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[toggle title=”Applicable Large Employer (ALE)” open=”no”]Very generally, an employer is considered an ALE for a calendar year if it employed an average of at least 50 full-time employees (FTEs) and full-time equivalents (FTEEs) on business days during the preceding calendar year.

There are control group considerations as well.

Why is this important? The employer shared-responsibility penalty rules (IRC 4950H) use the concept of an ALE in order to determine when a penalty is triggered, but not the amount of the penalty. If you are not an ALE, you most likely do not need to worry about ACA penalties and reporting. [/toggle]

[toggle title=”Employer Shared Responsibility (ESR)” open=”no”]Also referred to as “pay or play” or loosely, the “Employer Mandate”. The public policy reason behind the ESR is:

  1. Individuals who are not covered by health insurance but nonetheless receive care (e.g., emergency rooms) trigger a public cost that is met either by increased premiums on others or taxes (government programs).
  2. If an ALE does not offer health benefits to their FTEs, the employer shifts the cost of the uninsured to others.
  3. In order to ameliorate this and discourage such cost shifting, ACA imposes penalties (under certain circumstances) on certain employers that either do not offer coverage or offer coverage that is inadequate and/or unaffordable.

Why is this Important? Keeping this basic public policy idea in mind helps to focus on the purpose and objectives of the rules. Employers are subject to certain requirements under the ACA and should know whether these requirements are applicable to them, and if so, whether they are in compliance. Linked with these requirements is an additional requirement: a reporting requirement, i.e., 6055, 6056. [/toggle]

[toggle title=”Essential Health Benefits (EHB)” open=”no”]This is a term that can be easily confused with minimum essential coverage (MEC), but has a very different meaning. While employers may incur a penalty if their plans do not provide MEC, employers are not responsible under ACA for ensuring that the health benefits they offer include any of the EHB. All non-grandfathered, insured plans in the individual and small group markets – on and off the Health Insurance Marketplace are required to provide EHBs, with the start of plan years that begin on or after January 1, 2014. No other plans are required to provide EHBs. However, if they cover any benefits defined as EHBs, they cannot impose any annual or lifetime limits on the dollar value of those benefits. [/toggle]

[toggle title=”Full-Time Employee (FTE)” open=”no”]An employed person who averages 30 or more hours of service per week or 130 hours per month. This definition of employee is based on the common-law definition of employee.

Why is this Important? The number of full-time employees is used in determining several thresholds of ACA applicability and ACA penalty determination. In addition, the reporting rules generally take into account only FTEs. The reporting rules also require large employers to provide certain information each year to each of their full-time employees in regard to the health insurance coverage offered (or not offered) to the employee and his or her dependents and their eligibility for premium tax credits. [/toggle]

[toggle title=”Full-time Employee Equivalent (FTEE) ” open=”no”]Calculating full-time equivalents. In order to determine whether the employer meets the 50-employee threshold for any calendar year, it must average the number of employees across the months in the year:

  • Determine the number of full-time employees who average at least 30 work hours a week or 130 work hours in a calendar month.
  • Calculate the number of FTEEs by adding total monthly hours of part-time employees divided by 120.
  • Add the two numbers together to get the total number of full-time-equivalent employees for the month.

Add all calendar month totals together. Divide this number by 12 to determine the average monthly full-time-equivalent employee count.

Why is this Important? Under ACA, part-time employees count towards the calculation to determine whether the employer is an ALE (meeting the 50 FTE/FTEE threshold), so it is necessary to calculate the number of full-time equivalents (FTEEs) that they represent. However, part-time employees are not included in calculations of tax penalties. Part-time employees (or child dependents) receiving premium subsidies through health insurance exchanges will not trigger tax penalties.][/toggle]

[toggle title=”Minimum Essential Health Coverage – Employer requirement” open=”no”]In order to avoid the coverage penalty, an ALE is required to offer minimum essential health coverage to all but five percent of its full-time employees and their dependents or to all but five full-time employees and their dependents, whichever is greater. Most any major medical health insurance will satisfy this standard. An ALE is not required to offer a specific type or level of benefits to avoid the coverage penalty.[/toggle]

[toggle title=”Minimum Value (MV)” open=”no”]A plan provides Minimum Value or “MV” if the percentage of “allowed costs” expected to be paid by the plan (and not the employees) in the aggregate is at least 60% of such costs.

Employees usually pay costs via deductibles and co-payments. These payments are sometimes called “cost sharing” or “out of pocket”. The higher the employees’ cost sharing, the lower the plan’s expected share of the total allowable costs.

