“It will be crucial for lawyers to be able to clearly explain the mandate’s effects to growing small and medium-sized business clients.”
The first installment of this article (printed in the February Bar Bulletin) discussed what types of employers will be obligated in 2014 to provide full-time employees with affordable health insurance coverage under the Affordable Care Act’s employer mandate, as interpreted by the Internal Revenue Service’s proposed regulations; how to figure out if an employer is covered by the mandate; and which employees must be provided with coverage.
This last installment will cover how the mandate applies to the covered employers, with emphasis on the IRS’s proposed safe harbors for “affordable” coverage, and the penalties for covered employers that either do not provide minimum essential coverage or fail to provide “affordable” coverage. These two topics are related because the employer contribution required to keep coverage within the affordability safe harbors may exceed the mandate’s penalties, particularly in cases for low-wage employees.
What is “Affordable” Health Coverage?
Covered employers must provide full-time employees with health coverage that meets certain minimum essential coverage standards and is “affordable.” Coverage is “affordable” if the employee’s contribution is less than 9.5 percent of the employee’s “household income,” defined as the modified adjusted gross income of the employee and the employee’s spouse and dependants.
Because employers will typically not know their employees’ “household income,” the proposed rules provide employers with “safe harbors” based on the employee’s income that will allow employers to avoid the mandate’s penalties.
The first safe harbor allows an employer to escape liability where the employee’s annual contribution to the least expensive self-only coverage offered by the employer is less than 9.5 percent of the employee’s W-2 wages. If the employee is not offered coverage for the entire year—for instance because the employee was hired midyear—then the safe harbor applies if the employee’s contributions for the portion of the year when coverage was offered do not exceed 9.5 percent of the employee’s pro-rated W-2 wages.
Next, an employer is safe from liability if the employee’s contribution for any month is less than 9.5 percent of that employee’s monthly salary or his or her hourly wage multiplied by 130 hours.
Finally, an employer is safe if the employee’s monthly contribution is less than 9.5 percent of the federal poverty line for an individual divided by 12.
If an employer can meet any of these, then the employer will not face a penalty under the employer mandate even if a full-time employee receives a credit from a federal or state insurance exchange, which would otherwise trigger a penalty.
When are Penalties Imposed, and in what Amounts?
Employers face two types of penalties for failure to comply with the employer mandate: 4980H(a) liability for failing to offer any coverage and 4980H(b) liability for offering coverage that is not affordable. Each is triggered when a full-time employee receives a tax credit or cost sharing subsidy from an exchange.
An employer faces the more serious 4980H(a) liability when the employer does not offer its eligible full-time employees and their dependents the opportunity to enroll in an employer-sponsored plan providing minimum essential coverage for any month, regardless of affordability. The proposed rules provide some leeway because an employer is treated as offering a suitable plan to its full-time employees if it offers coverage to all but the greater of five or five percent of the employer’s full-time employees. On the other hand, if a full-time employee is not offered coverage for a single day in a month, then that employee is counted as not receiving coverage for that entire month.
The annual penalty for 4980H(a) violations is $2,000 for each of the employer’s full-time employees in excess of thirty. For example, an employer with 50 full-time employees that did not offer its employees coverage meeting the minimum essential coverage requirements would be fined $40,000 ($2,000 x 20) annually. This penalty is imposed monthly, and applies to each employee beyond 30 for the month even if only a single employee receives a subsidy or credit on an exchange.
As noted in the first installment, there is a wrinkle in calculating 4980H(a) liability for businesses that form a controlled group. If some businesses within the group provide coverage and others do not, then only the businesses not providing coverage are penalized, and the penalty is calculated only on that business’ full-time employees, not those of the whole group. The entire group, however, shares the 30 employee deduction described above, so if a given employer only employs 10 percent of the full-time employees in the entire group, that employer will only be permitted to deduct three full-time employees.
4980H(b) liability arises where the employer offers its full-time employees and their dependents the opportunity to enroll in a plan providing minimum essential coverage, but an employee receives a credit or subsidy because the employer’s coverage is not “affordable.” Employers can avoid 4980H(b) liability completely by ensuring that the employer’s plan meets one of the “safe harbors” described above for each full-time employee.
The penalty for 4980H(b) violations will typically be less drastic than for 4980H(a) violations because the fine, $3,000 per full-time employee, is calculated based only on the full-time employees who actually receive a credit, rather than all of the employer’s full-time employees in excess of 30. Plus, in the event that an employer’s 4980H(b) liability would exceed the employer’s possible 4980H(a) liability, the 4980H(a) liability controls. For example, if the employer’s coverage was not “affordable” for 45 of the employer’s 50 full-time employees, the penalty would be $40,000 ($2,000 x (50-30)) rather than $135,000 ($3,000 x 45).
Again, there is a wrinkle for businesses that form part of a controlled group. If an employee of a controlled group member is also an employee of one or more other members, any 4980H(b) liability for such an employee is divided between the respective employers based on the proportionate number of hours of service that the employee worked for each employer.
While lesser known than the individual mandate of NFIB v. Sebelius, the employer mandate may have a broader effect on the national economy, depending on how employers react to its incentives. Accordingly, it will be crucial for lawyers to be able to clearly explain the mandate’s effects to growing small and medium-sized business clients.
Jack Blum is an associate at Paley Rothman Goldstein Rosenberg Eig & Cooper, Chtd.