The Affordable Care Act in 2015: The employer mandate "gets real"
Few Americans remain on the fence about the Affordable Care Act (ACA). Regardless of the politics that surround the law, 2015 is the year that employers who cross the 50-employee threshold must track and report the coverage that they provide to employees. Those who fail to count and offer coverage to employees as the law requires may face significant penalties. Even employers who have performed this count before can benefit from taking some time to review records, determine whether or not their businesses are subject to the mandate and, if so, which employees they’re required to cover.
First, count
Every year, a business must determine if it has 50 or more full-time and full-time-equivalent (FTE) employees. The rules require that the business look back to the prior year. An employer is subject to the “employer shared responsibility” provisions of the ACA (also known as the “employer mandate”) in 2015 if the business had 50 or more full-time and FTE employees at the end of 2014. A full-time employee is one who averages 30 hours per week or 130 hours per month. The FTE calculation is a two-step process.
- First, calculate the aggregate hours of service in a month for employees who aren’t full-time employees. Don’t include more than 120 hours of service for any one employee.
- Divide the hours of service by 120. The result is the number of full-time-equivalent employees for the month in question.
A business that begins operation in 2015 will be subject to the mandate if it reasonably expects to employ an average of at least 50 full-time and FTE employees on business days during the calendar year and it actually does employ an average of at least 50 full-time and FTE employees during the calendar year.
Second, if the count is 50 or greater, cover
Once a business crosses the 50-employee threshold, it’s considered an “applicable large employer” (ALE). The law requires that an ALE offer “affordable coverage” that meets certain “minimum value” requirements to “substantially all” “full-time employees.” To understand what the law requires an ALE to do, an employer must understand how the four terms in quotes are defined by the ACA and related guidance.- Full-Time Employee: A business may cross the 50-employee threshold based on its count of full-time and FTE employees, but it’s only required to offer coverage to those who qualify as full-time. When it comes to counting employees for threshold purposes, the rules define a full-time employee as one who works 30 hours per week or 130 hours per month. When determining who qualifies as a full-time employee for coverage requirements, businesses have two options:
- The monthly method is the same method used to determine if the threshold has been crossed. An employee is considered full-time if the person works 30 hours per week or 130 hours per month.
- The look-back method allows an employer to set a “measurement period” of anywhere from three to 12 months. If an employee qualifies as full-time during that measurement period, the person would be treated as full-time for the duration of a future “stability period” that would be at least six months long but no shorter in duration than the measurement period. An employee who qualified as full-time during the measurement period wouldn’t lose coverage during the stability period if the person’s average hours dipped below 30 hours per week. Similarly, an employee who failed to qualify during the measurement period but reached an average of 30 hours per week during the stability period wouldn’t qualify for coverage. That person would qualify only after maintaining a 30-hour average during the next measurement period.
- Substantially All: For the first plan year beginning in 2015, most employers must offer coverage to at least 70 percent of full-time employees in order to avoid the Large Employer Shared Responsibility penalty. (Some employers with 50–99 employees may delay the employer mandate until 2016, and some employers with more than 100 employees may qualify for limited relief until 2016 if they cover at least 70 percent of full-time employees.) For plan years that follow, employers are required to offer coverage to at least 95 percent of full-time employees.
- Affordable Coverage: The law states that coverage is affordable if it costs no more than 9.5 percent of the employee’s household income. Because it may be difficult for the employer to learn the total income of an employee’s household, there are three safe harbors based on (1) the employee’s Form W-2 wages at year end, (2) the employee’s rate of pay at the beginning of the coverage period, or (3) 9.5 percent of the federal poverty line for a single individual.
- Minimum Value: A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.
Third, if you’re an ALE and you don’t offer qualifying coverage, pay
The ACA imposes two types of penalties on employers:- Failure to Offer Coverage to Substantially All Full-Time Workers. Sometimes called the “Section 4980H(a)” penalty, it charges employers who fail to offer coverage to substantially all full-time employees $2,000 per full-time employee, assuming at least one employee buys coverage through a Public Exchange. In 2015, employers with 100 or more employees who offer coverage to at least 70 percent of full-time employees can subtract the first 80 full-time employees from the total number before multiplying by $2,000. In years thereafter, employers will be able to subtract 30 employees from the total.
- Failure to Offer “Affordable” or “Minimum Value” Coverage. Employers who fail to offer coverage that meets these two criteria are subject to what’s sometimes called the “Section 4980H(b)” penalty. They’re charged $3,000 for each full-time employee who purchases subsidized coverage through the Public Exchange, to a maximum of the 4980H(a) penalty.
Effect of ACA on service companies
Prior to the ACA, many businesses in the service sector didn’t offer healthcare benefits to those working as few as 30 hours per week. Those businesses that did offer such coverage typically required a contribution from the employee that wouldn’t be considered “affordable” under the new law. It seems likely that many businesses in this part of the economy will face some significant changes as the new law comes into effect.
From a practical standpoint, most service employers won’t be able to develop and maintain a strategy that keeps them below 50 employees. It takes a certain number of labor hours to operate a business at a particular volume and, if the business is growing, it will eventually cross the 50-employee threshold and be treated as an ALE. However, the law does offer some flexibility in calculating which employees must be offered coverage.
Seasonal businesses, such as resort-based establishments that employ significantly more people in summer than the rest of the year, can use the look-back method to limit the number of short-term employees who qualify for coverage. Businesses with a more steady year-round volume can increase the percentage of their work done by part-time employees who work fewer than 30 hours per week. Their hours will still count toward the 50-employee threshold as full-time-equivalents, but the individuals won’t qualify when it comes to determining the full-time employees who qualify to receive an offer of affordable coverage from the employer.
Much of the data reporting to be done this year isn’t required until after the end of the plan year, but ALEs should be collecting data already. These businesses should also know whether they’re using the look-back or monthly method in order to determine which employees qualify for an offer of coverage. Employers who aren’t clear on the details surrounding implementation of the ACA and the requirements they need to meet should contact a compensation and benefits professional who is familiar with the changes as soon as possible.
