Obamacare: Proposed IRS Regs Define “Large Employer”

Under the Patient Protection and Affordable Care Act (ACA, often called Obamacare), companies with 50 or more full-time workers are required to provide health benefits to at least 95 percent of their full-time employees or pay a $2,000 per-employee penalty (the penalty excludes payment for the first 30 full-time employees).  This requirement will become effective January 1, 2014.  Some employers have been reducing the hours of some employees in order to avoid the threshold of 50 full-time employees.  The IRS has now proposed regulations that will make many such avoidance measures ineffective. Proposed IRS Regulations.

Under the proposed IRS regulations, a full-time employee for purposes of the 50-employee threshold means any worker who is compensated for 30 hours in an average week. These 30 hours thus include all paid hours whether or not the employee actually works during those hours.  For example, paid hours include paid vacation time, jury duty, sick days and voting.

Even more surprising, the IRS views a “full-time employee” as a full-time equivalent.   That is, the hours of part-time employees working under 30 average hours per week will be combined to determine how many 30-hour-per-week equivalents are created in the aggregate.  Thus, two 15-hour per week workers will count as one full-time employee, and six 20-hour per week employees will count as four full-time employees for purposes of the 50 full-time employee threshold.

The proposed regulations also describe the health care insurance requirements that must be met by companies within the definition of “large employer” to avoid the penalty.  This is an area where careful planning is needed.  To avoid the penalty, an employer must offer “affordable” coverage to 95% of its full time employees.  “Affordable” means that the cost to the employee (or the cost of the cheapest option if more than one option is offered to employees) cannot exceed 9.5% of any full-time employee’s household income.  If this requirement is not met and any one of the employees receives a government subsidy or tax credit intended to allow purchase of coverage on an insurance exchange, the employer must make a $2,000 per-employee “shared responsibility payment.”  The problem with a reference to household income is that an employer cannot know the household income of each full-time employee.  Even if it did know, circumstances change and the employer could suddenly find itself outside the ACA requirement.  Thus, employers choosing to provide health insurance will feel that they must offer at least one coverage option that does not require a premium contribution greater than 9.5% of the lowest-paid full-time employee’s annual compensation.   Note that “low cost” option is a relative term; it may not actually come at a low cost to the employer.  The IRS, in cooperation with the Department of Health and Human Services, proposes that employer coverage must meet a minimum value threshold based on a combination of co-payments, deductibles, and other cost factors, determined through an as-yet undeveloped automated tool employers can use to see if their coverage options qualify.

It is quite possible that some small employers, although “large” under the proposed IRS regulations, that currently provide health care coverage for their employees will drop the coverage and elect to pay the penalty of $2,000 per full-time employee.  This penalty could be significantly less than the employer’s share of the premium under the lowest cost option meeting federal requirements.  Some employers may even drop their current coverage and “share” the savings by increasing employees’ compensation, thereby shifting what was previously the employer’s cost to the government through the subsidies and tax credits that will supplement the cost of insurance purchased through an exchange by lower paid individuals.

The deadline for public comment on the proposed IRS regulations is March 18, 2013.


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