To Pay or Play in 2014?
ObamaCare Poses Difficult Choice for Employers
By Richard Dyo, Tax Principal and Don Hughes, Tax Manager
National Health Care Practice Members
Uncertainty makes business decisions hard. With the Supreme Court decision on the Patient Protection and Affordable Care Act (referred to herein as "ObamaCare") and the Presidential election behind us, we now have a clear vision of the tax landscape to come. Or do we? There are still a number of unanswered questions about ObamaCare. The long-term future of our nation's health care and tax laws seem almost as uncertain as they did one year ago. What we do know is that ObamaCare's mandate for employer-sponsored health care coverage for employees is set to take effect commencing January 1, 2014. This mandate is found in Section 4980H of the Internal Revenue Code ("IRC") and is oftentimes referred to as the "pay or play" provisions of ObamaCare. The "pay or play" provisions of ObamaCare are some of the more significant provisions in ObamaCare that employers must be prepared to address.
Pay or Play Rules in a Nutshell
If an employer with at least 50 full-time or full-time equivalent employees (defined in IRC Section 4980H as an "Applicable Large Employer") does not offer "affordable" health insurance that provides a minimum level of coverage (the "minimum value" requirement) to at least 95% of their full-time employees (and their dependents), the employer may be subject to a monetary tax penalty if at least one of their full-time employees receives a "premium assistance tax credit" (under IRC Section 36B) to purchase health insurance on one of the new Affordable Care Act Insurance Exchanges (see the discussion below under the heading "ObamaCare Subsidy" for a description of which employees can potentially qualify for a "premium assistance tax credit").
IRC Section 4980H Proposed Regulations
The IRS published Proposed Regulations interpreting IRC Section 4980H in December 2012. These proposed regulations can be relied upon until they are finalized (which presumably will occur sometime in 2013). They provided information on safe harbor methods that employers can use to determine its "full-time employees", but only for purposes of computing any otherwise applicable monetary tax penalty for failing to meet the requirements of IRC Section 4980H (discussed below), and not if an employer would be considered to be an "Applicable Large Employer" so as to invoke the potential application of IRC Section 4980H. For example, the employer can determine each ongoing employee's full-time status by looking back over a "standard measurement period." This is defined as a time period chosen by the employer that is 3 to 12 consecutive calendar months. The employer can choose the number of months to be used for the standard measurement period. They also note that the determination of an individual's status as an employee will be based on the common law definition of employee. Thus, partners in a partnership will not be considered employees for Section 4980H. Another item in the proposed regulations is that under a special transitional rule, group health plans that are using a fiscal year as of December 27, 2012 and cover a reasonable percentage of the workforce, will not be subject to the requirements of IRC Section 4980H until the first day of the plan year that begins in 2014.
Some of the More Important Definitions Under ObamaCare Are as Follows:
Applicable Large Employer
This is defined as a business that employs at least 50 "full-time employees" and "full-time equivalent employees." This determination will generally take into account seasonal employees that work for more than 120 days. Independent contractors are not included in the calculation.
The proposed regulations note that to determine Applicable Large Employer status for each calendar month the employer must do the following:
- Count the number of full-time employees working an average of 30 hours per week per month.
- Calculate the number of full-time equivalent employees by totaling the number of monthly hours worked by part-time employees (including seasonal employees) and dividing by 120.
- Add the full-time and full-time equivalent employees calculated in Step 1 and 2 for each of the 12 months in the preceding calendar year.
- Add the monthly totals and divide by 12. If the average exceeds 50, but only because of the inclusion of full-time equivalent employees, the employer will need to determine if the below described seasonal employee exception applies.
The regulations have special rules for employers whose workforce exceeds 50 full-time equivalents for no more than 120 days during a calendar year if the employees in excess of 50 were seasonal employees.
Hours worked by employees (whether or not U.S. citizens) outside the U.S. are generally excluded from the above stated calculation of hours worked.
In addition, the business aggregation rules similar to those used to define an employer for retirement plan purposes will apply. This means related businesses or businesses with common ownership may have to combine employees when determining if they meet the 50 full-time employee/full-time equivalent employee test.
The proposed regulations provide some transition relief for smaller employers that are close to the 50 full- time employee threshold. The relief allows those employers to determine if they are large employers based on any six consecutive month period chosen by the employer during 2013.
