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Employee Shared Responsibility under Health Care Reform

After a one-year delay, health care reform’s employer shared responsibility (“play or pay”) penalty tax rules are scheduled to take effect January 1, 2015. A “large employer” is subject to penalties if it fails to offer health coverage to enough full-time employees (and their children up to age 26) and any full-time employee receives premium tax credits for health coverage purchased on a state or federal Exchange. Even large employers that offer coverage may be subject to penalties if the coverage is not affordable or does not provide minimum value. Although shared responsibility does not take effect until next year, action is required now because certain steps need to be taken in 2014 for application in 2015. For example, employers should be prepared to:

  • Track hours of service. The law has specific counting rules, including required recognition of paid time off.

  • Determine whether they are large employers subject to the law. Generally, an employer is considered to be “large” for this purpose if it had 50 or more full-time employees during the preceding calendar year (an employee working an average of 30 or more hours per week is considered full-time). Regulations explain how employees working less than 30 hours per week must be converted to full-time equivalent employees.

  • Identify which full-time employees can trigger a penalty. Employers can count employees’ hours month by month, or, alternatively, average their hours over a period of up to 12 months and “lock in” the employee’s status for an equivalent period.

  • Understand the consequences of not offering basic coverage to full-time employees and their children up to age of 26. Not offering basic health coverage to enough full-time employees and their children can lead to penalties of $2,000 per year for each and every full-time employee.

  • Consider whether to offer affordable, minimum value coverage. Even if basic coverage is offered to enough full-time employees and their children, a full-time employee not eligible for affordable, minimum value coverage can trigger a $3,000 annual penalty. The law allows different methods for determining minimum value and affordability.

  • Evaluate eligibility for transition relief, which may mitigate or delay some of the shared responsibility consequences for 2015. For example, some employers with fewer than 100 full-time employees will not be subject to play or pay penalties until 2016.

  • Report required information to the IRS, which the government will need to correctly administer employer shared responsibility, the individual mandate, and premium tax credits.

The reporting rules provide no delay for smaller employers.