Proposed Rule Clarifies Employer Mandate Calculations

Guidance on calculating the coverage threshold of 50 or more full-time employees or full-time equivalents

By Stephen Miller, CEBS Jan 2, 2013

updated July 3, 2013

Employer Mandate and Reporting Provisions

Delayed Until 2015

The Obama administration caught the U.S. business community by surprise when it announced a one-year delay, until Jan. 1, 2015, in the Patient Protection and Affordable Care Act mandate that employers with 50 or more full-time-equivalent employees provide health care coverage to their full-time employees (those working on average 30 or more hours per week) or pay steep penalties. The announcement was made on July 2, 2013. The article below has been edited to reflect the revised implementation dates.

To learn more, see the SHRM Online article "Health Care Law's Employer Mandate Delayed Until January 2015."

On Jan. 2, 2013, the Internal Revenue Service published in the Federal Register a proposed rule, Shared Responsibility for Employers Regarding Health Coverage, with guidance on complying with the requirement that "large" employers provide affordable health care coverage to employees under the Patient Protection and Affordable Care Act (PPACA).

Relatedly, on Dec. 28, 2012, the IRS posted online new questions and answers regarding the PPACA's "shared responsibility" provisions.

The proposed rule and Q&As closely track the requirements outlined in the PPACA, which states that the shared responsibility provisions (that is, the employer health care mandate) applies to employers with 50 or more full-time employees or a combination of full-time and part-time employees that is equivalent to at least 50 full-time employees.

Employers with 50 or more full-time employees (including full-time equivalents) must offer all employees working an average of 30 hours per week or more in a month health care coverage with "minimum value," beginning in 2015, or pay penalties.

In other words, although large employers are not required to provide health care coverage to part-time employees working less than 30 hours per week, these part-time employees are included in calculating the threshold number of 50 workers (including full-time equivalents) that would require employers to offer affordable coverage to all full-time employees.

Margin of Error: The 95% Standard

Briefly, employers with 50 or more full-time employees or equivalents that do not offer coverageto their full-time employees face a penalty of $2,000 times the total number of full-time employees if at least one full-time employee receives a premium tax credit/subsidy to purchase coverage through a state-based health insurance exchange established under the PPACA.

If employers with 50 or more full-time employees or equivalents do offer coverage to their full-time employees but the coverage is “unaffordable” to certain employees or does not provide minimum value, the employers face a penalty of $3,000 times the number of full-time employees receiving a premium tax credit/subsidy for exchange coverage (not to exceed $2,000 times the total number of full-time employees).

Under the law, employees with household income between 100 percent and 400 percent of the federal poverty level are eligible for tax credits for exchange coverage if they do not have access to affordable employer-sponsored coverage that is of at least a minimum value.

However, the $2,000-per-full-time-employee penalty will not apply so long as employers offer coverage to at least 95 percent of their full-time employees and their dependents up to age 26, according to the proposed rule and Q&As.

An employer would be liable for penalties if it fails to provide affordable coverage to at least 95 percent (or, if greater, five) of its full-time employees (and to those employees' dependents) and one or more of those employees who are not offered coverage receive a premium tax credit or cost-sharing reduction when purchasing coverage on a state exchange.

Calculating the Full-Time Employee Threshold

As explained in the new Q&As, because under the PPACA a full-time employee is an individual employed on average at least30 hours per week, half-time would be 15 hours per week, and 100 half-time employees would equal 50 full-time employees. In another example given in the Q&As, 40 full-time employees employed 30 or more hours per week on average plus 20 half-time employees employed 15 hours per week on average are equivalent to 50 full-time employees.

Among other points, the proposed rule and Q&As clarify that:

Employers will determine each year, based on their current number of employees, whether they will be considered a large employer subject to the shared responsibility provisions for the following year. For example, if an employer has at least 50 full-time employees including a combination of full-time equivalents (FTEs) for 2014, it will be subject to the shared responsibilities provisions in 2015.

Employers average their number of employees across the months in the year to see whether they meet the threshold of 50 FTEs. The averaging can take account of fluctuations that many employers may experience in their work force across the year.

