On January 1, 2016, Obamacare’s “Employer Mandate” goes into effect for companies with between 50 and 99 full-time employees. The Employer Mandate requires applicable companies to offer a minimum level of affordable health insurance coverage to their full-time employees and their dependents. Is your company subject to the Employer Mandate? If so, are you ready to offer affordable health insurance to your full-time employees? As of January 1, 2016, if you are not offering coverage or if the coverage you offer is not affordable, your company could be subject to serious financial penalties.
Companies with 50 or more full-time employees are known as “Applicable Large Employers” or “ALEs.” ALEs are potentially liable for two penalties (or, in the words of the regulations, “assessable payments”) under Obamacare. The IRS refers to these two penalties as “4980H(a) liability” and “4980H(b) liability” (referring to the sections of the Internal Revenue Code where the ACA provisions are codified). The 4980H(a) penalty applies to any ALE that fails to offer to its full-time employees and their dependents “minimum essential coverage” under an employer-sponsored health plan and any full-time employee receives a subsidy on the Obamacare Exchange. The 4980H(b) penalty applies to any ALE that offers its full-time employees and their dependents “minimum essential coverage” but one or more full-time employees receives a subsidy through the Exchange because the employer’s coverage is unaffordable or does not provide minimum value. We will address the meaning of “minimum essential coverage,” “affordable” and “minimum value” later in this article. But first, we will discuss how to determine whether your company is an ALE that is subject to the Employer Mandate.
Beware of the Aggregation Rules
The term “applicable large employer” means, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) during the preceding calendar year.
As a preliminary matter, it is important to recognize that certain aggregation rules apply to the determination of an employer’s status as an “applicable large employer.” Thus, all employees of a controlled group under Section 414(b) or (c) of the Internal Revenue Code or an affiliated service group under Section 414(m) of the Code are taken into account in determining whether the members of the controlled group or affiliated service group together constitute an applicable large employer. If you thought that you could avoid Obamacare by breaking up your company into several smaller companies, each with fewer than 50 employees, that simply will not work. Likewise, if the same ownership group owns multiple companies, each with fewer than 50 employees, those companies will be aggregated and will be considered an ALE if the total number of employees is 50 or greater.
“Full-Time” Means 30 Hours Per Week and Part-timers Must Be Converted into Full Time Equivalents (“FTEs”) to Determine ALE Status
An employer’s status as an ALE for a calendar year is determined by taking the sum of the total number of full-time employees, including any seasonal workers, for each calendar month in the preceding calendar year and the total number of FTEs, including any seasonal workers, for each calendar month in the preceding year, and dividing by 12. The result, if not a whole number, is then rounded to the next lowest whole number. If the result of this calculation is less than 50, the employer is not an ALE for the current calendar year. If the result of this calculation is 50 or more, the employer is an ALE for the current calendar year.
A full-time employee is an employee who was employed on average at least 30 hours of service per week. The rules provide for a monthly standard of 130 hours of service in a calendar month as equivalent to 30 hours per week.
The number of full-time equivalents (“FTEs”) for each calendar month in the preceding calendar year is determined by calculating the aggregate number of hours of service for that calendar month for employees who were not full-time employees (but not more than 120 hours of service for any employee) and dividing that number by 120. In determining the number of FTEs for each calendar month, fractions are taken into account. Here are some examples that show how to calculate your employees to determine ALE status:
FTE Calculation Examples
Example 1
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| FT | 20 | 20 | 20 | 24 | 25 | 25 | 25 | 25 | 23 | 20 | 20 | 20 |
| PT/FTEs | 5 | 5 | 10 | 40 | 40 | 40 | 40 | 40 | 10 | 5 | 5 | 5 |
| Total | 25 | 25 | 30 | 64 | 65 | 65 | 65 | 65 | 33 | 25 | 25 | 25 |
Assuming that the workers who are added in March – September are seasonal workers
12 month total = 512
Monthly Avg 512/12 = 42.66 = 42
Because 42 < 50, the Employer is not an applicable large employer.
