Beginning in 2014, certain large employers may be subject to a penalty tax for failing to offer minimum essential health care coverage for all full–time employees (and dependents) or offering eligible employer–sponsored coverage that is not "affordable" or does not offer "minimum value." The penalty tax would be assessed if any full–time employee receives a premium tax credit for health insurance purchased through a health insurance exchange.
An applicable large employer is one who employed an average of at least 50 full–time (or full–time equivalent) employees. For the purposes of the mandate, full–time is considered 30 or more hours of service per week and 130 hours of service per month.
While part–time employees are considered in the calculation for determining the number of full–time equivalent employees, an employer would not be assessed a penalty for not offering coverage to part–time employees, and part–time employees would not be considered in the calculation of any assessed penalty.
As stated above, an employer must include full–time equivalent employees when "counting" to determine if the mandate applies. Because of this rule, an employer cannot avoid being treated as a large employer simply by making its work force all part–time. At the same time, an employer would not automatically be required to pay the penalty just for qualifying as a large employer. The penalty tax is calculated based only on coverage for actual full–time employees (30 or more hours per week) and is determined monthly.
How to convert part–time employees into full–time equivalents
- Calculate the aggregate hours of service in a month for employees who are not full–time employees for that month. (This number cannot exceed more than 120 hours of service for any employee.)
- Divide the total hours of service from step one by 120.
The result is the number of full–time equivalents for that month.
Determining employer’s size is made retrospectively — employees are counted in 2013 to determine employer’s size status for 2014. The proposed regulations provide a transition rule that allows employers to choose any period of six consecutive months in 2013 (rather than the entire year) to determine their status in 2014.
An employer with 50 or more full–time employees can avoid large–employer status if:
- The employer’s workforce exceeds 50 or more full–time employees for 120 days or fewer during the calendar year, and
- The employees in excess of 50 employed during the 120 days were seasonal workers.
The penalty actually consists of two separate taxes. The first applies when the employer does not offer its full–time employees (and dependents) the opportunity to enroll in minimum essential coverage under an eligible employer–sponsored plan and any full–time employee is certified as having received a premium tax credit or cost sharing reduction.
The second applies when the employer offers its full–time employees to enroll in minimum essential coverage under an eligible employer sponsored plan and one or more employees is certified as having received a tax credit or cost sharing reduction because the coverage was either unaffordable or did not provide minimum value.
If the plan’s share of the total allowed costs of benefits provided is at least 60 percent, the plan meets minimum value. A plan is considered affordable if the premium is less than 9.5 percent of the employee’s income.
Calculating the penalty tax when coverage is not offered to full–time employees and at least one full–time employee received a premium tax credit.
A penalty of $2,000 for each employee eligible for coverage would be assessed, allowing for a 30–employee reduction. For example, an employer with 40 full–time eligible employees would be assessed the penalty on only 10 of those employees (40–30=10). The tax is payable monthly so in this example it would be (10 x 2,000)/12= $1,666.67. Even if only one employee receives the tax credit, the penalty tax would be based on the total number of full–time employees.
Calculating the penalty tax when coverage is offered, but it is either not affordable or doesn’t meet minimum value and at least one full–time employee received a premium tax credit.
The penalty is $3,000 for each employee that receives a tax credit. It is also calculated monthly and there is no first 30–employee reduction. However, the penalty is capped so that it cannot exceed the amount of the "no coverage" penalty tax. If an employer’s plan meets both minimum value and affordability and an employee opts out of the employer’s plan, the employee would not be eligible for a tax credit and the employer would not be liable for a penalty tax.