Pay or Play Options of ACA Employer Mandate

Absolute compliance is normally the highest priority for a professional in day-to-day activities. However, employers may decide the cost to comply with the Affordable Care Act (ACA) is too great and choose to pay the penalty, at least until software automates the process.

The subject line of an email sent to business clients before the end of the year could possibly read: “Attention applicable large employers: the ACA employer mandate penalties are here.” The body of the message could read: “The Affordable Care Act (ACA) (Code Secs. 6055 and 6056) includes an Employer Shared Responsibility Provision, which mandates all businesses with over 49 full-time equivalent employees (FTE) offer minimum health insurance at an affordable cost to at least 95 percent of their FTEs and dependents (up to age 26), or else pay a penalty. There are exceptions. Our firm is ready to help you assess your responsibility under the ACA employer mandate.”

Questions are already proliferating regarding ACA’s effect on employers. This article can serve as an overview, providing short answers for clients before you dig deep into the details to provide exact answers. It’s what you’re good at and why your clients depend on you.

There are four big questions:

1. How much is the penalty?
2. What are the exceptions?
3. Am I a large employer?
4. How do I calculate FTE employees?

>Once they know the answers to these questions, your applicable large employer (ALE) clients may then decide whether to pay penalties or provide health insurance coverage.

How Much is the Penalty?

Section 4980H imposes a penalty referred to as an assessable payment on ALEs. This penalty is imposed if certain requirements relating to the provision of healthcare coverage to FTEs are not met, and one or more FTEs claim a premium tax credit. If an employer does not offer its FTEs insurance, and at least one eligible FTE receives a federal credit or subsidy, the employer will pay $2,000 per employee (minus 30 employees). If an employer does offer insurance, but at least one employee receives a federal credit or subsidy, the employer pays the lesser of $3,000 per subsidized employee, or $2,000 per employee (minus 30 employees).

What Are the Exceptions?

For 2015, the penalty is $2,000 for each FTE, with the exception of the first 80 employees. For 2016 and beyond, the penalty exists for each FTE, with the exception of the first 30 employees.

Smaller ALEs with 50 to 99 FTEs are not required to offer health insurance to their FTEs until Jan. 1, 2016. The ACA does not require employers with 49 or fewer FTEs to offer health insurance to their FTEs.

Am I a Large Employer?

There are many ways to work with clients. A major consideration is to determine if they are an applicable large employer, and if so, what coverage must be offered to their employees and whether the policy offered is affordable.

Employers with 100 or more FTEs, and average annual wages above $250,000, are already mandated to offer insurance to at least 70 percent of their FTEs in 2015. They are required to offer coverage to at least 95 percent of their FTEs in 2016.

How Do I Calculate FTE Employees?

Some of the first elements important for employers to understand about ACA are the implications of key terms: 1) FTEs subject the employer to the provisions of ACA, and 2) FTEs are the employees to whom the employer must make the insurance available.

An FTE is one who is employed for an average of at least 30 hours per week. [Reg. 54.4980H-1(a)(21)] ACA defines an FTE as an employee whose hours of service to the employer equal at least 130 hours a month for more than 120 days in a year. A large employer must offer affordable health insurance to all of its FTEs.

First, identify all employees who are FTEs because they average 30 hours per week or they work 130 hours per month. To this number of employees, add up the total hours of service for which the employer pays wages to employees during the month (but not more than 120 hours for any employee), and divide by 120. Most employers are going to need to know the FTE count by month because they use the Look-Back Measurement Method.

Concluding Advice

Tax professionals can advise ALE employer clients in several areas. The first piece of guidance is to determine whether they are affected and offer proactive advice on how to calculate FTEs. Another guidance area is explaining the affordability percentages for 2015. It is expected that ALE clients will need help gathering information necessary to complete Form 1095-C.

For further research, refer to the Treasury Department final rule and related fact sheet. Although posted on the IRS forms site on Aug. 6, 2015, on Oct. 5, 1095-C still displays a caution as a draft form. The 1095-C form may be viewed here.

Editor’s Note: Intuit has an Affordable Care Act resource website, designed for tax professionals to understand the Act and its consequences for employers and clients.