Despite a great deal of effort and a good amount of news coverage about making changes to the Affordable Care Act, the act’s Employer Mandate has not changed at all. Employer’s today must be aware of the mandate’s requirements and take steps to ensure they are properly safe harbored from the potential tax assessments (penalties) it may generate.
First and foremost employers need to come to terms that the mandate is a tax issue, not a healthcare issue. There are aspects of the law which require certain benefits to be offered in order to qualify a plan, but IRS tax section 4980h sets forth rules and regulations governing the assessment of a tax in response to an Employer Shared Responsibility Assessment. Employers are not required to offer healthcare to remain compliant, they are simply assessed a possible tax when they choose to pay versus play. There are compliance requirements and associated penalties under Section 6055 & 6056, if employers fail to file and/or report information to the IRS and employees.
In addition to the tax assessments and penalties, the ACA also made changes and enhanced other laws which introduced new compliance issues. Employer’s are expected to comply with the ACA while also weaving in related rules and requirements from ERISA (which regulates employee benefits) as well as ensuring plans meet coverage standards set by HHS for minimum essential coverage (MEC) and minimum value (MV). There is also new emphasis on soliciting social security numbers for dependents as well as employees.
To fully comply, applicable large employers should accurately complete form 1095-C and timely report the information to employees and file the returns with the IRS to avoid 6055/6056 penalties. Also, in order to avoid being assessed taxes based on section 4980h, employers must look for safe harbors and properly document them or be prepared to pay the assessed taxes. All the while taking care to fully comply with ERISA and coverage standards set by HHS.
The first safe harbor is to keep your company below 50 FT+FTE and thus not be subject to the tax assessment at all. So we need to determine if the employer is considered an Applicable Large Employer or A.L.E.
Section 4980H applies only to applicable large employers. If the employer is not an ALE, then it cannot be assessed a tax under 4980h. In order to make an ALE determination, a company will look back at the number of hours worked by common law employees in the previous year to determine if the company has averaged at least 50 or more full time or full time equivalents. A quick method for doing this is to cap every employees hours each month at no more than 120 hours. After capping the hours, sum the hours for each employee in a given month and divide by 120. This will give the number of FT+FTE for each month. Total all twelve months and then divide by 12, this is the number that must be greater than or equal to 50 to be considered an ALE. Be sure to research which employee’s hours may be excluded, there are a number of exceptions. Some quick exclusions may include 2% partners in an S-corp, Statutory Employees , Statutory Nonemployees , Tricare recipients… Also if a businesses employee count spikes above 50 FT+FTE for less than 120 days due to seasonal workers, then the seasonal workers may also be excluded for those days.
If a business is new, the owners would make a self assessment as to whether they expect to have more than 50 FT+FTE employees the first year and then simply declare themselves an ALE or not.
One important note… given that all the facts needed to determine if your business is an ALE are based on the previous year, then there is nothing that can happen in the current year that will effect this determination. Your business is either an ALE all year or it is not, it does not move in or out of ALE status throughout the current year. The current years status is determined every year by January 1 and it does not change all year.
If an employer is determined to be an ALE, then the next concern is whether the employer may be assessed a tax for any employee in a given month. 4980H(a) is the first possible tax assessment. In order to safe harbor this assessment the company would need to offer MEC coverage to at least 95% (70% in 2015) of the full time employees or in the case there is less than 100 FT employees total, the employer must offer to all but 5 full time employees in a given month.
This raises one of the most complicated issues with the employer mandate, determining which employees are full time or more accurately which employees are eligible to be assessed a tax. There are two methods outlined in the final regulations. The first is the monthly method, the second is the look back method.
