Health Care Reform: Frequently Asked Questions – Employer

Sources: U.S. Departments of Labor, Health and Human Services and Treasury

General Questions and Answers for Employers

When do the reforms go into effect?
The health care reform law, the Affordable Care Act (ACA), was signed into law by President Obama in March 2010. The changes made by ACA take effect over a period of years. Some of the law’s changes are already in effect, such as the prohibition on pre-existing condition exclusions for individuals under age 19. Other changes will become effective in the future. For example, the requirement that large employers provide a certain level of health coverage to full-time employees and their dependents or pay a penalty goes into effect in 2015.

Does health care reform allow people to keep their current health coverage?
Not necessarily. Nothing in the law requires individuals to terminate the coverage that they have. However, due to the law’s health care reforms, the coverage provided under a health plan may undergo changes. If an employer’s health plan existed on March 23, 2010, and the employer has not made certain changes to the plan, the plan may have grandfathered status. Grandfathered plans are subject to many, but not all, of the health care reform law’s requirements.

In addition, beginning in 2014, ACA requires most individuals to obtain acceptable health coverage or pay a penalty. The penalty will start at $95 per person for 2014 and increase each year.

Am I required by law to offer health coverage to my employees?
The health care reform law does not require companies to offer health coverage to their employees. However, large employers will subject to ACA’s employer mandate, also called “pay or play” rules. A large employer is one with 50 or more full-time employees, including full-time equivalents (FTEs). For 2015 an applicable large employer is defined as employing over 100 FTEs. Employers between 50-99 FTEs are not subject to penalties until 2016.

Under the pay or play rules, large employers that do not offer health coverage to full-time employees and their dependents will be subject to a penalty if any of their full-time employees receives a tax credit or cost-sharing reduction for health coverage through an insurance exchange.

Also, large employers will be subject to a penalty under ACA’s pay or play rules if they offer health coverage and any full-time employee still receives a tax credit or cost-sharing reduction for coverage through an insurance exchange. This can occur if the employer’s coverage is unaffordable or does not provide minimum value.
These penalties will not apply to employers that had fewer than 50 full-time equivalent employees on business days in the prior calendar year.

What are the penalty amounts for large employers that don’t offer coverage?
Large employers that do not offer health coverage to full-time employees (FTEs) will be subject to an annual penalty of $2,000 per full-time employee, excluding the first 30 employees, if any of their full-time employees receives a tax credit or cost-sharing reduction for coverage through an insurance exchange. For 2015 applicable large employers over 100 FTEs are able to exempt the first 80 employees.

What are the penalty amounts for large employers that offer coverage and have employees who receive subsidized coverage through an exchange?
These employers are subject to a penalty of $3,000 for each full-time employee who receives a tax credit or cost-sharing reduction for coverage through an exchange. The maximum penalty is the amount equal to $2,000 times the number of full-time employees, excluding the first 30 employees.

What is a “grandfathered plan”?
A grandfathered plan is a group health plan or health insurance coverage in which an individual was enrolled on the date of enactment of the health care reform legislation (March 23, 2010). Some of the health care reform provisions affecting health plans do not apply to grandfathered plans. A plan can still be a grandfathered plan if it allows new employees, or family members of current employees, to enroll after the date of enactment.

How does health care reform affect grandfathered plans?
Grandfathered plans are exempt from certain insurance market reforms and coverage mandates included in the health care reform legislation and have delayed compliance dates for other provisions.

Grandfathered plans are not required to:

  • Cover preventive care services without cost-sharing (for example, deductibles, co-payments or coinsurance)
  • Permit selection of any available participating primary care provider
  • Comply with limits on preauthorization requirements and cost-sharing for emergency services
  • Satisfy nondiscrimination rules for fully-insured plans
  • Implement an improved internal appeals process and meet minimum requirements for external review
  • Meet guaranteed issue or renewal of coverage mandates

However, some of the health coverage reforms apply to grandfathered plans as well as non-grandfathered plans. These reforms include prohibitions on lifetime and annual limits, pre-existing condition exclusions, rescissions of coverage and excessive waiting periods. Grandfathered plans must also comply with the rules regarding coverage of adult children up to age 26 and provision of a Summary of Benefits and Coverage.

