Last week, the IRS issued proposed regulations titled "Shared Responsibility for Employers Regarding Health Coverage," which is commonly referred to as the "employer mandate," and a series of questions and answers explaining key provisions of the proposed regulations. This guidance addresses the penalties which may be assessed against employers with 50 or more full-time or full-time equivalent employees who fail to provide health coverage or fail to provide affordable health coverage with a minimum value to their full-time employees and dependents. All employers, including for-profit, nonprofit and governmental entities, may be subject to the penalties assessed under the employer mandate.
These penalties generally take effect January 1, 2014, and apply only to employers with 50 or more full-time employees or a combination of full-time and part-time workers that is equivalent to 50 employees (e.g., 40 full-time employees working 30 or more hours per week on average and 20 part-time employees working 15 or more hours per week on average). Employers will be subject to these provisions in 2014 based on the number of full-time and full-time equivalent employees they employ in 2013. The safe-harbor methods available to determine the number of full-time or full-time equivalent employees are discussed in detail in IRS Notice 2012-58 and here.
Companies that are part of the same control group for tax and employee benefit purposes generally will be combined for the purpose of determining whether they collectively employ 50 or more full-time employees or full-time equivalents. If the combined total is at least 50, each separate company is subject to the employer mandate, even if a company does not individually employ enough employees to meet the threshold. For purposes of determining whether an employer meets the 50 full-time employee threshold, only work performed in the U.S. is considered for both foreign and U.S.-based companies.
For those employers with 50 or more full-time or full-time equivalent employees, the penalties assessed pursuant to the proposed regulations will be calculated as follows:
Employer Provides No Coverage. If an employer does not offer coverage to at least 95% of its full-time employees and at least one employee receives a premium tax credit to purchase insurance on a state exchange, the employer owes an Employer Shared Responsibility payment equal to the number of full-time employees the employer employed during the year (minus 30 employees) multiplied by $2000. This amount will be prorated monthly for those employers who offer coverage during some months but not others.
Employer Provides Coverage But At Least One Employee Receives a Premium Tax Credit. Even if an employer offers coverage to at least 95% of its full-time employees, and if at least one full-time employee receives a premium tax credit to purchase insurance on a state exchange, the employer is responsible for a monthly payment equal to the number of full-time employees who received a premium tax credit for that month multiplied by one-twelfth of $3000. The amount of payment for any calendar month is capped at the number of full-time employees employed in a month (minus 30 employees) multiplied by one-twelfth of $2000. This penalty may be assessed because the coverage offered was either unaffordable or failed to provide minimum value.
Note that whether an employer has 50 or more employees is determined based on both full-time employees and full-time equivalent employees. The penalties are calculated based only on the number of full-time employees.
An employee will generally be eligible for a premium tax credit to help pay for coverage through a state exchange if: (1) his or her income is between 100% and 400% of the federal poverty level; (2) he or she is not eligible for coverage through another government sponsored program such as Medicaid or CHIP; and (3) he or she is not eligible for employer-sponsored coverage or the employer coverage offered is either unaffordable or does not provide minimum value.
To ensure that coverage offered to employees is affordable, employers may take advantage of the affordability safe harbor, which allows an employer to avoid the assessment of a penalty as long as the cost of coverage to an employee would not exceed 9.5% of the wages the employer paid to the employee during that year as reported in Box 1 of Form W-2. In order to assess whether the coverage offered provides minimum value, employers may take advantage of a minimum value calculator which will be made available by the IRS and the Department of Health and Human Services.
If an employer owes an Employer Shared Responsibility payment, the IRS will provide information on the potential liability and give the company an opportunity to respond before any penalty is assessed. If the employer is liable for such Employer Shared Responsibility payment, the IRS will send a notice and demand for payment instructing the employer on how to make the payment. Employers will not be responsible for including the payment on any tax return that they may file.