The Affordable Care Act’s (ACA) Employer Shared Responsibility Determination and the Potential Employer Penalty Julie M. Whittaker Specialist in Income Security April 19, 2016 Congressional Research Service 7-5700 www.crs.gov R43981 ACA: Employer Shared Responsibility Determinations and Potential Penalties Summary The Affordable Care Act (ACA) creates shared responsibilities for both employers and individuals with regard to health insurance coverage. The ACA expands federal private health insurance market requirements and requires the creation of health insurance exchanges to provide individuals and small employers with access to insurance. This report examines the new employer responsibilities. To ensure that employers continue to provide some degree of health coverage, the ACA includes a “shared responsibility” provision. This provision does not require that an employer offer employees health insurance; however, the ACA imposes penalties on a “large” employer if at least one of its full-time employees obtains a premium credit through the newly established exchange. As of 2015, employers with at least 50 full-time equivalent (FTE) employees are subject to the shared responsibility provisions. However, in 2015 only, employers with between 50 and 100 FTE employees were eligible for transition relief if certain criteria were met. The ACA sets out a multi-stage process for determining, first, which firms may be subject to the penalty (i.e., definition of large), and second, which workers within a firm would trigger the penalty. Complex calculations and multiple definitions of full-time work have led to confusion among policymakers and employers. This report discusses these definitions and the application to the employer penalty in greater detail. The potential employer penalty applies to all common law employers, including government entities (such as federal, state, local, or Indian tribal government entities) and nonprofit organizations that are exempt from federal income taxes. If multiple businesses are owned by one individual or entity, employees in each of the franchises must be aggregated to determine the number of both FTEs and full-time employees. The actual amount of the penalty varies depending on whether an employer currently offers insurance coverage and the number of full-time employees. Employers must provide both affordable and adequate health insurance coverage to avoid paying a penalty. Coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.66% of the employee’s household income for 2016. However, the Internal Revenue Service (IRS) allows employers to use the employee’s W-2 income in lieu of household income for this calculation (because most employers do not readily have information on an employee’s household income). A health plan is considered to provide adequate coverage if the plan’s actuarial value (i.e., the share of the total allowed costs that the plan is expected to cover) is at least 60%. The total penalty for any applicable large employer is based on its number of full-time employees. The ACA specified that working 30 hours or more per week is considered full-time. Employers have some flexibility to designate certain measurement or look-back periods (up to 12 months) during which they calculate whether a worker is full-time or not. Once an employee is determined to be full-time, there is an administrative period to enroll employees in a health plan, if necessary. If an employer penalty is levied under the ACA requirements, it applies only for the time period following the administrative period, which is called the stability period. An employer is not penalized if an employee enters the exchange and receives a premium credit during the measurement period. Appendix A provides a list of employer reporting requirements. Appendix B includes a table of relevant legislation introduced in the 114th Congress. Congressional Research Service ACA: Employer Shared Responsibility Determinations and Potential Penalties Contents Employer Shared Responsibility Determinations............................................................................ 1 Applies to All Employers .......................................................................................................... 1 Potential Employer Penalty Requirements ................................................................................ 1 Large Employers, Shared Responsibility Provisions, and Potential Penalty Determinations ....................................................................................................................... 2 Large Employer Status: Determined by Full-Time Equivalent Calculation ....................... 3 Employers Such as Franchise Owners or Multiple Business Owners ................................ 3 Independent Contractors ..................................................................................................... 4 Temporary Staffing Firm Workers ...................................................................................... 4 Calculating Large Employer Status When the Firm Employs Workers Covered by TRICARE or Veterans Assistance ................................................................................... 4 Calculating Large Employer Status When the Firm Employs Seasonal Workers ............... 4 Potential Penalties on Large Employers .......................................................................................... 5 Large Employers Determined to Not Offer Health Coverage ................................................... 