Also, grandfathered plans are not exempt from other ACA reforms, such as the requirement to include the value of coverage on each employee’s Form W-2 (effective in 2012 for employers that file at least 250 Forms W-2), the pay or play rules that may impose penalties on large employers that do not offer a certain level of health coverage to their full-time employees (effective Jan. 1, 2014), the high-cost health plan excise tax (effective Jan. 1, 2018) and the mandatory automatic enrollment requirement (effective once regulations are issued).

Can a grandfathered plan be amended without losing the grandfathered status?
Plan sponsors can make certain changes to grandfathered plans and maintain their grandfathered status. However, plans will lose their grandfathered status if they make significant changes that reduce benefits or increase costs to consumers.

Specifically, making the following changes would cause a plan to lose its grandfathered status:

  • Significantly cutting or reducing benefits
  • Raising co-insurance charges
  • Significantly raising co-payment or deductibles
  • Significantly reducing employer contributions
  • Adding or reducing an annual limit

The grandfathered plan rules initially provided that changing insurance companies or policies would cause a health plan to lose grandfathered plan status. However, on Nov. 15, 2010, an amended rule was released stating that a group health plan will not lose grandfathered status merely because of a change in the plan’s insurance policy, certificate or contract of insurance, as long as the coverage under the new policy is effective on or after Nov. 15, 2010. Also, to maintain grandfathered status, the plan must provide documentation of the prior plan’s terms to the new issuer.

How does the grandfather rule apply to collectively bargained plans?
The health care reform legislation states that health insurance coverage maintained pursuant to one or more collective bargaining agreements that were ratified before March 23, 2010, is not subject to the insurance market reforms and coverage mandates found in Subtitles A and C of ACA until the date on which the last collective bargaining agreement relating to coverage terminates. Any coverage amendments made pursuant to a collective bargaining agreement that amends the coverage to conform with Subtitles A or C will not cause the plan to lose its grandfathered status.

What is the small business tax credit and how do I know if I am eligible?
Beginning with the 2010 tax year, tax credits are available to qualifying small businesses that offer health insurance to their employees. In general, your business qualifies for the credit if you cover at least 50 percent of the cost of health care coverage for your workers, pay average annual wages below $50,000 and have less than the equivalent of 25 full-time workers (for example, a firm with fewer than 50 half-time workers would be eligible).

The size of the credit depends on your average wages and the number of employees you have. For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer’s premium expenses that count toward the credit. The full credit is available to firms with average wages below $25,000 and less than 10 full-time equivalent workers. It phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

What if my small business doesn’t offer insurance today, but I choose to start offering insurance this year? Will I be eligible for these tax credits?
Yes. The tax credit is designed to both support those small businesses that provide coverage today as well as those that newly offer such coverage. Beginning in 2014, the amount of the maximum tax credit will increase, and the credit will only be available for employers purchasing insurance coverage through an exchange.

What is a health insurance Exchange?
Beginning in 2014, each state will have a health insurance Exchange. Each state can decide whether to operate its own Exchange or have the federal government run the Exchange for its residents. Individuals and small businesses will be able to purchase health insurance through the Exchanges. The intent of the health insurance Exchanges is to provide increased purchasing power by pooling a number of insurance buyers together. Beginning in 2017, states may allow employers of any size to purchase coverage through the Exchange.
Does the health care reform law affect dependent care flex accounts and health flexible spending accounts?

Dependent care flex accounts are capped at $5,000 annually. Prior to 2013, health flexible spending accounts (health FSAs) had no cap (although many employers implemented their own caps, typically at the $5,000-$6,000 level or less). The health care reform law does not change the limits on dependent care flex accounts, which remain capped at $5,000. However, the law does establish an annual cap of $2,500 on employee pre-tax contributions to health FSAs. This change is effective for plan years beginning on or after Jan. 1, 2013.

