By: Kara M. Maciel, Adam Solander, Brandon Ge and Philo Hall
As we blogged about previously, the Affordable Care Act provides unique compliance obligations for hospitality employers, many of whom employ large numbers of part-time and seasonal employees. On December 28, 2012, the Internal Revenue Service (“IRS”) released a Notice of Proposed Rulemaking (“NPRM”) on Shared Responsibility for Employers Regarding Health Coverage (the “Employer Mandate”) under the Affordable Care Act (“ACA”). The NPRM largely incorporates previously released guidance on the subject (IRS Notices 2011-36, 2011-73, 2012-17, and 2012-58). Employers may rely on these proposed regulations for guidance until final regulations are issued.
Comments on the NPRM are due to the IRS by March 18, 2013. The IRS has also scheduled a public hearing on April 23, 2013 to receive feedback on these issues. The Employer Mandate requirements under the NPRM take effect on January 1, 2014.
Overview
The Employer Mandate provides that employers with 50 or more full-time employees (including full-time equivalent employees) will be penalized if any full-time employee receives a premium tax credit or cost-sharing reduction to purchase health coverage through an Affordable Health Insurance Exchange (“Exchange”). Generally, an employee is eligible for a cost-sharing subsidy if: (1) an employer does not offer its full-time employees the opportunity to enroll in coverage; or (2) an employer offers its employees the opportunity to enroll in coverage, but the coverage is “unaffordable” or does not provide “minimum value.”
Applicable Large Employers
Under ACA, employers are considered to be “applicable large employers” and, therefore, subject to the Employer Mandate if they employ 50 or more “full-time” employees or a combination of “full-time” and part-time employees that equals 50 “full-time” equivalent employees.
A full-time employee is an employee (including seasonal employees) who provides an average of 30 hours of service per week. To calculate the number of “full-time equivalent” employees, an employer must aggregate the number of hours worked by all part-time employees (including seasonal employees) and divide this figure by 120. The average monthly number of full-time employees plus “full-time equivalents” for the preceding calendar year determines whether an employer is an “applicable large employer.”
There is a seasonable employee exception, which applies when an employer’s workforce exceeds 50 full-time employees for no more than 120 days or four calendar months (which need not be consecutive) during a calendar year if the employees in excess of 50 during that period were seasonal employees. Employers may use a reasonable, good faith interpretation of the term seasonal worker until the IRS issues further guidance.
For purposes of determining whether an employer employs at least 50 full-time employees, companies that have common ownership or are otherwise related (such as certain franchises) will be combined using a test codified at Section 414 of the Internal Revenue Code. However, this aggregation rule will not be applied to companies for the purposes of determining potential liability and payment amount under the Employer Mandate.
Full-Time Employees
An employee’s hours of service include each hour for which the employee is paid for performance of services, or entitled to payment even when no work is performed (for example, due to vacation, illness, or leave of absence).
Previous guidance proposed, and the NPRM adopted, a “look-back stability safe harbor method” for determining whether employees worked the requisite average of 30 hours per week to be considered full-time. Generally, under this approach, employers are allowed to select a period of time between three months and one year to use as a “measurement period” to determine if an employee worked an average of 30 hours a week. If an employee provided 30 hours of service per week during the “measurement period,” then the employer must treat the employee as a full-time employee for a corresponding “stability period” regardless of the number of hours of service the individual works over that time period. Generally, an employer must use the same look-back period for all employees but may use different periods for certain categories of employees.
Offer of Coverage/Dependent Coverage
The Employer Mandate imposes liability on employers who do not offer their full-time employees the opportunity to enroll in minimum essential coverage. One of the more controversial aspects of the NPRM is that it requires employers to offer coverage to not only full-time employees, but their dependents as well. The NPRM defines dependents as children up to age 26, but does not include spouses in the definition.
To provide employers sufficient time to implement these changes, the NPRM provides a transition relief period with respect to dependent coverage for 2014. Under this relief, any employer that takes steps in 2014 to fulfill its obligations to offer coverage to dependents of full-time employees will not be liable for any tax payment under the law solely on account of failing to offer coverage to dependents in plan year 2014.
Determination of Affordability and Minimum Value
If an employer offers full-time employees the opportunity to enroll in minimum essential coverage, the employer will still be liable if the coverage is either “unaffordable” or does not provide “minimum value.” Coverage is affordable if the employee’s premium obligation for self-only coverage does not exceed 9.5 percent of the employee’s household modified adjusted gross income. Because, household income is not readily known to employers, the NPRM provides three safe harbors that provide more certainty with regard to the affordability of coverage.
The minimum value standard will be further addressed in subsequent guidance. A calculator will be available that will be similar to the actuarial value calculator provided by the U.S. Department of Health and Human Services. A plan will be deemed to provide minimum value if it covers at least 60 percent of the total allowed cost of benefits that the plan is expected to incur.
Calculation of the Penalty
If an applicable large employer does not offer coverage or offers coverage to less than 95 percent of its full-time employees, it must pay a penalty of $2,000 for each full-time employee (minus the first 30) if any employee receives a premium tax credit.
For employers that offer coverage for some months but not others during a calendar year, the penalty will be computed separately for each month in which the employer did not offer coverage.
This penalty will be equal to 1/12th of $2,000 for each full-time employee employed for the month (minus up to the first 30 depending on whether the employer is related to other employers).
If an employer offers coverage to 95 percent or more of its full-time employees, it must nonetheless pay the tax penalty if one or more full-time employees receive a premium tax credit on the basis of the coverage not being “affordable” or not providing “minimum value.” This penalty will be equal to 1/12th of $3,000 for each full-time employee who received a premium tax credit for the month. The NPRM provides that the amount paid under this scenario cannot exceed the amount the employer would have had to pay if it did not offer coverage.
EBG counsels clients on ACA implementation requirements and will continue to track developments in the area.