2016 Compliance Checklist Series: Employer Penalty Rules

Under the ACA’s employer penalty rules, applicable large employers (ALEs) that do not offer health coverage to their full-time employees (and dependent children) that is affordable and provides minimum value will be subject to penalties if any full-time employee receives a government subsidy for health coverage through an Exchange. The ACA sections that contain these requirements are known as the “employer shared responsibility” or “pay or play” rules.

These employer penalty provisions, and the related reporting requirements, took effect for most ALEs on Jan. 1, 2015. The first penalties will be assessed beginning in 2016. However, eligible ALEs with fewer than 100 full-time employees (including FTEs) have an additional year, until 2016, to comply with the employer shared responsibility rules. In addition, certain employers that have non-calendar year plans may be able to delay compliance with these rules until the beginning of their 2015 plan year.

On Feb. 10, 2014, the IRS released final regulations implementing the ACA’s employer shared responsibility rules. Among other provisions, the final regulations establish an additional one-year delay for medium-sized ALEs, include transition relief for non-calendar year plans and clarify the methods for determining employees’ full-time status.

This checklist will help you evaluate your possible liability for an employer shared responsibility penalty for 2016. Please keep in mind that this summary is a high-level overview of the employer shared responsibility rules. It does not provide an in-depth analysis of how the rules will affect your organization. Please contact FPE Insurance Services for more information on the employer penalty rules and how they may apply to your situation.

Calculate Penalties for 2015

An ALE is only liable for a penalty under the pay or play rules if at least one full-time employee receives a premium tax credit or cost-sharing reduction for coverage purchased through an Exchange. Employees who are offered health coverage that is affordable and provides minimum value are generally not eligible for these Exchange subsidies. Depending on the circumstances, one of two penalties may apply under the employer shared responsibility rules—the 4980H(a) penalty or the 4980H(b) penalty.

The 4980H(a) Penalty—Penalty for ALEs Not Offering Coverage

Under Section 4980H(a), an ALE will be subject to a penalty if it does not offer coverage to “substantially all” full-time employees (and dependents) and any one of its full-time employees receives a premium tax credit or cost-sharing reduction toward his or her Exchange plan. The 4980H(a) penalty will not apply to an ALE that intends to offer coverage to all of its full-time employees, but that fails to offer coverage to a few of these employees, regardless of whether the failure to offer coverage was inadvertent. The final regulations provide transition relief that will phase in the “substantially all” requirement over two years. Thus, an ALE will satisfy the requirement to offer minimum essential coverage to “substantially all” of its full-time employees and their dependents if it offers coverage to:

• At least 70 percent—or fails to offer coverage to no more than 30 percent—of its full-time employees (and dependents) for each calendar month during 2015 (and any calendar months during the 2015 plan year that fall in 2016); and
• At least 95 percent—or fails to offer coverage to no more than 5 percent (or, if greater, five)—of its full-time employees (and dependents) in 2016 and beyond. According to the IRS, the alternative margin of five full-time employees is designed to accommodate relatively small employers, because a failure to offer coverage to a handful of full-time employees might exceed 5 percent of the employer’s full-time employees.

However, ALEs that qualify for the transition relief from the 4980H(a) penalty for 2015 plan years are still subject to potential 4980H(b) penalties for that time period (for example, if the health plan coverage is unaffordable or does not provide minimum value).

Under the ACA, the monthly penalty assessed on ALEs that do not offer coverage to substantially all full-time employees and their dependents will be equal to the ALE’s number of full-time employees (minus 30) X 1/12 of $2,000, for any applicable month. After 2014, the penalty amount will be indexed by the premium adjustment percentage for the calendar year. This adjustment mechanism is not affected by the one-year delay for the employer shared responsibility rules. Therefore, the IRS has indicated that the penalty amount for 2015 will be adjusted.

The final regulations include transition relief for 2015 that allows ALEs with 100 or more full-time employees (including FTEs) to reduce their full-time employee count by 80, instead of by 30, when calculating the penalty. This relief applies for 2015 plus any calendar months of 2016 that fall within the ALE’s 2015 plan year.

The 4980H(b) Penalty—Penalty for ALEs Offering Coverage

Employers that do offer coverage to substantially all full-time employees (and dependents) may still be subject to penalties if at least one full-time employee obtains a subsidy through an Exchange because:

• The employer did not offer coverage to all full-time employees; or
• The employer’s coverage is unaffordable or does not provide minimum value.

The monthly penalty assessed on an ALE for each full-time employee who receives a premium credit will be 1/12 of $3,000 for any applicable month. However, the total penalty for an employer would be limited to the 4980(a) penalty amount. After 2014, the penalty amounts will be indexed by the premium adjustment percentage for the calendar year. This adjustment mechanism is not affected by the one-year delay for the employer shared responsibility rules. Therefore, the IRS has indicated that the penalty amount for 2015 will be adjusted.

Affordability of Coverage

Under the ACA, an employer’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year (adjusted to 9.66 percent for plan years beginning in 2016). “Household income” means the modified adjusted gross income of the employee and any members of the employee’s family.

Because an employer generally will not know an employee’s household income, the IRS provided three affordability safe harbors that employers may use to determine affordability based on information available to them. These safe harbors allow an employer to measure affordability based on the employee’s W-2 wages, the employee’s rate of pay or the federal poverty level for a single individual. IRS Notice 2015-87 confirms that ALEs using an affordability safe harbor may rely on the adjusted contribution percentages for 2015 and 2016.

Minimum Value

Under the ACA, a plan provides minimum value (MV) if the plan’s share of total allowed costs of benefits provided under the plan is at least 60 percent of those costs. The following three approaches may be used to determine MV:

In addition, any plan in the small group market that meets any of the “metal levels” of coverage (that is, bronze, silver, gold or platinum) provides MV.

On Nov. 4, 2014, the IRS issued Notice 2014-69 to clarify that plans that do not provide inpatient hospitalization or physician services (referred to as Non-Hospital/Non-Physician Services Plans) do not provide MV. On Dec. 18, 2015, HHS and the IRS issued final regulations that prohibit an employer from using the MV Calculator (or any actuarial certification or valuation) to demonstrate that a Non-Hospital/Non-Physician Services Plan provides MV. As a result, a Non-Hospital/Non-Physician Services Plan should not be adopted for the 2015 plan year or beyond.

Calculate potential penalties for 2015:

• Review the cost of your health plan coverage to determine whether it’s affordable for your employees by using one or more of the affordability safe harbors.
• Determine whether the plan provides MV by using one of the four available methods.
• Calculate any penalties that may apply under Section 4980H(a) or 4980H(b) using the formulas above.