[IMGCAP(1)]Beginning Jan. 1, 2014, many large employers will be subject to the "play or pay" mandate, under which they must either play by offering their full-time employees and their dependents affordable health insurance coverage that provides minimum value or pay a penalty, referred to as the "play or pay penalty" or "shared responsibility penalty."
Although this mandate doesn't apply until 2014, the planning needs to start now. For one thing, the definition of an applicable large employer is based on the preceding year's employee count. So, the 2013 employee count will determine whether the employer is subject to the mandate in 2014. Secondly, open enrollment season for the Insurance Exchanges (now referred to as the Health Insurance Marketplace, or simply the Marketplace) starts on Oct. 1, 2013. By that time, employees will need to know (and employers will need to tell them) what coverage the employer is offering as this will affect the employee's ability to receive premium reduction credits and cost-sharing reductions.
Thus, the decision to provide (or not provide) health coverage for 2014 needs to made by Oct. 1, 2013. Perhaps just as important, though, this new and evolving area will take a while to get your hands around. It is chock full of new terms, concepts and complications.
Under the play or pay mandate, an applicable large employer may be subject to a play or pay penalty if either of the following apply:
1. The employer does not offer at least 95 percent of its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. In this case, for 2014, the potential penalty equals $2,000 times the number of full-time employees over a 30-employee threshold. (The penalty is calculated and paid on a monthly basis. Thus, for 2014, the penalty is $166.67 per month per employee over the 30-employee threshold.) However, the employer is not subject to the penalty unless it receives certification that a full-time employee has enrolled in a Qualified Health Plan (QHP) through the Marketplace and is receiving a premium assistance credit or cost-sharing-reduction subsidy.
Caution: This penalty will apply even if only one full-time employee is certified as having enrolled in a QHP and is receiving a premium assistance credit or cost-sharing-reduction subsidy.
2. The employer offers minimum essential coverage, but it is unaffordable, or does not provide minimum value. In this case, for 2014, the potential penalty equals $3,000 times each full-time employee for whom the employer has received a certification that the employee enrolled in a QHP through the Marketplace and is receiving a premium assistance credit or cost-sharing-reduction subsidy. Again, the penalty is calculated and paid on a monthly basis. Thus for 2014, the penalty is $250 per month for each employee for whom certification is received. However, the total penalty for any month cannot exceed the penalty that would be applicable if the employer had not offered minimum essential coverage for the month (i.e., the number of full-time employees during the month over the 30-employee threshold multiplied by $166.67).
Generally, only individuals whose household income is at least 100 percent, but no more than 400 percent of the federal poverty line based on family size are eligible for a credit or subsidy. As an employer won't likely know its employees' household income, it will be virtually impossible to determine in advance if any of its employees will receive subsidized coverage. However, a rough estimate can be made by using Form W-2 wages.
The play or pay penalty is a nondeductible business expense for income tax purposes.
The first thing that will need to be done is to determine if the client is an applicable large employer. If not, the penalty will not apply. End of story. For applicable large employers, however, this is just the beginning of the story.
An applicable large employer, generally, is an employer that employed an average of 50 or more full-time employees (including full-time equivalents) on business days during the preceding calendar year. So, a client who has less than 50 employees (including the part-time equivalents and seasonal) during 2013 is off the hook for 2014. Of course, the closer the employee count is to the magic 50, the more work you'll likely need to do to determine if the threshold is met. Also, this will be a yearly drill. You'll need to check back in 2014 to determine the client's 2015 status.
Coming up with the employee count for employers that have a stable workforce of only full-time employees should be pretty straight forward. Not so much for employers who have part-time, seasonal or variable-hour employees. Ditto for those who hire or lose employees during the year.
For these employers, determining if the applicable large employer threshold is met can be daunting because all employees who worked (or were entitled to compensation) during the year must be taken into account.
When determining if an employer is an applicable large employer, all related businesses treated as a single employer under IRC Sec. 414(b), (c), (m), or (o) (e.g., controlled groups or affiliated service groups) are treated as one employer. Therefore, all employees of the controlled or affiliated group are taken into account in determining whether the group as a whole constitutes an applicable large employer. If the group is determined to be an applicable large employer, each separate entity of the group is considered an applicable large employer member.
Calculating the Average Number of Employees
An employer is an applicable large employer based on having an average of 50 or more full-time employees (including full-time equivalents) on business days in the previous calendar year. The average number of employees is calculated as follows:
• Step One: Calculate the number of full-time employees and the Full-time Equivalent (FTE) value of all employees who are not full-time employees for each month of the applicable year. (This will be 2013 for determining an employer's status for 2014.) To do this, the employer must first determine each employee's total hours of service during each month of the year.
• Step Two: Add together the number of full-time employees and FTE values determined in Step One for all the months of the year.
• Step Three: Divide the result of Step Two by the number of months in the year. The result, if not a whole number, is rounded down to the next lowest whole number (e.g., 49.5 is rounded down to 49).
