Alloy Silverstein’s Chris Cicalese gives small business owners a summary of key things they need to know about Employer Shared Responsibility and Obamacare (Affordable Care Act) in 2015.
What is Employer Shared Responsibility (ESR) and Who Does it Impact?
Starting in 2015, employers (for-profit, nonprofit, and government entities) with 100 or more full-time employees, or a combination of full-time employees and full-time equivalents (FTEs), will be subject to the Employer Shared Responsibility (ESR) provisions of the Affordable Care Act (ACA). Employers with at least 50, but less than 100, FTEs will be subject to ESR provisions beginning in 2016. Small businesses with fewer than 50 workers are exempt from the Employer Shared Responsibility provisions.
To determine whether the employer is subject to ESR for a given calendar year, the employer needs to look at the size of its workforce for the prior calendar year. To calculate the number of FTEs an employer has, look at the total hours of service that wages were paid to employees during the year, which cannot exceed 2,080 hours for any employee. After dividing the total amount by 2,080, round down to the next lowest whole number and that is the number of full-time employees and FTEs an employer has on its payroll. In the event that the number is less than one, round up to one employee.
Minimum Essential Health Coverage and Affordability
Under the Employer Shared Responsibility provisions, a large employer generally must offer minimum essential health coverage to its full-time employees. Starting in 2015, the percentage of employees covered must be 70%. In 2016 and thereafter, employers will have to cover 95% of their workforce.
The ACA requires minimum essential health coverage for employees to also be affordable. Health coverage is not considered affordable if the employee’s share of the premium would cost them more than 9.5% of the employee’s annual household income (9.56% for plans beginning in 2015).
In the event that the employee’s annual household income is unknown, there are safe harbors that employers use to determine the affordability of coverage:
Form W-2 Wages Safe Harbor – – 9.5% of the wages paid to the employee by the employer. Salary reduction elections are still applied, but only the current year wages are considered. Lastly, employers are not permitted to impute full Form W-2 wages during periods of unpaid leave and should refer to another safe harbor method.
Rate of Pay Safe Harbor – Amount paid by employee does not exceed 9.5% of the employee’s hourly rate of pay as of the first day of the coverage period, or the employee’s lowest hourly rate of pay during the calendar month multiplied by 130 hours.
For example: Company A pays its full-time employees $7.50 per hour. Based on 130 hours per month, its employees’ income is equivalent to $975. So the maximum amount an employee may pay for health coverage each month before it is considered unaffordable is 9.5% of $975 = $92.63 per month.
Federal Poverty Level Safe Harbor – Coverage is considered affordable if the employee’s required contribution for the calendar month for the lowest cost self-only coverage does not exceed 9.5% of the monthly federal poverty line for the current year.
For example: The current federal poverty line for a family of four is $23,850 per year, or $1,987.50 per month. Affordable health coverage for this family should therefore cost no more than 9.5% of $1,987.50 = $188.81 per month.
Employer Shared Responsibility Payments
In the event an employer does not offer coverage or the coverage offered applies to less than the mandated percentage for the year, and at least one of its full-time employees receives a premium tax credit for purchasing individual coverage on the new Health Insurance Marketplace, the employer will therefore be subject to an Employer Shared Responsibility (ESR) payment.
In addition, the employer will be subject to an ESR payment if it offers coverage to at least 95% of its full-time employees, but one full-time employee receives the premium tax credit. This could happen if the employee was not offered coverage, the coverage was unaffordable, or the coverage failed to provide the minimum value. Plans provide minimum value if they cover at least 60% of the total cost of benefits expected to be incurred.
What Happens if I Have to Pay an Employer Shared Responsibility Payment?
In the event employers are subject to ESR because they do not offer coverage or coverage is applied to less than 70% (95% in 2016) of its full-time employees, they will owe an ESR payment equal to the number of full-time employees they employed for the year (less an exemption of up to 80 full-time employees during 2015) multiplied by $2,000, as long as one full-time employee receives the premium tax credit.
If the employer offers coverage for only a portion of the calendar year, the payment would then be computed separately for each month the coverage was not offered. Payment would equal the total number of full-time employees employed for the specific month less an exemption of up to 80 full-time employees during 2015 (this returns to 30 in 2016) multiplied by 1/12 of $2,000 ($166.67). When there are companies that are related (such as common owners), the 30-employee exclusion is allocated in proportion to each employer’s number of full-time employees.
For example: Company B has 125 full-time staff, but only offers health coverage to 80, which is only 64% of its full-time workforce. Company B would be subject to a payment of $166.67 (1/12 x $2,000) per employee, multiplied by 125-80=45 employees, giving a total required ESR payment of $7,500.15 per month.
When an employer offers coverage to at least 70% (in 2015) of its full-time employees, but still has one or more full-time employees who receive the premium tax credit, the ESR payment is computed separately for each month. The amount due for the month is calculated by taking the number of full-time employees who receive the premium tax credit multiplied by 1/12 of $3,000 ($250). The amount due for any calendar month is capped at the number of full-time employees for the month (minus up to 80 in 2015) multiplied by 1/12 of $2,000 ($166.67). This cap ensures that an employer does not pay more than it would have had it not offered coverage. The Employer Shared Responsibility provisions provide an inflation adjustment beginning in years after 2014.
Exemptions from Employer Shared Responsibility
Final regulations have clarified whether specific employee types or occupations are considered full time. These categories include:
Volunteers: Hours for volunteers for a government or tax-exempt entity will not cause them to be full-time employees.
Educational Employees: Teachers and other educational employees are considered full time even if their school is closed or operating on a limited schedule during the summer.
Seasonal Employees: Employees whose annual employment is six months or less generally are not full-time employees.
Student Work-Study Programs: Services performed by students under a work-study program are not included when calculating full-time employees.
Adjunct Faculty: Until further guidance is issued, employers with adjunct faculty should use a method of crediting hours of service for those employees that is consistent with ESR provisions. The final regulations allow crediting adjunct faculty members with 2.25 hours of service per week for each hour of time as a reasonable method.
Obamacare (The Affordable Care Act) brings with it many changes and reporting updates for employers of all sizes. If you need guidance on being compliant, speak to one of our specialists here at Abacus Payroll on 856-667-6225 or email us.
The information above is an overview based on the guidance provided by the U.S. Department of the Treasury as of February 12, 2014, as well as the Internal Revenue Service’s Affordable Care Act Tax Provisions for Employers section accessed in January 2015.
Further resources are available at:
- IRS – Employer Shared Responsibility under the Affordable Care Act
- IRS – Affordable Care Act Information Center
- Department of Treasury – Shared Responsibility for Employers Regarding Health Coverage; Final Rule
- US Treasury Department – Fact Sheet: Final Regulations Implementing Employer Shared Responsibility Under the ACA for 2015
- Society for Human Resource Management – Employer Mandate for 2015
About the Author: Christopher Cicalese, CPA
Chris is a CPA and tax professional at Alloy Silverstein with a special interest in advising professional athletes and the amusement and family entertainment industry. Tweet him at @AthleteCPA. If you’d like to know more about how Abacus Payroll Inc. or the Alloy Silverstein Group can help your business, please call us at 856-667-6225 or email us.