The monthly method seems simple on the surface but has it’s challenges. Simply, if an employee works 130 hours or more in a given month, the employee is full time, if they work less than 130 hours then they are not. The first challenge is summing the hours from the first day of the month to the last day of the month. This requires a time and attendance system that can record hours by month, not by week or by pay period which is the most common way hours are recorded. The second issue is that an employer does not know for sure if an employee was full time in a given month until the employee completes the month. If the employee was not previously considered full time and offered coverage, as such, then the employee may have just triggered a tax assessment for the employer. Basically, the problem here is the monthly method is like driving using the rear view mirror instead of the windshield. You are always looking behind you, not fully aware of what is coming at you. I will say that if you feel all your employees are full time and you offer coverage to everyone, then this is a good method to use. The worst that can happen in this scenario is that an employee may test part time and you offered coverage, not a big deal unless you are looking to avoid offering coverage.
The look-back method is a way for employers to look through the windshield and see what is coming. By looking back over a number of months (measurement period) the employer can then designate an employee as full time (or not) for the same number of months going forward (stability period). The look back period can be up to 12 months or as little as three months, but the stability period must be at least 6 months. Between the measurement period and the stability period, there is an administrative period which may be up to 90 days. The administrative period is used to calculate the results from the measurement period and then make an offer of coverage if needed. The offer of coverage would need to be effective by the first day of the stability period, which is always the first day of the month.
This is where the ACA and ERISA start to meet. The ACA works in months as the employee’s safe harbor is applied bt the calendar month, but ERISA works in days and the delay (waiting period) from determining eligibility and offering coverage can be no more than 90 days under ERISA. The ACA offers related non-assessed periods to sync up with the ERISA waiting period and keep the company in compliance throughout the offer process. You can start to see why this is a complicated law and why most companies should seek help.
Given you properly applied one of the two measurements above then you have determined which months an employee is full time and which months they are not. Then the employer decides if they will play (offer coverage) or pay the tax. This is referred to as “pay or play”.
2A Safe Harbor – Qualified Offer
The safest and most expensive route is to offer a fully qualified MV plan at a rate to the employee that is less than the IFPL (Individual Federal Poverty Line) safe harbored amount and is offered to no less than 95% of all employees. This IFPL safe harbor amount is determined by multiplying the IFPL by the affordability factor, both are indexed each year so one must look these up for each year. For 2019, the IFPL is $12,140. The affordability factor is 9.86%. So simple math would indicate the employee’s share of the premium must be less than $99.75 per month in 2019. The employer would pay any remaining premium each month. This safe harbor is referred to as a Qualified Offer and is indicated with a 2A on line 16 of the form 1095-C for the employee for all the months in the plan year. The employer who uses this safe harbor is not required to complete line 15 (the employee cost) and the employer may also choose to use an alternative form when communicating with the employee. Otherwise this safe harbor is exactly the same as 2G safe harbor described below.
2B Safe Harbor – Not Full Time
Another method of safe harboring an employee for a given month is to ensure that the employee is not full time by reducing their hours below 30 hours per week such that they do not qualify as full time using one of the two measurement methods described above. Given an employee is not full time in a given month then this would be indicated on the 1095-C as a 2B on line 16.
2C Safe Harbor – Employee Enrolled
If for any reason the employee is offered coverage and is enrolled in at least MEC coverage then the employer is safe harbored for that month and would indicate a 2C on line 16. The interesting part of this safe harbor is it does not take in to account affordability or if the coverage was qualified as MV, it only needs to be MEC. Therefore if an employer enrolls an employee then they are safe harbored regardless of cost or MV requirements and may use a 2C on line 16.
2D Safe Harbor – Non-Assessed
The safe harbor code 2D would be applied during any month the employee was in a non-assessed month. There are 5 situations where this may apply.
- If an employee is a new full time hire, then they are non-assessed for the first three full calendar months and the first partial month if it was not a full month as long as they are offered coverage effective by the first day of the fourth full month after hire.
- If an employee is hired into a non-full time position and the employer is using the look back method then the employee would be non-assessed during the initial measurement period and the associated administrative period that follows as long as the total period of the non-assessed months is less than 14 full calendar months.
