Clarifying Employer Insurance Mandate and Transition Relief

In conjunction with the issuance of the new employer mandate regs, IRS has released a series of questions and answers (Q&As) on the subject. The Q&As cover a variety of topics including how to determine whether an employer is subject to the mandate, how to properly identify full-time employees, and how to calculate the shared responsibility payment.

Background. For months beginning after Dec. 31, 2013, an "applicable large employer" is liable for an annual assessable payment if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, and either the employer:

1. Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC, see below) under an eligible employer-sponsored plan (Code Sec. 4980H(a) liability); or

2. Offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan that, for a full-time employee who has been certified as having enrolled in qualified health plan for which an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value as these terms are defined in Code Sec. 36B(c)(2)(C) (Code Sec. 4980H(b) liability).

Together, Code Sec. 4980H(a) and Code Sec. 4980H(b) are called "employer shared responsibility" provisions or the "employer mandate."

An applicable large employer for a calendar year is one that employed on average at least 50 full-time employees on business days during the preceding calendar year. For determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs) are taken into account using a formula provided in Code Sec. 4980H(c)(2).

In July of 2013, IRS issued Notice 2013-45, 2013-31 IRB 116, which delayed the employer mandate until 2015 and provided transition relief for 2014 from certain related reporting requirements.

Q&A guidance. The new Q&As provide guidance on and clarify a number of issues related to the employer mandate in general and the transitional relief afforded in new final regs. Highlights follow.

Treatment of seasonal employees. Seasonal employees are taken into account in determining the number of full-time employees, subject to the following caveat: if an employer's workforce exceeds 50 full-time employees (including full-time equivalents) 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 considered an applicable large employer. Seasonal workers are workers who perform labor or services on a seasonal basis as defined by the Secretary of Labor, and retail workers employed exclusively during holiday seasons. For this purpose, employers may apply a reasonable, good faith interpretation of the term "seasonal worker." (Q&A 4)

Commonly owned or related businesses. If two or more companies have a common owner or are otherwise related, they are combined for purposes of determining whether they employ enough employees to be subject to the employer mandate. However, these rules for combining related employers do not apply for purposes of determining whether a particular company owes an employer shared responsibility payment or the amount of any payment—rather, these determinations are made separately for each related company

(Q&A 6)
Types of employers subject to the mandate. In addition to for-profit businesses, non-profit and government entity (including federal, state, local, and Indian tribe) employers are subject to the employer mandate if they are applicable large employers. (Q&As 7 - 8)

Employees exempt from individual mandate. For purposes of determining whether an employer is an applicable large employer, all employees are counted (subject to the limited exception for seasonal employees, above), regardless of whether they are exempt from the individual mandate. (Q&A 11)

Employees outside the U.S. An employer generally takes into account only work performed in the U.S. in determining whether it is an applicable large employer—so, a foreign employer with fewer than 50 full-time employees (including FTEs) in the U.S. generally won't be subject to the employer mandate. Similarly, a company that employs U.S. citizens working abroad would only be subject to the employer mandate if the company had at least 50 full-time employees (including FTEs), determined by taking into account only work performed in the U.S. (Q&As 13 -14)

"Affordable" coverage and "minimum value." To avoid paying an employer shared responsibility payment, the coverage offered must be affordable and must provide minimum value. "Affordable" means that the employee's share of the premium doesn't exceed 9.5% of his annual household income, but since employers don't have this information, they may determine affordability using the wages they pay, their employees' hourly rates, or the federal poverty level. A plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan, and IRS has provided a minimum value calculator that employers can use for this purpose. (Q&As 19 - 20)

Effect of employees purchasing other coverage, etc. If an employer offers health coverage that is affordable and that provides minimum value to its full-time employees and their dependents, the fact that some of the employees (or their spouses or dependents) either purchase health insurance through a marketplace or enroll in Medicare or Medicaid, won't cause the employer to be subject to an employer shared responsibility payment. Liability for that payment is triggered by a full-time employee's receipt of a premium tax credit, and an employee who is offered affordable coverage that provides minimum value is ineligible for the credit. (Q&As 21 - 23)

2014 transition relief. No employer shared responsibility payment will apply for 2014. The employer mandate provisions generally go into effect in 2015, with additional transition relief for mid-sized employers. (Q&A 29)

Effect on eligibility for premium tax credit. IRS clarified that the fact that an employer doesn't employ enough employees to be subject to the employer mandate does not affect its employees' eligibility for a premium tax credit. (Q&A 44)

Calculating the payment—failure to offer coverage to any or to sufficient percentage of employees. If an applicable large employer doesn't offer coverage, or offers coverage to fewer than 95% of its full-time employees (and their dependents), the employer shared responsibility payment equals the number of full-time employees (but not FTEs) employed for the year (minus up to 30) multiplied by $2,000, as long as at least one full-time employee receives the premium tax credit. If coverage is offered for some months but not others, the amount of the payment per month is one-twelfth of the above. However, for any calendar month in 2015 or any calendar month in 2016 that falls within an employer's non-calendar 2015 plan year, the penalty only applies for an applicable large employer with at least 100 full-time employees (including FTEs) that does not offer coverage to at least 70% of its full-time employees (and their dependents), and the payment equals the number of full-time employees the employer employed for the month (minus 80) multiplied by one-twelfth of $2,000, provided that at least one full-time employee receives a premium tax credit for that month. (Q&As 24, 38)


Calculating the payment—coverage offered, but at least one employee still gets credit. If an applicable large employer does offer coverage to at least 95% of its full-time employees (and their dependents) but has one or more full-time employees who receive a premium tax credit, then the payment is computed separately for each month and equals the number of employees who receive the credit for that month multiplied by one-twelfth of $3,000 (capped at the amount of full-time employees for the month, minus up to 30, multiplied by one-twelfth of $2,000—to make sure that the payment for an employer that offers coverage can never exceed the payment that it would owe if it didn't). However, for 2015, the penalty only applies for an applicable large employer with at least 100 full-time employees (including FTEs) that does offer coverage to at least 70% of its full-time employees but still has at least one full-time employee who receives the credit. (Q&A 25, 39)