Example 2
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| FT | 20 | 20 | 20 | 24 | 25 | 25 | 25 | 25 | 23 | 20 | 20 | 20 |
| PT/FTEs | 5 | 5 | 10 | 100 | 100 | 100 | 100 | 100 | 10 | 5 | 5 | 5 |
| Total | 25 | 25 | 30 | 124 | 125 | 125 | 125 | 125 | 33 | 25 | 25 | 25 |
Assuming that the workers who are added in March – September are seasonal workers
12 month total = 812
Monthly Avg 812/12 = 67.66 = 67
Because 67 >50, the Employer is an applicable large employer SUBJECT TO the seasonal worker exception.
Because the workforce exceeded 50 for more than four months (the number exceeded 50 for five months), the seasonal worker exception does not apply, and the employer is an applicable large employer.
Example 3
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| FT | 20 | 20 | 20 | 24 | 25 | 25 | 25 | 25 | 23 | 20 | 20 | 20 |
| PT/FTEs | 5 | 5 | 10 | 15 | 35 | 100 | 100 | 100 | 15 | 5 | 5 | 5 |
| Total | 25 | 25 | 30 | 39 | 60 | 125 | 125 | 125 | 38 | 25 | 25 | 25 |
Assuming that the workers who are added in May – September are seasonal workers.
12 month total = 667
Monthly Avg 667/12 = 55.58 = 55
Because 55>50, the Employer is an applicable large employer SUBJECT TO the seasonal worker exception.
Because the workforce did not exceed 50 for more than four months (the number exceeded fifty for exactly four months), the seasonal exception applies, and the Employer is not an applicable large employer.
IRC Section 4980H(a) Liability
As stated previously, ALEs are potentially liable for two different penalties under the Employer Mandate. In the regulations, the IRS refers to these two penalties as “4980H(a) liability” and “4980H(b) liability” in reference to the section of the Internal Revenue Code in which they are codified. An employer incurs 4980H(a) liability if it fails to offer to all its full-time employees (and their dependents – but not spouses) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. Under this prong, if an employer fails to make an offer of coverage to its full-time employees, a penalty is imposed monthly in an amount equal to $166.67 ($2000 annually) multiplied by the number of the employer’s full-time employees, excluding the first 30.
IRC Section 4980H(b) Liability
An ALE incurs liability under Section 4980H(b) if it offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, but the coverage is either (i) “unaffordable” or (ii) does not provide “minimum value” and one of ALE’s employees gets a subsidy from the Exchange. Under Section 4980H(b), the penalty is equal to $250 per month multiplied by the number of full-time employees who receive a subsidy from the Exchange. The amount of the 4980H(b) penalty is capped at the 4980H(a) penalty amount. As a result, an employer that offers group health plan coverage can never be subject to a larger penalty than that imposed on a similarly situated employer that does not offer group health plan coverage at all.
How Does Obamacare Define “Unaffordable” and “Minimum Value”?
Employer-provided health insurance coverage is deemed “unaffordable” if the premium required to be paid by the employee exceeds 9.5% of the employee’s household income. Recognizing that an employer has no way of knowing the “household” income of its employees, the regulations allow affordability to be determined on the basis of an employee’s income as reported on his or her Form W-2 (in Box 1) instead of household income. Additional “safe harbors” for determining affordability are the “rate of pay” safe harbor and the “federal poverty line” safe harbor.
Under the rate of pay safe harbor, the employer would (1) take the hourly rate of pay for each hourly employee who is eligible to participate in the health plan as of the beginning of the plan year, (2) multiply that rate by 130 hours per month, and (3) determine affordability based on the resulting monthly wage amount. For salaried employees, monthly salary would be used instead of hourly salary multiplied by 130. An employer may use this safe harbor only if, with respect to the employees for whom the employer applies the safe harbor, the employer did not reduce the hourly wages of hourly employees or the monthly wages of salaried employees during the year.
The federal poverty line safe harbor recognizes that an employee whose income would qualify him or her for coverage under Medicaid should be disregarded in determinations of affordability, since such person would not be eligible for a premium tax credit. This safe harbor provides that coverage is affordable if the employee’s cost for self-only coverage under the plan does not exceed 9.5% of the federal poverty line amount for a single individual.
