What penalties are imposed on large employers?

Full implementation of the shared responsibility provisions is delayed one year to 2015, as announced by the Obama Administration in early July 2013.

Large Employer Penalties

There are two types of penalties large employers might face in 2015:

  • For not offering health insurance coverage to the employee and his or her dependents; or
  • 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. 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.

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.

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.

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

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.

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 full-time employees minus 30).

Example:
You have 60 full-time employees and three (3) receive a premium tax credit for the marketplace:

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

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 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 and drug deductibleCost SharingMaximum out of pocket limitOther
1 $3,500 80% $6,000  
2 $4,500 70% $6,400 $500 employer health savings account
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.

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.

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

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)
$100 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).