- An employee who is in the initial measurement period, but is promoted to a full time position during the initial measurement period would continue to be non-assessed but must be offered coverage within the normal waiting period and the end result must be no longer than they would normally have been offered coverage they were to fully complete the initial measurement period without the promotion.
- If using the monthly method to determine full time status, then the employee is also non-assessed for the first full month they measured 130 plus hours and the next two full months. The total is three full months non-assessed including the month that triggered the event. This also requires an offer effective by the first day of the month following.
- If an employer is a new ALE for the current calendar year (they were not an ALE in the previous year), then all full time employees are non-assessed until April 1st as long as they are offered coverage beginning on April 1st.
2E Safe Harbor – Multi-employer Agreement
In the event a workforce is engaged in a multi-employer collective bargaining agreement and the employers in the agreement are required to contribute to a welfare fund which provides affordable MV coverage to the employee and their dependents, then the employers would indicate a 2E for the months applicable on line 16 of the 1095-C.
2F, 2G & 2H Safe Harbors – Affordability
The next three safe harbors are 2F, 2G and 2H. These are affordability safe harbors and they do not necessarily indicate the premiums are actually affordable to the individual, specifically. The employer really has no way of knowing what is actually affordable in any given employee’s finances. So the IRS provides 3 ways to safe harbor the employer, regardless of the actual affordability to the employee. The coverage must be MV and meet one of the three conditions below.
- 2F indicates the monthly premium is less than 9.86% of the employees w-2 box 1 wage divided by the number of months worked.
- 2G indicates the monthly premium is less than 9.86% of the federal poverty line ($12,140) divided by 12
- 2H indicates the monthly premium is less than 9.86% of the employee’s hour wage times 130 hours (30 hours per week)
No Safe Harbor Applies
If none of the safe harbors mentioned above (2A-2H) apply then the employer is not safe harbored for the employee for that month and the box on line 16 is left blank.
If the box is left blank for more than 5 FT employees and also more than 5% of the all FT employees for any given month and just one full time employee receives a premium assistance subsidy, then the employer would be assessed the 4980H(a) penalty. The tax assessed is $193.33 times the number of total FT employees minus 30 employees for the month indicated.
If the employer is not eligible for the 4980H(a) penalty but the box on line 16 is still blank and the employee with the blank month receives a premium assistance subsidy in that same month, then the employer would be taxed $290 for that employee for that month.
IRS Letters are going out in Waves
The IRS has taken some time to crunch all the data they have received from 2015 and then resolve which employers owe taxes. The first assessments just began to roll out in Q4 of 2017 for the tax year 2015. The letters are going out in rounds, with the first round assessing penalties on employers suspected of being an ALE, but not filing a return for 2015. The penalty for this is $50 per employee-not-filed up to $512 per employee-not-filed depending on how quickly the employer corrects the error and if the IRS feels it was willful neglect.
The second round of letters went out for ALE’s who filed as required, but indicated on the form that they did not meet the 4980H(a) requirement of offering MEC to at least 70% (2015 percentage required). These assessed amounts are usually quite large and this is referred in ACA circles as the “sledgehammer” penalty. Many employers actually indicated that they offered MEC, but due to a glitch in the IRS software, the IRS did not register the indicator properly. This is quickly solved by resubmitting a corrected 1094-C.
The third round of letters went out for ALE’s who filed as required, and also offered MEC coverage as required by 4980H(a), but some or all employees still received a subsidy and the employer was not safe harbored (line 16 is blank) for the same months. The letter assesses a tax for 4980H(b).
The fourth round of letters have now started and are penalizing employers who the IRS feels are ALE in 2016, but did not file a 1095-C in 2016. You can see the pattern here and the next rounds are for 4980H(a), 2016… 4980H(b), 2016…
This is a lengthy article to read and it is because it is a complicated issue. The ACA requires a great deal of record keeping, integration of data from multiple sources and a strong knowledge of all the rules to properly safe harbor your company. Of all the compliance laws, this one is truly one you will want to seek help on.