Affordable Care Act 101
The Affordable Care Act (ACA) went into effect January 1, 2015. Under the Employer Shared Responsibility provisions of the law, employers with at least 50 full-time employees must either offer affordable health insurance coverage or pay a penalty. To be in compliance, employers must also file reports with IRS about their organization, employees and coverage – a complex task that requires employers to accurately collect information about their workforce and the plans they offer throughout the year. While this process may sound relatively straightforward, the reality is that the definitions of terms like “full-time” and “affordable” can quickly become complicated for large employers, and there are fines associated with failing to report this information or reporting it incorrectly. Below are some of those definitions, along with the details you’ll need to know to get and stay on track for ACA compliance in 2015 – and make sure you’re ready for the IRS reporting deadline in 2016.
The Who, What, When and How of the ACA
WHAT Must Be Reported:
Information about the healthcare coverage offered to full-time employees
WHEN Information Must Be Reported:
On or before February 28 of the year immediately following the calendar year for which information is reported
HOW the Information is Reported:
By filing Form 1095-C for each employee
Employer Shared Responsibility Mandate
aka “Pay or Play”
As of 2015, this mandate requires Applicable Large Employers – employers with 50 or more full-time employees – to offer minimum essential coverage to “substantially all full-time employees or dependents” (95%). If ALEs do not offer this coverage, they may be subject to a fine and at least one full-time employee receives a premium tax credit for purchasing individual coverage on an affordable insurance exchange (a health insurance marketplace).
This provision applies to for-profit, non-profit, and government entity employers, as well as to foreign companies that employ US citizens, and to US companies with employees working abroad. However, there was transition relief in 2015 for employers with fewer than 100 full-time employees and for companies with seasonal workers.
Employers who do not comply with the mandate will face fines, including:
- Up to $2,000 per employee per year for not complying with Pay or Play
- Up to $3,000 per employee per year for not offering qualifying coverage or affordable coverage
- Up to $100 per statement for not providing employees with required payee statements
- 40% excise tax (also known as the Cadillac Tax) starting in 2018 on high-cost health plans, which ACA defines as plans with a total cost of $10,200 for an individual and $27,500 for a family (with the tax applying to amounts above those thresholds)
Terms to Know:
Full-time Employee: According to ACA, employers with more than 50 full-time employees are considered Applicable Large Employers and must offer coverage. A full-time employee is defined as someone who works an average of 30 hours or more per week (or 130 hours per month) and more than 120 days per year. But it’s not as simple as just counting your full-time employees. You need to examine your entire workforce – full-time, part-time and variable-hour employees – to see if, when added together, you have the equivalent of 50 full-time employees. A Full-time equivalent (FTE) is any combination of employees who together work the same amount of hours as one full-time person. By that math, one person working full time is one FTE, and two people each working 15 hours per week are also one FTE. Seasonal workerswho work fewer than 120 days per year are generally excluded from the FTE calculation.
Applicable Large Employer (ALE): An organization that employed at least 50 full-time employees during the previous calendar year is referred to as an Applicable Large Employer. This designation applies not only to individual businesses, but also to companies with a common owner or that are otherwise related. If this “controlled group” collectively employs at least 50 full-time employees or FTEs, then each individual company is subject to the shared responsibility requirements, even if it does not have enough employees to meet the threshold. Starting January 31, 2016, ALEs are required to file Form 1095-C with the IRS.
Self-Insured / Fully Insured: Employers that buy health insurance from an insurance carrier are described as fully insured, while those that provide health benefits directly to employees are described as self-insured. Self-insured employers pay claims from their own revenue; fully insured employers pay a premium to a third-party carrier that then handles all claims. ACA requirements also differ for each type of employer. For example, fully insured organizations aren’t required to pay penalties under the Cadillac Tax provision in the Pay or Play requirement; rather, the insurer is responsible for paying the tax.
Affordability: Coverage is considered affordable under the ACA if the employee’s share of the premium for employer-provided coverage is not more than 9.5% of his or her annual household income.
Safe Harbors: Employers are required to offer affordable coverage based on an employee’s household income. But because employers generally won’t know that number, they can use one of three alternate measurements known as Safe Harbors instead. These are the income reported in the employee’s W-2, the pay rate of the lowest-paid employee, or the federal poverty line. Safe Harbor calculations must be applied consistently for all employees in a given category.
Eligibility: The Shared Responsibility Mandate requires Applicable Large Employers to offer Minimum Essential Coverage to substantially all full-time employees (95%). Employers are responsible for determining and tracking employee eligibility for benefits by using one of two methods:
- The monthly measurement method: the employer counts each employee’s hours of service for each month in order to determine full-time status (and hence eligibility for coverage). This option can cause an undue amount of work for HR and Benefits teams.
- The look-back measurement method: the employer determines full-time status during a future period (the stability period), based upon hours of service of the employee in a prior period (the measurement period). This method simplifies the process and reduces benefits churn.
Employers must offer coverage to full-time employees and their dependents, but can also offer coverage to other employees as well. Learn more about eligibility and affordability requirements.
Minimum Essential Coverage: MEC refers to the types of services that must be covered in order for a plan to qualify under ACA. MEC requirements apply to employer-sponsored coverage including:
- Group health insurance coverage for employees under a governmental plan, a plan offered in the small or large group market within a state or a grandfathered health plan offered in a group market.
- A self-insured group health plan for employees
- COBRA coverage
- Retiree coverage
Short-term plans, fixed benefit plans, vision plans and dental plans are not considered MEC.
Minimum value: A plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan.
1095-C: Starting January 31, 2016, ALEs must report their compliance status to the IRS by compiling relevant data and using it to file Form 1095-C: Employer-Provided Health Insurance Offer and Coverage. The form must be sent to employees by January 31 and filed with the IRS by February 28, 2016 (or e-filed by March 31).
This form is an annual statement to all eligible employees that describes the coverage offered to them, the lowest-cost premium available, and the months of the year when the coverage was available. It is also designed to show compliance with the Employer Shared Responsibility Mandate to the IRS. Taken together, Forms 1095-A (filed by exchanges), 1095-B (filed by insurers), and 1095-C (filed by Applicable Large Employers, or ALEs) give the IRS a complete Individual Mandate story for each US employee.
1094-C: A 1094-C transmittal form, which acts as a cover sheet for the 1095-C, must also be filed with the IRS at the same time. It includes employer information such as contact information, number of employees and number of 1095-C forms being submitted.
Exchange: People who are not eligible for coverage through their employers can purchase coverage directly from individual health insurers or research their options and purchase plans from online marketplaces called exchanges. These include the federal exchange, state-run exchanges, and state-federal partnership exchanges.
Subsidy: Subsidies may be available on exchanges for employees who are not eligible for employer plans. The ACA requires state and federal exchanges to notify an employer if an employee is determined eligible for this assistance – and that the organization may be liable for a penalty failing to provide affordable coverage. In that situation, the employer will need to either offer affordable insurance or appeal the determination – either by gathering evidence to explain that affordable insurance was in fact offered, or that the employee is not actually eligible.