The Affordable Care Act (ACA) was first enacted under former President Barack Obama in 2010. The Employer Shared Responsibility Provisions (ESRP) is a component of the ACA that impacts employers. The ESRP, also known as the Employer Mandate, did not take effect until 2015. While the ACA has seen some changes, the ESRP provisions remain constant. Key elements that impact the ESRP are as follows:
Four Key Areas of the ACA Affecting Employers
1. The Employer Shared Responsibility Provisions (ESRP), otherwise known as the “Employer Mandate,” requires Applicable Large Employers (ALEs), organizations with 50 or more full-time employees and full-time equivalent employees, to offer Minimum Essential Coverage (MEC) to at least 95% (70% for 2015) of their full-time workforce and their dependents whereby such coverage met Minimum Value (MV) and is affordable for the employee or be subject to penalties. This requires ALEs to submit annual filings to the IRS to prove their compliance with the ACA.
2. Establishment of the Premium Tax Credit (PTC) and government-run health exchanges, which allows low-income individuals an opportunity to obtain affordable health coverage. Individual taxpayers can obtain Premium Tax Credits from the federal government to subsidize health insurance plans purchased on government-run healthcare exchanges. However, in some instances, this can trigger tax penalties for employers.
3. Expansion of Medicaid and Medicare allowed Americans with income levels less than 138% of the federal poverty line (FPL) to enroll in Medicaid if such expansion was allowed within their state.
4. Individual shared responsibility, or the “Individual Mandate,” which required every citizen to be enrolled in health coverage or be subject to a tax penalty. This part of the ACA was phased out starting in January 2019. Some states have decided to create their own state-wide individual mandates to replace the federal Individual Mandate. The Individual Mandate interplays with the Employer Mandate by incentivizing employees to obtain health coverage, whether through the employer, a government-run health exchange or otherwise.
2. Who the ACA’s ESRP Impacts
Under the ACA’s ESRP, organizations with 50 or more full-time employees and full-time equivalent (FTE) employees, known as ALEs, are required to offer Minimum Essential Coverage (MEC) to at least 95% (70% for 2015) of their full-time workforce and their dependents whereby such coverage meets Minimum Value (MV) and is affordable for the employee or be subject to penalties.
Determining whether or not you’re an ALE can be difficult for any employer. It can be particularly complicated for organizations with a mix of full-time and part-time workers. In order to know whether or not your organization is an ALE, an aggregated employer analysis must be performed.
Generally speaking, the following information needs to be reviewed to perform an aggregate employer analysis:
- All of the legal entities that could potentially be related through ownership or working relationship
- The business structure and date each entity was formed;
- The ownership for each entity;
- The working inter-relationship, if any, among the potentially legal entities, such whether one provides services, such as management, for another.
Among the significant consequences of incorrectly performing an aggregate employer analysis is the misapplication of the allocation of the reduction of full-time employees or “freebies,” which is 30 per ALE Aggregated Group (except for 2015, which, through transition relief, allowed for 80). These 30 are “freebies” in that the IRS will not penalize the ALE Aggregated Group or single ALE for the first 30 full-time employees. However, these freebies are allocated ratably among the ALE members. Accordingly, it is important that the ALE members are properly identified.
Another consideration in determining whether or not your organization is an ALE is the existence of Seasonal Workers.
Seasonal Workers are accounted for to determine whether or not an organization is an ALE. If an employer’s workforce exceeds 50 full-time employees, including full-time equivalent employees (employees who work 130 hours in a month), for 120 days or fewer during the preceding calendar year, and all of 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 ALE. Note that a “seasonal worker” is different from a “seasonal employee.” A “seasonal worker” is one who performs labor or services on a seasonal basis as defined in certain Department of Labor Regulations and include agricultural laborers and retail workers employed exclusively during holiday seasons.
Regardless of your views about the ACA, as an ALE, the ACA is a law you can’t ignore. It impacts the bottom line of your employee benefits cost, it can impact your employees’ health coverage, and it requires your HR, tax and payroll departments to prepare detailed reports that must be filed with the IRS every year.
