Layoffs, Furloughs and the ACA’s Employer Mandate

Unpaid leave raises employers’ risk of incurring Affordable Care Act penalties

By © Conrad Siegel April 15, 2020
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With the COVID-19 pandemic stretching to all corners of the United States, group health plans have felt the impact of workforce shutdowns and restrictions as well as new laws passed by Congress. It's important for employers and group health plans to consider the effect of these workforce changes within the scope of the Affordable Care Act (ACA).

Employment Practices and the Employer Mandate

For applicable large employers (those with 50 or more full-time equivalent employees), the employer mandate requires that at least 95 percent of full-time employees as defined by the ACA—generally, those working at least 30 hours per week—are offered affordable health coverage that provides minimum essential coverage and meets the minimum value threshold.

Employers who fail to provide eligible employees with coverage under this mandate risk being subject to either the 4980H(a) ("sledgehammer") penalty or the 4980H(b) ("tack-hammer") penalty under the ACA.

Layoffs and Furloughs

Employers enacting layoffs without termination—or furloughs that cut employees' hours or require they take a certain amount of unpaid time off—face the greatest potential for inadvertently triggering the "sledgehammer" penalty under the ACA.

Under the employer mandate, many employers measure their full-time employees via the look-back method, which means they have already determined which employees are considered full-time under the ACA for the 2020 calendar year.

Employers who officially terminate employees do not have a responsibility for continuing to offer individuals coverage, but employers furloughing or moving employees to an unpaid leave status may have a responsibility for offering coverage under the employer mandate.

If an employer chooses to furlough or put employees on leave without terminating their employment, the following considerations should be made:

  • To avoid any potential for exposure to the "sledgehammer" penalty under the ACA, employers should verify that all full-time employees, as defined by the ACA, are continually offered health coverage, even if employers bear 100 percent of cost, while the furlough or leave period is taking place. Employers failing to offer minimum essential coverage to "essentially all" of their ACA full-time employees may be subject to a $2,570 annual penalty in 2020 for every ACA full-time employee, minus the first 30.
  • Employers should understand the exposure that may exist in offering a COBRA or 100-percent-of-cost offer to employees who are still considered ACA full-time while on leave. If that full-time employee waives the COBRA/100 percent offer and elects a subsidized policy in the ACA marketplace, the applicable large employer is subject to a "tack-hammer" annualized penalty in 2020 of $3,860 per applicable employee.
  • Employers should document these offers of coverage and also confirm with their insurance carriers how these offers are being made to ensure carrier eligibility considerations are met.

[SHRM members-only HR Q&A: What are the employer shared responsibility penalties under the Patient Protection and Affordable Care Act?

Breaks in Service

Under the employer mandate, employees who face extended leaves with zero hours of credited service—whether officially terminated or on unpaid leave/furlough—will be subject to "break in service" rules under the ACA. Under the look-back method, if an employee returns to service after a period of 13 or more weeks without any credited service hours, the employer may consider the employee as a "new hire" for the purpose of the employer mandate upon their return. For educational institutions, this break in service period is 26 or more weeks.

Additionally, employers can treat an employee as new if they return from a break of four or more weeks without any credited service hours, given that break in service was longer than the employee's actual service tenure prior to the break.

One important item to note, however, is that these rules only address how an employee can be treated under the ACA on their return to work after the break in service. As noted previously, if an employer furloughs an employee without terminating them, their ACA status during the break in service will have already been determined based on the rules for measuring new or ongoing employees.

Affordability

If applicable employees move to an unpaid leave status but maintain an ACA full-time status, employers offering them either employee-paid health care continuation coverage under COBRA or group plan coverage at 100 percent cost will have potential exposure to the "tack-hammer" penalty under the ACA. As noted above, in 2020 this penalty is an annual amount of $3,860 for each employee who elects a subsidized policy in the ACA marketplace, assessed on a monthly basis.

While this potential penalty payment likely costs less than offering the employee affordable coverage, employers should still keep in mind that this scenario represents exposure to a penalty that could be levied a few years down the road.

This responsibility exists in situations where individuals remain employed but place onto unpaid leave—employers do not have this potential exposure in cases where an employee terminates employment.

Conrad Siegel is a national employee benefits, actuarial and investment advisory firm. This article was first posted on the firm's website in a slightly different version. Hyperlinks were added by SHRM Online. © 2020 Conrad Siegel. All rights reserved. Reposted with permission.

Related SHRM Articles:

Employers' Health Care Costs Expected to Rise from Coronavirus, SHRM Online, April

How the CARES Act Changes Health, Retirement and Student Loan Benefits, SHRM Online, March 2020

IRS Relaxes High-Deductible Terms for COVID-19 Testing and Treatment, SHRM Online, March 2020

HHS 2020 Out-of-Pocket Maximums Raise Employer Penalties, SHRM Online, June 2019


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