Patient Protection and Affordable Care Act

Transition Relief for Employers and Individual Mandate

In Brief

Under the new U.S. healthcare laws, employers can choose to continue to offer healthcare coverage to their workforce-or force employees to enroll in the government-regulated marketplace to pinchase a healthcare plan. This article discusses the transition issues for employers regarding the implementation of the Patient Protection and Affordable Care Act (ACA).

Tax incentives for employer-sponsored insurance (ESI) were first instituted during World War II in order to attract qualified workers during a wage freeze, but decades later they still represent the leading source of funding for healthcare coverage in the United States. The Transamenca Center for Health Studies conducted a senes of surveys on healthcare coverage between July 2013 and July 2014 (https://www.transamericacenterforhealthstiidies.oig/docs'default-sourcetiesearclVfinaltchs-2014-report-one-year-m-americans-res pond-to-the-aca.pdf?sfvrsn=2). According to its findings, as of July 2014, 67% of Americans were covered by private health insurance, with 56% of those Americans having coverage through an employer-sponsored healthcare plan (p. 47). the percentage of Americans without health insurance fell from 22% in November 2013, before the mandate took effect, to 15% as of July 2014, after the mandate's implementation (p. 11). In addition, of the 64.2% of Americans covered by private health insurance, the income distribution of the participants varied significantly. Approximately 73.7% of private health insurance participants (148 million of the 201 million total) had adjusted gross income of 250% or more of the federal poverty line (http://www.census.gov/content/dam/Census/libraiy/publications/2014/de mo/p60-250.pdf, p. 3, and Table 4, p. 9).

One of the aims of the ACA is to increase the number of individuals with access to affordable healthcare through an ESI plan; however, the extent to which employers wall continue to offer coverage wall depend on the economic impact once the ACA is fully implemented (http://www. forbes.com/sites/theapothecary/2014/02/26/ obamacares-cadillac-tax-could-lielp-reducethe-cost-of-health-care/) [P. L. 111-148, 124 Stat. 119 (2010)], as amended by the Health Care and Education Reconciliation Act of 2010 (HCERA), (P. L. 111-152, 124 Stat. 1029). To understand the economic impact of the ACA on individuals and employers in 2015 and beyond, one needs to understand the ACA's individual and employer mandates, as well as the applicable transition rules.

The Individual Mandate

The ACA included a mandate that eveiy individual must have healthcare coverage effective Januaiy 1, 2014 [IRC section 5000A (a)]. Beginning with tax year 2014, individuals are required to report whether they had minimum essential coverage for the full year on Form 1040, line 61. If they did, they check a box. Otherwise, they aie required to attach Form 8965 to report an exemption they were granted by the marketplace because their income falls below a certain threshold. If they were not granted an exemption, they must report their individual responsibility payment on line 61 of Form 1040, which is based on the number of months they or their dependents failed to have minimum essential coverage. the individual responsibility payment is calculated using a worksheet included in the Instructions to Form 8965.

Individuals must enroll in an ESI plan or select a coverage option through an "exchange," which allows those who do not have access to coverage, or affordable coverage, to enroll in a government-regulated marketplace to purchase healthcare coverage. Individuals who purchase their healthcare coverage through an exchange may receive a subsidy through a premium tax credit, which is based on household income.

If individuals opt out of healthcare coverage, the government will have the right to impose a penalty for their failure to comply with the mandate [IRC section 5000A(b)]. If the taxpayer or any of Ins dependents does not have minimum essential coverage for any month, then the penalty for transition year 2014 is generally the greater of $95 for each such adult and $47.50 for each child under age 18 (subject to a maximum amount of $285 per family), or 1% of applicable household income. The amounts increase for transition year 2015, and again for 2016, and aie adjusted for inflation thereafter. (See Exhibit 1)

The Employer Mandate

Employers can also be assessed a penalty if they do not provide certain healthcare coverage to then employees. If a large employer has at least one full-time employee whose household income is between 100% and 400% of the federal poverty level and who receives a premium tax credit for exchange coverage, the employer must offer coverage to its full-time employees that is deemed affordable and provides minimum value. Otherwise, an exase tax, or penalty, may be assessed (IRC section 4980H). The excise tax is often referred to as the "shared responsibility" or the "pay-or-play" requirement. It is generally not effective until Januaiy 1, 2015, meaning there wall be no excise tax assessed for 2014 (Notice 2013-45).

