The Patient Protection and Affordable Care Act (ACA, P.L. 111-148), as amended, increases access to health insurance coverage, expands federal private health insurance market requirements, and requires the creation of health insurance exchanges to provide individuals and small employers with access to insurance. To ensure that employers continue to provide some degree of coverage, ACA includes a “shared responsibility” provision. This provision does not explicitly mandate that an employer offer employees health insurance; however, ACA imposes penalties on “large” employers if at least one of their full-time employees obtains a premium credit through the newly established exchange. Employers are not subject to a penalty if their full- time workers are eligible for Medicaid or CHIP. According to the Congressional Budget Office (CBO), employers are projected to pay $150 billion in penalty payments over a 10-year period.
ACA sets out a two-part calculation for determining, first, which firms are subject to the penalty (e.g., definition of large), and, second, to which workers within a firm the penalty is applied. Because the treatment of part-time and seasonal workers differs across these two parts of the calculation, this has led to some confusion among policymakers and employers. For example, part-time employees are included in what is termed a full-time equivalent calculation to determine if an employer has at least 50 full-time equivalent employees (FTEs) and is thus considered large for purposes of applying the penalty. However, the actual penalty, if applicable, is levied only on full-time workers (those working at least 30 hours a week on average). This report discusses these definitions and the application to the employer penalty in greater detail.
The potential employer penalty applies to all common law employers, including an employer that is a government entity (such as federal, state, local, or Indian Tribal government entities) and an employer that is a non-profit organization that is exempt from federal income taxes. If a franchise is owned by one individual or entity, employees in each of the franchises must be aggregated to determine the number of both full-time equivalent and full-time employees.
The actual amount of the penalty varies depending on whether an employer currently offers insurance coverage or not. In order for employers who do provide health insurance coverage to avoid paying a penalty, health insurance coverage that is both affordable and adequate must be offered to the employee and his/her dependents. Dependent is defined as a child of an employee who has not attained age 26. Dependent does not include a spouse. Coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5% of the employee’s household income for the taxable year. However, IRS has provided a safe harbor for employers to use the employee’s W-2 income for this calculation (since most employers do not readily have information on an employee’s household income). A health plan is considered to provide adequate coverage if the plan’s actuarial value (i.e., the share of the total allowed costs that the plan is expected to cover) is at least 60%. This report provides greater detail on these requirements.
The total penalty for any applicable large employer is based on its number of full-time employees. ACA specified that working 30 hours or more a week is considered full-time. However, the statute did not specify what time period (i.e., monthly or annually) employers would use to determine if a worker is full-time. To address this issue, the Secretary of Health and Human Services (HHS) and the Secretary of Labor have published proposed regulations to provide guidance for employers to use to determine which employees are considered full-time employees for purposes of administering the ACA employer penalty provision. The proposed regulations provide employers some flexibility [...]