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Employer penalties for Obamacare kick off in early 2015, businesses could take major hit

Nov. 5, 2014
The Affordable Care Act—also known as Obamacare—has been a controversial flash point

The Affordable Care Act—also known as Obamacare—has been a controversial flash point, with one side complaining that there has been a government takeover of the healthcare system and the other side supporting healthcare for everyone, regardless of their ability to pay.

But Anita Baker, managing principal of employee benefit plans for CliftonLarsonAllen, said it really doesn’t matter at this point.

“It is the law of the land today,” Baker said. “I don’t believe they’ll be repealing that any time soon.”

The key now, she said, is understanding it.

“It is very complicated,” she said. “The good news is that there have been some final-rules regulations issued within the last six to 12 months that help us determine how we’ll implement the Affordable Care Act.”

To help employers understand it, Baker and Nicole Fallon, director/consultant of health care for CliftonLarsonAllen, presented a webinar, “Affordable Care Act: Large Employer Shared Responsibility Final Rules and Transition Relief.”

Obamacare was signed into law in March 2010 and applies to all businesses in the US, including governments. It requires almost all individuals to obtain health insurance coverage or pay a penalty, and establishes health insurance exchanges (state or federal). Large employers may have to pay a penalty, if they don’t offer full-time employees affordable, minimum-level health insurance after January 1, 2015, with some exceptions until January 1, 2016. Implementation details continue to be outlined through the issuance of new regulations, guidance, and FAQ documents from the Internal Revenue Service, Department of Labor, and Department of Health and Human Services.

Baker said the definition of “large employer” varies depending upon the section of the law one is referring to. For employer mandate and penalties: In 2015, a large employer is 100 or more full-time (FT) employees plus full-time equivalents (FTEs). In 2016, it’s 50 or more FT employees plus FTEs. Eligibility for premium tax credits: 25 or fewer employees earning less than average of $50,000.

Not in place yet is a regulation that requires employers with 100 or more employees to auto-enroll.

The employer penalty implementation timeline:

• For 2015: All applicable large employers must offer coverage to at least 70% of their full-time employees to avoid a $2,000 penalty, and a $3,000 penalty may still apply for uncovered; for employers with 100 or more employees, a $2,000 penalty applies after the first 80 full-time employees if no insurance is offered; there are no penalties for employers with 50-99 employees who meet certain criteria, and no penalties between January and the plan year start for certain non-calendar year plans.

• For 2016: All employers with 50 or more employees must offer coverage to at least 95% of full-time employees to avoid penalties; a $2,000 no-insurance penalty is assessed after the first 30 FT employees (no longer 80); Small Business Health Options Program (SHOP) is open to all employers with fewer than 100 employees; and the information return for 2015 is to be filed with the IRS.

• For 2017: SHOP coverage is open to all small and large employers.

Large employers

Baker said large employers are subject to one of two “shared responsibility” penalties if any FT employee receives exchange subsidies. For employers that own multiple companies, the 50-plus-employees classification is determined by a control group or affiliated service group. For “minimum essential coverage”, see IRS Notice 2012-31 at: http://www.irs.gov/pub/irs-drop/n-12-31.pdf.

For 2015, an employer can determine whether or not it is a large employer by selecting any consecutive six-month period in 2014. The seasonal worker exception can only be used if looking at a full calendar year.

For the first year an employer is determined to be a large employer, an employer has until April 1 of that year to offer affordable, minimum-value coverage to previously uncovered full-time employees without being subject to the $3,000 penalty for the first three months. The failure to offer any coverage by April 1 can result in a $2,000 penalty applying as of January 1. There is one-time-only transition relief even if it drops below the 50 threshold.

Methods for determining full-time status of employees:

Monthly measurement. Total each employees hours worked each month and compare to 130 hours. If at or over 130, they’re full-time. There is an optional “weekly rule.” The positive is that this calculates the actual number of full-time employees in real time, but the negative is that employees are on/off the plan monthly.

Look-back measurement. The employer uses prior hours of service over an employer-selected period as a determinant of future full-time status. The positive is the predictability, and a longer measurement period can reduce the number to which benefits must be offered, but the negative is that it may not accurately reflect the number of full-time employees.

IRS Notice 2012-58 and the December 2012 IRS/HHS proposed regulations explain a method employers may use to determine full-time status for ongoing employees, new employees, and variable-hour and seasonal workers.

The measurement period is three to 12 months (employer determined); the administrative period is up to 90 days, and must overlap with the prior stability period so there are no coverage gaps; and the stability period is the greater of six months or the measurement period length.

Baker said the look-back measurement method can be used for ongoing employees, and for new variable-hour or seasonal employees.

“An ‘ongoing’ employee is someone employed for at least one standard measurement period,” she said. “The method cannot be used for new employees who are not variable-hour or seasonal. If they’re hired to be full-time, they must be treated as full-time at the start.”

She gave some key terms for the look-back measurement method:

Initial measurement period (IMP). A period of three to 12 consecutive months as selected by the employer used under the look-back measurement method. For 2015, all current employees’ IMP will start on same date. For new hires, IMP will begin on their first day of employment or up to and including the first day of the first calendar month following their start date.

Standard measurement period (SMP). Same definition as IMP but applies to ongoing employees.

Administrative period. Optional period that begins immediately following the end of SMP and ends immediately before the start of the stability period. Maximum of 90 days, which includes gaps between start date and IMP start. Must overlap with a prior stability period so there’s no gap in coverage. May differ by category of employee.