5 Large Employers Determined to Offer Health Coverage .......................................................... 6 How to Determine an Employee’s Full-Time Status ................................................................. 7 Ongoing Employees .................................................................................................................. 9 New Employees Reasonably Expected to Work Full-Time ...................................................... 9 Full-Time Status Determination of Variable Hour Work and Seasonal Workers ...................... 9 Variable Hour Employees ................................................................................................... 9 Seasonal Workers .............................................................................................................. 10 Full-Time Status Determination of Adjunct Faculty, Employees with Layover Hours or On-Call Hours, Employees with Difficult to Identify or Track Hours ............................ 10 Exclusions from Definition of Hour of Service: Volunteers, Student Workers in Certain Types of Employment, and Members of Religious Orders ...................................... 11 Volunteers (Including Some Volunteer Firefighters) ......................................................... 11 Student Workers ................................................................................................................. 11 Religious Orders ................................................................................................................ 11 Health Insurance Coverage Requirements for Employer Plans ..................................................... 11 Dependent Coverage: Children Under 26 but Not Spouse ...................................................... 12 Affordable Coverage ............................................................................................................... 12 Affordability and Family Health Insurance Coverage: The “Family Glitch” ................... 12 Adequate Coverage (Minimum Value).................................................................................... 12 Implementation and Transition Relief Through 2015 ................................................................... 13 Measurement Period ................................................................................................................ 13 Dependent Coverage ............................................................................................................... 13 Employers with Fewer Than 100 FTEs ................................................................................... 14 Limited Workforce Size .................................................................................................... 14 Maintenance of Workforce and Aggregate Hours of Service ........................................... 14 Maintenance of Previously Offered Health Coverage ...................................................... 14 Figures Figure 1. Determining If an Employer Is Subject to Shared Responsibility (Penalty) Provisions in 2016 .................................................................... 2 Congressional Research Service ACA: Employer Shared Responsibility Determinations and Potential Penalties Tables Table 1. Time Frame for Determining Full-Time Status ................................................................. 8 Table B-1. Related Legislative Activity in the 114th Congress ...................................................... 17 Appendixes Appendix A. Employer Reporting and Other Requirements ......................................................... 15 Appendix B. Related Legislative Activity in the 114th Congress .................................................. 17 Contacts Author Contact Information .......................................................................................................... 21 Congressional Research Service ACA: Employer Shared Responsibility Determinations and Potential Penalties T he Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended) expanded insurance coverage in the United States through its “shared responsibility” provisions: Employers either provide health coverage or face potential employer tax penalties; likewise, individuals purchase health coverage or face potential individual tax penalties.1 The ACA does not require employers to provide health coverage, but it does impose employer penalties in the form of a monthly tax on employers that do not provide adequate and affordable health coverage to certain employees. This is known as the employer “shared responsibility” provision. Since 2015, employers with at least 50 full-time equivalent (FTE) employees are subject to the employer shared responsibility provisions under Section 4908H of the Internal Revenue Code (IRC) as amended by the ACA. However, in 2015, employers with between 50 and 100 FTE employees were eligible for transition relief if certain criteria were met. (For details, see “Implementation and Transition Relief” below.) This report describes the potential employer penalties as well as regulations to implement the ACA employer provisions. The regulations address insurance coverage requirements, methodologies for determining whether a worker is considered full time, provisions relating to seasonal workers and corporate franchises, and other reporting requirements. For an economic analysis of the employer penalty and policy options to modify the penalty, see CRS Report R43181, The Affordable Care