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After Dec. 31, 2013, an applicable large employer (ALE) can be subject to a penalty for not providing health insurance coverage to certain employees. As was previously discussed in this series, determining whether an employer is an ALE is not a matter of merely counting to 50. In a similar vein, the employer shared responsibility payment (the “penalty”) makes a seemingly straightforward computation—counting the number of full-time employees and multiplying the resulting number by a statutorily designated amount—an exercise in complexity.
The following is not a comprehensive discussion on computing penalties under the PPACA, but is rather to provide employers with an overview of the applicable rules and highlight matters that employers should begin considering to avoid the penalty.
The amount of the penalty differs depending on whether 1) the employer offers any health insurance coverage to its employees or 2) the employer offers coverage, but such coverage is deemed to be either unaffordable or fails to provide minimum value.
An ALE that fails to offer health insurance coverage becomes subject to a penalty when at least one of its full-time employees purchases insurance through an exchange and receives a premium tax credit to offset a portion of the cost. The penalty in this case is equal to: (x) the number of the employer’s full-time employees less 30, multiplied by (y) one-twelfth of $2,000 (“failure-to-cover penalty”). Therefore, for a particular month, the penalty is $166.67 for each full-time employee in excess of 30 full-time employees.
An ALE that offers health insurance coverage, but such coverage is either unaffordable or does not provide minimum value, is subject to a penalty each month equal to the lesser of: (1) one-twelfth of $3,000 (i.e., $250) multiplied by each full-time employee that qualifies for the exchange, or (2) the failure-to-cover penalty.
Determining who is a full-time employee
The key analysis for employers computing their PPACA penalty liability is determining the number of full-time employees. To complicate matters, the number of full-time employees used to calculate the penalty is not equivalent to the number of full-time employees used to initially determine whether an employer is an ALE (i.e., the sum of full-time and full-time equivalent employees determined on a controlled group basis).
For the penalty calculation, a full-time employee is any employee that averages at least 30 hours of service per week or 130 hours of service per month. An employer may determine the number of its full-time employees on a month-to-month basis. However, determining whether an employee is full-time on a monthly basis would be administratively challenging for many employers, particularly those without a static workforce. To assist employers with projecting which employees would need to be offered coverage to avoid the penalty or, alternatively, to calculate the penalty liability, the IRS issued safe harbor methods that use a look-back period on which employers can rely for determining their number of full-time employees.
Overview of safe harbor approach
The safe harbor methods refer to the look-back period used to determine the number of employees that are full time as the “measurement period.” Every measurement period may have an associated administrative period, but must have a stability period related to it. Once the measurement period ends, an employer has an optional administrative period to determine the number of full-time employees and enroll them in health coverage. Immediately following the administrative period, the stability period begins. During the stability period, any employee that was determined to be full-time during the prior measurement period is treated as a full-time employee in calculating the penalty regardless of how many hours the employee actually works during the stability period.
As represented in Chart 1, these methods set up a recurring cycle of measurement periods that are the basis for calculating penalties.
Subject to certain statutory parameters, employers are permitted to choose the length of time for each period. The applicable parameters depend on whether the employee is classified as 1) an ongoing employee, 2) a new full-time employee, or 3) a new variable hour or seasonal employee.
Employees that have been continuously employed by the employer for one complete measurement period are considered ongoing employees. For these employees, an employer may choose a standard measurement period of between three and 12 consecutive months for measuring whether an employee averaged 30 hours of service per week.
At the end of the measurement period, the employer may use a period of up to 90 days as an administrative period. Employers are prevented from dropping coverage during the administrative period for any employee that is covered because he or she was a full-time employee in a prior measurement period. For example, an employee that is determined to be a full-time employee during a measurement period (First Measurement Period), which is the measurement period preceding the current measurement period (Second Measurement Period), to which the current administrative period (Second Administrative Period) relates, must remain covered throughout the entire Second Administrative Period even if the employer determines that the employee was not full-time during the Second Measurement Period.
Again, see Chart 1 to visualize the succession of measurement periods.
An employer would not incur a penalty liability for failing to offer coverage to this employee once the stability period following the Second Administrative Period begins.
The length of the stability period for ongoing employees must be at least six consecutive calendar months and may not exceed 12 months, but may not be less than the length of the measurement period chosen by the employer. Therefore, if an employer chooses a nine-month measurement period, the associated stability period may not be less than nine months.
It is only during the stability period that employers are subject to the penalty.
If the employer determines that an ongoing employee averaged at least 30 hours of service per week (i.e., was full-time) during the measurement period, the employer must treat the employee as a full-time employee during the following stability period regardless of the number of hours actually worked by that employee. If the employee did not work full-time during the standard measurement period, the employer would not need to treat the employee as a full-time employee during the stability period that follows. Employers can change the length of the measurement period and stability period on a go-forward basis, but may not do so once a measurement period has started.
Generally, an employer must use the same length of measurement, administrative and stability periods for all employees. However, employers are permitted to treat the following categories of employees as having different measurement, administration and stability periods:
• collectively bargained employees and noncollectively bargained employees
• each group of collectively bargained employees covered by a separate collective bargaining agreement
• salaried employees and hourly employees
• employees whose primary place of employment are located in different states
Calculating the employer shared responsibility payment: More counting...
By Addie M. Prewitt
Since the passage of the Patient Protection and Affordable Care Act (hereafter, the PPACA or the Act) on March 23, 2010, how employers create and administer their health plans is dictated by a new set of rules. And yet, the rulemaking process has only just begun. The PPACA, or “health care reform,” will take years to become fully effective and requires the creation of many new regulations. More than 10,000 pages of regulations have been issued to date—with more to come. With 2014 fast approaching as a critical implementation period, the sponsors will present three installments of the special advertising series Deciphering Health Care Reform, appearing in the March 5, May 28 and Aug. 6 issues of Business Report.
