FAQs: Employer Shared Responsibility Provisions

Beginning in 2014, the Affordable Care Act (ACA) imposes “pay or play” requirements on large employers. Under these “pay or play” requirements, large employers that do not offer health coverage to their full-time employees, or that offer coverage that is either unaffordable or does not provide minimum value, may be subject to a penalty. This penalty is also referred to as a “shared responsibility payment.”

The Internal Revenue Service (IRS) recently issued the following Questions and Answers on the employer shared responsibility provisions to help employers comply with the “pay or play” requirements.

Basics of the Employer Shared Responsibility Provisions

1.  What are the employer shared responsibility provisions? Starting in 2014, employers employing at least a certain number of employees (generally 50 full-time employees and full-time equivalents, explained more fully below) will be subject to the employer shared responsibility provisions under section 4980H of the Internal Revenue Code (added by the ACA). Under these provisions, if these employers do not offer affordable health coverage that provides a minimum level of coverage to their full-time employees, they may be subject to an employer shared responsibility payment, if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges (Exchanges).

To be subject to these employer shared responsibility provisions, an employer must have at least 50 full-time employees or a combination of full- and part-time employees that is equivalent to at least 50 full-time employees (for example, 100 half-time employees equals 50 full-time employees). As defined by the statute, a full-time employee is an individual employed on average at least 30 hours per week (so half-time would be 15 hours per week).

2.  When do the employer shared responsibility provisions go into effect? The employer shared responsibility provisions generally go into effect on Jan. 1, 2014. Employers will use information about the employees they employ during 2013 to determine whether they employ enough employees to be subject to these new provisions in 2014.

3.    Is more detailed information available about the employer shared responsibility provisions? Yes. Treasury and the IRS have proposed regulations on the new employer shared responsibility provisions. Comments on the proposed regulations may be submitted by mail, electronically or hand-delivered and are due by March 18, 2013.

Which Employers are Subject to the Employer Shared Responsibility Provisions?

4.    I understand that the employer shared responsibility provisions apply only to employers employing at least a certain number of employees? How does an employer know whether it employs enough employees to be subject to the provisions? To be subject to the employer shared responsibility provisions, an employer must employ at least 50 full-time employees or a combination of full- and part-time employees that equals at least 50 (for example, 40 full-time employees employed 30 or more hours per week on average plus 20 half-time employees employed 15 hours per week on average are equivalent to 50 full-time employees). Employers will determine each year, based on their current number of employees, whether they will be considered a large employer for the next year. For example, if an employer has at least 50 full-time employees (including full-time equivalents) for 2013, it will be considered a large employer for 2014.

Employers average their number of employees across the months in the year to see whether they meet the large employer threshold. The averaging can take account of fluctuations that many employers may experience in their workforce across the year. For those employers that may be close to the 50 full-time employee (or equivalents) threshold and need to know what to do for 2014, special transition relief is available to help them count their employees in 2013. The proposed regulations provide additional information about how to determine the average number of employees for a year, including information about how to take account of salaried employees who may not clock their hours and a special rule for seasonal workers.

5.    If two or more companies have a common owner or are otherwise related, are they combined for purposes of determining whether they employ enough employees to be subject to the employer shared responsibility provisions? Yes, consistent with longstanding standards that apply for other tax and employee benefit purposes, companies that have a common owner or are otherwise related generally are combined together for purposes of determining whether or not they employ at least 50 full-time employees (or an equivalent combination of full- and part-time employees). If the combined total meets the threshold, then each separate company is subject to the employer shared responsibility provisions—even those companies that individually do not employ enough employees to meet the threshold. (The rules for combining related employers do not apply for purposes of determining whether an employer owes an employer shared responsibility payment or the amount of any payment.) The proposed regulations provide information on the rules for determining whether companies are related and how they are applied for purposes of the employer shared responsibility provisions.

6.    Do the employer shared responsibility provisions apply only to large employers that are for-profit businesses or to other large employers as well? All employers that employ at least 50 full-time employees or an equivalent combination of full- and part-time employees are subject to the employer shared responsibility provisions, including for-profit, non-profit and government entity employers.

7.    Which employers are not subject to the employer shared responsibility provisions? Employers who employ fewer than 50 full-time employees (or the equivalent combination of full- and part-time employees) are not subject to the employer shared responsibility provisions. Additionally, an employer with at least 50 full-time employees (or equivalents) will not be subject to an employer shared responsibility payment if the employer offers affordable health coverage that provides a minimum level of coverage to its full-time employees.

