Many penalties face businesses under Obamacare

Associated Oregon Industries
Oregon’s Largest Business Advocate

AOI has begun to receive questions about requirements and penalties that the law imposes on employers. This article attempts to answer some of those questions.

Although the federal health reform law (PPACA) does not explicitly mandate an employer to offer employees acceptable health insurance, most employers with at least 50 full-time equivalent employees will face penalties, beginning in 2014, if one or more of their full-time employees obtains a premium credit through an exchange. An employee may be eligible for such a premium credit either because:

the employer does not offer coverage; or
the employer offers coverage that is either not “affordable” or does not provide “minimum value.”
Who is a Large Employer?

Only a large employer may be subject to penalties regarding employer-sponsored health insurance. A “large employer” is one with more than 50 full-time equivalent employees in the preceding calendar year. To determine whether an employer is a “large employer,” both full-time and part-time employees must be included in the calculation. (Full-time employees are those working 30 or more hours per week, excluding full-time seasonal employees who work for less than 120 days during the year). The hours worked by part-time employees (those working less than 30 hours per week) are included in the calculation of a large employer, on a monthly basis, by dividing their total number of monthly hours worked by 120.

Thus, if a firm has 35 full-time employees (30+ hours), as well as 20 part time employees who all work 24 hours per week (96 hours per month), the part-time employees’ hours would be treated as equivalent to 16 full-time employees, as follows:

20 employees x 96 hours / 120 = 1920 / 120 = 16.

Potential Tax Penalties in 2014 on Large Employers

Regardless of whether a large employer offers coverage, it will be potentially liable for a penalty beginning in 2014 only if at least one of its full-time employees obtains coverage through an exchange and receives a premium credit. Although part time employees are included in the determination of a large employer, they are not included in penalty calculations. An employer will not pay a penalty for any part-time worker, even if that part-time employee receives a premium credit.

Beginning in 2014, employees who are not offered employer-sponsored coverage and who are not eligible for Medicaid or other programs may be eligible for premium credits for coverage through an exchange. These individuals will generally have income between 138% and 400% of the federal poverty level (FPL). Employees who are offered employer-sponsored coverage can only obtain premium credits for exchange coverage if, in addition to the other criteria above:

– they also are not enrolled in their employer’s coverage; and
– their employer’s coverage meets either of the following criteria:
the individual’s required contribution toward the plan premium for self-only coverage exceeds 9.5% of their household income; or
– the plan pays for less than 60%, on average, of covered health care expenses.

Penalty for Large Employers Not Offering Coverage

As previously mentioned, beginning in 2014, a large employer will be subject to a penalty if any of its full-time employees receives a premium credit toward their exchange plan. In 2014, the monthly penalty assessed to employers who do not offer coverage will be equal to:

(number of full-time employees – 30) x (one-twelfth of $2,000)

After 2014, the penalty payment amount will be indexed by the premium adjustment percentage for the calendar year.

Penalty for Large Employers Offering Coverage

Employers who do offer health coverage will not be treated as meeting the employer requirements if even one full-time employee obtains a premium credit in an exchange plan because the employee’s required contribution for self-only coverage exceeds 9.5% of the employee’s household income, or if the plan offered by the employer pays for less than 60% of covered expenses. After 2014, penalty amounts will be indexed by the premium adjustment percentage for the calendar year.

Finally, those firms with more than 200 full-time employees that offer coverage must automatically enroll new full-time employees in a plan (and continue enrollment of current employees).

Free Choice Vouchers

An employer who offers minimum essential coverage and pays any portion of the premium must provide free choice vouchers to each qualified employee. A qualified employee is defined as an employee:

whose required contribution to the employer plan, for self-only coverage, is greater than 8% and less than 9.8% of the employee’s household income for the taxable year; and
whose household income is not greater than 400% of the FPL for the relevant family size; and
who does not participate in the plan offered by the employer.
Beginning after 2014, the 8% and 9.8% would be indexed by the rate of premium growth over the rate of income growth. The free choice voucher must be equal to the monthly amount that the employer would have contributed toward the plan for which the employer pays the largest portion of plan costs, for either self or, if elected by the employee, family coverage.

An individual receiving a free choice voucher will not be eligible for the exchange premium credits or cost-sharing subsidies. No penalty will be imposed on an employer for an employee who receives a voucher.

Reporting and Other Requirements

At the time of hiring, employers must provide employees, (or for current employees no later than March 1, 2013), written notice concerning:

– the existence of an exchange, including services and contact information;
– the employee’s potential eligibility for premium credits and cost-sharing subsidies if the employer plan’s share of covered health care expenses is less than 60%; and
-the employee’s potential loss of any employer contribution if the employee purchases a plan through the exchange and is not eligible for a free choice voucher. Employers will be subject to this requirement beginning March 1, 2013.

Portions of this article are adapted from the Congressional Research Service’s report Summary of Potential Employer Penalties Under the Patient Protection and Affordable Care Act (PPACA), May 2010

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