ACA News & Publications

IRS Issues New Guidance on Employer Penalties

October 3, 2012

Beginning in 2014, large employers may face penalties if they do not offer any health coverage to full‐time employees, or if they offer health coverage that is unaffordable or does not provide minimum value. The penalty is known as a “shared responsibility payment,” and is triggered if one of the employer’s full‐time employees receives a premium tax credit or cost sharing reduction for coverage obtained through a health insurance exchange.

On Aug. 31, 2012, the IRS issued Notice 2012‐58, which describes safe harbor methods and rules that employers may use to determine which employees are considered fulltime for the purposes of the Affordable Care Act (ACA)’s shared responsibility provisions.

This notice also addresses a safe harbor based on Form W‐2 wages for employers to use in determining whether their health coverage is affordable. Employers will not be required to comply with any future guidance that is more restrictive until at least January 2015.

Notice 2012‐58 includes safe harbor rules for determining full‐time status for ongoing employees and new employees, including employees with variable hours and seasonal employees. Under the safe harbor for ongoing employees, employers may use three‐month to 12‐month measurement and stability periods to determine whether ongoing employees work at least 30 hours per week. Also, employers may utilize an “administrative period” of up to 90 days between the measurement and stability periods to determine which ongoing employees are eligible for coverage and to notify and enroll employees.

For new employees, Notice 2012‐58 provides that employers will not be subject to a shared responsibility penalty for an employee who is expected at his or her start date to work full‐time, as long as coverage is offered no later than 90 days following the employee’s start date.

The safe harbor for new variable hour and seasonal employees is similar to the one for ongoing employees, meaning that employers may use the measurement and stability periods to determine if the employees are fulltime. Employers may also use an administrative period following the measurement period for new variable hour and seasonal employees. When the stability period ends, employers must repeat the process, beginning with another measurement period.

In addition, Notice 2012‐58 discusses the affordability of health care and how to determine if an employer will be subject to a shared responsibility penalty. ACA dictates that coverage is considered affordable if the employee’s required contribution is less than or equal to 9.5 percent of his or her household income for the taxable year. To address the issue of employers being unaware of their employees’ family members’ income levels, the safe harbor allows only the employee’s wages from the employer that is providing coverage to determine coverage affordability.

In order to be eligible for the affordability safe harbor, an employer must offer its full‐time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer sponsored plan, and the employee portion of the self‐only premium for the employer’s lowest cost coverage that provides minimum value must not exceed 9.5 percent of the employee’s W‐2 wages.

Employers satisfying these requirements will not be subject to penalties for providing unaffordable coverage for that employee, even if the employee receives a premium tax credit or cost sharing reduction through a health insurance exchange. Employers can be proactive, however, and structure their plans and operations so that the employee contribution amount does not exceed 9.5 percent of any employee’s W‐2 wages for that year.

It is also important to note that the safe harbor does not affect employees’ eligibility for premium tax credits, which are based on the affordability of employer‐sponsored coverage relative to employees’ household incomes, rather than W‐2 wages.

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This ACA Pathways is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

The information contained in this ACA Pathways includes emerging health care news from a limited perspective and does not encompass all views. The information was selected from a wide range of sources selected on the basis of their potential impact on employers and/or their employee benefit plans. For more information, please contact Burnham Benefits.

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