February 2013 Version
Caution: These rules are complex. For a more detailed explanation, see IRS proposed regulations on shared responsibility for employers regarding health coverage (Federal Register, January 2, 2013).
Endnote A – Generally, employers count full-time employees and full-time equivalents for part-time employees on business days during the preceding calendar year. Special rules apply if the employer was not in existence in the preceding calendar year. All employers that are members of a controlled group as defined in Code Section 414(b), (c), (m) or (o) are considered a single employer. Consult with your tax advisor to determine if your company is a member of a controlled group. The term full-time employee means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer. For this purpose, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, provided the employer applies this equivalency rule on a reasonable and consistent basis. The number of full-time equivalents is determined by adding the hours of service for each calendar month for employees who were not full-time (but not more than 120 hours of service for any employee)) and dividing that number by 120. Generally, an employee’s hours of service would include each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
Under the transition rule for 2014, employers have the option to use a period of at least six consecutive months in 2013, rather than a 12-month period.
Endnote B – The proposed regulations on shared responsibility for employers define an offer of coverage to full-time employees as an offer to at least 95% of its full-time employees and their dependent children who are under age 26, as defined in Code Section 152(f)(1). The term dependent does not include spouses. An employer is not required to make a contribution to the coverage to satisfy the offer requirement. There is transition relief in 2014 for plans that do not currently offer coverage to children. There is transition relief through 2014 for employers contributing to multiemployer plans.
Endnote C – Two types of subsidies are required to become available in 2014: health premium tax credits and cost-sharing reductions. These subsidies are available to individuals with household income starting at 100% of the federal poverty level up to 400% of the federal poverty level. 400% of the federal poverty level in 2014 for a family of four is estimated to be approximately $91,000. Household income includes the income of the taxpayer and all individuals for whom the taxpayer can claim a personal exemption. Health premium tax credits operate on a sliding scale. The tax credit begins at 2% of household income for taxpayers at 100% of the federal poverty level and phases out at 9.5% of household income for those above 400% of the federal poverty level. For example, an individual at 100% of the federal poverty level would be expected to pay 2% of their household income for coverage; the premium tax credit would equal the balance of the cost of coverage for a “benchmark plan” (defined as the second-lowest-cost plan in the Exchange). No one would receive a credit that is larger than the amount they actually pay for their plan.
Cost-sharing reductions lower the annual out-of-pocket expenditures for deductibles, coinsurance, copayments and similar charges. Cost-sharing reductions do not include premiums, balance billing amounts for non-network providers or spending for non-covered services. They phase out after household income exceeds 400% of the federal poverty level.
Endnote D – This is the §4980H(a) penalty; it is calculated on a monthly basis. No level of employer contribution is required to avoid this penalty. Employers are not subject to this penalty for failing to offer coverage to an employee for the initial three calendar months of employment. Generally, a fiscal year plan that existed as of December 27, 2012 will not need to comply with the employer shared responsibility rules until the first day of the fiscal year plan in 2014.
Endnote E – IRS created an optional safe harbor that is based on an employee’s W-2 wages instead of household income.
Endnote F – IRS final regulations on the premium tax credit rules clarified that eligibility for the premium tax credit will be based on the affordability of single-only coverage.
Endnote G - This is the §4980H(b) penalty; it is calculated on a monthly basis.
Endnote H – Under the minimum value rule, an employer must pay at least 60% of the cost of a basket of health care expenses. Most employer-sponsored plans, excluding mini-meds, are expected to meet the minimum value requirements, according to a report released by HHS. HHS issued a final rule providing a Minimum Value Calculator for self-funded plans and large fully-insured group plans.