Coverage is deemed to provide “minimum value” if it pays for at least 60% of all plan benefits, without regard to co-pays, deductibles, co-insurance, and employee premium contributions. The IRS has proposed rules for determining minimum value based on guidance issued by the Department of Health and Human Services relating to actuarial value.
Calculating ACA Penalties
Example 1: Not Offering Minimum Essential Coverage
Company A has 50 FTEs
Offers coverage that does not meet the minimum essential coverage requirement
1 FTE goes to the Exchange for coverage
1 FTE gets a subsidy to buy coverage on the Exchange
Penalty for not offering minimum essential coverage is $2000 per FTE (less the first 30) if any FTE receives a subsidy for Exchange coverage. Penalty = (50 -30) x $2000 = $40,000
Example 2: Not Offering Minimum Value or Not Offering Affordable Coverage
Company B has 50 FTEs
Coverage either does not meet minimum value or is not affordable for at least 5 FTEs
5 FTEs go to Exchange and get subsidies
Penalty for not offering minimum value or affordable coverage is $3000 for each FTE who receives a subsidy for Exchange coverage (or the penalty for not offering minimum essential coverage, whichever is less). Penalty = 5 x $3000 = $15,000
What if Your Employees Work Variable Hours? How Do You Determine Who is “Full-Time”?
A full-time employee is an employee who was employed on average at least 30 hours of service per week. The rules provide for a monthly standard of 130 hours of service in a calendar month as equivalent to 30 hours per week.
An ALE’s liability for penalties is determined on a month-by-month basis. Because a month-by-month determination would be difficult to administer, particularly for employers with large numbers of variable-hour workers, the regulations contain a “look-back measurement period” methodology. The regulations provide for two look-back measurement methods, one for “on-going employees” and the other for “new variable hour employees and new seasonal employees.”
Ongoing Employees
An ongoing employee is an employee who has been employed by an employer for at least one “standard measurement period.” A standard measurement period is a time period of not less than 3 but not more than 12 consecutive months, as chosen by the employer. Measurement periods may be coordinated with one week, two week, or semi-monthly payroll periods, such that a measurement period does not end in the middle of a payroll period. If the employer determines that an employee was employed on average at least 30 hours of service per week during the standard measurement period, then the employer must treat the employee as a full-time employee during a subsequent “stability period,” regardless of the employee’s number of hours of service during the stability period, so long as he or she remains an employee. If, on the other hand, an employee is determined not to be employed on average at least 30 hours of service per week during the standard measurement period, he or she need not be treated as a full-time employee during the stability period that follows. The stability period must be at least six consecutive calendar months but no shorter than the measurement period.
Measurement periods and stability periods may differ in length or in their starting and ending dates for the following categories of employees: (i) collectively bargained employees and non-collectively bargained employees, (ii) each group of collectively bargained employees covered by a separate collective bargaining agreement, (iii) salaried employees and hourly employees, and (iv) employees whose primary places of employment are in different states.
The employer may also add an “administrative period” between the measurement period and the stability period of up to 90 days. To prevent an administrative period from creating a gap in coverage, the administrative period must overlap with the prior stability period. For an employee whom the employer determines to be a full-time employee during the standard measurement period, the stability period would be a period that immediately followed the standard measurement period (and any applicable administrative period), the duration of which would be at least the greater of six consecutive calendar months or the length of the standard measurement period.
New Employees
An employee who is reasonably expected at his or her start date to be employed on average 30 hours of service per week must be offered coverage within the employee’s initial three calendar months of employment in order for the employer to avoid any penalties.
A different rule applies to “variable hour employees.” A new employee is a “variable hour employee” if, based on the facts and circumstances at the start date, it cannot be determined that the employee is reasonably expected to be employed on average at least 30 hours per week. A new employee who is expected to be employed initially at least 30 hours per week but whose tenure is expected to be of limited duration may nevertheless be a variable hour employee.
