Last July the IRS granted employers an extra year before it will begin imposing penalties under the employer shared responsibility provisions of the Affordable Care Act (ACA). But there is plenty to do right now to prepare for the 2015 tax season, when the penalties will commence.
In what’s become known as the “play or pay” decision, employers can choose to offer full-time employees heath-care coverage that meets certain minimum requirements, or pay fines and point the workers toward the new public health insurance exchanges.
On a strictly dollars-and-cents basis, most companies would save money by opting for the fines, but there may be strong competitive motivations for providing insurance. At present it’s expected that few large companies will stop offering coverage, but down through the size spectrum it’s likely that more and more will consider the move.
But regardless of whether an employer wants to play ball with the ACA by offering a health plan, identifying which employees are full-time (defined as those working 30 hours or more per week) is essential.
Because penalty amounts for employers with no health plans will be based on how many full-time employees they have, those who choose to “pay” can’t just watch the game from the stands; they need to conduct measurements of employee hours. And those that plan to avoid penalties by offering health plans may still face fines if some full-time employees buy coverage on the public exchanges with the assistance of premium tax credits provided under the ACA.
Regulations relating to the issues described in this article are set to be finalized soon and may require employers to “call an audible” — that is, adjust their game plans.
Know the Rulebook
When employer penalties become real in 2015, fines — technically, excise taxes — will come in two flavors. An “A” penalty applies if an employer chooses to “pay” rather than “play,” while a “B” penalty may apply even to employers that “play.”
The A penalty (from Section 4980(a) of the ACA) is based on the total number of full-time employees, minus 30, and the fine is $2,000 per employee per year. The B penalty (from Section 4980(b) of the ACA) is $3,000 per employee but applies only to full-time workers who use premium tax credits for buying insurance through a public exchange. With the B penalty being higher per employee, the total penalty is capped at what the employer would owe under the A penalty.
To avoid the A penalty, employers must offer “minimum essential coverage” to at least 95% of full-time employees. The employer avoids the B penalty if its health plan meets minimum value requirements and safe harbor guidelines. The simplest of those compares the employee’s payroll deduction for self-only coverage under the least expensive plan offered to 9.5% of the employee’s wages (as listed in box 1 of form W-2). A key to mitigating risk for either penalty is to understand which and how many employees are classified as full-time.
Create a Playbook
Employers need to establish a measurement period for determining each ongoing employee’s average hours per week. The period cannot be less than three months or more than 12 months. An administrative period of no more than 90 days can follow to give the employer time to figure out who will and won’t receive coverage during an upcoming “stability” period, and to get employees enrolled or notified of upcoming disenrollment.
The stability period must be at least as long as the measurement period but no less than six months. During the stability period, the IRS assesses A and B penalties, in both cases treating workers as either full-time or part-time as had been established during the measurement period.
Employers are under a tight time frame to find technology and administrative solutions for tracking employee hours. Those planning to use a 12-month measurement period and 12-month stability period for testing employee eligibility effective January 1, 2015, needed to have begun tracking hours in the fall of 2013. To comply with the rules, employers that haven’t been tracking employee hours will have to look back at prior payroll records to populate a compliance system or tool retroactively, and those tools will need to be fully operational by the fall of 2014. That process will occur every year.
Keep Score on Paid and Unpaid Hours
Quantifying hours to distinguish employees’ full-time vs. part-time status may not be as simple as looking at the number of hours worked. The measurement must include the hours employees are paid and not working, such as during vacation or, in the case of union workers, layoff, to determine coverage eligibility.
Employers have options with respect to crediting unpaid leave hours. If the employer is subject to the Family and Medical Leave Act (FMLA), it can either credit the employee with unpaid FMLA leave hours, or shorten the measurement period so that it doesn’t include the leave period. Similar rules apply if an employee takes an unpaid leave for jury duty or military service.
Other breaks in employment are not as clear-cut. Basically, if the unpaid break is less than four weeks, then employers must treat the worker as an ongoing employee, but they do not have to count those leave hours during the measurement period.
If the employee is off work for at least 26 consecutive weeks, the employer may treat the employee as a new hire upon return. There is another optional rule, the “rule of parity,” for employees with no credited hours over a period of at least four weeks but less than 26 weeks. Under the rule of parity, if the time of absence is at least four weeks and is longer than the employee’s previous period of service, then the employer can treat the employee as a new hire upon return.
Mary Bauman is an attorney at the law firm Miller Johnson in Grand Rapids, Mich., and Don Garlitz is executive director of bswift Exchange Solutions, a provider of benefits software and services.
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Don’t Be Sidelined by ACA Delay: Act Now to Avoid ‘Play or Pay’ Flag | California Employee Benefits