Employer penalty See below for key issues where guidance is needed. Beginning in 2014, the “Patient Protection and Affordable Care Act” (ACA) imposes financial penalties on large employers (50 or more full-time employees) that do not offer health insurance coverage, as well as financial penalties for offering coverage that is considered “unaffordable.” IRS refers to these penalties as the employer shared responsibility provisions under §4980H. Large employers are potentially subject to one of two penalties. No Offer to All Full-Time Employee Penalty Section 4980H(a) Penalty Employers with 50 or more full-time employees (or full-time equivalents) on business days during the preceding calendar year are liable for a penalty tax if the employer fails to offer all full-time employees (and their dependents) the opportunity to enroll in an employer-sponsored plan AND any full-time employee is certified to receive an advance premium tax credit or cost-sharing reduction. The determination of employers with 50 or more full-time employees is based on a controlled group. The penalty is calculated on a monthly basis by multiplying 1/12 of $2000 by the number of full-time employees less 30. Only one 30-employee reduction per controlled group of employers is allowed. After 2014, the $2,000 amount will be adjusted for inflation. Below this penalty is expressed as a simple mathematical equation. No Offer to All Full-Time Employee Penalty = $2,000 annually X (the number of full-time employees – 30) Note: No level of employer contribution is required to avoid the 4980H(a) penalty. Employers are not subject to the No Offer penalty for failing to offer coverage to the employee for the initial three calendar months of employment. The definition of full-time employees will be critical. See below for a discussion of the definition of full-time employees. Unaffordable Coverage Penalty Section 4980H(b) Penalty If an employer with 50 or more full-time employees (or full-time equivalents) on business days during the preceding calendar year offers minimum essential coverage, but the coverage is not affordable or does not provide minimum value, the employer must pay an excise tax equal to 1/12 of $3,000 per month times the number of its full-time employees who receive a premium tax credit or cost-sharing reduction. This excise tax is capped so that it does not exceed the section 4980H(a) liability that would have applied if the employer did not offer coverage. Below this penalty is expressed as a simple mathematical equation. Unaffordable Coverage Penalty = the lesser of: $3,000 annually X (the number of full-time employees receiving advance premium tax credits); or $2,000 annually X (the number of full-time employees - 30) What does unaffordable mean? Coverage is unaffordable if the employee’s required contribution to the premium cost for single coverage for the employer’s lowest cost plan exceeds 9.5% of the employee’s household income for the taxable year, or, the employer-sponsored plan does not provide minimum value. Note: See the section below on “Family Coverage and Eligibility for Advance Premium Tax Credits” for important developments. What does minimum value mean? The IRS released a request for comments (Notice 2012-31) on several possible approaches to determining whether health coverage under an employer-sponsored plan provides “minimum value.” These approaches include an actuarial value calculator, safe harbors in the form of checklists, or certification by an actuary. Waiting for Guidance on these Key Issues Definition of Full-Time Employee - According to IRS Notice 2011-36, the definition of full-time employee is key in determining whether and, if so, to what extent, an employer may incur §4980H(a) liability or §4980H(b) liability. ACA treats an employee who has an average of at least 30 hours of service per week as a full-time employee. IRS contemplates that proposed regulations would provide that 130 hours of service in a calendar month would be treated as the monthly equivalent of at least 30 hours of service per week. An employee’s hours of service would include each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. IRS further contemplates that no more than 160 hours of service would be counted for an employee on account of any single continuous period during which the employee was paid or entitled to payment but performed no duties. Key Point: Many plans only offer coverage to those full-time employees who work 32 hours per week. If this eligibility requirement is not reduced to 30 hours, the employer will incur a penalty on the whole group of full-time employees minus 30. Offer Coverage to All Full-Time Employees – If even one full-time employee in a controlled group is not offered health coverage, the $2,000 per employee penalty applies to all full-time employees minus 30. The kicker is that the employer provides a plan for almost all full-time employees and the employer is also hit with a whopping penalty tax on all full-time employees minus 30. We are waiting for guidance on what it means to offer coverage to all full-time employees. In IRS Notice 2011-36, IRS contemplated that the proposed regulations to be released at some future date on the employer shared responsibility provisions would make clear that an employer offering coverage to “all, or substantially all” of its full-time employees would not be subject to the §4980H(a) provision. The definition of “substantially all” will be important for many of your clients, especially those who have plans that are in compliance with IRC section 105(h), but do not offer coverage to all full-time employees. SPBA has been discussing the “substantially all” language with IRS officials and they have indicated that compliance with section 105(h) will not meet the definition of “substantially all.” Under section 105(h), the health plan must satisfy one of two tests: 1) 70% of all non-excludable employees must participate in the plan; or, 2) 70% of all non-excludable employees must be eligible and of that group 80% must receive benefits under the plan. Family Coverage and Eligibility for Advance Premium Tax Credits – In a proposed regulation, the IRS stated that family members would not be eligible for the advance premium tax credits when affordable coverage was available to the employee but not to the family. The final IRS regulations on the premium tax credits (released in June 2012) have placeholders for addressing the issue of affordability for family members. The issue remains under discussion. The final decision on this issue could have implications for calculating employer penalty taxes. The cost estimates of the premium tax credits were based on the assumption that only employees would be eligible for the premium credits when unaffordable coverage was offered. SPBA continues to monitor this closely. Household Income Determination for Affordable Coverage – IRS Notice 2012-58 provides employers with assurance that they can rely, at least through the end of 2014, on an employer not being subject to a penalty for offering affordable coverage based on an employee’s W-2 wages. SPBA is seeking another safe harbor for determining affordable coverage that would take into account household income but would not require an employer to have knowledge of household income. As noted above, coverage under an employer-sponsored plan is considered affordable to a particular employee if the employee’s required contribution for the self-only premium for the employer’s lowest cost plan does not exceed 9.5 percent of the employee’s household income for the taxable year. Household income for this purpose is defined as the modified adjusted gross income of the employee and any members of the employee’s family (which include any spouse and dependents) who are required to file an income tax return and for whom the employee claims a tax deduction. IRS acknowledged in Notice 2012-73 that employers may encounter practical difficulties in assessing whether the coverage they are offering is affordable to certain employees given that household income is determined by variables that are generally unknown to employers (i.e., an employee’s other sources of income, as well as the income of spouses and dependents). To address these unknowns, IRS created an affordability safe harbor based on W-2 wages of the employee, which is a known number to employers. Using W-2 wages will, in most cases, lead to a penalty assessment that is far greater than the assessment that would result from an employee’s household income. This is because a large number of employees live in households with two income earners. SPBA has suggested the following alternatives for IRS consideration. 1. Since the applicant for the premium assistance tax credit must complete an application and submit this to the Exchange, it would be appropriate to ask that the applicant provide the anticipated household income for the year. The employer-plan would provide the Exchange with the required employee contribution and the Exchange would determine affordability and notify the employer. No anticipated household income information would be shared with the employer/plan. The Exchange would simply notify the employer/plan whether or not the coverage was affordable and the employer/plan would rely on that in determining the penalty assessment. This approach would build on the methodology proposed by the Department of Health and Human Services to determine whether an individual’s household income meets the eligibility requirements for advance premium tax credits. Under this proposal, the Exchanges would project an individual’s household income for the plan year using household income reported on the applicant’s most recently filed tax return. 2. The Exchanges would use the prior year’s household income for an applicant, provided by IRS records, to determine affordability and notify the employer one way or the other. The Exchanges would not provide any household income information to the employer. (More to come)
Posted on: Fri, 04 Oct 2013 21:48:12 +0000
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