What is the Form W-2 reporting requirement and when do I need to comply?
ACA requires employers to disclose the value of the health coverage provided by the employer to each employee on the employee’s annual Form W-2. This reporting was optional for the 2011 tax year. It remains optional for small employers (those filing fewer than 250 Form W-2s) until further guidance is issued. Employers that file at least 250 Forms W-2 must comply with this reporting requirement for 2012 (for W-2 Forms that must be issued by the end of January 2013) and future years.

What is a Summary of Benefits and Coverage?
ACA requires employer-sponsored health plans and health insurance issuers to provide a Summary of Benefits and Coverage (SBC) to applicants and enrollees. Both non-grandfathered and grandfathered plans need to provide the SBC.
The SBC is a concise document providing simple and consistent information about health plan benefits and coverage. It must be provided free of charge. Its purpose is to help health plan consumers better understand the coverage they have and to help them make easy comparisons of different options when shopping for new coverage.

Federal agencies have provided a template for health plans and issuers to use. Health insurance issuers must provide the SBC to health plan sponsors at certain times, including at renewal and upon request, beginning Sept. 23, 2012. In addition, health plans must provide the SBC to participants and beneficiaries at specific times, including at enrollment, before the start of each plan year and upon request. If the issuer of a fully-insured plan provides a timely and complete SBC to plan participants and beneficiaries, the employer sponsoring the plan is not required to provide the SBC to those individuals.

The SBC requirement becomes effective as follows:

  • Plans and issuers must provide the SBC to participants and beneficiaries who enroll or re-enroll during an open enrollment period beginning with the first open enrollment period that begins on or after Sept. 23, 2012.
  • For participants who enroll in coverage other than through an open enrollment period (for example, newly eligible individuals and special enrollees), plans and issuers must provide the SBC beginning with the first plan year that begins on or after Sept. 23, 2012.

How does the additional Medicare tax for high wage earners work?
Effective Jan. 1, 2013, ACA increased the Medicare hospital insurance tax rate by 0.9 percentage points on wages over $200,000 for an individual ($250,000 for married couples filing jointly). An employer must withhold the additional Medicare tax from wages it pays to an employee in excess of $200,000 in a calendar year, regardless of the individual’s filing status or wages paid by another employer.
There is no employer portion corresponding to the amount payable by the employee. All wages that are currently subject to Medicare Tax are also subject to the additional Medicare tax, including noncash fringe benefits, tips and other noncash wages.

FAQs on the Employer Shared Responsibility Provisions

What is “Pay or Play”?
The Affordable Care Act (ACA) imposes “pay or play” requirements on large employers. Under these “pay or play” requirements, large employers that do not offer health coverage to their full-time employees, or that offer coverage that is either unaffordable or does not provide minimum value, may be subject to a penalty. This penalty is also referred to as a “shared responsibility payment.” This penalty is not scheduled to take effect until the 2015 calendar year.

Basics Of The Employer Shared Responsibility Provisions

  • What are the employer shared responsibility provisions?
    Starting in 2015, employers employing at least a certain number of employees (generally 50 full-time employees and full-time equivalents, explained more fully below) will be subject to the employer shared responsibility provisions under section 4980H of the Internal Revenue Code (added by the ACA). Under these provisions, if these employers do not offer affordable health coverage that provides a minimum level of coverage to their full-time employees, they may be subject to an employer shared responsibility payment, if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges (Exchanges).

    To be subject to these employer shared responsibility provisions, an employer must have at least 50 full-time employees or a combination of full- and part-time employees that is equivalent to at least 50 full-time employees (for example, 100 half-time employees equals 50 full-time employees). As defined by the statute, a full-time employee is an individual employed on average at least 30 hours per week (so half-time would be 15 hours per week).

  • When do the employer shared responsibility provisions go into effect?
    The employer shared responsibility provisions generally go into effect on Jan. 1, 2015. Employers will use information about the employees they employ during 2014 to determine whether they employ enough employees to be subject to these new provisions in 2015. See below for more information on determining whether an employer is subject to the employer shared responsibility provisions.
  • Is more detailed information available about the employer shared responsibility provisions?
    Yes. Treasury and the IRS have proposed regulations on the new employer shared responsibility provisions. Comments on the proposed regulations may be submitted by mail, electronically or hand-delivered and are due by March 18, 2013.

