The Internal Revenue Service has published proposed regulations providing guidance on, among other things, the shared responsibility provisions, how to determine whether an employer is an applicable large employer and how the penalties will be assessed. 

I.    Employers which Must Comply with the Shared Responsibility Requirements

A.   Which employers are subject to the automatic enrollment requirements?

Effective January 1, 2014, the ACA requires employers with more than 200 full-time employees to automatically enroll them in a health insurance plan, subject to any waiting period, which cannot exceed 90 days.  The methods for calculating whether an employer meets the 200 full-time employee threshold are the same as those outlined below in subsection B.

The U.S. Department of Labor (“the DOL”) has not yet issued regulations implementing the automatic enrollment provisions.  The DOL expects to issue regulations before January 1, 2014.  Until it does, employers are not required to comply with the automatic enrollment provisions. 

B.   Which employers are “applicable large employers?”

In order to determine whether an employer is an applicable large employer, the employer must take into account both its full-time and full-time equivalent employees from the preceding calendar year.  Because the ACA’s penalty provisions go into effect on January 1, 2014, employers will need to begin reviewing their existing workforce this year.

The calculation for determining the total number of full-time and full-time equivalent employees is as follows:  add the total number of full-time employees (including seasonal workers) to the total number of full-time equivalent employees for each calendar month in the preceding calendar year, and divide by 12.  If the total is 50 or more, the employer is an applicable large employer for that calendar year.  In most cases, an employer will know whether it is an applicable large employer without having to perform any employee headcount-related calculations. 

Calculating the number of full-time equivalent employees only arises for the purpose of determining whether an employer is an applicable large employer.  An applicable large employer is not penalized for failing to offer coverage to part-time employees (those who are employed, on average, fewer than 30 hours per week).

C.   Who is a full-time employee?

In general, a “full-time employee” is an employee who is employed, on average, at least 30 hours per week or 130 hours in a calendar month. 

For hourly employees, an employer calculates actual hours of service to determine whether an employee is a “full-time employee.”  Hours of service includes each hour for which an employee is paid.  It also includes time for which the employee performs no duties, but is paid due to vacation, sick or personal leave, holiday, incapacity, layoff, jury duty, military duty or leave of absence.

For non-hourly employees, an employer calculates the number of hours of service using any of the following three methods:  (1) counting actual hours of service (the same procedure as is used for hourly employees); (2) using a days-worked equivalency method, which credits the employee with eight hours of service for each day of service; or (3) using a weeks-worked equivalency method, which credits the employee with 40 hours of service for each week served. 

An employer may use different methods for different classifications of non-hourly employees, as long as the classifications are reasonable and consistently applied.  Permissible classifications include:  each group of employees covered by a separate collective bargaining agreement; employees covered by a collective bargaining agreement and employees not covered by a collective bargaining agreement; salaried employees and hourly employees; and employees whose primary places of employment are in different states. 

D.   How does an employer calculate the number of full-time equivalent employees?

In order to calculate the total number of full-time equivalent employees, an employer must add up the total hours of service of all non-full-time employees (including seasonal employees) worked in a particular month (up to 120 hours per employee), and divide that number by 120.  The resulting number represents the number of full-time equivalent employees employed for that month. 

By way of example, an employer which employs 40 part-time employees who each work 90 hours per month has 30 full-time equivalent employees:

(40 part-time employees x 90 hours of service)/120   =   30 full-time equivalent employees

E.   For purposes of determining “applicable large employer status,” what is the impact of a special unpaid leave and/or an unemployment break?

There are proposed regulations with regard to special unpaid leave; i.e., leave taken pursuant to the Family and Medical Leave Act, the Uniformed Services Employment and Reemployment Rights Act and/or jury duty obligations.  For educational institutions, these proposed regulations also apply to any employment break period.  Generally, the proposed regulations require that full-time employees be treated the same during active and special unpaid leave/employment break periods.   These proposed regulations do not apply to employees who are terminated and then rehired.

II.   Internal Revenue Code Section 4980H(a) Penalty

A.   When is the Section 4980H(a) penalty imposed?

The Section 4980H(a) penalty will be imposed if:  (1) an applicable large employer does not offer the opportunity to enroll in “minimum essential coverage” to its full-time employees and their dependents (which only includes dependents under 26 years old; it does not include spouses); and (2) the employer receives certification that at least one full-time employee who was not offered the opportunity to enroll subsequently received subsidized coverage in a healthcare exchange.  The proposed regulations provide that an applicable large employer will not be penalized if it offers the opportunity to enroll to all but 5% (or, if greater, five) of its full-time employees.  In other words, coverage must generally be offered to at least 95% of full-time employees. 

Example:  An employer employs 60 full-time employees.  95% of 60 is 57.  To avoid the Section 4980H(a) penalty, coverage must be offered to at least 55 full-time employees; i.e., all but five of the full-time employees (and their dependents) must be offered coverage.

B.   How is the Section 4980H(a) penalty calculated?

The Section 4980H(a) penalty is assessed on a monthly basis at a rate equal to $2,000 multiplied by the total number of full-time employees, and divided by 12.  The first 30 full-time employees are excluded from this calculation. 

