Household Employers: Affordable Care Act FAQ

At this point, most employers understand the basics of the Affordable Care Act (ACA) but they may still have questions about many of its details. The IRS recently issued a series of Q&As to help answer some specifics.

Here are selected questions from the IRS, along with answers that are edited for space limitations:

Q. What are the Employer Shared Responsibility provisions? When do they go into effect?

For 2015 and later, employers with at least a certain number of employees (generally 50 full-time or a combination of full-time and part-time employees that is equivalent to 50 full-timers) will be subject to the Employer Shared Responsibility provisions under section 4980H of the Internal Revenue Code. (This is sometimes called “the employer mandate.”)

As defined by the statute, a full-time employee is employed on average at least 30 hours per week.

An employer that meets the 50 full-time employee threshold is referred to as an applicable large employer. If these employers don’t offer affordable health insurance that provides a minimum level of coverage to their full-timers (and their dependents), the employer may be subject to an Employer Shared Responsibility payment if at least one of its full-time employees receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges, also called the Health Insurance Marketplace.

The Shared Responsibility provisions aren’t effective until January 1, 2015, meaning no payments will be assessed for 2014. Employers will use information about the number of employees they employ and their hours during 2014 to determine whether they’re considered an applicable large employer for 2015.

Q. How many employees must an employer have to be subject to the Shared Responsibility provisions?

To be subject to the provisions for a calendar year, an employer must have employed during the previous calendar year at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. For example, an employer that employs 40 full-time employees (that is, employees employed 30 or more hours a week on average) and 20 employees employed 15 hours a week on average has the equivalent of 50 full-time employees, and would be an applicable large employer.

Seasonal workers are taken into account in determining the number of full-time employees. However, if an employer’s workforce exceeds 50 full-time employees (including full-time equivalents or 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 considered an applicable large employer.

Seasonal workers are those 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 “seasonal worker.”

Employers will determine each year based on their current number of employees whether they’ll be considered an applicable large employer for the next year. For example, if an employer has at least 50 full-time employees (including FTEs) for 2014, it will be considered a large employer for 2015.

Note: Since employers will be performing this calculation for the first time to determine their status for 2015, there is a transition rule intended to make this first calculation easier.

Employers average their number of employees across the months in the year to see whether they’ll be an applicable large employer for the next year. This can take account of fluctuations that many employers experience. The final regulations provide additional information about how to determine the average number of employees for a year, including how to take account of salaried employees who may not clock their hours.

Q. How does an employer not in existence the preceding calendar year determine if it has enough employees to be subject to the Shared Responsibility provisions?

An employer not in existence on any business day in the prior calendar year is considered an applicable large employer in the current year if the employer is reasonably expected to employ an average of at least 50 full-time employees (including full-time equivalents) on business days during the current calendar year and it actually employs an average of at least 50 full-time employees (including FTEs) on business days during the calendar year.

In contrast, for the next year (the year after the first year), the employer will determine its status as an applicable large employer using the rules that generally apply (that is, based on the number of full-time employees and full-time equivalents that the employer employed the preceding year).

Q. If two or more companies have a common owner or are otherwise related, are they combined for purposes of determining whether they employ enough employees to be subject to the Shared Responsibility provisions?

Yes, Section 4980H includes a longstanding provision that also applies for other tax and employee benefit purposes. Under it, companies with a common owner or that are otherwise related generally are combined and treated as a single employer. So they would be combined for purposes of determining whether or not they collectively employ at least 50 full-time employees (including FTEs). If the combined total meets the threshold, then each separate company is subject to the Shared Responsibility provisions, even those that individually do not employ enough people to meet the threshold. (These rules for combining related employers don’t apply for purposes of determining whether a particular company owes a Shared Responsibility payment or the amount of any payment. That is determined separately for each related company).

Q. Do the Employer Shared Responsibility provisions apply only to large employers that are for-profit businesses?

All employers that are applicable large employers are subject to the Shared Responsibility provisions, including for-profits, non-profits, and government entities (federal, state, local, and Indian tribal government employers).

Q. Do the Employer Shared Responsibility provisions apply in states where a federally-facilitated Exchange (Marketplace) has been established on behalf of the state?

Yes. An applicable large employer is subject to an Shared Responsibility payment if at least one of its full-time employees receives a premium tax credit. A premium tax credit is only available to eligible individuals who obtain coverage through a Marketplace, which includes a State Based Exchange, regional Exchange, subsidiary Exchange, or the federally-facilitated Exchange established on behalf of a state.

Q. Do the Shared Responsibility provisions apply to employers with full-time employees who are eligible for health coverage through other sources, such as Medicare, Medicaid, or spouses’ employers?

