|How the ACA's shared responsibility penalties could impact your business|
In the years ahead, employers of all sizes will in some way be affected by the Affordable Care Act (ACA). While the impact may be less to some, employers with more than 50 full-time equivalent employees may face potentially significant financial penalties under the ACA’s shared responsibility provision.
Is my business subject to ACA’s shared responsibility penalties?
Beginning in 2014, employers with more than 50 full-time equivalent employees during the previous calendar year have a shared responsibility under the ACA to offer minimum essential coverage. Failure to meet this shared responsibility could subject the employer to penalties, which are discussed later in this article.
Determining employer size
For purposes of determining employer size an employer counts both full- and part-time employees. Your total number of full-time employees is used to calculate actual penalty amounts.
How do I determine how many full-time equivalent employees I have?
The ACA provides a formula for calculating full-time equivalent employees for purposes of the shared responsibility penalty. First, calculate the total number of full-time employees who worked an average of 30 hours per week for a given month. Second, divide the total number of hours of service for which wages were paid to part-time employees during a particular month by 120. Then, add that number to the total number of full-time employees.
Note: Seasonal employees who work less than 120 days in a calendar year are not considered in this calculation.
|Calculating Employer Size:
Let’s say an employer has a total of 150 employees (100 full-time and 50 part-time). The part-time employees average a combined total of 1,600 hours worked per month. Divided by 120, the employer would have 13 full-time equivalent employees. Thus, in this example, the total employer size (total full-time equivalent employees) would be 113 (100 + 13). This means the employer could potentially be assessed a penalty the next year.
What are the shared responsibility penalties?
There are two potential ways employers can be penalized under the shared responsibility provisions of the ACA.
Employers with 50 or more full-time equivalent employees that do not offer minimum essential coverage to their employees are subject to a penalty if one or more full-time employee receives a premium tax credit or cost-sharing subsidy through an exchange. The penalty is $2,000 per full-time employee per year, with the first 30 full-time employees excluded from the penalty calculation. Although the penalties are annual, they accrue monthly.
|Calculating the Penalty:
Using the example above, if the same employer fails to offer minimum essential coverage and only one of that employer’s full-time employees receives a premium tax credit or cost-sharing reduction through the exchange, the employer would be penalized. The employer would owe $2,000 for all full-time employees after excluding the first 30 full-time employees, for a total penalty of $240,000 (150 minus 30, multiplied by $2,000), or $20,000 per month ($240,000 divided by 12).
- Inadequate Coverage Penalty
Employers that offer their full-time employees minimum essential coverage may be subject to a penalty if one or more full-time employees enroll in a qualified health plan and receive a premium tax credit or cost-sharing reduction through a public exchange. By offering coverage that is not “unaffordable” and meets “minimum value” requirements, an employer may be able to avoid penalties.
Note: Coverage is deemed unaffordable if the individual’s required contribution toward the plan premium for self-only coverage is more than 9.5% of their annual household income. Minimum value is defined as coverage that pays at least 60% of the cost of covered services.
The penalty is the lesser of $3,000 for each full-time employee receiving the premium tax credit or cost-sharing reduction, or $2,000 for each full-time employee, excluding the first 30 full-time employees. The example below demonstrates how this is calculated. Although the penalty is annual, it will accrue monthly.
|Calculating the Penalty:
Using the same example, if an employer offers minimum essential coverage and 25 of your 150 full-time employees enroll in a qualified health plan and receive a premium tax credit or cost-sharing reduction through an exchange, the employer would owe $3,000 for each of the 45 employees, for a total penalty of $135,000 (45 multiplied by $3,000), or $11,250 per month ($135,000 divided by 12).
The maximum penalty is capped at the amount of the penalty the employer could be assessed for all full-time employees, not just those who received a premium tax credit or cost-sharing reduction. The maximum amount would equate to $240,000 (150 minus 30, multiplied by $2,000), which is $20,000 per month ($240,000 divided by 12). Since the $135,000 penalty is less, you would pay that amount.
Penalty calculations can be confusing, so remember to consult with your tax advisor to help you determine your best approach come 2014.
Wellmark is here to inform, lead, assist and support you through all the ACA changes as you make your decisions about your group health plan.
This article provides information of a general nature. None of the information contained herein is intended as legal advice or tax advice or opinion relative to specific matters, facts, situations or issues. Additional facts and information or future developments may affect the subjects addressed in this document. You should consult with a lawyer or tax adviser about your particular circumstances before acting on any of this information because it may not be applicable to you or your situation. Any company or person noted herein is hypothetical and for illustrative purposes only.