Providing Health Insurance Coverage for Employees

Will all employers have to provide health insurance for their employees?

No, the law does not require employers to provide health insurance to their employees. However, large employers that do not provide any health insurance or do not provide affordable health insurance to their full-time employees and their dependents may face penalties. Refer to the Kaiser Family Foundation diagram:

Kaiser chart for penalties for employers not offering affordable coverage under the ACA Beginning in 2014

Are small employers subject to penalties?

No, small employers are not subject to penalties for not providing any health insurance or affordable health insur¬ance for their employees. A small employer is less than 50 full-time employees.

Do employers have to provide health insurance to part-time employees?

No employer (regardless of size) has to provide health insurance to their part-time employees (those who work less than an average of 30/ hours week). There are also no penalties for employers if their part-time employees obtain insurance through the health insurance marketplace.

Will employers be penalized if they hire Medicaid beneficiaries?

No, employing a Medicaid beneficiary will not trigger penalties for non-coverage or non-affordability. However when an employer calculates the full–time equivalents (FTEs) they must include all employees receiving Medicaid.

Who is an employee?

Various federal laws have different definitions of “employee.” The ACA uses a broad definition – an employment relationship exists when the employer has the right to control and direct the details, means, and results of the work performed by the employee. Some factors that help to determine whether an individual is an employee include whether:

  • the individual is required to comply with the employer’s instructions about when and where to work;
  • the individual is trained by the employer;
  • there is a continuing relationship between the individual and the employer; and
  • there are set hours of work for the employee.

How do I determine if I am a large employer?

A large employer has 50 or more full–time employees, taking into account full–time equivalents (FTEs) during the previous year. Full–time is 30 or more hours per week. This includes hours during which the employee is paid but no work is performed (vacation, holiday, leave, etc). The employer does not need to include full–time employees who are employed for three months or less in its calculation.

Full time = 30 hours per week.

The formula to calculate full–time employees involves adding together the number of full–time employees and full-time equivalents for each month in the previous calendar year. Full–time equivalents are calculated by dividing the total number of monthly working hours of your part–time employees by 130. This is added to the number of full–time employees (working more than 30 hours) to determine total number of full–time equivalents. Disregard all fractions. See examples of the employer size formula below.

Example: 49.7 full-time employees rounds down to 49 full-time employees.

Employer A – NOT a large employer

  number of employees x average hours per month = total # of monthly hours / 120 = Full–time equivalents
full time 30   ---   ---   ---   30
part time 12 x 80 = 960 / 130 = 7.38
                  Total FTEs = 37

Employer B – a large employer

  number of employees x average hours per month = total # of monthly hours / 120 = Full–time equivalents
full time 30   ---   ---   ---   30
part time 40 x 100 = 4,000 / 130 = 30.76
                  Total FTEs = 60
FOR 2014 ONLY
As a transition policy, employers may use any consecutive 6–month period in 2013 to calculate the number of its full-time equivalent employees. For example, an employer can use the period of time from April 2013 until September 2013 to calculate its number of employees. Then, the employer may use the remainder of the year to take action to avoid the penalty, such as purchasing insurance if it has not done so.

Does this calculation happen every month?

Yes, this is a monthly calculation.

Is there a simpler way to do this?

Recognizing that it may be burdensome on employers to do this every month, the regulations allow a look-back/stability period safe harbor. The regulations use the term safe harbor to give employers easier methods for complying with the law. This means that an employer can look back over a designated period to determine whether an ongoing employee is a full-time employee.

What is the measurement period?

Under the safe harbor method, an employer would determine an ongoing employee’s full-time status by looking back at a period of three (3) to twelve (12) consecutive months, i.e., the standard measurement period. The employer reviews the employee’s hours over time to see if the hours averaged 30 or more per week. If the employer determines an employee averaged at least 30 hours per week (or at least 130 hours per month) during the standard measurement period, then the employee must be treated as a full-time employee during the subsequent stability period.

What is the stability period?

For an ongoing employee determined to be a full-time employee, the stability period is a period of at least six (6) consecutive months that follows the measurement period, but not shorter than the measurement period. If the employee did not work full-time during the measurement period, then the employer does not need to treat the employee as a full-time employee during the stability period. If the employee did work full-time then the employer has an opportunity to offer health insurance coverage.

Measurement PeriodStability Period
Three (3) – Twelve (12) months At least six (6) months, but not less than measurement period.

What if I have new employees that may not work the same hours every week?

The safe harbor also applies to newly hired variable hour employees. Under the safe harbor, an employer would determine whether a newly hired variable hour employee is to be treated as a full-time employee using an “initial measurement period” and associated stability period. The initial measurement period must be between three (3) and twelve (12) months, and may begin on the employee’s start date or the first day of the next month. The employer measures the number of hours completed by the new employee during the initial measurement period and determines whether the employee completed an average of 30 hours per week. If the newly hired employee is determined to be a full-time employee during the initial measurement period, then the employer must treat the employee as a full-time employee during the subsequent stability period. If the employee is determined not to be a full-time employee during the initial measurement period, then the employer may treat the employee as not a full-time employee during the subsequent stability period, which must be the same length as the stability period for ongoing employees.