8.    Are companies with employees working outside the United States subject to the employer shared responsibility provisions? For purposes of determining whether an employer meets the 50 full-time employee (or full-time employees and full-time employee equivalents) threshold, an employer generally will take into account only work performed in the United States. For example, if a foreign employer has a large workforce worldwide, but less than 50 full-time (or equivalent) employees in the United States, the foreign employer generally would not be subject to the employer shared responsibility provisions.

9.    Are companies that employ U.S. citizens working abroad subject to the employer shared responsibility provisions? A company that employs U.S. citizens working abroad generally would be subject  to the employer shared responsibility provisions only if the company had at least 50 full-time employees (or the equivalent combination of full- and part-time employees), determined by taking into account only work performed in the United States. Accordingly, employees working only abroad, whether or not they are U.S. citizens, generally will not be taken into account for purposes of determining whether an employer meets the 50 full-time employee (or equivalents) threshold. Furthermore, for employees working abroad, the time spent working for the employer outside of the U.S. would not be taken into account for purposes of determining whether the employer owes an employer shared responsibility payment or the amount of any payment.

Liability for the Employer Shared Responsibility Payment

10.  Under what circumstances will an employer owe an employer shared responsibility payment? In 2014, if an employer meets the 50 full-time employee threshold, the employer generally will be liable for an employer shared responsibility payment only if:

(a)   The employer does not offer health coverage or offers coverage to less than 95 percent of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an Exchange; or

(b)  The employer offers health coverage to at least 95 percent of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee (see question 11) or did not provide minimum value (see question 12).

After 2014, the rule in paragraph (a) applies to employers that do not offer health coverage or that offer coverage to less than 95 percent of their full-time employees and the dependents of those employees.

11. How does an employer know whether the coverage it offers is affordable? If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5 percent of that employee’s annual household income, the coverage is not considered affordable for that employee. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement.

Because employers generally will not know their employees’ household incomes, employers can take advantage of one of the affordability safe harbors set forth in the proposed regulations. Under the safe harbors, an employer can avoid a payment if the cost of the coverage to the employee would not exceed 9.5 percent of the wages the employer pays the employee that year, as reported in Box 1 of Form W-2, or if the coverage satisfies either of two other design-based affordability safe harbors.

12. How does an employer know whether the coverage it offers provides minimum value? A minimum value calculator will be made available by the IRS and the Department of Health and Human Services (HHS). The minimum value calculator will work in a similar fashion to the actuarial value calculator that HHS is making available. Employers can input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value by covering at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.

13. If an employer wants to be sure it is offering coverage to all of its full-time employees, how does it know which employees are full-time employees? Does the employer need to offer the coverage to all of its employees because it won’t know for certain whether an employee is a full-time employee for a given month until after the month is over and the work has been done? The proposed regulations provide a method to employers for determining in advance whether or not an employee is to be treated as a full-time employee, based on the hours of service credited to the employee during a previous period. Using this look-back method to measure hours of service, the employer will know the employee’s status as a full-time employee at the time the employer would offer coverage. The proposed regulations are consistent with IRS notices that have previously been issued and describe approaches that can be used for various circumstances, such as for employees who work variable hour schedules, seasonal employees and teachers who have time off between school years.

Calculation of the Employer Shared Responsibility Payment

14. If an employer that does not offer coverage or offers coverage to less than 95 percent of its employees owes an employer shared responsibility payment, how is the amount of the payment calculated? In 2014, if an employer employs enough employees to be subject to the employer shared responsibility provisions and does not offer coverage during the calendar year to at least 95 percent of its full-time employees, it owes an employer shared responsibility payment equal to the number of full-time employees the employer employed for the year (minus 30) multiplied by $2,000, as long as at least one full-time employee receives the premium tax credit. (Note that for purposes of this calculation, a full-time employee does not include a full-time equivalent).

For an employer that offers coverage for some months but not others during the calendar year, the payment is computed separately for each month for which coverage was not offered. The amount of the payment for the month equals the number of full-time employees the employer employed for the month (minus up to 30) multiplied by 1/12 of $2,000. If the employer is related to other employers (see question 5), then the 30-employee exclusion is allocated among all the related employers. The payment for the calendar year is the sum of the monthly payments computed for each month for which coverage was not offered. After 2014, these rules apply to employers that do not offer coverage or that offer coverage to less than 95 percent of their full-time employees and the dependents of those employees.

15. If an employer offers coverage to at least 95 percent of its employees and, nevertheless, owes the employer shared responsibility payment, how is the amount of the payment calculated? For an employer that offers coverage to at least 95 percent of its full-time employees in 2014, but has one or more full-time employees who receive a premium tax credit, the payment is computed separately for each month. The amount of the payment for the month equals the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000. The amount of the payment for any calendar month is capped at the number of the employer’s full-time employees for the month (minus up to 30) multiplied by 1/12 of $2,000. (The cap ensures that the payment for an employer that offers coverage can never exceed the payment that employer would owe if it did not offer coverage). After 2014, these rules apply to employers that offer coverage to at least 95 percent of full time employees and the dependents of those employees.