Large Employers

Before an exase tax can be assessed, an employer must be considered large. In order to properly identify whether or not the employer meets this definition, the company must first determine which entities within the organization structure are required to be aggregated, including analyzing parent and brother-sister common ownership. All employers that aie members of a controlled group are considered a single employer for purposes of determining large employer status [IRC section 4980H(c)(2)(C)]. Even though the aggregation of the controlled group is used to determine whether or not an employer is considered large, each company is considered separately when determining whether or not the appropriate coverage has been offered and thus whether an excise tax will be assessed.

For the 2016 taxable year and forward, a large employer comprises on average at least 50 full-time employees, including fulltime equivalent employees, generally determined using the busmess days during the preceding calendar year [IRC section 4980H(c)]. Companies wall need to use a 12-month calculation penod from Januaiy 1, 2015, through December 31, 2015, in order to detennme if they are considered a large employer for 2016. A full-time employee includes any employee who works on average 30 hours or more each w^eek [IRC section 4980H(c)(4)]. Full-time equivalent employees also must be included when determining whether or not an employer is considered large. The number of full-time equivalents is equal to the total horns of service performed by part-time employees in a month divided by 120 [IRC section 4980H(c)(2)(E)].

When calculating the number of fulltime employees and full-time equivalents for the testing period, the taxpayer should disregard any fraction that arises [Treasury Regulations section 54.4980H-2(b)(l)]. If it is determined that the number of fulltime employees exceeds 50, the taxpayer should then evaluate whether the seasonal exception applies. If the employer's workforce exceeds 50 full-time employees for 120 days or less and the employees in excess of 50 are considered seasonal workel's, then the business will not be considered a large employer [IRC section 4980H(c)(2)].

The definition of a large employer is more lenient for the 2015 taxable year due to transition rehef. For the 2015 taxable year, employers may not be considered large even if they employ between 50 and 99 full-time employees. In addition, when trying to measure whether or not 100 or more employees are employed in 2014, thus meeting the large employer definition for 2015, employers may adopt a measurement period of less than 12 consecutive months, but not less than six consecutive months (Treasury Decision 9655, 02/13/2014).

Thus, whether a busmess is considered to have large employer status could vary between the 2015 and 2016 taxable year. Assume that company A employs 24 fulltime employees, and 8 part-time employees who work 650 hours total each month, during the testing peiiod. In addition, Company A owns 80% of company B. Company B employs 22 full-time employees. For purposes of determining whether company A and B are large employers, the companies must be combined, as they are in a controlled group. Therefore, company A and B have 46 fulltime employees (24+22). In addition, company A has 5.51 full-time equivalents (650 hours/120). For the 2016 taxable year, both company A and company B qualify as large employers because, disregarding the fraction that anses, they have a total of 51 employees (46+5.51). However, company A and B would not qualify as large employers for 2015 as they employ less than 100 employees.

Excise Tax

Penalty for failing to offer coverage If it is determined that an employer is large and the employer does not offer coverage, or offers coverage to less than 95% of its full-time employees and their dependents, then an excise tax may be assessed, equal to the applicable payment amount times the number of all full-time employees, if at least one full-time employee is receiving a premium assistance tax credit [IRC section 4980H(a)]. There is some transition rehef for the 2015 taxable year, since the full-time employee coverage offered by the employer must be less than 70% before the excise tax is assessed. For the 2015 taxable year, the applicable amount is $2,000 per year, or $166.67 for any month. In addition, employers who do not offer coverage may subtract the first 30 workera when calculating their excise tax, resulting in an excise tax for each full-time employee in excess of 30 for the 2016 taxable year going forward-and, as part of transition relief, m excess of 80 for 2015. (See Exhibit 2.)