Which Employers Are Subject To The Employer Shared Responsibility Provisions?

  • I understand that the employer shared responsibility provisions apply only to employers employing at least a certain number of employees? How does an employer know whether it employs enough employees to be subject to the provisions?
    To be subject to the employer shared responsibility provisions, an employer must employ at least 50 full-time employees or a combination of full- and part-time employees that equals at least 50 (for example, 40 full-time employees employed 30 or more hours per week on average plus 20 half-time employees employed 15 hours per week on average are equivalent to 50 full-time employees). Employers will determine each year, based on their current number of employees, whether they will be considered a large employer for the next year. For example, if an employer has at least 50 full-time employees (including full-time equivalents) for 2014, it will be considered a large employer for 2015. For 2015 only, employers between 50-99 are not subject to penalties.

    Employers average their number of employees across the months in the year to see whether they meet the large employer threshold. The averaging can take account of fluctuations that many employers may experience in their workforce across the year. For those employers that may be close to the 50 or 100 full-time employee (or equivalents) threshold and need to know what to do for 2015, special transition relief is available to help them count their employees in 2014. See below for information about this transition relief. The proposed regulations provide additional information about how to determine the average number of employees for a year, including information about how to take account of salaried employees who may not clock their hours and a special rule for seasonal workers.

  • If two or more companies have a common owner or are otherwise related, are they combined for purposes of determining whether they employ enough employees to be subject to the employer shared responsibility provisions?
    Yes, consistent with longstanding standards that apply for other tax and employee benefit purposes, companies that have a common owner or are otherwise related generally are combined together for purposes of determining whether or not they employ at least 50 full-time employees (or an equivalent combination of full- and part-time employees). If the combined total meets the threshold, then each separate company is subject to the employer shared responsibility provisions—even those companies that individually do not employ enough employees to meet the threshold. (The rules for combining related employers do not apply for purposes of determining whether an employer owes an employer shared responsibility payment or the amount of any payment.) The proposed regulations provide information on the rules for determining whether companies are related and how they are applied for purposes of the employer shared responsibility provisions.
  • Do the employer shared responsibility provisions apply only to large employers that are for-profit businesses or to other large employers as well?
    All employers that employ at least 50 full-time employees or an equivalent combination of full- and part-time employees are subject to the employer shared responsibility provisions, including for-profit, non-profit and government entity employers.
  • Which employers are not subject to the employer shared responsibility provisions?
    Employers who employ fewer than 50 full-time employees (or the equivalent combination of full- and part-time employees) are not subject to the employer shared responsibility provisions. Additionally, an employer with at least 50 full-time employees (or equivalents) will not be subject to an employer shared responsibility payment if the employer offers affordable health coverage that provides a minimum level of coverage to its full-time employees. Employers between 50-99 employees are not subject to penalties in 2015
  • Are companies with employees working outside the United States subject to the employer shared responsibility provisions?
    For purposes of determining whether an employer meets the 50 full-time employee (or full-time employees and full-time employee equivalents) threshold, an employer generally will take into account only work performed in the United States. For example, if a foreign employer has a large workforce worldwide, but less than 50 full-time (or equivalent) employees in the United States, the foreign employer generally would not be subject to the employer shared responsibility provisions.
  • Are companies that employ U.S. citizens working abroad subject to the employer shared responsibility provisions?
    A company that employs U.S. citizens working abroad generally would be subject to the employer shared responsibility provisions only if the company had at least 50 full-time employees (or the equivalent combination of full- and part-time employees), determined by taking into account only work performed in the United States. Accordingly, employees working only abroad, whether or not they are U.S. citizens, generally will not be taken into account for purposes of determining whether an employer meets the 50 full-time employee (or equivalents) threshold. Furthermore, for employees working abroad, the time spent working for the employer outside of the U.S. would not be taken into account for purposes of determining whether the employer owes an employer shared responsibility payment or the amount of any payment

Liability For The Employer Shared Responsibility Payment

  • Under what circumstances will an employer owe an employer shared responsibility payment?
    In 2015, if an employer meets the 100 full-time employee threshold, the employer generally will be liable for an employer shared responsibility payment only if:

    (a)The employer does not offer health coverage or offers coverage to less than 70 percent of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an Exchange; or

    (b) The employer offers health coverage to at least 70 percent of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee (see question 11) or did not provide minimum value (see question 12).

