Employer Mandate (Free Rider Penalty)
Under Internal Revenue Code (Code) Section 4980H, large employers that do not offer health coverage to full-time employees and their dependent children, or offer coverage that is “inadequate” or “unaffordable,” and have at least one employee enroll in exchange (Marketplace) coverage and qualify for a federal premium tax credit or cost-sharing reduction, must pay a non-deductible penalty. While generally effective January 1, 2015, the final regulations provide transition relief for non-calendar year plans in existence on December 27, 2012: for any employee for whom the employer offers “adequate” and “affordable” coverage by the first day of the plan year beginning in 2015, no penalty will be due prior to the beginning of the plan year beginning in 2015. Note that an employer is not eligible for this transition if it modified its plan year after December 27, 2012 to begin at a later date.
Large Employers Subject to the Penalty
The Employer Mandate (or Free Rider Penalty) only applies to large employers. A large employer generally is one that employed an average of at least 50 full-time equivalent employees on business days during the preceding year. However, employers with 50-99 full-time equivalent employees will not be subject to the penalty until the first day of the plan year that begins on or after January 1, 2016. An employer’s number of full-time employees is based on actual hours of service in the prior year. However, for purposes of determining whether an employer is a large employer in 2015, an employer may use a period of at least six consecutive calendar months, chosen by the employer, in the 2014 calendar year (rather than having to use the entire 2014 calendar year).
There are two penalties that could apply:
If the employer does not offer coverage to substantially all full-time employees and their dependent children, and at least one employee enrolls in exchange coverage and qualifies for a premium tax credit, the monthly penalty imposed under Code Section 4980H(a) is 1/12th times $2,000 per employee after the first 30 employees. A transition rule for 2015 increases this number to 80 employees. For the 2015 plan year, an employer will have satisfied the requirement to offer coverage to “substantially all” employees if it offers coverage to 70% of the employees (decreased from 95% from the proposed regulations) who are considered full-time under the law. Beginning in 2016, the substantially all threshold increases to 95%.
A second penalty applies if the employer’s provided coverage is considered “inadequate” or “unaffordable.” This penalty could also be triggered for any full-time employee who is not offered coverage in the situation where the employer satisfies the “substantially all” requirements (70% in 2015 and 95% in 2016) but the employee is not offered coverage and thus falls in the gap (30% for 2015 and 5% for 2016). The amount of this penalty is 1/12th x $3,000 per month per full-time employee who enrolls in exchange coverage and qualifies for a federal premium tax credit. The amount of the penalty is capped at the amount the employer would have had to pay for not offering coverage at all under 4980H(a).
Employer Mandate Hot Topics & FAQs
- IRS Releases Fact Sheet on Employer Mandate Procedures
Beginning January 1, 2015, the ACA imposes two potential penalties-(1) a penalty imposed on employers that choose not to offer healthcare coverage to substantially all of their full-time employees, and (2) a penalty imposed on employers that offer coverage, but the coverage offered is not adequate or affordable under the law. Both penalties are triggered when any one full-time employee obtains health insurance through the Public Exchange Marketplace (Marketplace) and receives a premium tax credit.
The new IRS fact sheet details these two types of penalties and how they will be calculated. It sets forth how the penalties will be imposed month-by-month, and gives examples of how the penalties might be assessed in various scenarios.
The fact sheet also explains that employers will not self-report or calculate these employer shared responsibility payments. Rather, the IRS will calculate the potential penalty due and contact the employer. The IRS' determination will occur after the employees have filed their individual tax returns for the year claiming any premium tax credits. After the IRS sends the calculation to the employer, the employer will have an opportunity to respond to the IRS before any assessment or notice/demand for payment will be made. The IRS will adopt procedures to ensure that employers are notified when an employee receives the premium tax credit for purchasing coverage through the Marketplace.
Employers should begin to think about the ACA and to prepare now, before an assessment or collection notice arrives from the IRS. Applicable transition relief, ACA safe harbors, and careful workforce planning can minimize or prevent employer mandate penalties. Thorough documentation will be an employer's best defense against an IRS claim that an employer mandate penalty is due.
- Court of Appeals Decision on ACA Law
On Tuesday, July 22, 2014 the U.S. Court of Appeals in the District of Columbia and the 4th District fell on opposite sides with regard to the ability of Federally-Facilitated Exchanges (FFEs) to provide subsidies (e.g., Premium Tax Credits) to offset the cost of health care. The decisions do not impact the ability of state run exchanges to offer subsidies. The implications that a Federal exchange not be allowed to offer subsides extends to individuals and employers. Individuals in the 36 states that are run by an FFE could lose their Premium Tax Credits and have to pay more for coverage through the Exchange. That scenario, though, may benefit employers in those states as the 4980H penalties only apply if an employee receives a Premium Tax Credit in the exchange. The DC decision (which struck down the law) has been stayed pending review by the full Circuit court, which is not expected before this fall. Therefore, these rulings change nothing for now with respect to how both employers and individuals operate in the new environment of ACA.
