Employer Mandate Penalty: How to Avoid it

The Employer Mandate (also known as the Employer Shared Responsibility Payment) is the Health Care Reform provision that requires all employers with 50 or more full time equivalent employees to offer a certain level of health insurance coverage at an affordable rate to all full-time employees, or face a penalty. The Employer Mandate penalty is triggered if at least one full-time employee of a covered employer receives a premium tax credit for purchasing individual coverage on one of the new State Insurance Exchanges, also called the Health Insurance Marketplace.

So how do you protect your organization from incurring any Employer Mandate penalties? We have detailed below the four critical steps midsized and large employers must take to ensure they are completely immunized from such fines:

STEP 1:  Offer Minimum Essential Coverage. Only certain health insurance plans meet the Affordable Care Act’s requirements. Generally, the organization is required to offer a plan that has an actuarial value of 60% or higher (commonly called a Bronze Level plan). This has nothing to do with how much the employer contributes to the plan; rather, minimum essential coverage refers exclusively to the design on the plan. We do not recommend that employers attempt to determine whether their plan meets these requirements. Instead, it is recommended that you ask your health plan broker or carrier to verify that your plan in fact offers minimum essential coverage.

STEP 2:  Ensure Your Coverage Is “Affordable.” This is probably the most complex of the steps to immunize your organization from Employer Mandate penalties. Basically, the plan is “affordable” if the employee does not have to contribute more than 9.5% of their total household income to the employee-only portion of the premium. However, there are three safe harbors in place that the employer may use to determine affordability. We suspect most employers will use one of these three safe harbors, as an employee’s total household income is generally unknown by the employer. The safe harbors are:

1. W-2 Safe Harbor- The organization will meet the affordability requirement if the employee is not required to contribute more than 9.5% of his W-2 wages on the premium for single health insurance coverage.
2. Rate of Pay Safe Harbor – The organization will meet the affordability requirement if the employee is not required to contribute more than 9.5% of an employee’s monthly wages on the premium for single health insurance coverage. For hourly employees, this is calculated by multiplying the employee’s hourly rate by 130 hours. For salaried employees, the employer may simply use the employee’s regular monthly salary.
3. Federal Poverty Level Safe Harbor – The organization will meet the affordability requirement if the employee is not required to contribute more than 9.5% of the federal poverty level for the year on the premium for single health insurance coverage. (The current federal poverty level is $11,670 for a single person, so 9.5% of that is approximately $1100. Therefore, to meet this safe harbor, the employer must ensure the employee is not required to contribute more than approximately $1100/year for the employee’s premium for single health insurance coverage.)

Note:  No employer contribution is required toward dependent health coverage. All of these affordability calculations should be performed using the employee-only cost of the health plan premium. 

STEP 3:  Offer the Plan to all Full Time Employees and their Dependent Children. The health insurance plan must be offered to all full-time employees regularly working 30 or more hours per week. The health plan (but no contribution) must also be offered to the employee’s dependent children. The organization is not required to extend coverage to spouses or domestic partners to avoid employer mandate penalties.

STEP 4:  Perform your Section 6056 Reporting. Both midsized and large employers are required to begin employer mandate reporting under Section 6056 of the tax code beginning in the 2015 tax year. The reporting forms must be provided to employees by January 31, 2016 and filed with the IRS by February 28, 2016 (if reporting on paper), or by March 31, 2016 (if reporting electronically).

Whatever option you elect for your organization, it is crucial to be prepared for these monumental changes on the horizon. Employer Mandate penalties have the potential to be substantial, so make sure you begin your preparation now.

For more information, contact GTM Insurance Agency at (888) 432-7972.