A Primer on the Affordable Care Act's "Employer Mandate"
The so-called "employer mandate", was enacted as part of the Patient Protection and Affordable Care Act (Act), and although commonly referred to as a "mandate," it is officially called the "shared employer responsibility'" in the Act.
Essentially, the Act requires certain large businesses to offer affordable adequate health insurance coverage to their employees, or pay a penalty. The shared employer responsibility provisions can be overwhelming and complicated, and many of the regulations and reporting requirements are still being finalized.
Who Must Comply with the Shared Employer Responsibility Requirements?
The Act refers to the "applicable large employer," which is defined as an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.
A full-time employee is someone who is employed on average at least 30 hours of service per week.
The law specifically exempts small businesses with less than 50 full-time employees. According to the administration, that translates into 96% of the firms in the United States.
There are also exemptions for certain employers who only have 50 full-time employees for 120 days or less during the calendar year, or the employees in excess of 50 employed during such 120 day period were seasonal workers.
For many employers, determining the number of employees and their full-time status should be fairly straight-forward, but there is also specific guidance in the regulations on how to calculate the hours of service and the number of full-time employees.
It should be noted that certain small employers may be eligible for a small business tax credit for providing health insurance to their employees, even though they are not subject to the shared employer responsibility requirements. For 2013, eligible employers may receive a small business credit for up to 35 percent of their contribution toward the employee's health insurance premium. For 2014 and beyond, small employers who purchase coverage through the new Health Insurance Exchanges can receive a tax credit for two years of up to 50 percent of their contribution.
What are the Requirements?
In January 2013, the IRS issued a proposed rule entitled Shared Responsibility for Employers Regarding Health Coverage, which aimed to clarify the requirements and provide guidance for large employers complying with the Act. Employers may rely on these proposed regulations for guidance pending the issuance of final regulations or other applicable guidance.
Under the proposed regulations, an applicable large employer must pay a penalty under two conditions:
1. The employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and any full-time employee is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction, or
2. The employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and one or more full-time employees is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction.
The regulations note that the second scenario generally occurs where the offered coverage is not affordable or does not provide minimum value under the Act. Coverage for an employee under an employer-sponsored plan is affordable if the employee's required contribution for self-only coverage does not exceed 9.5 percent of the employee's household income for the taxable year. A plan fails to provide minimum value if the plan's share of the total allowed costs of benefits provided under the plan is less than 60 percent of those costs.
Importantly, the penalty does not kick in unless and until the employee receives the federal tax credit to purchase health insurance through the health insurance exchange.
If a large employer does not offer the required coverage, the penalty or "assessable payment amount" is calculated by taking the number of full-time employees, with the first 30 employees excluded, and multiplying that number $2,000 for the annual amount, or for the monthly amount, use 1/12 of $2,000, or $166.67.
If a large employer fails to provide coverage that is affordable or has minimum value under the second scenario, then the penalty is calculated by taking the number of full-time employees who receive an applicable premium tax credit or cost-sharing reduction multiplied by $3,000, or for the monthly amount, use 1/12 of $3,000, or $250.00.
The Shared Employer Responsibility Requirements Go Into Effect January 1, 2015
The shared employer responsibility requirements were originally set to be effective as of January 1, 2014.
On July 2, 2013, the Assistant Secretary for Tax Policy at the U.S. Department of the Treasury issued a press release advising that the Administration will provide an additional year before the employer reporting requirements begin, in order to allow time to simplify the reporting requirements, adapt the reporting systems, and issue final rules and regulations. As a result, the employer shared responsibility payments will not apply until January 1, 2015.
The press release also advised that the extension does not affect employees' access to the premium tax credits available under the Act, or any other provision of the Act.
Stay Tuned and Stay Updated
When it announced that the requirements will not go into effect until January 1, 2015, the IRS advised that further proposed rules and regulations will be published, and ultimately final rules will be implemented at some point.
Be reminded that this is a broad overview of the shared employer responsibility provisions. There are many nuances and complicated aspects to this law, and the penalties are steep for non-compliance.