The IRS recently released proposed regulations regarding the “Play or Pay” provisions of PPACA. The regulations provided additional guidance for calculating full-time and full-time equivalent employees for the purpose of determining “Applicable Large Employers,” as well as a number of transition rules related to the effective date of the regulations. In an effort to provide manageable information related to a very complex subject, we are providing the following in this communication:
· Executive Summary
· Background information
· Penalties for not offering coverage
· Penalties for offering coverage that is unaffordable
Beginning in 2014, certain large employers may be subject to a penalty tax for
· failing to offer minimum essential health care coverage for all full-time employees (and their dependents); or
· offering eligible employer-sponsored coverage that is not “affordable” or
· does not offer “minimum value.”
Applicable Large Employers
The penalty tax applies to “applicable large employers.” An applicable large employer for a calendar year is an employer who employed an average of at least 50 “full-time employees” on business days during the preceding calendar year.“Full-time” includes “full-time-equivalent” employees. Therefore, the employer must take part-time employees into account to determine whether or not it is an applicable large employer.
FULL TIME EQUIVALENT EMPLOYEES
The number of full-time equivalents the employer employed during the preceding calendar year are taken into account for the purpose of determining Applicable Large Employer status. All employees (including seasonal workers) who were not employed on an average of at least 30 hours of service per week for a calendar month in the preceding calendar year are included in calculating the number of full-time equivalents for that calendar month. The approach for converting part-time employees to full-time equivalents includes two steps:
Step 1: Calculate the aggregate hours of service in a month for employees who are not full-time employees for that month. (Do not include more than 120 hours of service for any employee.)
Step 2: Divide the total hours of service from Step 1 by 120.
The result is the number of full-time equivalent employees for the month.
This is just a simple overview of the calculation. The proposed regulations include specific details regarding measurement periods, seasonal employees, new employees, breaks in service, as well as a number of other topics. They also include guidance for educational organizations, confirming that teachers(working 30 hours per week) are considered full-time employees, despite breaks in service when school is not in session.
It is our belief that most EBS member schools will be Applicable Large Employers as you must employ 50 eligible employees in order to participate in our large group plan. However, should you have any questions regarding your status as an Applicable Large Employer, please feel free to contact us.
AVOIDING THE NO OFFER PENALTY
In order to avoid the No Offer Penalty, which is the most costly of the two penalties, it is extremely important for your school to offer medical coverage to all full-time employees and their dependentchildren. The statute defines a full-time employee, with respect to any month, as “an employee who is employed on average at least 30 hours of service per week.” The play or pay penalties will not be triggered if an employer does not offer coverage to part-time employees (defined as those employees working less than 30 hours per week). However, should an employee working variable hours, exceed the 30 hour per week average in any given month, it is imperative for the employer to offer coverage to that employee in order to avoid the possibility of the No Offer Penalty.
One of the challenges for our schools, will be determining whether or not the coverage they offer is “affordable,” as defined by the law. The good news is that the new IRS proposed regulations clarify that plan affordability for employer penalty purposes is tied to employee-only coverage for the employer’s lowest cost plan. Coverage is considered unaffordable if the employee’s contribution to the premium cost exceeds 9.5% of the employee’s household income for the taxable year . The IRS recognizes that it is difficult for an employer to determine household income for each employee. They have provided safe harbor methods, including using either wages reported on the W-2 form or your employee’s gross salary to determine the applicable contribution amount.
EXAMPLE: For an employee earning $20,000.00 annually, the cost for coverage could not exceed approximately $160.00 per month in order to be considered “affordable” under the terms of the law. For those schools offering our lowest cost plan (the new 90/70 H.S.A. Plan), you would need to contribute approximately $180.00 per month (at 2013 rates) to the cost of coverage in order to avoid the penalty. This would satisfy the requirement, even if the employee chose to enroll in one of your more expensive plan offerings, or to enroll for dependent coverage. If your school does not currently offer the new 90/70 H.S.A. Plan, you would need to contribute more to the cost of the coverage in order to avoid the penalty. Please call us to review your benefit offerings, should this be a concern to you.
As long as the coverage you offer to your employee is considered affordable, you will not be liable for the penalty, even if the employee decides to purchase coverage through the Exchange and receives a premium tax credit.
EMPLOYEES WHO QUALIFY FOR THE TAX CREDIT
A number of factors will affect whether an employee qualifies for a premium tax credit. For example, any of the following factors could result in the employee not qualifying for a premium tax subsidy:
The employee elects not to purchase health coverage at all or elects to purchase coverage other than through an Exchange;
The employee’s household income exceeds the threshold (400% of poverty level) for which the premium tax credit is available;
The employee has coverage through a spouse that is both affordable and provides minimum value; or
The employee is eligible for Medicare or Medicaid coverage.