- Final Employer Mandate Regulations
On Monday, February 10th the Internal Revenue Service (IRS) released long-awaited final regulations implementing the Employer Shared Responsibility provision (the Free Rider Penalty or employer mandate) under ACA. Our white paper provides a recap of the general rules, describes the changes and key clarifications provided by the final regulations, and highlights some of the questions that remain unanswered.
- New Guidance on Who Qualifies as a Full-Time Employee for the Employer Mandate
The proposed regulations describe a safe harbor employers may use to determine whether an existing or newly hired employee is considered a full-time employee for purposes of the Employer Mandate. In general, full-time status is determined for each month, and an employee who averages 30+ hours of service per week is considered a full-time employee. Employers may use an optional lookback period (of between 3 and 12 calendar months) to determine whether an employee averaged 30+ hours of service per week. If an employee was considered full-time during this “measurement period”, the employee must be treated as a full-time employee for benefits purposes for a subsequent “stability period” regardless of the employee’s number of hours worked during the stability period, so long as the individual remains an employee. If the employee was considered part-time during the measurement period, the employee may be treated as part-time for benefits purposes throughout the stability period. The stability period must be at least as long as the measurement period, and not shorter than six months.
These rules may be used for new employees who will work variable hours if, based on the facts and circumstances at the date of hire, it cannot be determined that the employee is reasonably expected to work an average of at least 30 hours per week. The rules may also be used for ongoing employees who have worked for at least one complete measurement period.
The employer has the flexibility to determine the months in which the measurement period starts and ends, which must be applied consistently for all employees in the same category (e.g., collectively bargained employees, hourly employees, or employees who work for different entities or at different locations). An employer may also utilize an administrative period of up to 90 days following the measurement period, but together the measurement and administrative periods may not extend longer than 13 months from the employee’s start date, plus the time remaining until the first day of the next calendar month (if the employee’s start date is not the first day of a calendar month). The proposed regulations include a number of examples illustrating the application of these rules and may be relied upon at least through 2014.
- Safe Harbor Definition of Income For Employer Mandate
Coverage is affordable, for purposes of the Employer Mandate, if the employee does not have to pay more than 9.5% of household income in order to receive employee-only coverage. The reference to “household income” raised concern for employers who do not have access to information about the employee’s household income. To address this concern, the proposed regulations provide three safe harbors. The safe harbors allow employers to determine “household income” in one of three ways: (1) the employees’ current Box 1 W-2 wages from the employer; (2) the employee’s current monthly rate of pay, which is the monthly salary for a salaried employee and the hourly rate of pay X 130 for an hourly employee; or (3) the federal poverty level for a single individual. An employer may choose to use one or more of these safe harbors for all or any reasonable category of employees as long as they are used on a uniform and consistent basis for all employees in a category. Coverage will be considered affordable if the coverage is otherwise adequate and the employee portion of the employee-only premium for the employer’s lowest cost coverage option does not exceed 9.5% of the safe harbor “household income” substitute selected by the employer. For purposes of the premium tax credit, an employee will be considered to have access to affordable employer-sponsored coverage (and therefore would not qualify for a premium tax credit) if the employee has to pay less than 9.5% of their household income for employee-only coverage.
- Will grandfathered plans be subject to the Employer Mandate?
Answer: Employers, not plans themselves, are subject to the Free Rider Penalty. There is no exemption for sponsors of grandfathered plans. Thus, if the grandfathered coverage is inadequate or unaffordable, the employer may owe a penalty.
- Does a high deductible health plan provide adequate coverage?
The plan sponsor would need to perform the calculation to determine whether the plan's actuarial equivalence is at least 60%. However, as a rule of thumb, high deductible health plan coverage offered in connection with a Health Savings Account often has an actuarial value of approximately 65%.
- How much is 400% of the Federal Poverty Level?
Click here to link to the latest Federal Poverty Levels as established by the federal government. The following are examples of 400% of the Federal Poverty Level in 2013:
- Individual: $ 45,960
- Family of 2: $ 62,040
- Family of 4: $ 94,200
- Family of 6: $ 126,360
What do you do with your health plan now?
To determine which employees may have unaffordable coverage today
Additional information about the availability of a premium tax credit
Link to the latest levels as established by the federal government
Calculate whether an employer's coverage is "adequate"
American Fidelity Assurance Company does not provide tax or legal advice.