Example of a penalty for failing to offer coverage Assume that a corporation has 120 full-time employees, but only offers affordable minimum value health care coverage to 30 of the employees. Of the 90 who aie not offered coverage, at least one full-time employee goes to the marketplace and qualifies for a subsidy in 2015. Under the transition núes for 2015, the corporation has failed to provide coverage to 70% of its full-time employees, or 84 persons (70% x 120). Assuming the facts remaní constant throughout the year, the excise tax for failing to offer coverage would be assessed on 40 employees (120 - 80) and create a penalty of $80,000 ($2,000x40).

Using the same fact pattem as above in the 2016 tax year, where the transition núes are no longer m effect, the penalty would rise to $180,000 ($2,000x90). The corporation would still be deemed as failing to provide coverage because only 30 employees had acceptable health coverage, instead of the required 114 (95%x 120). In addition, in 2016, only 30 workers are subtracted when determining the number of full-time employees utilized when calculating the excise tax (120-30). If none of the employees in these examples qualify for a subsidy when using the exchange, then the employer will not be assessed with a penalty for failing to offer coverage.

Penalty for offering noncompliant coverage An excise tax still may be assessed, regardless of whether a large employer offers coverage to their full-time employees, if the coverage is unaffordable to certain full-time employees or does not provide a minimum value [IRC section 4980H(b)]. Coverage will be deemed affordable to a full-time employee if the employee's required contribution for the calendar year, for the employer's lowest cost self-only coverage that provides minimum value, does not exceed 9.5% of the employee's annual household income [IRC section 36B(c)(2)(C)(i)]. As most employers do not know their employees' household income, the employer can take advantage of one or more of the three affordability safer harbor tests provided in Treas. Reg. section 54.4980H-5(e)(2). (See Exhibit 3.)

Not only must the employer-provided plan be affordable to ensure that a penalty is not assessed, but the employer's plan must also be deemed as providing minimum value coverage. Minimum value coverage is met if the health plan payment covers 60% or greater of the total allowed cost of benefits that are expected to be incurred [IRC section 36B(c)(2)(C)(ii)]. Final regulations announced in February provided further clarification as to how minimum value coverage would be defined.

The Department of Health and Human services stated that an employer sponsored plan would be deemed as providing minimum value only if the percentage of the total allowed costs of benefits provided under the plan was greater than or equal to 60%.

Based on proposed regulation issued in May of 2013, employers could evaluate whether minimum value was met through the use of the minimum value calculator that was developed by the Department of Health and Human Services (the calculator is available at http://cnis.gov/ccrio/resources/regulations-and-guidance/index.html). However, it was soon identified that employers could still meet the determination of minimum value through the use of the calculator without providing substantial coverage for hospitalization and physician services. The final rule announced that minimum value will not be met if the plan does not offer substantial coverage of inpatient hospital and physician services. Even so, it is still unclear how substantial will be defined.

In addition, it has been proposed that certain plans are automatically deemed to meet the minimum value coverage. This includes a plan with a $3,500 medical and drug deductible (which is integrated), 80% plan cost-sharing, and a $6,000 maximum out-of-pocket limit for cost sharing among employees (http://www.irs.gov/uac/Newsroom/Ques tions-and-Answers-on-Employer-SharedResponsibility-Provisions-Under-theAffordable-Care-Act).

If the employer coverage is provided but is unaffordable or does not provide minimum value, the excise tax generally is calculated by multiplying the number of full-time employees who utilize the Exchange and receive a premium assistance tax credit by $3,000, or $250 per month, for the 2015 taxable year [IRC sec- tion 4980H(b)]. the maximum amount of excise taxes for unaffordable or no minimum value coverage cannot exceed the IRC section 4980H(a) penalty, or $2,000 multiplied by the total number of full-time employees (less the 80-employee reduction for 2015 or 30-employee reduction for 2016 onward).

