Health Care Reform Penalties for Large Employers

Question: How will I know if I am subject to paying the penalty as a large employer under the health care reform rules?

Answer: Beginning in 2014, employers with 50 or more full-time equivalent employees may be required to make an annual shared responsibility payment if any full-time employee is certified to receive a premium tax credit or cost-sharing reduction payment. There is a great deal of information about how employers can count employees and full-time employee equivalents in the regulations; if you need them outlined for you, please let us know.

Here are the major provisions of the regulations to determine if the penalty would apply to you as a large employer:

Large Employer Does Not Offer Health Coverage. If the employer does not offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, and any full-time employee is certified to receive a premium tax credit or cost-sharing reduction, the annual penalty amount is $2,000 for each full-time employee (excluding the first 30 full-time employees).

Large Employer Offers Coverage with Employees Who Qualify for Premium Tax Credits or Cost-Sharing Reductions. If the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage that is either unaffordable relative to an employee’s household income (the safe harbor allows for the benchmark to be the employee’s W-2 earnings in 2014) or does not provide minimum value, and one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction, the annual penalty is the lesser of (a) $3,000 for each full-time employee receiving a tax credit or cost-sharing reduction, or (b) $2,000 for each full-time employee, excluding the first 30 full-time employees.

Note: The actual penalty amount is determined on a monthly basis (e.g., 1/12 of $2,000 for any month in which the penalty applies).

Coverage is unaffordable for an employee if the required contribution for self-only coverage exceeds 9.5% of household income for the taxable year.

There are rules from the IRS on the minimum value issue (final rules and resources still not available though), and I have provided the IRS link below in the references. The “expert” thinking, however, is that an eligible employer-sponsored plan generally provides minimum value if the plan pays for at least 60% of covered health care expenses.

Under the proposed rules, an employer who is subject to the requirements would generally be treated as offering coverage to its full-time employees for a calendar month if, for that month, it offers coverage to 95% of its full-time employees.

The proposed rules provide a number of transition relief provisions, including for employers sponsoring plans that do not operate on the calendar year (i.e., fiscal year plans), as well as relief to help employers that are close to the 50 full-time employee threshold determine their options for 2014. Employers may rely on these proposed rules for guidance pending the issuance of final regulations or other applicable guidance.

References:

IRS Rules for determining the minimum value of an employer sponsored plan: http://www.irs.gov/pub/irs-drop/n-12-31.pdf

Shared Responsibility regulations: http://www.gpo.gov/fdsys/pkg/FR-2013-01-02/pdf/2012-31269.pdf