    After 2015, the rule in paragraph (a) applies to employers that do not offer health coverage or that offer coverage to less than 95 percent of their full-time employees and the dependents of those employees.

  • How does an employer know whether the coverage it offers is affordable?
    If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5 percent of that employee’s annual household income, the coverage is not considered affordable for that employee. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement (see question 12).

    Because employers generally will not know their employees’ household incomes, employers can take advantage of one of the affordability safe harbors set forth in the proposed regulations. Under the safe harbors, an employer can avoid a payment if the cost of the coverage to the employee would not exceed 9.5 percent of the wages the employer pays the employee that year, as reported in Box 1 of Form W-2, or if the coverage satisfies either of two other design-based affordability safe harbors.

  • How does an employer know whether the coverage it offers provides minimum value?
    A minimum value calculator will be made available by the IRS and the Department of Health and Human Services (HHS). The minimum value calculator will work in a similar fashion to the actuarial value calculator that HHS is making available. Employers can input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value by covering at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.
  • If an employer wants to be sure it is offering coverage to all of its full-time employees, how does it know which employees are full-time employees? Does the employer need to offer the coverage to all of its employees because it won’t know for certain whether an employee is a full-time employee for a given month until after the month is over and the work has been done?
    The proposed regulations provide a method to employers for determining in advance whether or not an employee is to be treated as a full-time employee, based on the hours of service credited to the employee during a previous period. Using this look-back method to measure hours of service, the employer will know the employee’s status as a full-time employee at the time the employer would offer coverage. The proposed regulations are consistent with IRS notices that have previously been issued and describe approaches that can be used for various circumstances, such as for employees who work variable hour schedules, seasonal employees and teachers who have time off between school years.

Calculation Of The Employer Shared Responsibility Payment

  • If an employer that does not offer coverage or offers coverage to less than 70 percent (in 2015 only) of its employees owes an employer shared responsibility payment, how is the amount of the payment calculated?
    In 2015, if an employer employs enough employees to be subject to the employer shared responsibility provisions and does not offer coverage during the calendar year to at least 95 percent of its full-time employees, it owes an employer shared responsibility payment equal to the number of full-time employees the employer employed for the year (minus 80) multiplied by $2,000, as long as at least one full-time employee receives the premium tax credit. (Note that for purposes of this calculation, a full-time employee does not include a full-time equivalent).

    For an employer that offers coverage for some months but not others during the calendar year, the payment is computed separately for each month for which coverage was not offered. The amount of the payment for the month equals the number of full-time employees the employer employed for the month (minus up to 80) multiplied by 1/12 of $2,000. If the employer is related to other employers (see below), then the 80-employee exclusion is allocated among all the related employers. The payment for the calendar year is the sum of the monthly payments computed for each month for which coverage was not offered. After 2015, these rules apply to employers that do not offer coverage or that offer coverage to less than 95 percent of their full-time employees and the dependents of those employees.

  • If an employer offers coverage to at least 70 percent of its employees and, nevertheless, owes the employer shared responsibility payment, how is the amount of the payment calculated?
    For an employer that offers coverage to at least 70 percent of its full-time employees in 2015, but has one or more full-time employees who receive a premium tax credit, the payment is computed separately for each month. The amount of the payment for the month equals the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000. The amount of the payment for any calendar month is capped at the number of the employer’s full-time employees for the month (minus up to 80 for 2015) multiplied by 1/12 of $2,000. (The cap ensures that the payment for an employer that offers coverage can never exceed the payment that employer would owe if it did not offer coverage). After 2015, these rules apply to employers that offer coverage to at least 95 percent of full time employees and the dependents of those employees.

