IRS Provides Safe-Harbor Guidance to employers under the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010 (“PPACA”).
Background: Under PPACA, beginning January 1, 2014, each state has been tasked with establishing an American Health Benefit Exchange and Small Business Health Options Program. The purpose of the mandated exchange and options program is to provide qualified individuals and qualified small business employers access to qualified health plans. Individuals who are eligible to participate in a qualified health plan through a state established exchange may also be eligible for a Federal income tax credit and cost sharing subsidy in order to help defray the cost of the premiums under the state established exchange.
“Large employers” are required to offer their full-time employees (and their dependents) health insurance meeting minimum essential coverage. Full-time employees are those that average at least 30 hours of service a week. Under PPACA a large employer is one who employees at least 50 full-time employees on business days during the preceding calendar year. Hours of service by part-time employees are taken into account in determining full-time equivalent employees for purposes of 50 full-time employees.
If the employer fails to offer health insurance providing minimum essential coverage to its full-time employees (and their dependents), the employee may be eligible to participate in one of the state exchange programs. If full-time employees of “large employers” participate in one of the state exchange programs and receive a Federal income tax credit or subsidy, the employer faces a potential excise tax penalty. Under IRC 4980H, the penalty is equal to the product of:
1. $2,000 adjusted for inflation (prorated based on number of months in the year); x
2. The number of full-time employees over 30.
Example: In 2014, ACME, Inc. fails to provide minimum essential coverage to its 60 full-time employees, 1 of which receives a Federal income tax credit to help defray the cost of enrolling in a Washington state exchange plan. ACME, Inc. may be liable for a penalty equal to $2,000 x 30 (60 full-time employees – 30), or $60,000 prorated on a monthly basis.
The Notice: In Notice 2012-58, 2012-41 IRB, the IRS has provided helpful guidance to employers in determining who must be offered minimum essential coverage, or risk assessment of a penalty. Helpful guidance includes:
1. Employers may use a look-back measurement of between 3-12 months (as chosen by the employer) in order to determine whether the employee averaged at least 30 hours of service per week.
2. If under the look back period the employee is a full-time employee, the employee is treated as a full-time employee during the prospective six calendar months, or the look back period, whichever is longer;
3. Employers may impose a waiting period of 3 months before offering minimum essential coverage if the employer maintains a group health plan that meets certain minimum requirements without being subject to the penalty under IRC 4980H;
4. An employer will not be subject to the penalty under IRC 4980H, if it offers to its employees health insurance coverage that is deemed affordable based on the employee’s IRS Form W-2 wages as reported in box 1 of the IRS Form W-2.
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