The IRS postponed the deadline for compliance with the ACA “pay or play” penalties until January 1, 2015 for all employers. This extension provides special transitional rules on applicable large employers (“ALEs”) who fail to offer affordable, minimum value health insurance to its full-time (30 hours per week) employees during any calendar month.
An ALE is an employer that employed (aggregating all members of the controlled group) an average of at least 50 full-time employees (and full-time equivalent employees - “FTEs”) on business days during the preceding year. The IRS also provided an additional one-year extension until 2016 for ALEs with between 50 and 99 full-time employees (and FTEs) that meet certain requirements.
Summary of the Employer “Pay or Play” Penalties
The ACA does not require employers to provide health insurance coverage to its employees. However, employers that do not provide the minimum level of health insurance may be liable for one of the new federal taxes. The two new taxes are:
- Failure to Offer Health Insurance Coverage – An employer tax of $2,000 per year is imposed for each full-time (30 hours per week) employee who is not offered health insurance. This tax is assessed monthly. In calculating this monthly tax, the first 80 actual full-time employees are subtracted from the penalty for 2015 for ALE’s with 100 or more full-time employees. For 2016, the 80 person credit is reduced to a 30 person credit. An ALE with 50 to 99 full-time employees is only eligible to use the 30 person credit for 2015 and 2016. The penalty will only apply if one or more full-time employees receive some type of government subsidy on the new health exchange. For 2015, the employer must offer health insurance to at least 70% of its full-time employees. For 2016, the employer must offer health insurance to at least 95% of its full-time employees in order to avoid this tax.
- Failure to Offer Affordable Health Insurance Coverage – An employer tax of $3,000 per year is imposed on the employer if it requires full-time (30 hours per week) employees to pay more than 9.5% of their pay (or another compensation safe-harbor) for individual coverage. This tax is assessed monthly. The employer penalty only applies for those full-time employees that receive some type of government subsidy on the new health marketplace.
The total tax penalty may not be greater than the tax penalty that would apply if the employer failed to offer any coverage.
Employers with 50 to 99 Employees in 2014
An employer with at least 50, but fewer than 100 full-time employees (including FTEs) will not be assessed the $2,000 per person or $3,000 per person penalties in 2015 or for any portion of the 2015 plan year that occurs in 2016 if the following requirements are met:
- Limited Workforce Size. The employer employs on average at least 50 full-time employees (including FTEs), but fewer than 100 full-time employees (including FTEs) on business days during 2014.
- Maintenance of Workforce and Aggregate Hours of Service. During the period beginning on February 9, 2014, and ending on December 31, 2014, the employer does not reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition (50 to 99 employees). A reduction in workforce size or overall hours of service for bona fide business reasons will not be considered to have been made in order to satisfy the workforce size condition.
- Maintenance of Previously Offered Health Coverage. During the coverage maintenance period the employer does not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014. The “coverage maintenance period” means the period beginning on February 9, 2014, and ending on the last day of the plan year that begins in 2015.
- Certification of Eligibility for Transition Relief. The 50 to 99 ALE certifies on a new IRS Form 1094-C that it meets the eligibility requirements listed above.
Employers with 100 or More Employees in 2014
ALEs with 100 or more employees (“Large ALEs”) in 2014 are subject to the “pay or play” penalties in 2015. For calendar year 2015 plus any calendar months of 2016 that fall within the 2015 plan year, Large ALEs must offer affordable coverage (cost not to exceed 9.5% of pay or another compensation safe-harbor) that meets the minimum value requirements to at least 70% (rather than 95%) of its full-time (30 hours of service per week) employees (and also offer coverage to dependent children) in order to avoid the $2,000 penalty for the failure to offer coverage.
For the 2016 plan year, the 95% required coverage rule will be in effect rather than the 70% coverage rule.
It is important to note that even if the employer uses the 70% safe harbor in 2015, this will only protect the employer from the $2,000 penalty for its failure to offer coverage to at least 70% of its full-time employees. The Large ALE may still be liable for the $3,000 penalty for the failure to offer affordable coverage to its full-time employees beginning as of the first day of the 2015 plan year. The $3,000 employer penalty will apply to each excluded full-time employee that receives a tax subsidy on the government’s health care marketplace.
Determining ALE Status for 2015 – Look at 2014
In order to determine the size of the employer for purposes of the “pay or play” penalties and the special rules discussed above, employers will need to review the makeup of its employees.
Rather than being required to use the full twelve months of 2014 to measure whether it has 50 full-time employees (or FTEs), an employer may measure during any consecutive six-month period (as chosen by the employer) during 2014. For example, an employer could use a period of at least six months through August 2014 to determine its applicable large employer status and, if it is an applicable large employer, the period from September through December 2014 to make any needed adjustments to its plan (or to establish a plan).
Start Planning for 2015
Employers need to begin the planning process for 2015 to determine which rules they will fall under. We can help you analyze the required level of compliance for your company for 2015 and all the related issues under the Affordable Care Act.
In order to comply with the requirements imposed by the U.S. Internal Revenue Service, please be advised that any tax advice contained herein was not intended or written to be used, and cannot be used, by the taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein. The information provided above is general in nature. The actual IRS regulations and the Affordable Care Act is much more complicated.