 8, 2013, the U.S. Department of Labor issued a technical release (Number 2013-02) providing a model notice for the use of employers. Affected employers are required to provide the notice to each current employee by October 1, 2013 and to each new employee at the time of hiring, beginning on October 1, 2013. A model notice is also provided for COBRA purposes.
The ACA has vast implications for most, if not substantially all, employers. The ACA landscape is filled with landmines but also opportunities for planning. The Client Alert is intended as an introduction only – many key concepts are not addressed. Let us know if you want to discuss the issues in this Client Alert with you in greater detail.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this Client Alert is not intended or written to be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this Client Alert.