What penalties are imposed on large employers?

Large Employer Penalties

There are two types of penalties large employers might face:

  1. For not offering health insurance coverage to the employee and his or her dependents; or
  2. For offering unaffordable or inadequate coverage to the employee and his or her dependents.

If an employee receives a premium tax credit in the health insurance marketplace, then this may trigger a penalty. Premium tax credits are available to individuals and families with income up to 400% of the FPL. Refer to www.healthcare.gov for more information regarding the premium tax credits (http://www.healthcare.gov/marketplace/costs/tax-credits/index.html). In 2013, 400% of the FPL for an individual is $45,960.

While part-time employees are included in the calculation for determining if an employer is a large employer, they are not counted when determining penalties.

How are dependents defined?

Dependents are limited to an employee’s children who are under the age of 26. Spouses are not considered dependents under the ACA; however, some states may require that spouses be covered.

Dependents include:

  • Children by birth or adoption;
  • Stepchildren; and
  • Foster children.
FOR 2014 ONLY
The IRS recognizes that not all employers offer health insurance coverage to their employees’ dependents and is providing a transition year for employers who show progress in establishing the coverage for 2015. In 2014, employers will not be penalized solely for failure to offer dependent coverage.

What is the penalty for NON – coverage?

Large employers must pay a penalty for every full-time employee who receives a premium tax credit/subsidy in the health insurance marketplace.

EXAMPLE

You have 60 full-time employees and one (1) of your full-time employees receives a premium tax credit.

(60 - 30) x $2,000 = $60,000 (annually)

$60,000 / 12 months = $5,000 monthly penalty

Penalty for NON – coverage

If at least one full-time employee is receiving a premium tax credit, then the penalty equals $2,000 annually times the total number of full-time employees minus 30. The first 30 employees are not counted in the penalty calculation.

It is important to note that uninsured individuals have a strong incentive to obtain a premium tax credit if they qualify, since the law also contains individual penalties for non-coverage. Employers will not be penalized if their part-time employees receive a premium tax credit in the exchange.

Is there any flexibility?

The regulations allow some flexibility if an employer intended to cover all employees but inadvertently someone was not covered. The regulations allow a 5% gap or 5 people, whichever is greater, as shown below.

Employer AEmployer B
  • 300 employees
  • 5% = 15
  • 15 is greater than 5
  • Employer A is allowed a gap of up to 15 people.
  • 60 employees
  • 5% = 3
  • 5 is greater than 3
  • Employer B is allowed a gap of up to 5 people.

What is the penalty for UNAFFORDABLE coverage?

Large employers must pay a penalty for employees who receive a premium tax credit for the health insurance marketplace.

EXAMPLE

You have 60 full-time employees and three (3) of your full-time employees receive a premium tax credit.

3 x $3,000 = $9,000 (annually) $9,000 / 12 months = $750 monthly

OR

$2,000 x 30 (60 - 30) = $60,000 annually $9,000 monthly

You pay $750 monthly, the lesser of the two (2) amounts

Penalty for "UNAFFORDABLE" coverage.

The penalty is $3,000 multiplied by the number of full-time employees receiving a premium tax credit.

The penalty cannot be greater than the penalty the employer would have faced for not offering insurance ($2,000 multiplied by the total number of FTEs minus 30).

How is unaffordable or inadequate coverage defined?

Health insurance is unaffordable or inadequate if:

  • The employee’s required contribution for self-only coverage exceeds 9.5% of the employee’s household income; OR
  • The plan offered by the employer to provide minimum essential coverage pays for less than 60% of covered expenses. If that happens, the plan does not meet the minimum value standard. The Department of Health and Human Services has created a minimum value calculator (http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/mv-calculator-final-4-11-2013.xlsm) to help employers determine if the employer’s plan pays for less than 60% of covered expenses.

Is there an easier way to determine if a plan meets minimum value (MV)?

The IRS is proposing that plan designs covering all benefits included in the MV calculator (see above) and meeting any of the following three (3) examples will be considered meeting the minimum value requirement:

PlanIntegrated medical & drug deductibleCost sharingMaximum out of pocket limitOther
1 $3,500 80% $6,000
2 $4,500 70% $6,400 $500 employer health savings
3 $3,500 medical, $0 drug 60% medical, 75% drug $6,400 $10, $20, $50 prescription drug tiers, with 75% coinsurance for specialty drugs.

What if the coverage for dependents is unaffordable?

The affordability test applies only to the lowest cost self-only coverage plan. Employers do not need to determine if family coverage is affordable for their employees and will not face penalties for unaffordable family coverage.