Example of a penalty for offering noncompliant coverage Assume that a corporation has 120 full-time employees and provides minimum value coverage to 115 of the employees in 2016. the minimum value coverage is unaffordable to 25 of these 115 employees. Of the 25 employees who have unaffordable coverage, eight of the employees go to the exchange and receive a subsidy. Of the five employees who do not receive any coverage, two of them receive a subsidy from the exchange. The failure to offer coverage would not apply in 2015 or 2016 because the corporation offered coverage to at least 84 employees (70%xl20) and 114 employees (95% x 120), respectively. The failure to offer compliance coverage will be assessed, as 10 full-time employees who were not offered minimum value coverage were able to receive a subsidy when using the exchange. Provided the number of employees using the Exchange remains constant throughout the year, the penalty assessed would be $30,000 ($3,000x10). A significant difference between the penalty for failing to offer coverage versus the penalty related to lioncompliance is that the penalty for failing to offer coverage will be assessed on all fulltime employees (less the 80/30 employees), even if as little as one employee goes to the exchange and receives a subsidy. Instead, the penalty related to noncompliance is only assessed on the number of employees who did not receive acceptable coverage that went to the exchange and received a subsidy.

Example of the relationship between penalties for failing to offer coverage versus noncompliant coverage Assume the same facts as the example above, but instead assume 23 of the 25 employees are not offered affordable coverage, go to the exchange, and receive a subsidy. In addition, all five five full-time employees who aie not offered coverage qualify for a subsidy through the exchange.

the penalty for failing to offer coverage still does not apply for 2015 or 2016, as the employer offers coverage to at least 84 and 114 full-time employees, respectively. However, the failure to offer compliant coverage would still be assessed. Provided the number of employees who utilize the exchange and receive subsidies remains constant for the year, the penalty would increase to $84,000 (28x$3,000). However, the penalty for offering noncompliant coverage cannot be greater than the penalty for failing to offer coverage. Therefore, the penalty in this example would be limited to $80,000 [(120- 80)x$2,000],

These examples illustrate the need for large employers to track the number of fulltime employees they will be deemed to have in a year, and also estimate the number of full-time employees who will not receive compliant coverage and will most likely go to the exchange and qualify for a subsidy. If none of the employees qualifies for a subsidy on the exchange (e g., those employees that go to the exchange that do not qualify for Medicaid but earn less than 400% of the Federal Poverty Line), then neither penalty can be assessed. However, as soon as one fulltime employee is provided with a subsidy through the exchange and a large employer does not offer the appropriate amount of coverage to its full-time employees, the large employer opens itself up to an assessment of $2,000 for every full-time employee (less 80/30 employees) regardless of coverage. Depending on the number of full-time employees in a large corporation that will be able to receive an exchange subsidy, and the employer costs for employee coverage, it may be better to offer some type of coverage to 95% of their full time employees (or 70% in 2015) that could be unaffordable or not provide minimum value to some.

Compliance Options for Large Employers

In general, large employers have three options when determining the healthcare coverage to be provided to full-time employees and analyzing the implications of the excise tax. The fust option employers may choose is to not offer minimum essential coverage to their full-time employees, allowing employees to obtain coverage through an exchange and receive a premium tax credit if they qualify. An excise tax of $2,000 would be assessed for the number of full-time employees over 30 in the 2016 taxable year going forward. However, for the 2015 taxable year an employer would have to have full-time employees in excess of 80 before the $2,000 penalty would be assessed.

The second option would be for employers to offer coverage that may not be affordable or may not provide minimum value coverage to all full-time employees. This would allow certain employees to be covered by the exchange and receive a premium tax credit. An excise tax of $3,000 would be assessed; however, it would only apply to employees who go to the exchange and qualify for a tax credit, and the total excise tax assessed could not exceed the IRC section 4980H(a) penalty that would be assessed if healthcare coverage were not offered.

