The Affordable Care Act: What Employers Need to Know for 2016
The time for employer shared responsibility penalties, or “assessable payments” as the IRS refers to them, is finally here. Note that most of us would refer to penalties as “taxes,” but we don’t because the US Supreme Court taught us in NIFB v. Sibelius that there is a difference between taxes and penalties.
Under the Affordable Care Act, also known as the ACA or Obamacare, an employer with at least fifty full-time employees must offer them health coverage that meets certain standards or risk paying assessable payments to the IRS. Starting in 2016 employers must report that coverage to employees and the IRS on Forms 1094 and 1095, which is one way the IRS will determine the assessable payments. And if this wasn’t enough, Congress just passed the Protecting Affordable Coverage for Employees, or “PACE Act,” amending the ACA allowing states to define a large employer as one with more than fifty employees, not one with up to one hundred employees.
Without the PACE Act, the ACA’s original requirement that states define small employers as having one hundred or fewer employees would have been effective on January 1, 2016. This change is related to state insurance rating and coverage requirements and is separate and distinct from the requirement to provide coverage or pay a penalty. In other words, the PACE Act really has nothing to do with the assessable payments that may be due; it has to do with the coverage that small employers provide to their employees. Confusing? Yes. Here’s what everyone needs to know.
Assessable Payments under Employer Shared Responsibility
Starting January 1, 2015, any employer with at least one hundred full time employees must offer minimum essential coverage, or MEC, to employees in order to avoid assessable payments. For new full-time employees, employers must offer MEC to them by the first day of the month immediately following the conclusion of three full calendar months of employment or pay an assessable payment in 2016.
Beginning in 2016, this obligation will extend to employers with at least fifty full-time employees. Part-time employees and employees in categories such as volunteers do not have to be provided with coverage. (MEC is basically any type of group health plan that pays for a majority of healthcare expenses and one that meets ACA’s group health plan requirements such as no lifetime limits on essential health benefits. Account-based plans, or plans or policies that do not meet these requirements, are not MEC.)
The penalties apply to an employer that does not provide MEC to “substantially all” of its full-time employees and their dependent children (substantially all is 70 percent in 2015, 95 percent every year thereafter) and one or more of the employer’s full-time employee is certified to receive a premium tax credit or cost-sharing reduction when purchasing health insurance through a state-based or federally facilitated exchange or “Marketplace.” This is called the “no coverage penalty.”
The no coverage penalty is equal to $2,000 (indexed) multiplied by the number of full-time employees minus thirty (eighty for 2015). Even if an employer does provide coverage to substantially all of its full-time employees and their dependents, it can still be subject to a penalty if a full-time employee receives a premium tax credit or cost-sharing reduction when purchasing health coverage in a Marketplace because the employer’s coverage is not “affordable” or does not provide “minimum value.” This is referred to as the “insufficient coverage penalty.”
The insufficient penalty is equal to $3,000 (indexed) for the full-time employee who received the federal subsidy. Both penalties are divided by twelve and assessed for each month in which either no coverage or insufficient coverage is provided to a full-time employee accessing subsidized Marketplace coverage.
These penalties or assessable payments will be due on receipt of an IRS notice of and demand for payment. Prior to the demand for payment, an employer may learn when one of its employees is found eligible to receive subsidized Marketplace coverage through notification by a Marketplace. Employers can appeal this Marketplace determination and will reportedly have time to respond to the IRS about an assessable payment before it is due. Based on currently available information, the IRS will send these notifications after employees’ individual federal income tax returns are due, including extensions.
Forms 1094 and 1095 Reporting
Starting in 2016, many employers that make MEC available or have full-time employees will have to furnish statements to their full-time employees and file this information with the IRS. The statements that will go to full-time employees are similar to Form W-2s in that each is an individualized, personalized statement applicable only to that employee. The statements that go to the IRS are similar to Form W-3, providing copies through a transmittal form that compiles the data. The annual timing of the new statements and reports is similar to Form W-2s as well.
Employers that are subject to employer shared responsibility requirements must report information about MEC to employees and the IRS (Form 1095-C and Form 1094-C). Insurers and self-insuring small employers must report similar information (Form 1095-B and Form 1094-B). These forms disclose to employees and the IRS the months that the employees and any of their enrolled dependents had “minimum essential coverage.” Employees will likely have to submit this information as part of their income tax filing obligation in 2016.
The PACE Act
For small business employers, the PACE Act has everything to do with what kind of insurance coverage is provided and how much it costs, not whether the business has to report coverage or make assessable payments.
Before the ACA, small employers were defined as those with between one and fifty employees for group insurance purposes. This usually meant that these groups were community rated by insurers, but under the ACA small group health insurers have to apply a modified community rating standard; make essential health benefits available, consistent with a state benchmark plan; and meet certain actuarial requirements.
The ACA gave states until January 1, 2016, to expand this definition of small employer from fifty to one hundred. Due to concerns over price increases by not allowing mid-size employers to remain in the large group market, Congress passed the PACE Act, allowing states to keep the definition of small employer at fifty. As of this writing, we understand that Alaska will keep the definition of small employer of not more than fifty employees on business days during the preceding calendar year.
Melanie K. Curtice is a partner with Stoel Rives LLP, a US law firm operating out of twelve offices, including Anchorage. Curtice regularly assists Alaska employers with their employee benefit law needs. Contact her at email@example.com, 907-277-1900, or 206-386-7651. This article is provided for educational purposes only. It is not a substitute for legal counsel.
This article first appeared in the December 2015 print edition of Alaska Business Monthly.