TIP
Employers with many low wage employees should carefully consider these provisions. More information is available at http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act.

Are there other ways to determine if a health plan is affordable?

Since household income is not known by the employer, there are three (3) safe harbor provisions for determining affordability based on information available to the employer. These provisions help employers design benefits to meet the affordability test without requiring monthly calculations of every employee’s wages and hours.

These safe harbor provisions are only useable if the employer offers minimum essential coverage that meets minimum value (i.e., plans covers at least 60% of covered expenses).

The safe harbors do not affect an employee’s eligibility for premium tax credits.

The three (3) safe harbors measures include

  1. The W-2 Safe Harbor

    This test determines affordability based on whether an employee’s premium contribution for the lowest-cost, self-only coverage that provides minimum value exceeds 9.5% of the employee’s wages as reported on Form W-2 Box 1 for the calendar year. In order to qualify for this safe harbor, the employer must:

    • offer the employee and his or her dependents the opportunity to enroll in an employer’s plan that meets minimum value; and
    • ensure that the employee’s contribution toward the self-only premium for the employer’s lowest cost coverage does not exceed 9.5% of the employee’s Form W-2 wages for that specific employer.

    If these conditions are met, the employer will not be required to pay a penalty even if an employee receives a premium tax credit.

    W-2 Safe Harbor Example

    Employee A is employed by a large employer from May 15 to December 31, 2013. The employer offers coverage to Employee A from August 1 through December 31, 2013. Employee A’s contribution for self-only coverage is $100 per month or $500 for Employee A’s period of employment. For 2013, Employee A’s Form W-2 Box 1 wages are $15,000.

    To apply the affordability safe harbor, the Form W-2 Box 1 wages are multiplied by 5/8 (Five (5) calendar months of coverage offered over eight (8) months of employment during the calendar year). Affordability is determined by comparing the adjusted W-2 wages ($9,375, or $15,000 x 5/8) to the employee contribution for the period for which coverage was offered ($500). Because $500 is less than 9.5% of $9,375, the coverage is affordable for 2013 ($500 is 5.33% of $9,375).

    Employee Contribution per Month   # of months   Total Employee Contribution Annual Wages (Form W–2 Box 1)
    Employee Contribution per Month X 5 = $500 $15,000
    Adjusted W–2 Wages % of Annual Contribution (Must be less than 9.5%)
    $9,375 ($15,000 X 5/8) 5.33% ($500/$9,375)
  2. Rate of Pay Safe Harbor

    It may be difficult for an employer to analyze every employee’s wages and hours to determine whether coverage is affordable. Under this safe harbor, an employer can take the hourly rate of pay for each hourly employee who is eligible to participate in the health plan and multiply that rate by 130 hours per month (the requirement to be considered a full-time employee) to determine whether coverage is affordable. For a salaried employee, the monthly salary would be used in the calculation.

    If the employee’s contribution is equal to or lower than 9.5% of this result, then the coverage is affordable. To qualify for this safe harbor, the employer must offer minimum value coverage to the employee and his/her dependents and cannot reduce the hourly wages of the hourly employees during the year.

    Example: Employee B is employed for the 2013 calendar year with an employer that provides minimum value. The employee contribution for self-only coverage is $85 per month. Employee B is paid $7.25 per hour and earns $942.50 per month (130 hours of service times $7.25 per hour). Under this scenario, the coverage is affordable because Employee B’s contribution of $85 per month is less than 9.5% of Employee B’s assumed income ($85 is 9.01% of $942.50).

  3. Federal Poverty Line Safe Harbor

    Some employees are not allowed to receive a premium tax credit because their income is below 100% of the Federal Poverty Line (FPL) and the ACA assumed they would be covered by Medicaid (which may or not be the case depending on whether or not the state in which they live decided to expand Medicaid). Under this safe harbor, an employer may use the federal poverty line for a single individual to determine if coverage is affordable. Coverage is affordable if the employee’s required contribution for the lowest-cost self-only coverage that provides minimum value does not exceed 9.5% of the FPL. Thus, the employer sets the annual employee contribution for employee self-only coverage for each month in the year as an amount equal to 9.5% of the Federal Poverty Level.

    Federal Poverty Line Safe Harbor Example: The FPL for 2013 is $11,490. 9.5% multiplied by $11,490 is $1,091.55, then divide by 12 for a monthly premium of $90.96. The employer will offer affordable coverage if the monthly premium is set at or below $90.96 (i.e., equal to 9.5% of the FPL per month).

How will an employer know if an employee receives a premium tax credit?

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 notice and demand for payment is made.  Contact for a given calendar year will occur:

    • After employees’ individual tax returns have been filed for that year claiming premium tax credits; and
    • After large employers (50 full-time employee including full-time equivalents) have filed returns identifying their full-time employees and describing the coverage that was offered (if any).