Making an Employer Shared Responsibility Payment

16. How will an employer know that it owes an employer shared responsibility payment? The IRS will contact employers to inform them of their potential liability and provide them an opportunity to respond before any liability is assessed or notice and demand for payment is made. The contact for a given calendar year will not occur until after employees’ individual tax returns are due for that year claiming premium tax credits and after the due date for employers that meet the 50 full-time employee (plus full-time equivalents) threshold to file the information returns identifying their full-time employees and describing the coverage that was offered (if any).

17. How will an employer make an employer shared responsibility payment? If it is determined that an employer is liable for an employer shared responsibility payment after the employer has responded to the initial IRS contact, the IRS will send a notice and demand for payment. That notice will instruct the employer on how to make the payment. Employers will not be required to include the employer shared responsibility payment on any tax return that they file.

Transition Relief

18. I understand that the employer shared responsibility provisions do not go into effect until 2014. However, the health plan that I offer to my employees runs on a fiscal plan year that starts in 2013 and will run into 2014. Do I need to make sure my plan complies with these new requirements in 2013 when the next fiscal plan year starts? For an employer that, as of Dec. 27, 2012, already offers health coverage through a plan that operates on a fiscal year (a fiscal year plan), transition relief is available.

First, for any employees who are eligible to participate in the plan under its terms as of Dec. 27, 2012 (whether or not they take the coverage), the employer will not be subject to a potential payment until the first day of the fiscal plan year starting in 2014.

Second, if (a) the fiscal year plan (including any other fiscal year plans that have the same plan year) was offered to at least one-third of the employer’s employees (full- and part-time) at the most recent open season, or (b) the fiscal year plan covered at least one quarter of the employer’s employees, then the employer also will not be subject to the employer shared responsibility payment with respect to any of its full-time employees until the first day of the fiscal plan year starting in 2014, provided that those full-time employees are offered affordable coverage that provides minimum value no later than that first day.

So, for example, if during the most recent open season preceding Dec. 27, 2012, an employer offered coverage under a fiscal year plan with a plan year starting on July 1, 2013, to at least one-third of its employees (meeting the threshold for the additional relief), the employer could avoid liability for a payment if, by July 1, 2014, it expanded the plan to offer coverage satisfying the employer shared responsibility provisions to the full-time employees who had not been offered coverage. For purposes of determining whether the plan covers at least one quarter of the employer’s employees, an employer may look at any day between Oct. 31, 2012, and Dec. 27, 2012.

19. Is transition relief available to help employers that are close to the 50 full-time employee threshold determine their options for 2014? Yes. Rather than being required to use the full 12 months of 2013 to measure whether it has 50 full-time employees (or an equivalent number of part- and full-time employees), an employer may measure using any six-consecutive-month period in 2013. So, for example, an employer could use the period from Jan. 1, 2013, through June 30, 2013, and then have six months to analyze the results, determine whether it needs to offer a plan, and, if so, choose and establish a plan.

Additional Information

20. When can an employee receive a premium tax credit? Premium tax credits generally are available to help pay for coverage for employees who:

• Are between 100 percent and 400 percent of the federal poverty level and enroll in coverage through an Exchange;
• Are not eligible for coverage through a government-sponsored program like Medicaid or CHIP; and
• Are not eligible for coverage offered by an employer or are eligible only for employer coverage that is unaffordable or that does not provide minimum value.

21. If an employer does not employ enough employees to be subject to the employer shared responsibility provisions, does that affect the employer’s employees’ eligibility for a premium tax credit? No. The rules for how eligibility for employer-sponsored insurance affects eligibility for the premium tax credit are the same, regardless of whether the employer employs enough employees to be subject to the employer shared responsibility provisions. 

22. Where can employees get more information about Affordable Insurance Exchanges (Exchanges)? HHS is developing the rules for Exchanges.

23. The Treasury Department and the IRS have proposed regulations on the employer shared responsibility provisions that are proposed to be effective for months after Dec. 31, 2013. However, there are certain decisions and actions employers may have to take during 2013 to prepare for 2014. May employers rely on the proposed regulations during 2013 for guidance on the employer shared responsibility provisions? Yes. Taxpayers may rely on the proposed regulations for purposes of compliance with the employer shared responsibility provisions. If the final regulations are more restrictive than the guidance in the proposed regulations, the final regulations will be applied prospectively, and employers will be given sufficient time to come into compliance with the final regulations.