Every ownership situation is unique. There are many nuances and details that need to be taken into account. When performing an aggregate employer analysis, it may be in your interest to perform this analysis working with outside help that is familiar in dealing with the IRS on ACA issues, specializes in ACA compliance, and has expertise in data consolidation.
3. The ACA is Here to Stay
When President Donald J. Trump won the presidential election in 2016, he claimed as a big priority the repeal and replace of the ACA. While successful in effectively eliminating the Individual Mandate (one of the aforementioned elements of the ACA) beginning January 2019, other key provisions of the ACA remain intact, including the Employer Mandate. In efforts to fill the gap, states, such as Massachusetts, New Jersey, and Vermont, have passed statewide legislation to create their own individual mandates or other related healthcare initiatives.
Perhaps the biggest indicator that the ACA’s Employer Mandate is here to stay is the IRS enforcement action that began in November 2017. The IRS has issued penalties, some in the millions of dollars, to ALEs for not complying with the ACA. The IRS began issuing these ACA penalty assessments in its Letter 226J notice. To date, the IRS has issued more than 30,000 notices containing penalty assessments of about $4.4 billion to employers for failing to comply with the Employer Mandate. According to the latest Treasury Inspector General for Tax Administration (TIGTA) report, the IRS identified 318,296 organizations that qualified as ALEs for 2015. Of that amount, TIGTA reports that 49,259 are at risk for compliance action by the IRS. Employers who have not yet received a 2015 ESRP penalty notice should not breathe a sigh of relief yet. There are still more Letter 226J penalty notices to be issued for the 2015 reporting year. The Congressional Budget Office projects that the IRS will assess more than $12 billion penalties for employer non-compliance with the ACA for 2015.
Moreover, the IRS is expected to continue to enforce compliance of the ACA for reporting years 2016 and 2017 once it completes issuing notices for the 2015 year. The latest TIGTA report indicates that the enforcement process for 2015 was a “test run,” but still resulted in $4.4 billion dollars in penalties to date. The IRS has the data to begin the process to calculate the potential ESRPs for tax year 2016 for non-compliance ALEs. TIGTA reports that the IRS has spent over $2.8 million to improve the process for identifying, calculating, and processing non-compliant ALEs. Expect the IRS processes for identifying ACA non-compliance to become more robust for future reporting years.
The IRS has mentioned updating its tools for identifying ACA non-compliance more efficiently. The IRS has disclosed its use of an automated ACA compliance validation system (ACV) tool that identities ACA non-compliance based on annual ACA filings, suggesting more ALEs will receive IRS Letter 226J than in previous years. The IRS has been using the new ESRP case selection methodology to gather data to analyze all segments of the population to assist in future case analysis, selection, and assignment. TIGTA stated this will allow the IRS to use the data gathered from working the tax year 2015 cases to further refine case selection methodologies, as well as increase the probability for subsequent tax year case selections, to include those with the highest compliance impact.
4. How to Comply with the ACA
The IRS regulations state the following for complying with the ESRP:
“Applicable Large Employers" (ALEs), organizations with 50 or more full-time employees and full-time equivalent employees, are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is affordable for the employee or be subject to IRS 4980H penalties."
The three key determinants in that statement are:
- Minimum Essential Coverage
- Minimum Value
Minimum Essential Coverage
The term “Minimum Essential Coverage” is defined by examples to include certain government sponsored programs, such as Medicare and Medicaid, eligible employer sponsored plans and plans in the individual market.
A notable distinction between employer sponsored plans, on the one hand, and “qualified plans” in the individual market through a government-run exchange is the requirement of “essential health benefits.” “Essential health benefits” include doctor visits, emergency services (such as emergency room services), hospitalization, maternity and newborn care, mental health, prescription drugs, rehabilitation services and devices (which are services to help you recover from injury or disability), lab services, preventative and well-being services, and pediatrics. Unlike qualified plans in the individual market, employer sponsored plans do not require “essential health benefits.” Only qualified plans in the individual market through a government-run exchange allow for Premium Tax Credits (PTC)s and other subsidies.
