If an employer is large enough for the play or pay requirements to apply (100 or more full-time or full-time equivalent employees for 2015 and 50 or more full-time or full-time equivalent employees for 2016 and beyond), two separate requirements, and potential penalties, apply.
Full-time continues to mean 30 or more hours per week. Because the 30-hour requirement is in the law, the IRS says that any change in this threshold will have to be made by Congress.
Seasonal employees do not have to be offered coverage. A person may be considered seasonal if he or she normally works less than six months per year, at about the same time of year. (This is different than the 120-day measure used when counting employees for purposes of deciding if the employer is “large.”)
When deciding if a particular employee needs to be offered coverage, the employer may either look at the employee’s hours at the end of each month or use a look-back approach. Under the look-back approach, the employer tracks hours during a measurement period chosen by the employer of three to 12 months, which determines whether the employee will be considered full-time for purposes of the following stability period, which generally must be the same length of time. However, for 2015 an employer may use a six-month measurement period beginning no later than July 1, 2014, with a 12-month stability period. The look-back rules are essentially unchanged from the proposed regulations. There is one noteworthy change if an employee has a fairly short break in service (due to termination of employment or non-FMLA unpaid leave) when the employee returns to work his full-time (or not) status must be restored for the rest of the stability period if his break in service is 13 weeks or less (26 weeks was the period in the proposed regulations), unless the employee works for an educational institution. The 26-week period has been retained for employees of educational institutions.
Minimum Essential Coverage
A large employer must offer “minimum essential” (basic medical) coverage to “most” of its employees or pay a penalty of $2,000 per full-time employee per year. For 2015, “most” means 70% of its employees. For 2016 and later, “most” means 95% of its employees.
If the employer does not meet this requirement, it will owe $2,000 per full-time employee, even on employees who are offered coverage. However, for 2015 the first 80 employees are excluded from this calculation. Beginning in 2016, the first 30 employees may be excluded.
Example: Acme has 120 full-time employees, but only offers minimum essential coverage to 30 employees. Acme will owe the $2,000 penalty, but for 2015 it may exclude 80 employees so it will only owe 40 x $2,000. For 2016, Acme may only exclude 30 employees from the penalty so it will owe 90 x $2,000.
If an employer is part of a controlled or affiliated service group and the $2,000 penalty for not offering coverage applies, the employers in the group apply the “free” employee exclusion pro rata, even if the penalty only applies to some of the members of the group. Also, if the $2,000 “no-offer” penalty applies, an employer is only penalized for its own employees. For example, Acme is in a controlled/affiliated service group and does not offer coverage to its employees while Baker is in the same controlled/affiliated service group and offers coverage to all of its employees. Baker will not be subject to the penalty and Acme will.
Beginning in 2016, employers must offer minimum essential coverage to dependent children (up to age 26) as well as to full-time employees to avoid the no-offer penalty. Coverage does not have to be offered to spouses. An employer that offered coverage for dependent children in 2013 or 2014 is expected to maintain that eligibility. Coverage does not have to be offered to stepchildren or foster children.
Affordable, Minimum Value Coverage
A large employer must offer coverage that is both “affordable” and “minimum value” to its full-time (30 or more hours per week) employees or pay a penalty of $3,000 per year for each full-time employee who receives a premium tax credit. Therefore, an employer that provides minimum essential coverage to most of its employees and avoids the $2,000 per employee penalty, still may have to pay the $3,000 penalty on an employee who is either in the group that is not offered coverage or who is offered coverage that is not both affordable and minimum value if the employee receives a premium tax credit.
Coverage is considered affordable if the cost of single coverage for the least expensive plan option that provides minimum value does not exceed 9.5% of the employee’s income or Federal Poverty Level (FPL). The cost of single coverage is always the measure of affordability, even if the employee has family coverage. An employer may use any of three safe harbors when measuring the employee’s income:
• The employee’s Box 1 W-2 income for the current year.
• The employee’s rate of pay on the first day of the plan year, multiplied by 130 for hourly employees to create the assumed monthly income.
• The most recently published FPL for a single person (for 2014, FPL for a single person in the 48 contiguous states is $11,670, for Alaska it is $14,580, and for Hawaii it is $13,420).
Coverage is considered minimum value if the actuarial value of the coverage is at least 60%.
Penalties
If an employer owes a penalty, it will be billed by the IRS (most likely during the second quarter following the end of the year). The penalty will not be paid through the employer’s corporate tax return.
Although the penalty is paid annually, the penalty actually is calculated monthly, so if an employer offered coverage for part of the year, its penalty would exclude those months.
If you would like a White Paper outlining the recent clarifications, please request one here.
Up next: Non-Calendar Plans and Steps Employers Should Take Next
