IRS releases guidance on healthcare act’s “pay or play” provisions

The Internal Revenue Service has issued proposed regulations implementing the "Employer-Shared Responsibility Provisions," also known as "pay or play," of the Patient Protection and Affordable Care Act of 2010 (PPACA).
 
Under Internal Revenue Code section 4980H, an "applicable large employer member" may be subject to an "assessable payment" if the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in "minimum essential coverage (MEC)" under an "eligible employer-sponsored plan." In addition, an "applicable large employer" may be subject to an assessable payment if its offer of MEC under an "eligible employer sponsored plan" is "unaffordable" or does not provide "minimum value."
 
The recently issued regulations provide guidance with respect to the specifics of the terminology noted above including which employers must provide affordable health coverage, the nature of the coverage, and the calculation of the excise tax penalties for failing to meet the requirements.
 
Although the shared responsibility provisions don’t take effect until 2014, employers will use information about the workers they employ in 2013 to determine whether they’re subject to the provisions and face the potential for penalties in 2014.

Shared responsibility basics

As noted above, beginning on Jan. 1, 2014, the PPACA subjects a "large employer" to an excise tax penalty if the employer fails to offer the opportunity to enroll in MEC to "substantially all" of its full-time employees (and their dependents) under an eligible employer-sponsored plan that is affordable and provides minimum value. The penalty is triggered when any full-time employee is certified to the employer as having received a premium tax credit or cost-sharing reduction.
 
An employer will generally satisfy the requirement to offer MEC to "substantially all" of its full-time employees (and dependents) if it offers such coverage to 95% of its full-time employees and their dependents (or, if greater, to 5 full-time employees).

Determining large employer status

A "large employer" is defined as one with at least 50 full-time employees, or a combination of full-time and part-time employees "equivalent" to at least 50 full-time employees. A full-time employee is someone employed on average at least 30 hours per week.
 
Large employer status is determined in part by calculating full-time equivalent employees (FTEs). For a given calendar month, this requires totaling the hours of service for all part-time employees, and dividing that figure by 120. For example, an employer with 40 part-timers who average 90 hours per month would have 30 FTEs (40 × 90 = 3,600; 3,600/120 = 30) who must be added to the number of full-time employees (those working at least 30 hours per week) when determining whether the 50-FTE threshold is met.
 
For hourly employees, the proposed regulations require the hours to be calculated based on records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
 
For salaried employees, the proposed regulations provide three methods of determining the hours:

  • The same method used for hourly employees,
  • A days-worked equivalency method (each worker is credited with eight hours for each day worked), or
  • A weeks-worked equivalency method (each worker is credited with 40 hours for each week worked).

The employer is permitted to apply different methods for different classifications of nonhourly employees, so long as the classifications are "reasonable and consistently applied."
 
Employers must determine annually, based on their employees’ actual hours of service, whether they’ll be considered a large employer for the next year. This is done by averaging the number of employees across the months of the year to see whether they meet the large employer threshold. For 2014, however, the proposed regulations provide transitional relief. Rather than being required to take into account all twelve months of 2013, to measure whether it has 50 full-time employees (or an equivalent number of part time and full-time employees), the employer can use any six-consecutive-month period. That means an employer could select six-month periods toward the beginning of the year and use the remainder of 2013 to determine whether it is needed to offer coverage in 2014 and, if so, choose and establish a compliant plan.
 
As indicated above, Internal Revenue Code section 4980H implies the determination of full-time employee status and application of the excise tax penalties must be calculated on a month-to-month basis. Recognizing that applying these rules on a monthly basis could cause practical difficulties for employers, the proposed regulations also provide an optional "safe harbor" method as an alternative to the month-to-month calculation. There is also special guidance addressing the treatment of on-going and new employees, as well as teachers and employees of educational organizations.

Assessing affordability and minimum value

An employer offering health coverage could nonetheless be subject to penalties if at least one full-time employee receives a premium tax credit because the coverage offered to the employee was either unaffordable or didn’t provide minimum value.
 
Generally, if an employee’s share of the premium would cost that employee more than 9.5% of his or her annual household income, the coverage isn’t considered affordable. The proposed regulations lay out three safe harbors employers can use to satisfy the affordability requirement. An employer will avoid a penalty if:

The cost of the coverage won’t exceed 9.5% of the Form W-2 wages the employer pays the employee that year,
The employee’s monthly contribution amount for the self-only premium is equal to or lower than 9.5% of the computed monthly wages, or
The employee’s cost for self-only coverage doesn’t exceed 9.5% of the federal poverty line for a single individual.

The affordability test applies to the lowest cost option available to the employee also meeting the minimum value requirement.
 
Under the minimum value requirement, a health plan must cover at least 60% of the total allowed costs of benefits provided under the plan. The IRS and the US Department of Health and Human Services will make available an online minimum value calculator where employers can enter certain plan information and obtain a determination of whether the plan provides minimum value.

Calculating penalties

Large employers that don’t provide at least 95% of their full-time employees (and, after 2014, their dependents, defined as an employee’s children under age 26) with health coverage will be assessed a penalty if just one of these employees receives a premium tax credit when buying insurance in an insurance exchange. The annual penalty is $2,000 per full-time employee in excess of 30 full-time employees.

Employers providing at least 95% of their full-time employees (and, after 2014, their dependents) with coverage that isn’t deemed affordable or fails to provide minimum value generally must, if at least one employee receives a premium tax credit, annually pay the lesser of $3,000 for each employee receiving the credit or $2,000 for each full-time employee beyond the first 30 full-time employees.
 
For purposes of penalty calculations, full-time employees don’t include FTEs, only actual full-time employees. The proposed regulations describe how to determine which employees are treated as full-time employees for penalty purposes, including rules for assessing the status of ongoing employees, new hires and variable-hour or seasonal workers, as well as for other special circumstances.

Related companies

Companies sharing a common owner or otherwise related are combined for purposes of determining whether they’re a large employer; the proposed regulations include rules for determining whether companies are related. If the combined total meets the 50 FTE threshold, each separate company is subject to the shared responsibility provisions — even those that don’t individually employ enough employees to satisfy the threshold.
 
The rules for combining related employers do not, however, apply when determining liability for and amounts of penalties. Employers offering appropriate coverage, therefore, won’t be subject to penalties simply because another employer in its group fails to offer the coverage to its employees.

Moving forward

The proposed regulations would be effective for periods starting after Dec. 31, 2013. In the meantime, employers can rely on the proposed regulations for purposes of compliance with the shared responsibility provisions. If the final regulations are more restrictive, the IRS will give employers time to come into compliance. If you have questions on how the proposed regulations may affect your company, please contact your Baker Tilly tax advisor.