Last July the IRS granted employers an extra year before it will begin imposing penalties under the employer shared responsibility provisions of the Affordable Care Act (ACA). But there is plenty to do right now to prepare for the 2015 tax season, when the penalties will commence.
In what’s become known as the “play or pay” decision, employers can choose to offer full-time employees heath-care coverage that meets certain minimum requirements, or pay fines and point the workers toward the new public health insurance exchanges.
On a strictly dollars-and-cents basis, most companies would save money by opting for the fines, but there may be strong competitive motivations for providing insurance. At present it’s expected that few large companies will stop offering coverage, but down through the size spectrum it’s likely that more and more will consider the move.
But regardless of whether an employer wants to play ball with the ACA by offering a health plan, identifying which employees are full-time (defined as those working 30 hours or more per week) is essential.
Because penalty amounts for employers with no health plans will be based on how many full-time employees they have, those who choose to “pay” can’t just watch the game from the stands; they need to conduct measurements of employee hours. And those that plan to avoid penalties by offering health plans may still face fines if some full-time employees buy coverage on the public exchanges with the assistance of premium tax credits provided under the ACA.
Regulations relating to the issues described in this article are set to be finalized soon and may require employers to “call an audible” — that is, adjust their game plans.
Know the Rulebook
When employer penalties become real in 2015, fines — technically, excise taxes — will come in two flavors. An “A” penalty applies if an employer chooses to “pay” rather than “play,” while a “B” penalty may apply even to employers that “play.”
The A penalty (from Section 4980(a) of the ACA) is based on the total number of full-time employees, minus 30, and the fine is $2,000 per employee per year. The B penalty (from Section 4980(b) of the ACA) is $3,000 per employee but applies only to full-time workers who use premium tax credits for buying insurance through a public exchange. With the B penalty being higher per employee, the total penalty is capped at what the employer would owe under the A penalty.
To avoid the A penalty, employers must offer “minimum essential coverage” to at least 95% of full-time employees. The employer avoids the B penalty if its health plan meets minimum value requirements and safe harbor guidelines. The simplest of those compares the employee’s payroll deduction for self-only coverage under the least expensive plan offered to 9.5% of the employee’s wages (as listed in box 1 of form W-2). A key to mitigating risk for either penalty is to understand which and how many employees are classified as full-time.