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Employer Shared Responsibility and Health Care Reform

The most anticipated provision of the Health Care Reform Act (Patient Protection and Affordable Care Act (PPACA) is almost here. For months beginning on or after January 1, 2014, (The White House has delayed several provisions until 2015) an "applicable large employer" (defined below) is liable for an Employer Shared Responsibility Payment (ESRP) if:

(1)  the employer fails to offer to its full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month, and

(2)  at least one full-time employee is certified by HHS as enrolled in a qualified plan through a Health Insurance Exchange and is eligible to receive an applicable premium tax credit or cost-sharing reduction payment. (defined below).

If you are an "applicable large employer," the ESP penalty with respect to any calendar month equals the number of the employer's full-time employees (reduced by 30) multiplied by 1/12 of $2,000 (i.e. $166.67 per month). The $2,000 amount will be adjusted for inflation after 2014. Employers with common ownership or otherwise related are allowed only one 30-employee reduction, which is allocated ratably among all the related employers.

An applicable large employer is also liable for an ESRP if:

(1)  The employer offers minimum essential coverage under an eligible employer sponsored plan to its full-time employees and their dependents, but

(2)  At least one full-time employee is certified by HHS to receive an applicable premium tax credit or cost-sharing reduction payment because the coverage was not affordable to the employee or did not provide minimum value. These terms such as "affordable" and "minimum value" are defined below.

This penalty equals the number of the employer's full-time employees who receive a premium tax credit or cost-sharing reduction, multiplied by 1/12 of $3,000 (i.e. $250 per month). The $3,000 amount will be adjusted for inflation after 2014. It is noted, however, that payment for any month under this provision is capped at the number of the employer's full-time employees for the month (minus up to 30) multiplied by 1/12 of $2,000; This cap ensures that the payment for an employer that offers coverage can never exceed the payment the' employer would owe if it did not offer coverage.

What is an Applicable Large Employer?

An applicable large employer is any employer that employed, on average, at least 50 full-time employees or full-time equivalents on business days during the preceding calendar year. The employer averages the number of --) employees across the months in the previous calendar year and divides by 1,2.

What is a Full —Time Employee?

Full time employees are those who work at least 30 hours per week for the employer; Full time equivalent employees (FTEs) are determined by adding all hours of service for the month for employees who were not full-time employees and dividing by 120. An employer may determine each employee's status as a full-time employee by looking back at a standard measurement period of between 3 and 12 consecutive months. If the employee is determined to be a full-time employee according to the standard measurement period then he or she is a full-time employee during the stability period, which is an ongoing period of not less than 6 months. An employer may add an administrative period of up to 90 days between measurement period and stability period.

The employer is given a safe harbor of 3 months so if a newly hired employee is reasonably expected to be a full-time employee (and not a seasonal employee), an employer that offers health care coverage does not have to offer such coverage to the employee for the first 3 calendar months of employment.

For newly hired variable hour or seasonal employees, an employer may determine full-time employee status by using a measurement period of between 3 and 12 consecutive months, and an administrative period of up to 90 days. The stability period for new variable hour or seasonal employees determined to be full-time must be the same length as the stability period for ongoing employees.

Full-time employee status begins either on (1) the first day of the 4thmonth following the employment status change or (2) if earlier and the employee averages more than 30 hours of service per week during the measurement period, the first day of the first month following the end of the initial measurement period and any optional administrative period.

If an employer's workforce exceeds 50 full-time employees for 120 days or less (or four months) during the preceding calendar year, and the employees in excess of 50 who were employed during that period were seasonal workers, then the employer is not an applicable large employer. A seasonal worker is a worker who performs labor or services on a seasonal basis, as defined by the Department of Labor (including but not limited to certain agricultural workers and retail workers employed during the holiday season.)

Employer's Responsibility to "Offer Coverage"

An employer offers coverage for a calendar month if it offers the coverage for that month to at least 95% of its full-time employees (and their dependents). The employer has offered coverage if the employee has the opportunity to elect to enroll in or decline coverage at least once during the plan year. Failure to offer coverage for any day of a calendar month is treated as failure to offer coverage for the entire month. If an employee enrolls in coverage but fails to pay his or her share of premiums on a timely basis, the employer is nonetheless treated as offering coverage for that coverage period. If an employer offers minimum essential coverage to its full-time employees, even if the coverage is not affordable, the employer will not be liable for the penalty for failing to offer coverage but will be liable for an Employer Shared Responsibility payment. As a transition rule for 2014, if an employer takes steps during its plan year that begins in 2014 toward satisfying the requirement to offer coverage to dependents, the employer will not be liable for an assessable payment due solely for failing to offer coverage for dependents during 2014.

What is "Affordable Coverage"

Coverage for an employee is affordable if the employee's share of the premium for self-only coverage does not exceed 9.5% of the employee's annual household income beginning in tax years before January 1, 2015. The affordability test applies to the lowest-cost option available to the employee. Employers may use one of three safe harbors for the affordability test. (1) The W-2 safe harbor applies if the employee's share does not exceed 9.5% of employee's W-2 wages from the employer for the calendar year of coverage. (2) The Rate of Pay Safe Harbor applies if the employee's share does not exceed 9.5% of his or her monthly salary or, for a non-salary employee, an amount equal to 130 hours multiplied by the employee's hourly rate of pay as of the first day of the coverage period. (3) The Federal poverty Line Safe harbor applies if the employee's share does not exceed 9.5%of the federal poverty line for a single individual for the year.