Yes. To determine whether an employer is an applicable large employer, all employees are counted (subject to a limited exception for certain seasonal workers), regardless of whether the employees are eligible for health coverage from another source, such as Medicare, Medicaid, or spouses’ employers.

But, employees who are eligible for Medicare or Medicaid are not eligible for a premium tax credit. If no full-time employee receives a premium tax credit (for example, because all of an employer’s full-time employees are eligible for Medicare or Medicaid), the employer will not be subject to a Shared Responsibility payment.

However, if an applicable large employer doesn’t offer coverage to its full-time employees (and their dependents) or offers coverage to fewer than 95 percent of its full-timers (and their dependents) and a full-time employee receives a premium tax credit, the employer will be liable for a Shared Responsibility payment. It will be calculated based on the employer’s number of full-time employees. (However, there is some transition relief for 2015.)

Q. Which employers aren’t subject to the Shared Responsibility provisions?

For a calendar year, employers who employ fewer than 50 full-time employees (including FTEs) in the prior calendar year aren’t subject to the Shared Responsibility provisions. See above for a limited exception for employers with certain seasonal workers, and below for 2015 transition relief for employers with fewer than 100 full-time employees (including FTEs).

Q. How does an employer identify full-time employees for purposes of the Shared Responsibility provisions?

The number of full-time employees matters both for purposes of whether the Employer Shared Responsibility provisions apply and whether a Shared Responsibility payment is owed by an employer (as well as the amount). An employer identifies its full-time employees based on each employee’s hours of service.

For purposes of the Employer Shared Responsibility provisions, an employee is full-time for a calendar month if he or she averages at least 30 hours of service a week. Under the final regulations, for purposes of determining full-time status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours a week. Two measurement methods are provided for determining whether an employee has sufficient hours to be a full-time employee.

1. The monthly measurement method under which an employer determines each employee’s status as a full-time employee by counting the employee’s hours of service for each month.
2. The look-back measurement method under which an employer may determine the status of an employee as full time during a future period (referred to as the stability period), based upon the hours of service of the employee in a prior period (referred to as the measurement period). The look-back method for identifying full-time employees is available only for purposes of determining and computing liability for an Employer Shared Responsibility payment, and not for purposes of determining if the employer is a large employer.

The final regulations describe approaches that can be used for various circumstances, such as employees who work variable hour schedules, seasonal employees, and employees of educational organizations.

These methods prescribe minimum standards for identifying full-time employees. Employers may make additional employees eligible for coverage, or otherwise offer coverage more expansively than required.

Q. Are there special rules for hours of service that are challenging to identify or track?

Treasury and the IRS continue to consider additional rules for determining hours of service for certain categories of employees whose hours are particularly challenging to identify or track or for whom the general rules for determining hours may present special difficulties. This includes adjunct faculty, commissioned salespeople and airline employees as well as those with unusual work hours, including layover hours (for example for airline employees) and on-call hours. For this purpose, until further guidance is issued, employers are required to use a reasonable method of crediting hours of service that is consistent with Section 4980H.

Q. Is additional transition relief available for employers with at least 50 but fewer than 100 full-time employees (including full-time equivalents)?

Yes. For employers with fewer than 100 full-time employees (including FTEs) in 2014, that meet the conditions described below, no Shared Responsibility payment will apply for any calendar month during 2015. For employers with non-calendar-year health plans, this applies to any calendar month during the 2015 plan year, including months during the 2015 plan year that fall in 2016.

To be eligible for the relief, an employer must certify that it meets the following conditions:

Limited Workforce Size. The employer must employ on average at least 50 full-time employees (including FTEs) but fewer than 100 full-time employees (including FTEs) on business days during 2014. (Employers with fewer than 50 full-time employees (including FTEs) on business days during the previous year are not subject to the Shared Responsibility provisions.) The number of full-time employees (including FTEs) is determined in accordance with the otherwise applicable rules in the final regulations for determining status as an applicable large employer.

Maintenance of Work force and Aggregate Hours. During the period beginning on February 9, 2014 and ending on December 31, 2014, the employer may not reduce the size of its work force or employees’ overall hours of service in order to qualify for the transition relief. However, an employer that reduces work force size or overall hours of service for bona fide business reasons is still eligible for the relief.

Maintenance of Previously Offered Health Coverage. During the period beginning on February 9, 2014 and ending on December 31, 2015 (or, for employers with non-calendar-year plans, ending on the last day of the 2015 plan year) the employer doesn’t eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014. (Consult with your adviser if this is your situation since there are a number of other provisions.)

For more information, please visit IRS.gov, or contact GTM’s Household Employment Experts at (888) 432-7972.