Patient Protection and Affordable Care Act

Patient Protection and Affordable Care Act

The U.S. Department of the Treasury and the IRS have issued final regulations implementing the responsibility provisions under the Patient Protection and Affordable Care Act (ACA).  The final Employer Shared Responsibility Regulations (also known as the employer mandate or pay-or-play) provide significant transition relief for both medium-sized employers (50-99 full-time employees) and larger employers (100 or more full-time employees). The final regulations apply to periods after December 31, 2014.  However, employers may rely on them prior to that date.  Calculating the number of employees is especially important for employers that have close to 50 employees or whose workforce fluctuates through the year

Businesses that already offer health insurance coverage for employees must carefully evaluate the coverage their health plan provides. Many provisions of the law do not apply to plans that were in existence on March 23, 2010 (i.e., grandfathered plans), as long as the plan maintains its grandfathered status. However, some provisions apply to these grandfathered plans.

Many of the health care legislation's provisions that affect employers were effective in either 2010 or 2011. Others are not effective until later. Undoubtedly, additional legislation or guidance will affect provisions that have a delayed effective date. Businesses should be diligent about taking the proper steps to identify any changes in processes and procedures that are needed to comply with the law. This letter provides a brief overview of the key provisions affecting businesses.

Small Employers

For plan years beginning before January 1, 2016, employers averaging less than 50 full-time employees (including full-time equivalents) in the prior calendar year are considered a small employer. Small employers are not subject to the employer shared responsibility provisions of the Patient Protection and Affordable Care Act. Small business health care tax credits are available to employers of 25 or fewer full-time employees who pay average annual wages of no more than $50,800 for 2014 ($51,600 for 2015) per full-time employee and who have a contribution arrangement through which they pay at least half of the insurance premiums for employees at the employee-only coverage rate. A self-insured plan is not a qualifying arrangement, and employer contributions to HRAs, health FSAs, or HSAs are not taken into account in determining the small business tax credit. The credit is phased out gradually, based on the number of employees and the average annual wages.

Transition Relief

Under the transition relief, the shared responsibility rules generally apply to large employers with 100 or more full-time employees starting January 1, 2015, and medium-sized employers with 50 to 99 full-time employees starting on January 1, 2016. In addition, large employers are only required to offer affordable health insurance that provides a certain minimum value to 70 percent of their full-time employees (and their dependents, if insured) in 2015 and 95 percent in 2016 and beyond in order to avoid penalties.

For employers with plan years that do not start January 1, they will be able to begin compliance with employer responsibility at the start of their plan years in 2015 rather than on January 1, 2015. On a one-time basis, in 2014 preparing for 2015, plans may use a measurement period of six months even with respect to a stability period (the time during which an employee with variable hours must be offered coverage) of up to 12 months.

Grandfathered Health Plans

We will start with information on health plans that were in existence on March 23, 2010 (i.e., the enactment date of the Affordable Care Act). These grandfathered plans are exempt from many of the legislation's provisions affecting a plan's health insurance coverage as long as they do not do anything that causes them to lose their grandfathered status. However, the following key provisions do apply:

  1. No Annual or Lifetime Dollar Limits. No lifetime limits on the dollar value of certain benefits (i.e., essential health benefits) can be established.
  2. Prohibition of Rescission of Coverage. An individual's coverage cannot be rescinded once the individual is enrolled in the plan unless he or she commits a fraudulent act or intentionally misrepresents a material fact, as prohibited by the terms of the plan or coverage.
  3. Extension of Dependent Coverage. A health care plan that offers coverage for dependent children must continue to offer the coverage until the child reaches age 26. The child, if otherwise qualifying, must continue to be offered coverage by the parent's health plan even if he or she does not qualify as the parent's dependent for income tax purposes.
  4. Prohibition of Pre-existing Condition Exclusions. No exclusions for a pre-existing condition can be imposed on an individual.
  5. No Excessive Waiting Periods. For group health plans and group coverage, no waiting period (i.e., the period before an individual is eligible to be covered for benefits under a plan) can exceed 90 calendar days.
  6. New Reporting Requirements. Plans must provide applicants, enrollees, and policyholders or certificate holders a summary of benefits and coverage (SBC) that conforms to standards set by the Department of Health and Human Services (HHS).

Before a current plan makes any changes in benefits offered or increases premiums, the plan sponsor should obtain guidance to ensure the plan does not lose its grandfathered status unintentionally as they are limited in the modifications that can be made.

