Employer Shared Responsibility Penalties Under the Affordable Care Act (ACA)

By Dennis Morgret on February 23, 2013

The IRS has recently issued proposed rules and a set of related questions and answers to help provide guidance for employers regarding the shared responsibility requirements of the ACA. Employers can rely on these proposed rules until the final regulations are issued.

A quick glance at the “proposed rules” reveals this document is quite lengthy, very detailed and somewhat confusing.  Obviously, it’s impossible to provide an exhaustive summary of these regulations in this blog post. Instead, our intent is to provide a brief overview of the requirements of the shared responsibility provisions. And also provide some guidance provided by the proposed regulations.


Overview of Shared Responsibility Provision

Effective January 1, 2014, the shared responsibility provisions of the Affordable Care Act (ACA) assesses nondeductible penalties on large employers who fail to offer eligible employer-sponsored health plans to substantially all full-time employees (and their children). Penalties will also be assessed on those who offer coverage that is unaffordable or does not meet minimum value standards.

The penalties are triggered only if at least one of the full-time employees receives federal tax credits or other federal subsidies to buy health insurance through an Exchange. The penalties are defined below:


Penalty for Large Employers Not Offering Coverage to Substantially All Employees

The monthly penalty assessed to employers who do not offer eligible employer-sponsored coverage will be equal to the number of full-time employees minus 30 multiplied by one-twelfth of $2,000 ($166.67) for any applicable month.


Penalty for Large Employers Offering Coverage to Substantially All Employees

If an employer does offer substantially all full-time employees (and dependents) the opportunity to enroll in an eligible employer-sponsored plan, but the plan does not provide minimum value or is unaffordable, it will be required to pay the lesser of a $3,000 annual excise tax penalty for each full-time employee receiving the credit (calculated on a monthly basis at $250) or $2,000 per employee (calculated on a monthly basis at $166.67) for each full-time employee (after subtracting 30).

An employer offers “substantially all” full-time employees coverage if it offers coverage to all but 5% of its full-time employees (and their children) with a minimum of five employees to be excluded.

The IRS is currently developing a calculator to enable employers to determine if their plan meets the minimum value requirement.

A plan is “unaffordable” if the employee’s required annual premium contribution for self-only coverage exceeds 9.5% of the employee’s household income (modified adjusted gross income).  The IRS recognizes that an employer will generally not know an employee’s household income. Thus, proposed rules provide several “safe harbors” that an employer can use to assure that it is in compliance with the affordability requirement.


Transitional Relief for Non-Calendar Year Plans

The proposed regulations provide that if an employer, as of December 27, 2012, already offers health insurance coverage through a plan that operates on other than a calendar year basis (“a fiscal year plan”), and one-third of the employees were offered coverage under the plan OR one-quarter of its employees were covered under the plan,  transition relief is available.  As long as full-time employees are offered affordable, minimum value coverage no later than the first day of the 2014 plan year, no penalty will be due with respect to those employees for the period prior to the first day of the 2014 plan year.  (Refer to proposed regulations for complete details.)


Determining Applicable Large Employer Status

A “large employer” has an average of 50 or more full-time employees (including full-time equivalent employees) during the preceding calendar year.  “Full-time employees” are those working 30 or more hours per week. The hours worked by part-time employees (i.e., less than 30 hours per week) are included in the calculation of a large employer, on a monthly basis, by taking their total number of monthly hours worked (but not more than 120 hours of service for any one employee) divided by 120.

This determines the number of full-time equivalent employees who must be included. There are specific rules for counting seasonal workers; employers not in existence in the preceding year; special rules for government entities and churches; and also for members of a controlled group.

For the first year of compliance only, an employer can determine whether it is a large employer for 2014 by determining whether it employed an average of at least 50 full-time employees on business days during any consecutive six-month period in 2013 (rather than having to use the entire 2013 calendar year).


Identifying Full-Time Employees (Who Must Be Offered Coverage)

Generally, an employee who is employed on average at least 30 hours of service per week or 130 hours of service per month is considered a full-time employee and must be offered coverage.  For employees who are paid on an hourly basis, the employer must calculate actual hours of service from records of hours worked (including holidays, vacations, paid leave, etc.). For employees paid on a non-hourly basis, the employer may use the actual hours of service method, a days-worked equivalency or a weeks-worked equivalency.

The IRS realizes that applying these rules on a monthly basis could be very difficult for certain employers, especially if they have employees who work variable hours from week to week.  Therefore, the proposed rules provide an optional “safe harbor” method as an alternative to a strict “month-to-month” calculation of full-time employee status. The safe harbor guidelines are detailed and somewhat complicated.


Measurement Period:

The safe harbor allows the employer to use a look-back “measurement period” for counting the hours of service of an employee.  There are actually two measurement periods that the employer would use.

One, the “standard” measurement period, is used to determine the full-time status of ongoing employees. The other, “initial” measurement period, is used to determine the full-time status for new employees. The employer can determine the length of the measurement period which can be between three and twelve months.  The employer takes the average hours of service per week during the measurement period to determine if the employee should be treated as a full-time employee (30 hours or more per week) or as not a full-time employee.


Stability Period:

If after the measurement period (“standard” or “initial”) the employee is determined to be full-time, the employer must offer him coverage during the associated stability period, regardless of the number of hours he works during the stability period, as long as he remains an employee.

If an employee is determined not to be a full-time employee (during the measurement period) the employer is not required to offer him the group health plan during the associated stability period, even if he works greater than 30 hours per week during the stability period.

Generally, the length of the stability period must be the greater of six months long or the length of the measurement period.  The stability period must begin immediately after the measurement period and any applicable “administrative” period (described below).

Administrative Period: The employer has the option of establishing an “administrative” period that begins immediately after the end of the measurement period and ends immediately before the associated stability period.  It can’t exceed 90 days nor can it reduce or lengthen the measurement or stability period

The safe harbor requirements differ based on whether employees are “new” employees or “ongoing” employees, and, in the case of new employees, whether the employees are expected to work full-time or are “variable” or “seasonal” employees. An employer who may want to use this safe harbor should carefully review the detailed and specific guidance which is provided in the proposed regulations.


For More Information

Like I said earlier, these “proposed rules” are lengthy, detailed and somewhat confusing. If you have any questions about how the Affordable Care Act affects yours business please call Dennis at 412-576-5085 or email Dennis at  dennismorgret@libertyins.com. You may also leave a questions in the comments section below.

About Dennis Morgret

Dennis Morgret is a licensed Broker/Producer for Liberty Insurance Agency. Since 1998 Dennis’s has focused on bringing his knowledge and understanding of employee benefits to employers who wish to more aggressively manage the quality and cost of their employee benefit program. As Vice President of the Employee Benefit Department, Dennis delivers a higher level of value to Liberty’s clients through innovative strategies for Human Resource Directors, Benefit Administrators and employees.

If you have any questions or comments please leave your reply below.

2 Responses to “Employer Shared Responsibility Penalties Under the Affordable Care Act (ACA)”
  1. Lhommedieu says:

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  2. Рената says:

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