If the employee does not receive the subsidy, the applicable large employer will not be liable for the tax penalty. That is, even though it elected not to play, the employer does not have to pay. However, it should be noted that these factors are largely beyond the employer’s control, so the employer may be taking a large risk if it decides not to offer minimum essential coverage (coverage that is affordable and provides minimum value). Please see information below regarding penalty calculations.
An employer-sponsored plan provides minimum value if the plan's share of the total allowed costs of benefits provided under the plan is at least 60% of such costs. We are confident that our plan designs will offer minimum value as required by the law. We are working with our carriers to help us determine the actuarial value of current our plans. It is our understanding that the IRS will also provide “calculators” for the purpose of determining minimum value in the near future. Once our plans have been evaluated, we will provide additional information with regard to this aspect of the law.
The following information was provided to EBS through our affiliation with the Society of Professional Benefit Administrators (SPBA):
Applicable Large Employers - This is the term the law uses to refer to employers subject to the Play or Pay mandate.
Beginning in 2014, the “Patient Protection and Affordable Care Act” (ACA) imposes financial penalties on applicable large employers (50 or more full-time employees) that:
· do not offer health insurance coverage,
· offer coverage that is considered “unaffordable.”
No Offer to All Full-Time Employee Penalty
Employers with 50 or more full-time employees (or full-time equivalents) on business days during the preceding calendar year are liable for a penalty tax if the employer fails to offer all full-time employees (and their child dependents) the opportunity to enroll in an employer-sponsored plan AND any full-time employee is certified to receive an advance premium tax credit or cost-sharing reduction.
The penalty is calculated on a monthly basis by multiplying 1/12 of $2000 by the number of full-time employees less 30. Only one 30-employee reduction per controlled group of employers is allowed. After 2014, the $2,000 amount will be adjusted for inflation. Below this penalty is expressed as a simple mathematical equation.
No Offer to All Full-Time Employee Penalty = $2,000 annually X (the number of full-time employees – 30)
Note: No level of employer contribution is required to avoid the penalty. Employers are not subject to the No Offer penalty for failing to offer coverage to the employee for the initial three calendar months of employment.
Unaffordable Coverage Penalty
If an employer with 50 or more full-time employees (or full-time equivalents) on business days during the preceding calendar year offers minimum essential coverage, but the coverage is not affordable or does not provide minimum value, the employer must pay an excise tax equal to 1/12 of $3,000 per month times the number of its full-time employees who receive a premium tax credit or cost-sharing reduction. This excise tax is capped so that it does not exceed liability that would have applied if the employer did not offer coverage. Below this penalty is expressed as a simple mathematical equation.
Unaffordable Coverage Penalty = the lesser of:
· $3,000 annually X (the number of full-time employees receiving advance premium tax credits); or
· $2,000 annually X (the number of full-time employees - 30)
What does unaffordable mean? Coverage is unaffordable if the employee’s required contribution to the premium cost for single coverage for the employer’s lowest cost plan exceeds 9.5% of the employee’s household income for the taxable year; or, the employer-sponsored plan does not provide minimum value.
IRS PROPOSED REGULATIONS
No Offer To All Full-Time Employee Penalty Clarification
The new IRS proposed regulations clarify that coverage must be offered to child dependents to avoid the No Offer Penalty. An offer of coverage to an employee’s spouse is not required to avoid the penalty. The proposed regulations define an employee’s dependents as an employee’s child (as defined in section 152(f)(1)) who is under 26 years of age. A child attains age 26 on the 26th anniversary of the date the child was born.
Unaffordable Coverage Penalty Clarification
The new IRS proposed regulations clarify that plan affordability for employer penalty purposes is tied to employee-only coverage. Employers will not be penalized for failing to offer affordable dependent coverage.
For the unaffordable coverage penalty, liability is contingent on whether the employer offers minimum essential coverage under an eligible employer-sponsored plan, and whether that coverage is affordable and provides minimum value with respect to employee-only coverage.
Unresolved: This proposed regulation does not address whether the dependents will be eligible for premium tax credits if employer-sponsored coverage is available, but it is unaffordable. This is a significant policy decision that is still undecided.
What we do know is that an employer will not be penalized if a dependent receives a premium tax credit through an Exchange. An employer may be liable for a penalty only if one or more full-time employees are certified to the employer as having received a premium tax credit or cost-sharing reduction.
The information provided is based on our initial review of the proposed regulations. It should not be considered legal advice. We will provide additional information as we continue to digest the latest guidance. Please feel free to contact EBS should you have any questions regarding this information, or if we can help you in any way.