The IRS determines that an employer-sponsored plan provides Minimum Value (MV) if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan. See Notice 2014-69 for additional guidance regarding whether an employer-sponsored plan provides Minimum Value (MV) coverage if the plan fails to substantially cover in-patient hospitalization services or physician services. The Department of Health & Human Services (HHS) provides a Minimum Value Calculator that allows for ready determination as to whether a plan meets Minimum Value (MV).
Affordability is calculated based on a cap of 9.5% of an individual’s annual household income. This 9.5% cap is adjusted annually. For 2018, the percentage rate is 9.56%.
FPL Safe Harbor
The federal poverty line (FPL) is based on the annual household income which depends on the household size and is adjusted on an annual basis. For 2018, the FPL is $12,140 for a household size of 1. In order to meet this safe harbor for 2018, the employer would have to show that the full-time employees were offered self only coverage that did not exceed the product of the FPL multiplied by 9.56% and then divided by 12 ($12,140 x 9.56% / 12 = $96.72). If the employee contribution for self-only coverage meets or is below this amount, then the FPL safe harbor is met.
W-2 Safe Harbor
The W-2 safe harbor can be the trickiest safe harbor because it cannot be determined until the end of the year. While there are methods an employer can use to gauge whether or not this safe harbor will be met, it ultimately cannot be proven until the end of the year. The reason for this is because you need the amount in the W-2 Box 1 for the affordability calculation. In order to claim the W-2 safe harbor for 2018, the following formula is generally used: W-2 Box 1 Wages multiplied by 9.56% with an adjustment for partial year coverage.
Rate of Pay Safe Harbor
The rate of pay safe harbor is based on an employee’s hourly rate or monthly salaried rate depending on employment status.
Hourly Workers: To determine the affordability threshold for an hourly worker, for example, take the employee’s lowest hourly rate for the month and multiply by 130 (the minimum total of hours on a monthly basis to be treated as a full-time employee under the ACA). Take that product, multiply by 9.56% (for 2018). This will identify the maximum monthly premium that the employee may be required to pay to satisfy affordability per ACA regulations.
Here’s an example: Chris works 130 hours at a $15 hourly rate in March. Multiply $15 by 130. Take the result of $1,950 and multiply by 9.56%. The $186.42 is the maximum amount for March that Chris’s employer can require Chris to pay to cover himself if the employer wants to satisfy affordability for that month with respect to that employee.
Salaried Worker: To determine the affordability threshold for a salaried employee, multiply the monthly salary by 9.56%.
Here’s an example: Joanna is a full-time employee who receives a monthly salary of $10,000. Multiply $10,000 by 9.56%. The $956 is the maximum monthly amount that Joanna’s employer can require Joanna to pay to cover herself if the employer wants to satisfy affordability for that month with respect to that employee.
There are many practices that need to be accounted for when complying with the ACA’s Employer Mandate. The choice of measurement methods, data organization, benefits information, and understanding of the law all play a critical role in employers abilities to comply with the law.
5. How to Assess Full-Time Employees Under the ACA
Perhaps the most significant issue for ACA compliance is an ALE’s full-time employee count. There is a common misconception that “full-time” means 40 hours per week. With regard to the ACA, full-time means averaging 30 hours of service per week or 130 hours of service per month. The Employer Mandate dictates that the ACA-defined “full-time” employees are those for whom an offer of Minimum Essential Coverage (MEC) that meets Minimum Value (MV) and affordability to avoid IRC Section 4980H penalties. As mentioned earlier, the full-time employee count is also a significant factor in determining ALE status for an employers.
See below the difference between full-time and full-time equivalent employees:
A full-time employee
In general is an employee who, on average, works at least 30 hours per week, or at least 130 hours in a calendar month.
A full-time equivalent
Is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee. For example, two employees who each work an average of 15 hours per week are equivalent to one full-time employee.
