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IRS Issues Affordable Care Act (ACA) Employer Responsibility Regulations: Provides Some Transition Relief

On February 10th, the IRS issued final regulations that give employers who have 50-99 full-time employees until 2016 to comply with the employer mandate rules of the ACA. (These rules are discussed further below.)This is the second time that this mandate has been deferred. Employers with 100 or more employees must comply with the law as of January 1, 2015. These deferrals are welcome by most employers, but continue to add complexity to a law that most people do not understand.

On March 23, 2010 when the ACA was signed into law, it was quite clear that the mandate would go into effect January 1, 2014. Many employers spent a great deal of time getting ready for this mandate. However, issues with items such as the failure of the Exchange website and complaints from constituents on the employer mandate have delayed this process.
Whether or not an employer must comply with the law is dependent upon the number of full-time employees and full-time equivalents (FTEs) the employer has on his or her staff. This aspect of the law has become even more confusing to employers with under 100 lives.

When the ACA law went into effect, it categorized employers into two segments:

Small Employers – 49 or less full-time employees
Large Employers - 50 or more full-time employees

With the deferral of the employer mandate until 2016, the 50 to 99 group has begun to be referred to as "Mid Size Employers" in the press, but the law has not created this new distinction. Employers who have 49 or less full-time employees do not have to provide medical coverage.

Employers must consider part-time employees in the calculation to determine the total number of full-time employees for purposes of determining the classification as a large or small employer. As an example, Employer A has 20 full-time employees and 60 part-time employees. To determine how many full-time employees and full-time equivalents (FTEs) this employer has, a calculation is performed based on the previous year’s employee number. In this case, when the calculation was completed it was determined that the 60 part-time employees equated to 30 full-time employees. Adding this number to the existing full-time employee total elevated this group to a LARGE employer status.

Calculation to Determine who is a Large or Small Employer 

  1. Calculate the number of full-time employees for each calendar month of the preceding calendar year (30 hours per week or 130 or more hours in calendar month).
  2. Calculate the number of FTEs (Full-Time Equivalents) for each calendar month in the preceding calendar year
    a) Add up the number of hours of employees who were not full-time during the month (not more than 120 hours attributed to any employee) b) Divide total hours of service by 120
  3. Add the number of full-time employees and FTEs calculated in 1. and 2. above for each of the 12 months in the preceding calendar year
  4. Add up the 12 monthly totals and divide the sum by 12, then round down to nearest whole number
  5. Not a Large Employer – if the number of Full-Time employees is 49 or less during the current calendar year

Mandate for Large Employers

Under the ACA, large employers may be required to pay a penalty tax if they do not provide to their employees a minimum level of health care coverage. This penalty tax is imposed if (1) at least one employee purchases a health policy on an ACA Exchange and also qualifies for a premium assistance credit from the IRS, and (2) the employer does not cover at least 95% of their full-time employee workforce (70% under the transition rules for 2015). Further, the penalty tax also applies even if the employer does provide a health plan covering the minimum number of employees, where (i) an employee's share of the annual cost of participating in the plan is more than 9.5% of his W-2 wages, or (ii) the plan does not provide to the employee a "minimum value” of benefits as established by the ACA. Currently, the penalty tax cannot be greater than $2,000 per employee per year calculated on a monthly basis. The first 30 employees are, however, excluded from the penalty tax calculation. The penalty is not tax deductible by the employer.

Another aspect that the large employer is permitted to utilize under the ACA is to reduce an employee’s number of hours worked from 30 hours to 29 or fewer hours per week, thus not requiring them to provide coverage. This practice has gained popularity with a number of employers. However, in order to be eligible for transition relief under the new regulations, the employer will have to certify that it did not reduce the size of its workforce or reduce the overall hours of its employees to meet the work size condition of the ACA.

Recently, the Congressional Budget Office (CBO), a non-partisan wing of the U.S. Congress, determined that over the next 10 years 2.3 million full-time jobs will be lost in part due to this provision in the ACA. Additional job losses would occur due to the fact that Federal subsidies could be eliminated if individuals gained full-time employment. Clearly, these are unintended consequences of the ACA. There have been recommendations that the 30-hour requirement be increased to 40 hours per week, thus preserving a greater number of hours that employees could work. Whether or not this provision will be passed is unknown at this time.

One thing to keep in mind about the ACA is that it is a work in progress and many additional changes will take place over the next few years. It is our sincere hope that the changes are for the better and provide individuals and employers with a clear path to providing quality healthcare for all.

For more information regarding this topic, please contact your local UHY LLP professional or the author of this article:
John DePalma, MPH
Managing Director
Employee Benefits Consulting Services, Inc.