If a new variable hour employee or new seasonal employee has on average at least 30 hours of service per week during the initial measurement period, the employer must treat the employee as a full-time employee during the stability period that begins after the initial measurement period (and any associated administrative period). The stability period must be a period of at least six consecutive calendar months that is no shorter in duration than the initial measurement period. If a new variable hour employee or new seasonal employee does not have on average at least 30 hours of service per week during the initial measurement period, the employer need not treat the employee as a full-time employee during the stability period that follows the initial measurement period. If the employee was not employed an average of at least 30 hours of service per week during the initial measurement period, but was employed at least 30 hours of service per week during the overlapping or immediately following standard measurement period, the employee must be treated as a full-time employee for the entire stability period that corresponds to that standard measurement period.
An employer may apply an administrative period of up to 90 days for variable hour and seasonal employees. However, the initial measurement period and the administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date (totaling, at most, 13 months and a fraction of a month).
Once a new variable hour employee or new seasonal employee has been employed for an entire standard measurement period, the employer must test the employee for full-time employee status, beginning with that standard measurement period, at the same time and under the same conditions as apply to other ongoing employees. An employee who was employed an average of at least 30 hours of service per week during an initial measurement period or standard measurement period must be treated as a full-time employee for the entire associated stability period. Thereafter, the employer determines the employee’s status as a full-time employee in the same manner as it tests ongoing employees.
Changes in Employment Status
The regulations provide special rules that apply when a new variable or seasonal employee changes his or her employment status during the initial measurement period. This might occur, for example, if a new variable hour employee is promoted during the initial measurement period to a position in which employees are reasonably expected to be employed on average 30 hours of service per week. A new variable hour or seasonal employee who has a change in employment status during an initial measurement period is treated as a full-time employee as of the earlier of (i) the first day of the fourth month following the change in employment status, or (ii) if the employee averages more than 30 hours of service per week during the initial measurement period, the first day of the first month following the end of the initial measurement period (including any optional administrative period).
Breaks in Service
The regulations include rules for determining when a rehired employee may be treated as a new hire for purposes of the look-back measurement period safe harbors. If the period for which no hours of service are credited is at least 26 consecutive weeks, an employer may treat an employee who has an hour of service after that period, for purposes of determining the employee’s status as a full-time employee, as having terminated employment and having been rehired as a new employee. Alternatively, the employer can choose to apply a rule of parity for periods of less than 26 weeks under which an employee may be treated as having terminated employment if the period with no credited hours of service (of less than 26 weeks) is at least four weeks long and is longer than the employee’s period of employment immediately preceding that period with no credited hours of service.
Information Reporting on Health Coverage by Employers
ALEs must file IRS Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage,” and IRS Form 1094-C, “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns,” with the IRS annually, no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates. This is the same filing schedule applicable to other information returns commonly filed by employers, such as Forms W-2 and 1099.
Also, ALEs are required to furnish a statement to each full-time employee that includes the same information provided to the IRS, by January 31 of the calendar year following the calendar year for which the information relates. The first statements to employees must be furnished for the 2015 year by January 31, 2016, and the first information returns to the IRS must be filed by February 28, 2016 (March 31, 2016, if filed electronically). It is perfectly acceptable for the Employer to simply provide its full-time employees with copies of the Form 1095-C that the employer files with the IRS. ALEs must furnish a Form 1095-C to each of their full-time employees on paper by mail, unless the recipient affirmatively consents to receive the statement in an electronic format. The requirement for affirmative consent to receive the statement in electronic format ensures that statements are furnished electronically only to individuals who are able to access them. An individual may consent on paper or electronically. If consent is on paper, the individual must confirm the consent electronically.
The information to be reported to the IRS on Form 1095-C includes identification of the ALE, identification of full-time employees to whom an offer of insurance coverage was made, and the duration of the offer. The statement to be furnished to full-time employees must include the identification of the employer and the same information required to be reported to the IRS for each full-time employee. It is perfectly acceptable for the Employer to simply provide its full-time employees with copies of the Form 1095-C that the employer files with the IRS.