Example:  An employer with 330 full-time employees offers to less than 95% of its full-time employees the opportunity to enroll in its healthcare plan.  The employer receives certification that one full-time employee who was not offered the opportunity to enroll received subsidized coverage in a healthcare exchange.  The monthly penalty would be: 

($2,000 x (330-30))/12   = $50,000 per month

III. Internal Revenue Code Section 4980H(b) Penalty

 A.   When is the Section 4980H(b) penalty imposed?

Even if an applicable large employer has offered minimum essential coverage to the requisite number of full-time employees (and their dependents) to avoid the Section 4980H(a) penalty, it may still be subject to the Section 4980H(b) penalty.  This penalty will be imposed if:  (1) the minimum essential coverage offered by the applicable large employer does not provide “minimum value” or is “unaffordable;” and (2) the employer receives certification that at least one full-time employee received subsidized coverage in a healthcare exchange.

B.   What is “minimum value?”

A plan provides “minimum value” if, in general, it covers at least 60% of the total plan costs.  A group health plan is responsible for determining whether the policies it offers meet the minimum value requirement.  At this time, the New York Department of Civil Service has not issued any guidance with regard to whether the NYSHIP policies meet this standard.  Employers which do not participate in NYSHIP should contact their carriers with regard to this issue.

C.   What is “affordable” coverage?

Generally, coverage is affordable if an employee’s required contribution toward the premium for individual coverage under the employer’s least expensive plan is not more than 9.5% of the employee’s household income.  There are three alternative safe harbor methods for calculating affordability which may insulate an employer from being penalized.  These safe harbor provisions apply only to an applicable large employer that:  (1) provides minimum essential coverage to the requisite number of full-time employees (and their dependents) to avoid the Section 4980H(a) penalty; and (2) satisfies the minimum value requirement.

i.   The W-2 Safe Harbor

The proposed regulations provide that an employer may determine whether its plan is affordable by comparing the cost to the employee’s W-2 wages.  Wages for this purpose are the total wages reported in Box 1 of the employee’s Form W-2, Wage and Tax Statement.  An employer will not be penalized if an employee’s required contribution toward the premium for individual coverage under the employer’s least expensive plan is not more than 9.5% of the employee’s Box 1 wages.

ii.   The Rate of Pay Safe Harbor

This method is based upon two different calculations, one for hourly employees and one for non-hourly employees.  For hourly employees, coverage is affordable for a particular month if the employee’s required monthly contribution toward the premium for individual coverage under the employer’s least expensive plan is not more than 9.5% of the employee’s hourly rate multiplied by 130 hours.  For non-hourly employees, coverage is affordable for a particular month if the employee’s required contribution toward the premium for individual coverage under the employer’s least expensive plan is not more than 9.5% of the employee’s monthly salary.

iii.  Federal Poverty Line Safe Harbor

Employer-provided coverage offered to an employee is deemed affordable if the employee’s required monthly contribution toward the premium for individual coverage under the employer’s least expensive plan does not exceed 9.5% of the Federal Poverty Line for an individual, divided by 12.

D.   How is the Section 4980H(b) penalty calculated?

The Section 4980H(b) penalty is assessed on a monthly basis at a rate equal to $3,000 multiplied by the number of full-time employees who receive subsidized coverage in a healthcare exchange, and divided by 12. 

Example:  An employer offers minimum essential coverage to all of its 100 full-time employees.  The coverage is unaffordable for 10 of them.  Eight receive subsidized coverage in a healthcare exchange.  The monthly penalty would be: 

($3,000 x 8)/12 = $2,000 per month

If the Section 4980H(b) penalty is greater than what would have been imposed had the employer been subject to the Section 4980H(a) penalty, the employer’s Section 4980H(b) penalty will be capped at a dollar amount equal to the Section 4980H(a) penalty; i.e., $2,000 multiplied by the number of full-time employees employed for the at-issue month.

IV.   Implications for New York Public Employers

For employees represented by a union, any proposed change to an employee’s health insurance benefits may have to be bargained with that union.  Delays in successfully concluding negotiations regarding mandatorily negotiable components of the employer’s obligation to comply with the Affordable Care Act could result in a penalty being imposed by the Internal Revenue Service due to an employer’s failure to offer coverage to a sufficient number of its full-time employees (and their dependents) or offering unaffordable coverage.

There may be bargaining obligations with respect to determining an employer’s status as an applicable large employer, including how to calculate “full-time” status, and/or an employer’s use of safe harbor methods for determining whether it is subject to a penalty.  This is because these determinations could affect the number of full-time employees who are offered health insurance coverage and whether the offered coverage is deemed to be affordable.   

Even if an employer contributes the statutory minimum toward health insurance coverage (50% for individual coverage and 35% for dependent coverage) as set forth in Civil Service Law § 167, it still may be subject to a penalty.  This could occur if the coverage offered is deemed to be unaffordable for one or more full-time employees.

We will continue to apprise you of any significant changes to this important law as final and/or new regulations are promulgated or other events occur.  Until then, please contact us if you have any specific questions with regard to the Affordable Care Act or the information provided in this memorandum.

TAX ADVICE DISCLOSURE: THIS WRITTEN COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER.  THE FOREGOING LEGEND HAS BEEN AFFIXED PURSUANT TO U.S. TREASURY REGULATIONS GOVERNING TAX PRACTICE.

THIS MEMORANDUM IS MEANT TO ASSIST IN GENERAL UNDERSTANDING OF THE CURRENT LAW AND MAY CONSTITUTE ATTORNEY ADVERTISING.  IT IS NOT TO BE REGARDED AS LEGAL ADVICE.  THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL.
© Lamb & Barnosky, LLP, 2013