Generally, this calculation is based on a full calendar year. However, for 2014 determinations, employers can choose to use a shorter period of six months or more. We'll discuss this transition rule shortly.
Hours of Service: Generally, hours of service include all hours that an employee is paid (or entitled to payment) (1) for performing services or (2) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence. For an hourly employee, the employees' actual hours from the employer's records must be used. For nonhourly employees (e.g., salaried employees), the employer must use one of the following methods to determine hours of service:
1. Actual Hours of Service. This is the same as for hourly employees.
2. Days-worked Equivalency. The employee is credited with eight hours of service for each day for which the employer is required to pay the individual for at least one hour of service.
3. Weeks-worked Equivalency. The employee is credited with 40 hours of service for each week for which the employer is required to pay the individual for at least one hour of service.
Practice Tip: Employers should evaluate their payroll and human resources systems to be sure the information needed to determine an employee's hours of service can be easily obtained. Systems may need to be tweaked to provide the required information in a usable format.
Full-time Employee: Generally, a full-time employee for any calendar month is an employee whose hours of service average at least 30 hours per week. To take into account that the average month consists of more than four weeks, employers can treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week [i.e., (52 weeks x 30 hours) / 12 months = 130 hours], provided the employer applies this equivalency rule on a reasonable and consistent basis.
Determining Full-time Equivalent (FTE) Value: The total hours worked each month by all employees who are not full-time employees are used to determine the FTE value that is added to the number of actual full-time employees when calculating the number of employees during a month. The FTE value is calculated as follows:
Total hours of service for employees who are not full-time employees/120
No more than 120 hours of service can be used for an employee for any month. For hourly employees, the employees' actual hours must be used. For nonhourly employees (e.g., salaried employees), the employer must use the employee's actual hours or a days-worked, or weeks-worked, equivalency can be used. The same method doesn't have to be used for all nonhourly employees. Different methods can be used for different classifications of employees as long as the classifications are reasonable and consistently applied. Additionally, an employer may change the method of calculating nonhourly employees' hours of service for each calendar year.
Cowtown Supply has 40 full-time employees (i.e., employees who work on average at least 30 hours per week) each month in 2013. Cowtown also employs 24 employees who generally work 20 hours a week each month in 2013. All employees work the entire calendar year and are paid hourly.
To determine its applicable large employer status for 2014, Cowtown must calculate the FTE value for the hours worked each month by its part-time employees. Assuming each part-time employee works 90 hours in a month, the total hours worked by the part-time employees each month are 2,160 (90 hours x 24 employees). The FTE value of the 24 part-time employees is 18 (2,160 hours / 120 hours).
For each month, Cowtown adds the 18 FTE value to the 40 full-time employees to determine the number of full-time employees for the month. It then averages the monthly totals to determine if it had an average of 50 or more full-time employees on business days in the year, and therefore, is an applicable large employer. Cowtown had 58 full-time employees (40 full-time employees + 18 FTEs) each month on business days during 2013. Therefore, Cowtown is an applicable large employer in 2014. This example uses the number of hours worked in all of 2013 to determine if Cowtown is an applicable large employer for 2014. Under the transitional rule discussed next, a shorter period could have been used.
Determining the employee count gets much more complicated when there are seasonal employees or employees who work full-time for only a portion of a year (e.g., teachers), whose compensation is not based primarily on hours worked (e.g., commissioned employees, adjunct faculty), or whose active work hours may be subject to safety-related regulatory limits (e.g., airline pilots).
Instead of using the entire 2013 calendar year to determine their applicable large employer status for calendar-year 2014, employers can chose a measurement period of six or more consecutive calendar months in the 2013 calendar year (Preamble to Prop. Reg. 4980H-2, section IX.E). The transition measurement period must begin no later than 7/1/13, and end no earlier than 90 days before the first day of the plan year beginning in 2014.
This transition rule allows employers time to choose which method to use to count employees' hours of service, have a period of at least six months to determine its applicable large employer status, and if it is an applicable large employer, time to implement the play or pay requirements. Employers with calendar year plans that want to use the shortest transition period (i.e., six months) and a full 90-day administrative period, will need to begin tracking hours April 2, 2013 and complete the tracking by Oct. 2, 2013.
An employer must maintain records showing it has complied with the play or pay mandate. The records should document how the employer determined if it was (or wasn't) an applicable large employer.
Clients that fall below the 50-employee threshold are off the hook, at least for 2014. For clients who turn out to be applicable large employers, your work has just begun. They'll need to decide whether to provide (or not provide) health insurance coverage for 2014, and that decision will need to be made by Oct. 1, 2013. Stay tuned for more on that subject.
Robin Tuttle Christian, CPA, is senior tax analyst and managing editor of PPC's Practitioners Tax Action Bulletins at Thomson Reuters.
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