Stability period. The period that immediately follows and is associated with the standard or initial measurement period. Duration is the greater of six months or the length of the measurement period. Must be same length for ongoing as new variable hour, new seasonal, and new part-time employees.

She said there is a transition measurement period between six and 12 consecutive months, starting no later than July 1, 2014, and ending no earlier than 90 days before the start of the 2015 plan year.

She clarified the types of employees:

Full-time. One who has an average of 30 hours of service per week or 130 hours per month.

On-going. An employee who has been employed by the employer for at least one complete standard measurement period.

New employee. An employee that has not yet been employed for one complete standard measurement period. Expected to work full time: Up to 90-day waiting period permitted if full-time. No penalty during waiting period.

Variable hour. An employee for whom it is unclear whether they will average 30 hours of service/week for an entire measurement period. Employer has up to 13 months to determine full-time status and offer coverage before penalty.

Varying periods

Baker said measurement/stability periods can vary.

“You may use different measurement/stability periods by classification of employee,” she said. “That includes collectively bargained employees and non-collectively bargained employees; salaried employees and hourly employees; employees of different entities; and employees located in different states.

“For new variable or seasonal employees, the measurement plus administrative period cannot be more than 13 months after the employee’s start date. The stability period cannot exceed the remainder of the first SMP. The stability period cannot be more than one month longer than IMP.”

She said an employer can choose any duration between three and 12 months to determine full-time status of employees for whom it is not certain whether they will be full-time. She said rules appear to suggest that where the initial and standard stability periods overlap and conflict, defer the stability period where an individual is considered full-time and offer coverage.

The final rule clarified application of situations where stability periods are longer than measurement periods: The next measurement period must begin at the latest date that does not result in a gap between stability periods. Stability periods must equal measurement period when on-going employee does not meet the 30 hours of service per week during a prior measurement period.

In a seasonal worker example, an employer is only required to offer employee coverage for eight months out of a possible 27 months.

The following count as employees:

Educational employees. If full-time for school year, then treated as full-time for the calendar year.

Adjunct faculty. Until further guidance, employers are to establish a reasonable method for crediting hours of service that is consistent with the ACA. The IRS optional method equals 2.25 hours of service per week for each hour of teaching or classroom time.

Paid student interns or externs. Seasonal employees are counted in determining liability for employer penalties.

The following do not count as employees:

Bona fide volunteers. Applies to volunteers of government or tax-exempt entities. Allowed to compensate for reasonable expenses or reasonable benefits.

Seasonal worker. Can exclude from large-employer determination if they work 120 days or less in preceding calendar years.

Student work-study programs. Only for service performed by students under federal or state-sponsored work-study programs.

Home care workers. Where the service recipient is the common law employer of the worker.

Real estate agents and direct sellers.

She said a seasonal employee is “an employee who is hired into a position for which the customary annual employment is six months or less. There is no reference to consecutive months.”

A seasonal worker is one “who performs labor or services on a seasonal basis as defined by the Secretary of Labor and retail workers hired exclusively for the holidays. Employers may apply a reasonable, good-faith interpretation of this term. You can exclude them from large-employer calculations if they work 120 days or less in preceding calendar years and this is cause for the employer to exceed 50.”

On adjunct professors, she said: “Until further guidance, employers are to establish a reasonable method for crediting hours of service that is consistent with the ACA. The IRS optional method equals 2.25 hours of service per week for each hour of teaching or classroom time.”

On the employment break rule: “In the hours calculation for school year versus calendar year, treat them as a continuing employee (not rehired) unless there are no hours of service for 26 weeks or more.

There is optional rehire status if there are no hours for at least four consecutive weeks and this period of no hours exceeds the employee’s immediately preceding period of employment.

In terms of on-call employees, she said: “Final IRS rules (2/10/2014) require an employer to ‘use a reasonable method for crediting hours of service’ consistent with ACA.

It is NOT reasonable to provide zero credit hours in any of the following circumstances: for any on-call hour for which payment is made or due by the employer, or if an employee must remain on-call on the employer’s premises, or where the employee’s activities while on-call are substantially restricted, preventing the employee from using the time effectively for their own purposes.

New employee status equals no hours of service for more than 13 weeks—except for educational organization employees where the standard remains 26 weeks. This applies to both the monthly and look-back measurement methods.

Continuing employee status equals no hours for less than 13 weeks. Continue previous measurement/stability periods when they return to work. Health coverage continues the first day of work if they’re considered FT at the time of absence.

If the 12-month measurement period is used by the employer, the employee may not meet the threshold for full-time status due to zero hours accrued during absence.

She said casual employers can consider an employee a new hire when employees are absent fewer than 13 weeks, if the period with no hours of service is at least four weeks long AND longer than the employee’s employment period immediately before the absence.

A penalty is only assessed if a FT employee receives exchange subsidies. Employees are ineligible for subsidies if the employer coverage is affordable. This also applies if coverage is not offered to at least 70% (from 2016 and beyond, it must be 95%) of FT employees and their dependent children under age 26.

For those that offer coverage to 70% of FT employees for Plan Year 2015: If they meet or exceed, there is no $2,000 penalty assessed for all of Plan Year 2015 but a $3,000 penalty still can be assessed under these circumstances. They can only count a FT employee as offered coverage, if their dependent children under age 26 were offered coverage. Dependent transition relief applies.   ♦