Health care reform known as the Affordable Care Act (ACA) goes into effect Jan. 1, 2014. If you are an employer with 50 or more employees, the ACA requires "shared responsibility" for affordable health insurance coverage and imposes a tax penalty if the requirement is not met.
This article explains the shared responsibility requirement for employers with 50 or more employees. It also provides a formula to estimate the potential tax penalty.
The IRS imposes the penalty when:
To find out if you fall into the second category, take these steps to calculate an estimated tax penalty.
4 Step Process to Estimate Potential Tax Liability
Employers with 50 or more employees that offer health insurance but require large employee contributions should follow this four-step method to estimate their potential tax penalty liability under the ACA:
All non-grandfathered health plan benefits and rates will change Jan. 1, 2014. By following the four steps above an employer will have some idea of the potential tax penalty from this portion of the Affordable Care Act.
Does the Penalty Apply? Considerations and Definitions
Employers seeking to specifically calculate the penalty should consider:
a) Employee Definition
While the IRS is still developing its guidelines, as of October 2012, we know that the IRS considers any employee who works at least 30 hours per week to be a "Full Time Equivalent" or "FTE" and to be eligible for health insurance.
The IRS issued guidelines for determining full time employee status for employers who use seasonal and/or part-time employees. The IRS allows an employer to use different "measurement periods" and look back at previous three to twelve month periods to determine if an employee worked an average of 30 hours per week.
b) Affordable Coverage
The IRS has said that: "Coverage under an employer-sponsored plan is affordable to a particular employee if the employee’s required contribution [...] to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year" (see Page 2 "Proposed Affordability Safe Harbor for Employers") (pdf).The IRS realizes that most employers will not likely know the "modified adjusted gross household income" of their employees because household income includes earnings from non-employees. Accordingly, the IRS gives a "safe harbor" option for employers. The IRS will not penalize an employer when an employee’s contribution for self-only coverage does not exceed 9.5 percent of the employee’s W-2 wages rather than household income. (see Page 3 "Proposed Affordability Safe Harbor for Employers") (pdf).
c) Penalty Calculation
In this way, an employer could offer health insurance coverage and the IRS would still impose a penalty.
For example, an employer with 100 FTEs offers coverage that meets the minimum essential coverage requirements but 10 employees pay more than 9.5 percent of their W-2 wages (safe harbor) - AND the employees obtain a subsidy for coverage in the California Exchange - then the employer would pay a fine for each employee receiving the subsidy or 10 FTEs x $3,000, or $30,000.
The maximum penalty for an employer with more than 50 employees that offer coverage but requires employees to pay more than 9.5 percent of an employee’s wage would be: total FTEs minus 30 FTEs times $2,000. The penalty will not be higher than the employer who offers no coverage.
This chart has more detail on the shared responsibility tax penalties for employers:
DISCLAIMER: Consult your attorney or tax advisor regarding compliance with the Affordable Care Act. BenefitsCafe.com, DBA Professional Benefits & Insurance Services, does not give legal or tax advice.