Large businesses confused about complying with the employer mandate of the Affordable Care Act (ACA) received a little help recently from the Department of the Treasury and the IRS in the form of a new set of proposed ACA regulations. On Dec. 28, the IRS issued 144 pages of proposed regulations that are intended to provide a roadmap for businesses by providing the informational tools to act in accordance with the law and mitigate tax liabilities.
While the proposed regulations are not set in stone just yet, taxpayers may rely on them and consider them binding for now. Later this year, once the final regulations are issued, there is a possibility that more restrictions may be announced for larger employers. In the event that this takes place, businesses will be given sufficient time to make changes in order to comply with the updated rules.
The following are among the many clarifications and guidelines made in the proposed regulations:
Family coverage requirements do not include spouses
Under the ACA, employers will be required to offer health insurance coverage to their employees and their dependents. The definition of a dependent is defined as an employee's child who is under the age of 26. Clearly, spouses do not fall into this category. Therefore, large businesses that choose not to extend coverage to the spouses of employees will not be subject to a tax penalty.
This does not mean that spouses are completely out of luck. Spouses who do not have health insurance through their own employers will be eligible for premium tax credits from purchasing individual coverage through an online exchange.
The 95 percent rule
As long as a large employer provides health insurance coverage to 95 percent of workers and their dependents, it will not be liable for any tax penalties under the ACA. This new rule accommodates employers by providing for a 5 percent margin of error.
Special Transitional Rules for existing group plans
Existing group health insurance plans offered by large businesses will be treated as complying with the employer mandate if:
- The group plan runs on a fiscal year basis
- The group plan has existed since Dec. 27, 2012
- A reasonable percentage of the business's employees are covered
These special transitional rules will apply at the very least through the group plan's fiscal end in 2014.
Affiliate Companies and subsidiaries responsibilities
Confusion exists for some businesses that are part of a much larger family of companies with common ownership. When it comes to the employer mandate, the IRS is closing any loopholes whereby a large employer could utilize smaller subsidiaries in order to avoid offering affordable group coverage to all of its employees. Under the proposed regulations, a subsidiary company with less than 50 employees may still be treated as a large employer because its employees would be considered in conjunction with the employees of its parent company and any affiliates. The following example illustrates this scenario:
A parent company with 40 employees has a subsidiary with 20 employees. The 60 combined employees requires each the parent and subsidiary to be treated as a large employer for purposes of the mandate. However, when it comes to tax liability for not complying with the ACA, the responsibility lies solely on each individual company. In turn, none of the individual subsidiaries are at all responsible for the tax liabilities of others owned by the corporation. Additionally, a large employer that fails to offer health care coverage typically faces a tax penalty of $2000 per employee, minus the first 30 employees. Because the subsidiary, in this case, is part of a larger family of companies, it is only entitled to its pro-rata share of that 30 employee discount. In other words, it would pay $2000 per employee minus only the first 10 employees.
In order to test whether or not their coverage satisfies the affordability requirement of the ACA, employers are allowed to use one of three types of safe harbors. The safe harbors can be based on a worker's IRS Form W-2, their pay rate, or their relation to the Federal Poverty Line. Employers are given the right to apply these safe harbors to all employees, or pick and choose a certain group of workers.
Looking back to determine the full-time status of employees
Employers may choose a defined period of consecutive calendar time (not less than three months but no more than twelve) to determine if their current, ongoing employees are considered to be "full-time" under the ACA. This time frame is referred to as the "measurement period." Here's how it works: If, during the pre-determined measurement period, an employee averages at least 30 hours per week, they must be treated as "full-time" in the coming months, known as the "stability period." The stability period for this worker would need to be a minimum of six calendar months and cannot be any shorter than the original measurement period. A similar look-back period can be utilized to determine the full-time status of variable-hour and seasonal employees.
What is the value of a look-back period? Potentially, it is a great deal of money. Under the ACA, large businesses that do not offer health insurance to full-timers could face a tax penalty per employee. It makes sense that a business would want to take a little time to decipher just how many full-time staffers they have.
Comments on the proposed regulations are due in mid March 2013 and a public hearing is scheduled for a month later. While things still could change, employers can feel more confident for now as they move forward with their health insurance plans.