Full-Time Employees

For purposes of the Employer Shared Responsibility provisions, an employee is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week. Under the final regulations, for purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week. Employers have the option to use a look-back measurement period of up to 12 months to determine whether new variable hour employees or seasonal employees are full-time employees, without being subject to an assessable payment for that period with respect to those employees.

The final regulations clarify the rules regarding which employees count as full-time. Volunteer hours worked for a government or tax-exempt entity (such as volunteer firefighters) will not cause an employee to be considered a full-time employee. Teachers are not treated as part-time for the year simply because their school is closed during the summer. Employees whose positions customarily last for six months or less generally are not considered full-time employees. Service performed by students under federal- or state-sponsored work-study programs is not counted in determining whether the students are full-time employees. Colleges seeking a bright line rule may credit adjunct faculty with 2-1/4 hours of service per week for each hour of teaching or classroom time.

Related or Controlled Groups

Section 4980H provides for common ownership and control “aggregation” rules that may apply. These are similar to rules that have applied to 401(k) and other retirement plans for years. Under these rules, the employees of businesses that are under common control are added together to determine if an employer employs the equivalent of at least 50 (or 100 under the 2015 transition rule noted above) full-time employees (including full-time equivalents).

For example, if an individual owns 80% or more of two businesses that are separate legal entities, the total number of full-time employees of that employer is based on the full-time employees (including full-time equivalents) in both businesses combined together. If the employees in the combined businesses add up to fewer than 50 full-time employees (including full-time equivalents) in a year, the Employer Shared Responsibility provisions will not apply to those businesses for the following year.

Dependent Coverage in Employer Health Plans

Beginning in 2016, the general exclusion from income for employer-provided health care coverage and reimbursements is expanded to apply to employees' children who have not attained age 27 as of the end of the employee's tax year (i.e., generally the calendar year). To qualify for this tax break, the child must be the individual's son, daughter, stepson, stepdaughter, or eligible foster child. The child does not have to qualify as the employee's dependent for income tax purposes. Similarly, self-employed individuals can deduct, as a self-employed health insurance deduction on page one of Form 1040, the cost of insurance coverage for their children who have not attained age 27 as of the end of the tax year. Note that employers do not have to include dependent coverage until 2016.

Cost of Employer-Sponsored Health Coverage Included on Form W-2

Most employers must report the aggregate cost of employer-sponsored health insurance coverage on the employee's 2014 Form W-2. The IRS has provided relief from the reporting for employers who filed less than 250 Forms W-2 for the preceding calendar year. Any employer filing 250 or more Forms W-2 is required to file the forms electronically.

Penalty for Employers Not Offering Affordable or Adequate Health Insurance Coverage: Beginning in 2015, certain applicable large employers (ALE) that do not offer health insurance coverage to at least 70% (95% in 2016) of their full-time employees (and their dependents), or offer health insurance coverage that is unaffordable or does not provide a certain minimum value, must pay a penalty if the employer is notified that any full-time employee is allowed or paid either a premium assistance credit to purchase health insurance in the individual market through a state insurance marketplace or a cost-sharing-reduction subsidy to help with out-of-pocket expenses. Any penalty paid under this provision is not deductible as a business expense for federal income tax purposes. Although only full-time employees must be given the opportunity to enroll in affordable health insurance coverage, to determine if an employer is an applicable large employer (i.e., has on average at least 100 full-time employees during 2015 and at least 50 full-time employees after 2015), the full-time equivalent value of the hours worked by part-time employees must be calculated and added to the employer's number of full-time employees. This calculation can be challenging. Additionally, the rules for determining full-time status can be confusing for certain variable-hour employees.

Annual Certification of Coverage to the IRS and Covered Employees

Starting now, employers with 100 or more full-time equivalent employees (FTEs) will need to explore how they can gather the information they need to report the type of coverage, the individuals covered, and their periods of coverage to the IRS. These reports (Forms 1095-C and 1094-C) will cover data for 2015, which is why it is important to start January 1, 2015. The Reports are due by Feb. 28, 2016 or March 31, 2016 if filed electronically. Employers must also provide notification to their employees by Jan. 31, 2016. Form 1095-C must be filed for each full-time employee. The IRS is encouraging employers to voluntarily comply with the certification of coverage in 2014. Our staff can assist you in gathering the information and preparing the information statements.

As noted above, some of the Affordable Care Act provisions apply to all businesses, while other provisions only apply to employers once a certain employee threshold (generally, 50 full-time employees) is met. Please give us a call if you have any questions or would like to discuss the impact of the legislation on your business. We can help you determine your number of full-time employees for purposes of the mandate and discuss all of your options.