All information in this section is presented by the sponsors. The articles herein are educational and informational only and do not contain legal, tax, financial or medical advice specific to any individual or business.
An employer must offer health insurance coverage within three months of hiring a new employee that is expected to be full-time. The IRS identified two factors to consider when deciding whether an employee “is expected” to be full time: 1) whether the employee is replacing an employee who was a full-time employee or 2) whether the hours of service for ongoing employees in a same or similar position vary.
New variable hour and seasonal employees
A new employee is a variable hour employee when, at the start of employment, it cannot be determined that the employee is reasonably expected to average at least 30 hours per week.
To date, the IRS has not defined seasonal employees for the computation of the penalty. This is in contrast to the determination for whether an employer is an ALE. A seasonal employee for the ALE calculation is an employee that works less than 120 days during a year. The 120-day period does not apply to determine a seasonal employee for calculating the penalty. Rather, the IRS has indicated that additional guidance will be provided, but for 2014 employers are permitted to use a reasonable, good-faith interpretation of the term “seasonal employee.” (Under the proposed regulations, it is “unreasonable” for an educational
organization to treat an employee that works during the active portions of the academic year as a seasonal employee.)
An employer can select an initial measurement period of between three and 12 months followed by a 90-day administrative period for newly hired variable and seasonal employees. The initial measurement period may start on the day the new employee begins work, but can be no later than the first day of the calendar month following the employee’s start date. The gap between the first day of work and the first permissible day for the measurement period is subtracted from the 90-day administrative period following the initial measurement period. For example, if an employee begins work on day 15 of a month and the initial measurement period does not begin until day 1 of month 2, the administrative period following the initial measurement period may only be 2 1/2 months.
During this initial measurement period for variable and seasonal employees, the employer must measure whether the employee averaged 30 hours of service per week. To determine the average number of hours a variable or seasonal employee worked, the employer must total all of the employee’s hours during the measurement period and divide the number of hours worked by the number of weeks in the measurement period.
Employers are permitted to use an administrative period of up to three months following the measurement period for variable and seasonal employees. (However, the length of the measurement period and related administrative period cannot exceed 13 months.)
Once a newly hired variable or seasonal employee has completed the initial measurement period, then they are tested for full-time status under the rules governing ongoing employees. The initial measurement period may partially or entirely overlap with the standard measurement period for ongoing employees. If this occurs, the following rules apply:
- When an employee is a full-time employee for the initial measuring period but is not a full-time employee during the standard period in which the initial measurement period begins, the employee must be treated as a full-time employee for the stability period associated with the initial period, but an employer may cease to treat the employee as a full-time employee during the stability period following the standard measurement period (and related administrative period).
- When the employee is not a full-time employee during the initial measurement period but is a full-time employee in the following or overlapping standard measuring period, the employee must be treated as a full-time employee during the entire stability period related to the standard measurement period. Essentially, a finding that an employee is full-time under the standard measurement period trumps the determination made under the initial measurement period, and the stability period related to the standard measurement period controls.
Transitional relief for safe harbors during 2014
An employer wanting to use a 12-month period for the duration of its first stability period in 2014 may be unable to do so if it had not implemented appropriate procedures for tracing full-time employees prior to the IRS issue of proposed regulations. As such, the IRS issued transitional relief for 2014 permitting an employer to adopt a 12-month stability period if the following requirements are met: 1) the measurement period is at least six but less than 12 months, 2) it begins on or before July 1, 2013, and 3) the measurement period ends no sooner than 90 days before the beginning of the employer’s 2014 plan year.
The effect of the transitional relief is to delay the first date on which an employer with a fiscal year plan may be subject to the penalty. For example, an employer with a plan whose fiscal year begins on July 1, 2013, may use transitional relief under the safe harbors to adopt the following:
- a nine-month standard measuring period beginning on July 1, 2013, that runs through March 31, 2014;
- a three-month administrative period beginning on April 1, 2014 and ending on June 30, 2014; and
- a 12-month stability period beginning on July 1, 2014, and ending on July 1, 2015.
As employers are not subject to the penalty until the beginning of the stability period, the employer would have no exposure for the penalty from Jan. 1, 2014, through June 30, 2014.
Employers with a calendar-year plan year will need to determine their penalty liability beginning on Jan. 1, 2014. If an employer is to take full advantage of the safe harbor regulations and transitional relief, the measurement period has already begun. It could start on April 15, 2013, and end on Oct. 14, 2013. The administrative period could begin on Oct. 15, 2013, and end on December 31, 2013, and the stability period would cover the entire 2014 calendar year.
Whether or not an ALE is ultimately subject to a penalty, they will be required to remit monthly reports to the IRS. Accordingly, an ALE will need to determine the number of its full-time employees in order to ensure such employees are offered coverage and avoid the penalty.
The most important step that ALEs can take at this time is to work with the payroll department to ensure an appropriate system is in place to track the numbers of hours for determining and substantiating employees’ status as full-time or less than full-time. If the employer currently has no mechanism in place to track hours for the PPACA, then the employer needs to immediately begin implementing a system.
Next, an ALE should begin considering which timelines they would like to adopt for the first measurement period, subsequent measurement periods for ongoing employees, and initial measurement periods for variable or seasonal employees. This will allow the employer to project when they would become liable for a failure to comply with the employer mandate to offer health insurance coverage to full-time employees and either avoid such exposure or prepare for it.
This article is provided for educational and informational purpose only and should not be considered legal or accounting advice. You should consult with legal counsel and accountants for their interpretation of the applicable law, rules, regulations, guidance and consideration of other relevant facts before acting on any information contained herein. Any tax advice contained in this communication is not intended and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code or Treasury Regulations.