In the Federal Register on January 2, 2013, the U.S. Treasury Department released proposed regulations that provide new guidelines for employers (generally those with 50 employees or full-time equivalents) to help them determine whether they are required to provide affordable minimum essential health coverage.  In addition, the IRS website published a series of Questions and Answers summarizing the guideline of the mandate that will go into effect on January 1, 2014.[1]

Requirement to Provide Coverage

Pursuant to the provisions called the Employer Shared Responsibility which were added to the Internal Revenue Code by the Affordable Care Act (under Section 4980H), qualifying employers who do not offer affordable minimum health coverage to their full-time employees may be subject to IRS penalties.  The Employer Shared Responsibility provisions apply only to “large” employers, i.e. employers with at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50 employees.  A full-time employee is defined by the statute as an individual employed on average at least 30 hours per week (thus, part-time would require at least 15 hours per week).  The guidelines instruct on how employers should classify their employees and count their hours as well as the potential penalties they may face for noncompliance.

Employers classified as “large” must offer coverage to at least 95% of its full-time employees.  Furthermore, the proposed regulations use a “controlled group” aggregate standard, where each employer-member (for example, a subsidiary) is considered a “large employer” for liability purposes under the mandate, regardless of their respective number of employees.

To satisfy the requirement, employer must provide coverage to an employee’s “dependent,” defined as a child of the employee who has not attained the age of 26.  However, the definition does not include a spouse.  Therefore, to remain compliant with the mandate, an employer does not need to offer coverage to a spouse of a full-time employee.

Affordability of the coverage

The coverage is considered not affordable to an employee if the employee’s share of the premium for employer-provided coverage costs the employee more than 9.5% of the employee’s annual household income.  If the employer offers more than one healthcare option, the affordability test applies to the lowest cost option.  Since employers may not know their employees household income, the proposed regulation sets forth a safety harbor which allows employers to avoid penalties if the cost of coverage would not exceed 9.5% of the wages paid by the employer to the employee in that particular year, as reported in Box 1 of Form W-2.  There are also two other safety harbors available based on the employee’s rate of pay or the Federal Poverty Line.

If the coverage offered by a “large” employer fails to provide minimum value, the employee may be eligible to receive a premium tax credit.  The IRS and the Department of Health and Human Services will provide a minimum value calculator which will enable quick determination as to whether an employer’s plan provides minimum value by covering at least 60 percent of total allowed cost of benefits that are expected to be incurred under the plan.

In 2014, a large employer may be liable if (1) it does not offer health coverage or offers health coverage to less than 95% of its full-time employees, and at least one of the employees receives a premium tax credit to help pay for coverage on an Exchange; or (2) the employer offers health coverage to at least 95% of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange, which may occur if the employer did not offer coverage or the coverage offered was either unaffordable to employee or did not provide minimum value.  After 2014, penalty (1) will apply to employers who do not offer coverage or who offer coverage to less than 95% of their full-time employees and the dependents of those employees.

The proposed regulations are intended to provide guidelines to employers until the IRS issues the final regulations on this issue.  We will continue to monitor and report on any changes regarding the Employer Shared Responsibility provisions of the Internal Revenue Code.