Are You Subject to Employer Shared Responsibility? A Step-by-Step-Guide
The delay in the enforcement of the Affordable Care Act (ACA)’s provision that applicable large employers provide adequate and affordable health care coverage or face stiff penalties may seem like a cause for celebration. There would be good reason – it provides those applicable large employers with more time to prepare for the 2015 effective date of the reporting requirements and enforcement of penalties. While this brings relief to those employers already struggling to comply, it doesn’t mean the ACA has been repealed or that other provisions can be ignored. Critical choices regarding Employer Shared Responsibility (ESR) and information reporting cannot be left to gather dust. It’s essential to know if your business is subject to ESR, and if so, implement strategies now so you have time to handle issues before penalties go into effect.
Let’s break down who is subject to ESR and what potential penalties they face, how to calculate whether you fall into this category, and review some example scenarios that can help guide you through the process with your own business.
Are You Subject to ESR?
The provision only applies to “applicable large employers,” defined as those businesses with 50 or more full-time employees, (taking into account full-time equivalent [FTE] employees). In a quick overview, those employers who qualify may be subject to a penalty if they don’t offer their full-time employees minimum essential coverage (MEC) that provides minimum value and is affordable, according to the provision’s standards. For this reason, it’s important for businesses to determine if they fall into the applicable large employer category. If they are subject to the provision, they must strategize on how best to structure their current workforce and benefits arrangement to avoid significant penalties.
What are the Potential Penalties for Not Offering Adequate Coverage?
Applicable large employers who have 50 or more full-time employees (taking into account FTEs) could be subject to penalties if:
- They fail to offer health insurance coverage that meets the established minimum essential coverage (MEC) requirements to substantially all their full-time employees and their dependents, and at least one full-time employee receives a premium subsidy through the marketplace.
- The penalty is the number of full time employees minus 30 x $2,000. Thus, an employer with 50 full-time employees would face a penalty of $40,000 (50-30 x $2,000).
- If they offer MEC coverage to substantially all their full-time employees but that coverage is unaffordable or does not provide minimum value, or they offer qualified and affordable coverage to the required number of full-time employees, but at least one full-time employee who is not offered coverage (non-covered employee) receives a premium subsidy through a marketplace.
- The annual penalty is $3,000 per full-time employee who was not offered affordable coverage that meets minimum value and that employee receives a premium tax credit in the marketplace.
It’s important to note that the penalty for not offering affordable or adequate coverage cannot exceed the payment for not having offered health insurance (number of full-time employees minus 30 x $2,000) and no penalties will be charged to applicable large employers who have fewer than 30 full-time employees.
Calculating Full-Time Employees
Full-time employees are identified as those working 30 or more hours per week, calculated on a monthly basis, which equates to 130 hours per month. An employee's hours of service includes time for which an employee is paid, or entitled to payment, to perform duties for the employer; and each hour of paid leave, such as paid vacation time or sick time. According to the IRS, there are three methods for calculating the total number of hours of service for a non-hourly employee for the taxable year: actual hours worked; days-worked equivalency; and weeks-worked equivalency. The latter two methods cannot be used if it would substantially understate the employee’s hours in a manner that would cause the employee to be treated as not full time.
You will also need to determine the number of FTEs, which is calculated by taking the hours worked by all part-time employees in a month (capped at 120 hours per employee per month) and dividing that amount by 120. Then, add up both your full-time employees and FTEs to see if you have 50 full-time employees.
Let’s review a few scenarios to help you understand the process.
Example 1: Bonnie’s Day Care
Bonnie’s Day Care employs:
- 20 full-time employees working at least 130 hours per month
- 6 part-time employees each working 60 hours per month
Bonnie’s Day Care does not offer minimum essential coverage (MEC) to any employees. Ten full-time employees receive a premium subsidy through a marketplace.
Step 1: FTE Test
(6 part-time employees x 60 hours per month/120) + 20 full-time employees = 23 full-time employees and FTEs.
Bonnie’s Day Care does not qualify as an applicable large employer since the company falls below the threshold of 50 or more full-time employees and FTEs. Therefore, Bonnie’s Day Care is not subject to the provision. Even though some employees have received a premium subsidy, the employer may not be assessed a penalty.
Example 2: Cool Café
Cool Café is a non-seasonal business that does not offer MEC to employees. It employs:
- 18 full-time employees working at least 30 hours per week and 130 hours per month
- 60 part-time employees working fewer than 30 hours per week and an average of 80 hours per month.
Five full-time employees receive a premium subsidy through a marketplace.
Step 1: FTE Test
(60 part-time employees x 80 hours per month/120) + 18 full-time employees = 58 full-time employees and FTEs.
Cool Café qualifies as an applicable large employer with more than 50 full-time employees and FTEs.
Step 2: Full-Time Employee Test
Cool Café has 18 full-time employees.
Since Cool Café has fewer than 30 full-time employees, the business is not subject to any Employer Shared Responsibility assessments for this period.
You are Subject to ESR – Now What?
The IRS has delayed the reporting requirements as well as the enforcement of ESR penalties for one year, thus providing businesses with more time to prepare. However, other provisions of ACA have not been stalled and need to be addressed. The individual mandate will still be implemented on January 1, 2014.
It is strongly encouraged to begin tracking hours now to determine if you will qualify as an applicable large employer in 2015, and also institute a plan for gathering and reporting annual information regarding the health insurance you do or do not provide to your full-time employees. The IRS asks that businesses voluntarily provide this information in 2014 in order to work out any issues before full implementation in 2015. In addition, you need to assess whether the coverage you may currently offer is both affordable and meets minimum value in order to apply a strategy for avoiding penalties.