Determining the full-time employee count under the ACA can be tricky. The IRS allows employers one of two measurement methods for determining full-time status. The rules for identifying them are vastly different.
6. How to Implement the Correct Measurement Method for the ACA
The two methods sanctioned by the IRS for determining full-time employee status are the Look-Back Measurement Method and the Monthly Measurement Method. Employers need to implement one of these methods to ensure accurate full-time determination.
The Look Back Measurement Method
The Look-Back Measurement Method typically works best for workforces that have a mix of full-time and part-time, seasonal or other variable hour employees. Sometimes it’s difficult to identify which employees should be considered to be full-time under the ACA. The Look-Back Measurement Method allows employers to monitor and track their employees’ hours of service to determine if they are full-time or part-time under the ACA before extending an offer of coverage. The Look-Back Measurement Method consists of three different periods:
The Measurement Period
Each employee’s hours are tracked and averaged over the measurement period which can be as short as three months to as long as 12 months. Many employers prefer to use a 12 month Measurement Period that allows for a more normalized calculation of an employee’s average hours of service, as any seasonal fluctuations up or down will be smoothed out over the 12 months in a manner that may not have occurred had the employer utilized a shorter measurement.
The Administrative Period
Following the measurement period, there is an optional administration period of no longer than 90 days. The IRS has specifically rejected an extension of the 90 days to three full calendar months. This administrative period must begin immediately following the end of a measurement period and end immediately before the start of the associated stability period. The administrative period is often used as a time for gathering and collecting all the paperwork necessary to ensure that an offer can be made at the start of the stability period. The length of the administrative period may also vary depending on the type of measurement period that was completed. For example, for new hires completing their initial measurement period, employers may choose to use a 30-day waiting period while, for ongoing employees completing a standard measurement period, employers may choose to use a 60-day administration period.
The Stability Period
After the optional administration period is completed, the stability period begins. The beginning of the stability period should align with the beginning of the offer coverage effective date. The stability period determines the treatment of the employee’s full-time or non-full-time status based on the results of the preceding measurement period. During this stability period, regardless of the hours they are currently working, employees are locked in as either full-time or not full-time. Of course, even if the employee is “locked” into a non-full-time position, that doesn’t mean that the employer cannot offer coverage. For most employers, it makes the most sense to align the Standard Stability Period with the annual health plan renewal date.
The Monthly Measurement Method
The Monthly Measurement Method is more straightforward than the Look-Back measurement method. The monthly measurement method is designed for organizations that have primarily full-time workforces. An employee’s status is taken at face value. Employee status is based on whether or not he or she provided a minimum of 130 hours of service a month or 30 hours a week.
Under the Monthly Measurement Method, the employee’s status can fluctuate between full-time and non-full-time status as there are no stability or measurement periods. Each month, the hours are averaged to determine status.
If your organization has a lot of variable hour employees, this is not the method for you.
It is important to note that while there are certain categories for which your organization may apply the different methods, such as employees who are salaried versus hourly or employees who are at different locations, you cannot switch, for example, from the Look-Back Measurement Method to the monthly method, during a measurement period.
Make sure that your organization is utilizing one of these measurement methods correctly.
7. Possible Penalties for Not Complying With the ACA
If IRS enforcement is not convincing enough to take ACA compliance seriously, perhaps the possible consequences for failing to comply will be.
ALEs that do not comply with the ACA can be penalized in the millions of dollars under Section 4980H. The Section 4980H penalties have two components. The “A” penalty, under Section 4980H(a) for an ALE who fails to offer Minimum Essential Coverage (MEC) to 95% of full-time employees (and their dependents), is calculated at an annualized rate of $2,080 (for 2015 and adjusted upwards annually) multiplied by the total number of full-time employees. The “B” penalty, under Section 4980H(b), is calculated at a rate of $3,120 (for 2015 and adjusted upwards annually) multiplied by the number of full-time employees who obtain a tax subsidy because the ALE did not offer Minimum Essential Coverage (MEC) such coverage failed to meet “Minimum Value (MV)” and/or such coverage was not “affordable.” These penalties are currently being issued to employers in IRS Letter 226J.