Employers that are self-insured, whether or not they are ALEs, must report information about employees (and their spouse and dependents) who enroll in coverage under the information reporting requirements for providers of minimum essential coverage. Self-insured employers that are ALEs must use Form 1095-C and the transmittal Form 1094-C to meet their reporting requirements. Employers who are not ALEs but who sponsor self-insured group health plans must report information about employees (and their spouse and dependents) who enroll in the coverage to their employees, even though the employers are not subject to the Employer Mandate. These non-ALEs must use Form 1095-B, “Health Coverage,” and the transmittal Form 1094-B, “Transmittal of Health Coverage Information Returns,” to meet the information reporting requirements for providers of minimum essential coverage.
Beware of “Miracle Cures” for Your Obamacare Ills
The 30-hour-per-week definition of “full-time” under ObamaCare will likely increase the number of employees who are eligible for coverage. One response to the new definition of “full-time” by ALEs may be to reduce part-time workers’ hours below 30 hours per week and consequently ensure that employees who typically work over 30 hours per week work more hours. Employers would be well-advised to review any such plans with attorneys familiar with the ERISA law.
A strategy of reducing employee hours so that those who formerly worked 30 hours or more will remain under 30 hours and, thus, not eligible for health insurance could potentially expose employers to liability under Employee Retirement Income Security Act of 1974 (“ERISA”) section 510. ERISA Section 510 states, in part: “It shall be unlawful for any person to … discriminate against a participant or beneficiary … for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan….” An employee who averaged 30 hours or more a week previously and whose employer reduced his or her workload below 30 hours per week in response to the employer mandate, might have a claim under Section 510. Such an employee would argue that his or her change in hours was made with the intent to deny him or her a right to which he or she would have been entitled (i.e., health coverage).
Similarly, an ALE that does not currently offer health insurance and that remains consistently and coincidentally below either the 50 FTE employee threshold or below the 80 employee assessment trigger point may also be inviting a claim of “interference” under ERISA Section 510. Under such circumstances, the question would be whether that management decision was impermissible “interference” or a legitimate means of managing costs.
Another ERISA Section 510 issue is related to the employee/independent contractor classification. Because full-time employees of an ALE are entitled to health insurance, some employers getting close to the 50 FTE threshold may be tempted to use independent contractors, rather than hiring additional employees. While the IRS, federal and state departments of labor and the state department of employment security are always concerned with misclassification of employees, the ACA presents another reason for these agencies to care about the issue. The consequences of misclassification now may also include a finding that an employer is actually an ALE because people classified as independent contractors are employees. Failing to offer insurance as a result of the misclassification will result in IRC 4890H(a) liability of $2000 per full-time employee (excluding the first 30).
Another “solution” to ObamaCare being discussed among struggling employers is the use of a “premium reimbursement program.” Some benefits providers are offering this solution and are claiming that it is compliant with the ACA. This author has his doubts about that. For many years, IRC Section 105 permitted employers to reimburse employees pre-tax for the premiums paid directly by employees for individual health plans.
However, the IRS made clear in its Notice 2015-17 that such premium reimbursement arrangements are group health plans subject to the ACA’s market reforms. Because these premium reimbursement arrangements are unlikely to satisfy the market reform requirements, particularly with respect to preventive services and annual dollar limits, employers using these arrangements would be required to self-report their use and then be subject to ACA penalties, including an excise tax of $100 per employee per day.
While the IRS warned that premium reimbursement arrangements were not permitted, it confirmed that providing increased wages in lieu of employer-sponsored health benefits does not create a group health plan subject to market reforms, provided that receipt of the additional wages is not conditioned on the purchase of health coverage.
Prepare Now, Before It’s Too Late
If your company is an ALE with 50 or more FTEs, you have probably already begun preparing for implementation of the Employer Mandate on January 1, 2016. All ALEs should be consulting with their benefits specialists on plan design issues and on “affordability” issues. ALEs with a large number of low-paid employees will likely have to pay a portion of their employees’ premiums to meet the affordability threshold. While ALEs may be able to adjust their work force to minimize the number of full-time employees to whom they must offer coverage, such adjustments need to be made carefully, with legal advice concerning possible exposure under ERISA Section 510. If you haven’t begun preparing for Obamacare, please do not delay; call us today.
