Employer Mandate Compliance: IRS Issues Q & A Part 1

Concerned that the Feb 10 final rules on “Employer Shared Responsibility” create more compliance uncertainty, the IRS has now posted 46 questions and answers about the Affordable Care Act employer play or pay mandate.

Understanding the IRS requirements is like learning a foreign language: it involves an entirely new vocabulary. In the first of two blog posts on this topic, the excerpts and commentary below attempt to translate the new language. In Part 2 we’ll cover Transition Relief for 2015.

All employers that are Applicable Large Employers (i.e., they have 50 or more full-time employees) are subject to the Employer Shared Responsibility provisions, including for-profit, nonprofit and government employers.

An employee is a full-time employee for a calendar month if the employee averages at least 30 hours per week or 130 hours of service in a calendar month. Special rules are provided for seasonal workers, volunteers and adjunct faculty, among others.
One method to determine whether an employee has sufficient hours to be a full-time employee is the look-back measurement period, under which an employer determines the status of an employee during a future “stability period” based on hours of service in a prior “measurement period.” (For 2015 employers may use a 6-month look-back period in 2014 and a 12-month stability period in 2015).

An employer will be liable for an Employer Shared Responsibility payment (penalty) only if:

• the employer does not offer coverage or offers coverage to fewer than 95% (70% in 2015) of its full-time employees and the dependents of those employees and at least one full-time employee receives a premium tax credit subsidy to help pay for exchange-based health coverage; OR
• the employer offers health coverage to at least 95% (70% in 2015) of its full-time employees and dependents, but at least one full-time employee receives a premium tax credit to help pay for exchange coverage, which may occur because—(i) the employer did not offer coverage to that employee or (ii) the coverage the employer offered that employee was either “unaffordable” or did not provide “minimum value.”

In any case, an employer will not be liable for an Employer Shared Responsibility payment unless at least one full-time employee receives a premium tax credit subsidy. If no full-time employee receives a premium tax credit, the employer will not be subject to an Employer Shared Responsibility payment. (Note: the premium tax credit triggers the penalty; no subsidy, no penalty).

How much is the penalty for not offering coverage to full-time employees?

• If an applicable large employer does not offer coverage or offers coverage to fewer than 95% (70% for 2015) of its full-time employees (and their dependents), it owes an Employer Shared Responsibility payment equal to the number of full-time employees (minus up to 30) multiplied by $2,000, as long as at least one full-time employee receives the premium tax credit subsidy.
• (We can call this the “Greater Penalty” because in this scenario if one full-time employee qualifies for a premium tax credit subsidy the $2,000 penalty is multiplied by the total number of full-time employees.)

How much is the penalty for offering coverage that is unaffordable or not of minimum value for an employee?

• For an employer that offers coverage to at least 95% (70% in 2015) of its full-time employees (and their dependents) but has one or more full-time employees who receive a premium tax credit subsidy, the payment is computed for each month and equals the number of full-time employees who receive a premium tax credit subsidy for that month multiplied by 1/12 of $3,000.
• (We can call this the “Lesser Penalty” because in this scenario the $3,000 penalty pro-rated monthly is multiplied only by the number of full-time employees who qualify for a premium tax credit subsidy. If only one full-time employee receives a premium tax credit subsidy for 2015 the total employer shared responsibility penalty is $3,000.)

How does an employer know if it is liable for a penalty?

• If an employer owes an Employer Shared Responsibility payment IRS will contact employers to inform them of their potential liability before notice and demand for payment is made. The contact for a given calendar year will not occur until after the due date for employees to file individual tax returns for that year claiming premium tax credits and after the due date for employers to file the information return identifying their full-time employees and describing the coverage that was offered. (This suggests that employer mandate penalties will not be imposed until mid-year 2016).

Please stay tuned for Part 2 of this blog series for additional excerpts and commentary, including on Transition Relief for 2015 based on the IRS Q&A.