In addition to 4980H penalties being issued in IRS Letter 226J, penalties can be assessed to employers for other reasons.
Under Section 6721/6722, penalties may be assessed for failing to accurately and completely file returns to the IRS and/or failing to accurately and completely furnish statements to the applicable employees, i.e., the IRS 1094-C/1095-C Schedules. These penalties can reach $260 per return (which is on an employee basis), adding up to more than $6 million for combined filing and employee statement distribution failures. Moreover, the penalties double for a willful failure, which the employer bears the burden to show that any failure to comply was despite reasonable diligence.
8. The Benefits of an ACA Penalty Risk Assessment
With an ACA Penalty Risk Assessment, not only are you given an opportunity to address any data inconsistencies from prior filings, but you also have a chance to correct them and resubmit to minimize the risk of penalties. In doing so you may also rethink your current process for ACA compliance, implement any necessary changes, and improve your strategy for ACA reporting on a going forward basis.
There is a great deal of information contained in the IRS filings that needs to be checked for accuracy. Filing incorrectly or with incorrect information could result in millions of dollars of Employer Shared Responsibility Payments (ESRPs) under IRC Section 4980H, like those included in IRS Letter 226J, and/or other reporting penalties under IRC Section 6721/6722.
Having an ACA Penalty Risk Assessment performed can make sure these critical ACA filing items are checked:
- Submitting the correct company name and EIN
- Listing all ALE members and correctly allocating the reduction of full-time employees among the ALE members
- All 12 months indicators are reported accurately
- Code combinations are logical and correct
- List all covered members for self-funded plans
- All appropriate safe harbors are claimed
In addition, an assessment of your ACA information returns (1094-C/1905-Cs) each year will help you practice these steps in ACA compliance:
- Consolidating, aggregating and validating HR, Time and Attendance, Payroll, and Health Benefits data for each month of the applicable reporting year;
- Conducting a monthly audit of employment classifications, such as full-time, part time, variable and seasonal;
- Determining your workforce composition, at both the ‘Aggregated Employer Group’ and EIN level;
- Calculating health coverage affordability for each applicable employee; and
- Checking the accuracy of your data.
9. Getting Help Complying with the ACA
There are several types of outside vendors that can assist your organization with ACA compliance, resulting in various degrees of success. Most of these outside vendors require the employer to play a significant role in providing data for use in ACA compliance activities and information filings with the IRS.
Outside vendors that can offer the following are ideal for improving your ACA compliance:
- Understanding of the nuances of ACA’s Employer Mandate compliance;
- Consolidating and validating data from disjointed databases such as payroll, benefits administration, time and attendance and unstructured workforce data; and
- Tracking time and attendance, onboarding and offboarding, scheduling, and supporting documentation.
These resources can help you navigate the complexities of the ACA.
10. 2019 ACA Compliance
Organizations should continue adhere to the following steps to ensure they are complying with the ACA for 2019. Below is a checklist that should help in complying with complexities of the ACA.
Consolidate, Aggregate and Validate year-to-date data from HR, Time and Attendance, Payroll and Health Benefits each month. This is an important step to ensuring an accurate and timely ACA filing with the IRS.
Conduct a monthly audit of employment classifications, such as full-time “designated,” part-time, variable and seasonal. The ACA Employer Mandate requires employers to accurately identify their full-time employees and offer them health coverage meeting certain substantive standards. A 5% margin of error is allowed each month. For any month that an employer* strays outside of the 5% margin of error, the employer is exposed to an annualized penalty of $2,500 multiplied by the number of full-time employees if at least one full-time employee obtains a Premium Tax Credit (PTC) for that month.
Determine your Workforce Composition, at both the ‘Aggregated Employer Group’ and EIN level. This includes knowing the numbers of full-time (FT) and part-time employees, including full-time employees that are not part of the limited non-assessment period. You also need to know the numbers of “pending” and “trending” employees when using the Look-Back Measurement Method. Remember to track historical “FT employees, not in Limited Non-Assessment Period,” without an offer of health coverage.
