PPACA’S Employer Shared Responsibility Provisions: Will Your Business Be Subject To Potential Penalties?

By Kristi R. Gauthier, Esq.
Clark Hill PLC

January 2013 – Some of the most talked about aspects of the Patient Protection and Affordable Care Act (PPACA) relate to the employer mandate provisions (often times referred to as “employer shared responsibility”) taking effect in 2014. With 2014 right around the corner, employers are starting to analyze their current health plans and determine what penalties, if any, they could be facing next year.

What Are The Employer Shared Responsibility Provisions?

Beginning in 2014, PPACA requires that large employers (those who employ 50 or more full-time employees (as defined by PPACA) or full-time equivalents) offer health coverage to their full-time employees and their dependents that is “affordable” and that provides “minimum value.” If an employer fails to provide such coverage, the employer could be subject to penalties on and after January 1, 2014.  

Generally under PPACA, coverage will be deemed to be “affordable” if an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee’s household income. Given that it may be difficult for employers to know an employee’s household income, the IRS has provided affordability safe harbors under which coverage will be considered to be affordable if the cost of that coverage would not exceed 9.5% of the employee’s W-2 wages from that employer, or if the coverage satisfies either of two other designed-based affordability safe harbors.  

A health plan is considered to provide “minimum value” under PPACA, if the plan covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan.  Minimum value calculators will be made available by the IRS and the Department of Health and Human Services and employers will be able to input plan specific information on such items as deductibles and copays in order to determine if the plan provides minimum value.

Which Employers are Subject to the Employer Shared Responsibility Provisions?

Large employers with at least 50 or more full-time employees (defined as any employee working 30 or more hours per week for purpose of PPACA) or a combination of full-time employees and full-time equivalent employees will be subject to the employer shared responsibility provisions beginning in 2014. Employers with less than 50 full-time employees are not subject to the employer shared responsibility provisions.  

In addition to full-time employees, employers must also add up the part-time hours for all part-time employees (those working less than 30 hours per week) in a month and divide by 120 to get the number of “full-time equivalent employees.” It is also important to note that the determination of whether an employer is a “large employer” for purposes of employer shared responsibility is made on a controlled group basis, so if an employer is part of a larger group of related companies, employers must take into consideration all employees of the entire controlled group in making this determination.

Under What Circumstances Will Large Employers Be Subject to Penalties?

In 2014, a large employer will generally be subject to the employer shared responsibility penalties under two circumstances:  

1.    A large employer does not provide health coverage to at least 95% of its full-time employees and their dependents, and one or more of its full-time employees receives federal insurance subsidies and obtains coverage on a State based exchange. In this case, the employer will face a penalty of $2,000 per full-time employee (minus the first 30 employees).

2.    A large employer provides health coverage to at least 95% of its full-time employees and their dependents, but that coverage is deemed “unaffordable” or does not provide “minimum value.” If one or more of its full-time employees receives insurance subsidies and obtains coverage through a State based exchange, the employer will face a penalty of $3,000 per subsidized employee or $2,000 per employee (minus the first 30) whichever is less.

The IRS has indicated that it will contact employers to inform them of their potential penalty liability under PPACA’s employer shared responsibility provisions and provide them with an opportunity to respond before any liability is assessed or notice and demand for payment is made. The IRS has further provided that it will not contact employers regarding a given year until after employees’ individual tax returns are due for that year claiming premium tax credits and after the due date for applicable large employers to file the information returns identifying their full-time employees and the coverage that was offered for that particular year.

Stay Tuned!

2013 is sure to be a pivotal year in terms of health care reform guidance, and in particular with regard to the employer shared responsibility provisions. While the Agencies have issued preliminary guidance on this important issue, additional guidance and clarification are almost certain. Therefore, as we move closer to 2014, it is imperative for employers to work closely with their benefits consultants and legal counsel to ensure compliance with these complex regulations.

*This article is not intended to give legal advice.  It is comprised of general information.  Employers facing specific issues should seek the assistance of legal counsel.

Kristi R. Gauthier is a senior attorney in Clark Hill’s Birmingham office and concentrates her practice in Employee Benefits Law. Kristi has represented clients in a wide variety of employee benefits issues involving health and welfare benefits, as well as retirement plans. Kristi is admitted to practice in the State of Michigan, the U.S. District Court for the Eastern District of Michigan, and the U.S. Sixth Circuit Court of Appeals. She also is active in the legal community with memberships in the American Bar Association, the State Bar of Michigan, and the Oakland County Bar Association where she is a member of the Employee Benefits Committee. Kristi also serves as a member of the Clark Hill Diversity and Inclusion Committee. Kristi has lectured on various employee benefits issues, including ERISA compliance, healthcare reform, COBRA, section 125 plans, 403(b) plans and IRS plan correction programs. Kristi is also a co-author of the ABA publication ERISA Survey of Federal Circuits. Kristi was named a “Rising Star” by Michigan Super Lawyers in 2011.