Lastly, the employer may choose to offer minimum essential coverage that is affordable and provides minimum value coverage. No excise tax will be assessed, as the employer coverage plan meets the minimum value coverage and is affordable such that no full-time employee will qualify for the premium tax credit. (See Exhibit 4.)

Small Employers

While large employers are subject to the "pay or play" requirements, small employers, if qualified, may avail themselves of the Small Business Health Care Credit. The credit is intended to help certain small businesses-ones that employ less than 25 full-time equivalent employees and whose workers earn low to moderate income-afford the cost of an employer sponsored healthcare plan. It does so in two ways: First, it provides them with a credit that, to the extent it is not used to offset taxes in the current tax year, can be carried back or earned forward to other tax years. Second, it allows a business expense deduction for the amount of premiums they pay in excess of the credit. It is specifically designed to encourage small employers to provide coverage to their employees for the first time or maintain coverage that is already in place (http://www.irs. gov/uac/Affordable-Care-Act-TaxProvisions).

In order to qualify for the credit, the business's employees must earn an average wage of less than $50,000, effective 2014 (an amount now adjusted for inflation). In addition, the small business must pinchase a health insurance plan for its employees through the Small Business Health Options Program (SHOP) Marketplace, unless an exception applies, and cover at least half the cost of an individual policy for each employee. For 2014 and after, the maximum credit has been increased to 50%, up from the previous 35% allowed for tax years 2010 through 2013 (http://www.irs.gov/uac/SmallBusiness-Health-Care-Tax-Credit-forSmall-Employers). The amount of the actual credit the business is entitled to dann is determined using a sliding scale and depends on the size of the business. Those that have more than 10 full-time equivalent employees or pay an average wage of more than $25,000 (adjusted for inflation beginning in 2014) will be entitled to a reduced credit. Those with 10 or fewer full-time equivalent employees and an average wage of $25,000 or less will be entitled to the maximum credit of 50%. Those with more than 10 full-time equivalent employees or that pay an average wage in excess of $25,000 (adjusted for inflation) will be entitled to a reduced credit (http://www.irs.gov/uac/Small-BiismessHealth-Care-Tax-Credit-for-SmallEmployers.) The $25,000 threshold is subject to inflation. Tims, the credit begins to phase out for tax year 2014 when the average wage exceeds $25,400, and for tax year 2015 when the average wage exceeds $25,800 (http://www.irs.gov/ uac/Newsroom/In-2015,-V arious-T axBenefits-Increase-Due-to-InflationAdjustments). For 2014, the credit is completely phased out when average wages exceed $50,800 (http://www.irs.gov/ Affordable-Care-Act/Individuals-andFamilies/Changes-to-Small-BusinessHealth-Care-Tax-Credit). In addition, effective 2014 and after, employers can claim the credit for only two consecutive tax years begriming with tax year 2014 (http ://www.irs. gov/uac/Small-BusmessHealth-Care-Tax-Credit-for-SmallEmployers).

What Will the Future Hold?

Employers are still facing uncertainty as to how they will move forward in addressing the effects of the ACA. Even though employers are implementing strategies to address the ACA's effect on employer-sponsored healthcare coverage, many of them do not fully understand the law. In addition, the recent changes in the political landscape may result m an adjustment to the current policy. Although an entire repeal of the law is unlikely, modification of the law is more plausible with a Republican-controlled Congress.

The only certainty is that the landscape for healthcare coverage is changing, and both employers and employees will need to understand the new requirements and transition rales implemented by the ACA in order to make an informed and economical decision. ?

Lynn Mucenski-Keck, CPA, MST, is an assistant professor of accounting at St. John Fisher College, Rochester, N.Y. Prior to joining the faculty, she worked for both Bausch & Lomb and Carestream Health, as well as Ernst & Young and Deloitte. Kari A. Smoker, JD, MST, is an assistant professor of accounting at the State University of New York, The College at Brockport.