Calculate health coverage affordability. For 2019, in order to meet the ACA’s affordability threshold, the employee’s required contribution to the lowest cost monthly premium for Self-Only coverage providing Minimum Value (MV) should not exceed 9.86% of either (a) the employee’s Rate of Pay, (b) the employee’s W-2Box 1 wages, or (c) the Federal Poverty Line threshold for a household of 1. When calculating affordability, make sure to account for flex credits through cafeteria plans as allowed under IRS Section 125, and other factors such as opt-out payments, wellness plans, HRAs and fringe benefits.
Check the accuracy of your data. Many of the problems encountered on the path to ACA compliance are data problems. Make sure your key data points are accurate, including Legal Name, SSN, DOB, Address, Employment Periods, Hours, Wages, Rate of Pay, Compensation Type, Title, Employee Class, Location, EIN, Health Benefits Class, Health Benefits Eligibility Periods, Health Benefits Enrollment Periods, and W-2 information.
The IRS has set the following penalties for companies with 50 or more full-time or full-time equivalent employees that do not comply with the ACA for the 2019 reporting year:
Employer Shared Responsibility Payment for Failure to Offer Minimum Essential Coverage (MEC).
On a monthly basis, applies to each month that the employer failed to offer Minimum Essential Coverage (MEC) to at least 95% of a company’s full-time employees (and their dependents) AND at least one full-time employee received Premium Tax Credits for purchasing coverage through the Marketplace for that month.
Annualized Penalty for 2019 tax year is sum of $2,500/12 x (# ALL Full-Time employees – 30)* for each month that at least one full-time employee received Premium Tax Credits. An employer with 300 full-time employees would see an IRS penalty of $675,000, assuming a PTC was received over a 12-month period.
*The 30 reduction is ratably allocated among the entities within the single “employer.”
Employer Shared Responsibility Payment for Failure to Offer Coverage that Meets Affordability and Minimum Value (MV) (assessed if 4980H(a) does not apply).
On a monthly basis, applies for every full-time employee that did not receive an offer of coverage or received such an offer but the offer was either unaffordable or did not provide Minimum Value (MV) or both AND the employee received a premium tax credit for that month. Annualized Penalty for 2019 tax year is the sum of $3,750/12 x (# of full-time employees receiving PTCs for each month). An employer with 10 full-time employees would see an IRS penalty of $18,750.
Failure to File Penalty
Failure to file correct information returns.
If the return is not filed by the late filing deadline of August 1, 2020, the full penalty is assessed per applicable individual return not filed. Penalty for 2019 is $270** x (# of applicable individual not filed). Employers with 300 full-time employees would see an IRS penalty of $81,000.
** Amount doubled for intentional disregard.
Failure to Furnish Penalty
Failure to furnish correct payee statements to employees.
If the ACA-mandate health insurance information is not provided to employees by the deadlines established by the IRS, the penalties are assessed per applicable individual not receiving this information. Penalty for 2019 tax year is $270 x (# of applicable individuals not receiving information). Employers with 300 full-time employees would see an IRS penalty of $81,000.
11. ACA Reporting for 2020
After successfully complying with the ACA for 2019, organizations should take note of the following reporting dates to ensure they are accurately and timely submitting their ACA information filings containing information for 2019 with the IRS. Here are the IRS filing dates for the 2019 reporting year:
January 31, 2020
Deadline to furnish 1095-C schedules to employees.
February 1, 2020
Employers may start receiving exchange notices related to the 2019 tax year. Remember, there is a 90-day window to appeal exchange notices.
February 28, 2020
Deadline to file 1094-C/1095-C schedules if paper filing.
April 1, 2020
Deadline to file 1094-C/1095-C schedules if electronic filing.
April 16, 2020
Individual tax returns are due. Employees should include healthcare coverage on their individual returns.