This determination is made on an aggregate basis tested against national utilization data and is not on a plan specific basis. Basically, if a plan imposes a $1,000 deductible and the national data show that 90% of all individuals in the national database incur annual costs of less than $1,000, then most of the total costs of the plan would be expected to be paid by employees and therefore the plan may in fact not provide MV. The Department of Health and Human Services (HHS) has provided a calculator that is found at http://www.cms.gov. If the MV is not at least 60%, a plan sponsor will need to decide whether to lower employee costs or be subject to a shared responsibility liability.[/toggle]

[toggle title=”Minimum Essential Coverage (MEC) – Individual requirement” open=”no”]This is defined in a rather unusual way in the Internal Revenue Code (Section 5000(A)(f)), that is, by example. Basically MEC is the type of coverage an individual needs to have to meet the individual responsibility requirement under the Affordable Care Act. This includes individual market policies, job-based coverage, Medicare, Medicaid, CHIP, TRICARE and certain other coverage. Health insurance coverage that meets the minimum benefits standard of the small or large-group market within the state is considered to offer minimum essential coverage (MEC). This includes most broad-based medical coverage typically provided by employers. It would not include certain specific coverage, such as accident or disability income, stand-alone dental or vision coverage, or workers’ compensation insurance. [/toggle]
[toggle title=”Part-Time Employee” open=”no”]An employed person who averages fewer than 30 hours of service per week or 130 hours per month.[/toggle]

[toggle title=”Penalties” open=”no”]Note that there is a one-year delay in enforcement of the Employer Shared Responsibility (ESR) provisions of the Affordable Care Act (ACA) for employers with 50 to 99 FTEs until 2016, although the reporting requirements still apply (6055 and 6056).

Employers with 100 or more full-time employees are still subject to the ESR provisions in 2015; however, those employers with 100 or more full-time employees who offer coverage to at least 70 percent of this workforce instead of the previous standard of 95 percent can avoid potential penalties. This percentage goes back up to 95 percent in 2016.

Two Types of Penalties under ESR

There are two types of penalties under ESR (IRC Section 4980H) for ALES for noncompliance: the Coverage Penalty, sometimes called the Section 4980H(a) or “(a)” or “$2000” penalty, and the Affordability Penalty / Minimum Value Penalty, sometimes called the Section 4980H(b) or “(b)” or “$3000” penalty.

(1) Coverage Penalty.  If a large employer does not offer minimum essential coverage (MEC) to all or substantially all of its full-time employees and their children under 26 years of age, Section 4980H(a) imposes a penalty in the amount of $167 per month (or $2,000 per year, if the employer does not offer the coverage for any of the 12 months during the year) multiplied by the large employer’s total number of FTEs, not taking into account the first 30. Therefore, if an ALE has 200 FTEs, the (annual) amount of the potential Coverage Penalty for the employer would be $340,000 [(200-30) x $2,000].

Important: Remember that the penalty is assessed only if one FTE accesses the marketplace (exchange) and receives a premium tax credit. If that occurs, the penalty is calculated based on the employer’s total number of employees, not just the employee who accessed the marketplace-exchange. Thus, the coverage penalty can be quite substantial.

(2) Minimum Value/Affordability Penalty. Even if an ALE avoids the Coverage Penalty, the ALE may still be subject to a Section 4980H(b) Penalty, the Minimum Value Penalty or the Affordability Penalty.

Minimum Value Penalty
A penalty is imposed on the ALE if it does not offer its FTEs minimum essential coverage (MEC) that provides minimum value, thus, the “Minimum Value Penalty”. Briefly, MEC does not provide MV unless it covers at least 60 percent of the costs associated with the relevant benefits. In the event an ALE offers MEC that does not provide minimum value, the amount of the Minimum Value Penalty is $250 per month (or $3,000 annually) for each of the employer’s FTEs who qualifies for and obtains a premium tax credit.

Presumably, most commercial insurers will not issue a plan that does not provide minimum value, unless the ALE that sponsors the plan anticipates paying the Minimum Value Penalty.

Affordability Penalty.
Section 4980H(b) also imposes a penalty (the “Affordability Penalty”) on an ALE with respect to any FTE, (i) to whom the ALE offers MEC that is not affordable; and (ii) who qualifies for and obtains a premium tax credit. For this purpose, Section 4980H(b) provides that MEC offered by the ALE will be deemed to be affordable to each of the employer’s FTEs unless the premium for self-only coverage under the ALE’s lowest cost plan option is greater than 9.5 percent of the employee’s household income. The affordability test must be applied with respect to each of a ALE’s FTEs, regardless of whether the employee takes coverage. Moreover, in each case, the standard is the cost for self- only coverage, regardless of whether the employee is eligible for family coverage, and regardless of whether the employee takes any coverage. The cost of family coverage is not taken into account. An ALE most likely will not know its full-time employees’ household income. With this in mind, Treas. Reg. § 54.4980H-5(e) permits an ALE to rely on a FTE’s individual income (based on the employee’s income shown on IRS Form W-2, the employee’s rate of pay, or the applicable federal poverty line) as a safe harbor to apply the affordability test. While obviously not a reliable predictor of household income, this limited safe harbor nonetheless may enable an ALE to rule out the Affordability Penalty with respect to many, if not most or all, of its FTEs.

Important: Unlike the coverage penalty, these penalties are not determined based on the number of FTEs. They are based on the one FTE who accesses the marketplace-exchange and receives a premium tax subsidy.

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