Affordable Coverage
If the employee's portion (i.e., his self-only coverage portion) of the lowest cost health care option provided under the employer's health plan exceeds 9.5 percent of the employee's household income, the coverage is considered "unaffordable" for purposes of IRC Section 4980H. The proposed regulations recognize the difficulty in determining an employee's household income so they have included several safe harbors.
Employers can demonstrate they offer affordable coverage by showing that the employee premium share does not exceed 9.5% of the amount reported in Box 1 of Form W2. A second safe harbor is to show that the employee premium share does not exceed 9.5% of the hourly pay rate times 130 hours per month (130 hours is the benchmark used for full time status under new law). The last safe harbor is to show that the employee premium share does not exceed 9.5% of the federal poverty line for one person.
Minimum Value
A plan satisfies the "minimum value" requirement only if the plan's share of the total allowed costs of benefits provided under the plan is at least 60% of those costs (which will occur in those cases where, because of co-pays, deductibles, and co-insurance borne by a covered employee, the employee's share of those costs is less than 40% of the total allowed costs of benefits provided under the plan).
Definition of a "Dependent"
The proposed regulations define a dependent for purposes of Section 4980H as an employee's child under age 26. The proposed regulations refer to the definition of child in Section 152(f)(1). The employer will not be subject to tax penalties for not offering coverage to spouses.
Monetary Tax Penalties for Failing to Meet the Requirements of IRC Section 4980H
An Applicable Large Employer may be subject to a penalty (an excise tax) if at least one full time employee receives a premium tax credit to purchase health insurance through an insurance exchange.
If the business does not offer health care coverage to its full time employees (and their dependents), then the penalty imposed under IRC Section 4980H(a) will be $2,000 per full-time employee. This penalty is sometimes referred to as the "sledgehammer tax". The business will not have to pay the penalty on its first 30 full-time employees. In the situation where businesses are aggregated, only one 30 employee reduction will be allowed for the group.
On the other hand, if the business does offer health insurance coverage to at least 95% of its full-time employees (and their dependents), but the coverage either is considered to be "unaffordable" or fails the "minimum value" requirement, then the penalty imposed under IRC Section 4980H(b) will be either $3,000 per "subsidized" full-time employee, or $2,000 per full-time employee, whichever is less. The term "minimum value" is specifically defined in IRC Section 36B(c)(2)(C). This penalty is sometimes referred to as the "tack-hammer tax".
In either case, the monetary tax penalties imposed under IRC Section 4980H cannot be deducted by the employer for federal income tax purposes.
The Employee's Eligibility for Receiving an "ObamaCare Subsidy"
In general, in order for an employee to potentially qualify for an ObamaCare Subsidy, the employee's household income must be more than 100% of the federal poverty level (for 2013, this is $23,550 for a family of four), but less than 400% of the federal poverty level (for 2013, this is $94,400 for a family of four), and must not be covered under his employer's health plan.
Outstanding Issues
There are still some outstanding issues that still need to be clarified and addressed. The information reporting requirements by the employers to the IRS has not been fully addressed. The proposed regulations do not have specific rules to demonstrate that an offer of coverage was made to the employee. They only state that the employees be given an effective opportunity to accept coverage, as well as an opportunity to decline the offer of coverage if it does not meet the law's standard for affordability or minimum value.
The Department of Health and Human Services is expected to issue regulations to establish a procedure to notify large employers that an employee was certified to be eligible for a premium tax credit to purchase health insurance on an exchange.
Steps to Take Now
- Employers need to assess their workforce. Carefully review the number of full time, part time employees, and contract workers that are currently working. Also, review workers that could be reclassified as employees for purposes of the mandate. The IRC Section 4980H Proposed Regulations provide guidance and safe harbors for determining if an employee will be considered a full time employee.
- Review your reporting capabilities. The monetary penalty will be assessed on a monthly basis. Employers will need to know the composition of their workforce month by month.
- Learn about the health insurance exchanges. Exchanges that will be put in place in 2014 will also provide opportunities for employers as well as employees to acquire coverage.
- Assess your health insurance costs and coverage. You should review your current coverage to determine if they will comply with the coming requirements.
- Watch for developments. The rules may change or get updated.
For more information on this topic please contact a member of our health care team in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040 or visit us on the Web at uhy-us.com.
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