The proposed rule applies a calculation method for FTEs that was included inIRS Notice 2011-36, issued in June 2011. Under that method, all employees (including seasonal workers) who were not full-time employees for any month in the preceding calendar year are included in calculating the employer's FTEs for that month by (1) calculating the aggregate number of hours of service (but not more than 120 hours of service for any employee) for all employees who were not employed on average at least 30 hours of service per week for that month, and (2) dividing the total hours of service in step 1 by 120. This is the number of FTEs for the calendar month.

In determining the number of FTEs for each calendar month, fractions are taken into account. For example, if for a calendar month employees who were not employed on average at least 30 hours of service per week have 1,260 hours of service in the aggregate, there would be 10.5 FTEs for that month. However, after adding the 12 monthly FTE totals and dividing by 12, all fractions would be disregarded. For example, 49.9 FTEs for the preceding calendar year would be rounded down to 49 FTEs (and thus the employer would not be an applicable large employer in the current calendar year).

Paid Leave Hours

The hours used to determine monthly totals of hours worked per employee includes hours for which employees are entitled to compensation even if no work was performed, including paid leave for vacation, sick days and maternity leave.

Look-Back Period

To determine whether they have reached the threshold for 2015, employers can calculate their number of FTEs by averaging the full 12 months of 2014 or by averaging a consecutive six-month period during the year.

Determining 'Affordability' and 'Minimum value'

If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5 percent of that employee’s annual household income, the coverage is not considered affordable for that employee. If an employer offers multiple health care coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement.

Because employers generally will not know their employees’ household incomes, employers can take advantage of one of the affordability safe harbors set forth in the proposed regulations. Under the safe harbors, an employer can avoid a payment if the cost of the coverage to the employee would not exceed 9.5 percent of the wages the employer pays the employee that year, as reported in Box 1 of Form W-2, or if the coverage satisfies either of two other design-based affordability safe harbors.

According to the new Q&As, a minimum value calculator will be made available by the IRS and the U.S. Department of Health and Human Services (HHS). The minimum value calculator will work in a similar fashion to the actuarial value calculator that HHS has made available through its Center for Consumer Information & Insurance Oversight (CCIIO). Employers can input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value by covering at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.

Seasonal Workers

The proposed regulations provide additional information about how to determine the average number of employees for a year, including information about how to take account of salaried employees who may not clock their hours and a special rule for seasonal workers.

Regarding seasonal workers, the PPACA provides that if an employer's workforce exceeds 50 FTEs for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal workers, the employer is not an applicable large employer subject to the shared responsibility provisions.

The term seasonal worker under the PPACA is not limited to agricultural or retail workers.

The proposed rule states that until further guidance is issued, employers may apply a reasonable, good faith interpretation of the statutory definition of seasonal worker, including a reasonable good faith interpretation of the standard set forth under the U.S. Department of Labor regulations at29 CFR 500.20(s)(1).

Transition Relief

Under the proposed rule, for those employers that may have been close to the 50-FTE threshold and needed to know what to do for 2014, special transition relief was made available to help them count their employees in 2013. For instance, rather than being required to use the full 12 months of 2013 to measure whether it had 50 FTEs, an employer could measure using any six-consecutive-month period in 2013. So, for example, an employer could use the period from Jan. 1, 2013, through June 30, 2013, and then have six months to analyze the results, determine whether it needed to offer a plan and, if so, choose and establish a plan.

It is unclear whether similar transition relief will be provided now that the shared responsibility coverage mandate and related reporting provisions have been delayed until 2015.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related SHRM Article:

Some Employers Need to Start Affordable Care Act Measurement Periods in 2013, Perkins Cole LLP via SHRM Online Benefits, September 2013

Related Resource:

Full-Time Employee Worksheet, BenefitMall, 2013

Related External Articles:

Reform Update: IRS Proposes Regulations on Employer Penalty, Jackson Lewis LLP, January 2013

New Regulations Require Employer Action in Preparation Pay or Play Penalty,Miller Johnson, January 2013

IRS Issues Proposed Regs and FAQs on Employer Mandate, Health Affairs Blog, December 2012

Quick Links:

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SHRM OnlineHealth Care Reform Resource Page

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