Making An Employer Shared Responsibility Payment

  • How will an employer know that it owes an employer shared responsibility payment?
    The IRS will contact employers to inform them of their potential liability and provide them an opportunity to respond before any liability is assessed or notice and demand for payment is made. The contact for a given calendar year will not occur until after employees’ individual tax returns are due for that year claiming premium tax credits and after the due date for employers that meet the 50 full-time employee (plus full-time equivalents) threshold to file the information returns identifying their full-time employees and describing the coverage that was offered (if any).
  • How will an employer make an employer shared responsibility payment?
    If it is determined that an employer is liable for an employer shared responsibility payment after the employer has responded to the initial IRS contact, the IRS will send a notice and demand for payment. That notice will instruct the employer on how to make the payment. Employers will not be required to include the employer shared responsibility payment on any tax return that they file.

Transition Relief

  • I understand that the employer shared responsibility provisions do not go into effect until 2015. However, the health plan that I offer to my employees runs on a fiscal plan year that starts in 2014 and will run into 2015. Do I need to make sure my plan complies with these new requirements in 2014 when the next fiscal plan year starts?

    For an employer that, as of Dec. 27, 2012, already offers health coverage through a plan that operates on a fiscal year (a fiscal year plan), transition relief is available. First, for any employees who are eligible to participate in the plan under its terms as of Dec. 27, 2012 (whether or not they take the coverage), the employer will not be subject to a potential payment until the first day of the fiscal plan year starting in 2014.

    Second, if (a) the fiscal year plan (including any other fiscal year plans that have the same plan year) was offered to at least one-third of the employer’s employees (full- and part-time) at the most recent open season, or (b) the fiscal year plan covered at least one quarter of the employer’s employees, then the employer also will not be subject to the employer shared responsibility payment with respect to any of its full-time employees until the first day of the fiscal plan year starting in 2015, provided that those full-time employees are offered affordable coverage that provides minimum value no later than that first day.

    So, for example, if during the most recent open season preceding Dec. 27, 2012, an employer offered coverage under a fiscal year plan with a plan year starting on July 1, 2014, to at least one-third of its employees (meeting the threshold for the additional relief), the employer could avoid liability for a payment if, by July 1, 2015, it expanded the plan to offer coverage satisfying the employer shared responsibility provisions to the full-time employees who had not been offered coverage. For purposes of determining whether the plan covers at least one quarter of the employer’s employees, an employer may look at any day between Oct. 31, 2014, and Dec. 27, 2014.

  • Is transition relief available to help employers that are close to the 100 full-time employee threshold determine their options for 2015?
    Yes. Rather than being required to use the full twelve months of 2014 to measure whether it has 50 full-time employees (or an equivalent number of part- and full-time employees), an employer may measure using any six-consecutive-month period in 2014. So, for example, an employer could use the period from Jan. 1, 2014, through June 30, 2014, and then have six months to analyze the results, determine whether it needs to offer a plan, and, if so, choose and establish a plan.

Additional Information

  • When can an employee receive a premium tax credit?
    Premium tax credits generally are available to help pay for coverage for employees who:

    • Are between 100 percent and 400 percent of the federal poverty level and enroll in coverage through an Exchange
    • Are not eligible for coverage through a government-sponsored program like Medicaid or CHIP
    • Are not eligible for coverage offered by an employer or are eligible only for employer coverage that is unaffordable or that does not provide minimum value.

  • If an employer does not employ enough employees to be subject to the employer shared responsibility provisions, does that affect the employer’s employees’ eligibility for a premium tax credit?
    No. The rules for how eligibility for employer-sponsored insurance affects eligibility for the premium tax credit are the same, regardless of whether the employer employs enough employees to be subject to the employer shared responsibility provisions.
  • The Treasury Department and the IRS have proposed regulations on the employer shared responsibility provisions that are proposed to be effective for months after Dec. 31, 2014. However, there are certain decisions and actions employers may have to take during 2014 to prepare for 2015. Many employers rely on the proposed regulations during 2013 for guidance on the employer shared responsibility provisions?
    Yes. Taxpayers may rely on the proposed regulations for purposes of compliance with the employer shared responsibility provisions. If the final regulations are more restrictive than the guidance in the proposed regulations, the final regulations will be applied prospectively, and employers will be given sufficient time to come into compliance with the final regulations