"Shared Responsibility" - The Large-Employer Mandate

Posted by Alice Helle in April 2013 on 4/10/2013

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Both the individual mandate, which requires individuals to maintain health coverage or pay a penalty, and the employer mandate, which requires large (50+) employers to offer coverage to their full-time employees or pay a penalty, take effect in 2014. The Act refers to the employer mandate as the “shared responsibility” provision. It is also commonly referred to as “play or pay.” 

Employers are technically not required to offer coverage, but large employers that do not offer their full-time employees the opportunity to enroll in coverage under an employer-sponsored health plan are subject to a penalty (called the “Employer Shared Responsibility” payment or “assessable payment”). The penalty for not offering coverage is nondeductible and equals $2,000 per year multiplied by the number of full-time employees in excess of 30. For example, an employer with 50 full-time employees that does not offer coverage would be subject to a penalty of $40,000. 

Large employers who offer coverage may also be subject to penalties unless the coverage offered is “affordable” and provides “minimum value.” This penalty is in the amount of $3,000 times the number of employees who obtain coverage through an exchange and qualify for a premium tax credit or cost-sharing subsidy. This penalty is capped at the amount the employer’s penalty would have been if it did not offer coverage at all. The exchanges are state-wide health insurance marketplaces where individuals and small employers may purchase coverage beginning in 2014. 

The examples above calculate the penalties on an annual basis for simplicity. They are actually to be determined on a monthly basis, however. That translates to $166.67 per month for the $2,000 annual penalty and $250 per month for the $3,000 annual penalty. 

Definition of “Large Employer” 

For purposes of the mandate, “large employer” means an employer (including governmental and tax-exempt employers) who employed an average of at least 50 full-time employees during the preceding calendar year. A “full-time” employee is an employee who works at least 30 hours per week on average. Part-time (under 30 hour/week) employees are factored in by adding “full-time equivalents” which are determined by adding the aggregate number of hours worked by the part-time employees in a month and dividing by 120. 

An employer is not considered to be a “large employer” if its workforce exceeds 50 full-time employees for fewer than 121 days during the year and the workers in excess of 50 are seasonal workers. Seasonal workers are not taken into account for purposes of determining large employer status unless they work on more than 120 days during the year. For this purpose, “seasonal employee” means “a worker who performs services on a seasonal basis, as defined by the Department of Labor, including, but not limited to certain agricultural workers and retail workers employed exclusively during holiday seasons.” 

Determinations of “large employer” status are made on a controlled-group basis. If affiliated companies are treated as a single employer for retirement plan or other benefit purposes, they will also be treated as a single employer in this context. Members of a controlled group that do not offer coverage share one 30-employee exemption on a pro-rata basis. 

For example, assume ABC Corp. and XYZ, Inc. are members of the same controlled group. ABC has 20 full-time employees and XYZ has 40 full-time employees. Although each corporation has fewer than 50 employees, they must be treated as a single employer with 60 employees. If they do not offer coverage, the penalty will apply. Since ABC has 1/3 of the total employees and XYZ has 2/3, the 30 employee exemption would be prorated with 10 allocated to ABC and 20 allocated to XYZ. The penalties (annualized) would be calculated as follows: 

ABC: 20 – 10 = 10 x $2,000 = $20,000 
 XYZ: 40 – 20 = 20 x $2,000 = $40,000 

Each company is responsible for its own penalty payment. Note that the total of $60,000 is the same amount that would have applied to a single employer with 60 employees and no coverage (60 – 30 = 30 x $2,000 = $60,000). 

Employers who have variable hour or seasonal employees may have difficulty determining their employee numbers for purposes of determining “large employer” status. The next article in this newsletter discusses how to count employees to determine large employer status under those circumstances. 

Liability for “Employer Shared Responsibility” Payment 

An employer who is classified as a “large employer” will be liable for the penalty only if: 

1) The employer does not offer health coverage or offers coverage to less than 95% of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an exchange; or 

2) The employer offers health coverage to at least 95% of its full-time employees, but at least one of the full-time employees instead obtains coverage through an exchange and receives a premium tax credit or cost-sharing subsidy. This could occur if that employee was not offered coverage or if the coverage offered to the employee was not affordable or did not offer minimum value. 

Affordability. A health plan is “affordable” if the employee portion of the self-only premium for the employer’s lowest cost coverage that provides minimum value is no more than 9.5% of the employee’s household income. Since employers typically will not know the household income of their employees, the proposed regulations issued January 2, 2013 provide three optional safe harbors to determine affordability. In lieu of household income the employer may use the following to determine affordability: (1) the employee’s Box 1 W-2 income; (2) the employee’s rate of pay; or (3) the Federal Poverty Line (“FPL”), because employees under the FPL would be entitled to Medicaid, rather than a premium tax credit. 

Minimum Value. A health plan provides “minimum value” if the plan is designed to pay at least 60% of the covered health expenses for a typical person. Note that this is not a requirement for the employer to pay 60% of the premium. An online “minimum value calculator” will be made available to employers by the Internal Revenue Service and the Department of Health and Human Services. 

Premium Tax Credits. These credits are available only to individuals with household incomes between 100% and 400% of the FPL. 

Full-Time Employee. An employee who has at least 30 hours of service per week (130 hours per month) is considered full-time. (Note that the 130 hours per month used in this context differs from the 120 hours per month used to determine full-time equivalents for determining “large employer” status.) All hours for which an employee is paid or is entitled to be paid count. Actual hours of service must be used for hourly employees. Actual hours or an equivalency method may be used for non-hourly employees. The optional safe-harbor method using a “look-back” period for counting hours of service may be used for variable hour employees for determining full-time status as well as for determining “large employer” status. 

Alice Eastman Helle is a member of BrownWinick and practices primarily in the areas of pensions and employee benefits. Alice can be reached at (515) 242-2407 or helle@brownwinick.com.