Employer Shared Responsibility for Employee Health Insurance Coverage Under the Affordable Care Act (ACA)
The Employer Shared Responsibility for Employee Health Insurance Coverage affects large employers starting in 2015 due to the health care reform law commonly referred to as Obama Care. This provision was included as a disincentive for large employers considering dropping their current insurance plans once the insurance exchanges began operating as an alternative source of insurance. Specifically, the provision targets those large employers that do not offer adequate health insurance coverage to their full-time employees (and their dependents).
Below is a brief overview of the Employer Shared Responsibility for Employee Health Insurance Coverage provision and its effects on large employers. Failing to comply with the employer mandate will require that you make employer shared responsibility payments upon written notice from the Internal Revenue Service (IRS).
I. For 2015 – To be subject to the Employer Shared Responsibility provisions, during the previous calendar year employers must have employed at least 50 full-time equivalent employees. Businesses that fall within this category are considered “Large Employers” for purposes of the ACA and are governed under section 4980H of the Internal Revenue Code.
II. The Employer Shared Responsibility Payment:
A. Under the Employer Shared Responsibility provisions, if an applicable large employer does not offer affordable health coverage that provides a minimum level of coverage to at least 95% of their full-time employees (and their dependents), the employer may be subject to an Employer Shared Responsibility payment. This will occur if at least one of its full-time employees receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges, also called The Marketplace.
- A full time employee is an individual employed on average of at least 30 hours of service per week.
- A dependent is anyone that is either a biological or an adopted child.
a. Foster and step children are not considered dependent.
b. Nor is a spouse considered a dependent
- Minimum level of coverage is achieved when the Plan covers, on average, at least 60% of the Plan’s total cost of incurred benefits.
- Coverage is unaffordable if the full–time employee’s share of the lowest cost for self-only coverage, that provides minimum value, costs more than 9.5% of his/her annual household income.
i. Affordability Safe Harbor: if the cost of the employee of a self-only plan is not more than 9.5% of his/her wages as reported on Box 1 of the W-2, it’s deemed affordable for purposes of Employer Shared Responsibility.
B. Two Scenarios of how the Employer Shared Responsibility payments are calculated (excerpt from “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act”):
- Scenario One: If coverage is not offered to at least 70% in 2015 (95% in 2016) of FTE employees (and dependents), then
i. Payment applies if any full-time employee received a premium tax credit for coverage purchased in the individual Marketplace
ii. Payment owed is equal to the number of full-time employees employed for the year (minus up to 80 in 2015/30 in 2016) multiplied by $2,000.
iii. For an employer that offers coverage for some months but not others during the calendar year, the payment is computed separately for each month for which coverage was not offered. The amount of the payment for the month equals the number of full-time employees employed for the month (minus up to 80 for 2015/30 for 2016) multiplied by 1/12 of $2,000 (166.67/month).
- Scenario Two: If coverage is offered to full-time employees, but is either not affordable or does not meet minimum value, then
i. For an employer that offers coverage to at least 70% in 2015 (95% in 2016) of its full-time employees (and their dependents), but has one or more full-time employees who receive a premium tax credit, the payment is computed separately for each month.
ii. The amount of the payment for the month equals the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000.
iii. The amount of the payment for any calendar month is capped at the number of the employer’s full-time employees for the month (minus up to 80 in 2015/30 in 2016) multiplied by 1/12 of $2,000. (The cap ensures that the payment for an employer that offers coverage can never exceed the payment that the employer would owe if it did not offer coverage).
Note: for the purpose of the above calculations, a full–time employee does not include a full-time equivalent.
Summary: Employers should track employee hours now to determine how many full-time equivalent (FTEs) and full-time employees when deciding if and when to offer health coverage. Each large employer will have unique facts and circumstances in determining which of their employees are considered full-time, part-time and seasonal. At best, the calculations are complex and it is advisable that you work closely with your health insurance carrier and/or your health plan administrator to ensure that your business is in compliance with the employer mandate and its reporting requirements with the various federal agencies.