Act and Small Business: Economic Issues, by Sean Lowry and Jane G. Gravelle. Employer Shared Responsibility Determinations Applies to All Employers The ACA employer shared responsibility provisions apply to all common law employers, including government entities (such as federal, state, local, or Indian tribal government entities) and nonprofit organizations that are exempt from federal income taxes. Potential Employer Penalty Requirements The potential employer penalty does not explicitly require that employers offer their employees acceptable health coverage. However, it does impose penalties on certain firms with at least 50 FTE employees if one or more of their full-time employees obtains a premium tax credit through the newly established health insurance exchanges.2 An individual may be eligible for a premium tax credit if his or her income is between certain thresholds and the individual’s employer does not offer health coverage or offers insurance that is “not affordable” or does not provide “minimum value,” as defined by the ACA. As shown in Figure 1, determining the potential exposure to the employer penalty is a multi-stage process. 1 For information on the individual shared responsibility provisions, see CRS Report R41331, Individual Mandate Under the ACA, by Annie L. Mach. 2 For more information about exchanges under the Affordable Care Act (ACA), see CRS Report R44065, Overview of Health Insurance Exchanges, coordinated by Namrata K. Uberoi . For more information on premium credits in particular, CRS Report R44425, Eligibility and Determination of Health Insurance Premium Tax Credits and Cost- Sharing Subsidies: In Brief, by Bernadette Fernandez. Congressional Research Service 1 ACA: Employer Shared Responsibility Determinations and Potential Penalties  First, the firm must be a large employer with at least 50 FTEs to be potentially subject to the penalty.  Second, only workers who are considered to be full-time (generally, averaging 30 hours or more per week) may trigger the penalty.  Third, the actual calculation of the penalty will depend upon whether the employer currently provides health coverage to its full-time employees, if the coverage is considered adequate and affordable as defined by the ACA, and the number of full-time employees. Figure 1. Determining If an Employer Is Subject to Shared Responsibility (Penalty) Provisions in 2016 Source: Congressional Research Service (CRS) analysis of P.L. 111-148 and P.L. 111-152. Large Employers, Shared Responsibility Provisions, and Potential Penalty Determinations Only large employers may be subject to penalties regarding employer-sponsored health insurance. The ACA defines a large employer as one who employed an average of at least 50 FTEs on business days during the preceding calendar year.3 3 Internal Revenue Code (IRC) §4980H(c)(2), as amended by §1513 and §10106 of the ACA, and as amended and renumbered by §1003 of P.L. 111-152. The statute uses the term full-time employee in the definition of large employer but then expands on the definition of large employer to include both full- and part-time workers. For employers not in existence throughout the preceding calendar year, the determination of whether an employer is large is based on the average number of employees a firm reasonably expected to be employed on business days in the current calendar year. Any reference to an employer includes a reference to any predecessor of that employer. Congressional Research Service 2 ACA: Employer Shared Responsibility Determinations and Potential Penalties Large Employer Status: Determined by Full-Time Equivalent Calculation As depicted in Figure 1, to determine whether an employer is a large employer, the hours worked by both full-time and part-time employees must be calculated. Full-time is defined as having worked on average at least 30 hours per week.4 Hours worked by part-time employees (i.e., those working less than 30 hours per week) are converted into FTEs and are included in the calculation. In general, hours worked by seasonal employees are also included in this calculation. Overall hours worked by part-time employees during a month are added up, and the total is divided by 120 and added to the number of full-time employees to get the number of FTE workers.5 This calculation determines only whether an employer is considered large for purposes of potentially being subject to a penalty.6 The actual penalty is applicable solely to health coverage status of full-time workers and is discussed in the “How to Determine an Employee’s Full-Time Status” section of this report. Example: Full-Time Equivalent Calculation A firm has 35 full-time employees (averaging 30 or more hours per week, or 120 hours per month). In addition, the firm has 20 part-time employees who each work 24 hours per week (96 hours per month). Because of the hours worked, these part-time employees would be treated as equivalent to 16 full-time employees for the month based on the following calculation: 20 part-time employees x 96 hours = 1,920 total hours worked by part-time employees 1,920 ÷ 120 = 16 FTEs The 16 FTEs added to the 35 full-time employees will result in the firm being considered a “large” employer based on the number of part-time hours worked: 16 FTEs + 35 full-time employees = 51 FTEs Because 51 > 50, the employer is considered to be a large employer under the ACA employer penalty provisions. The process to determine the underlying employer may be a complicated determination. Owners or part-owners in multiple businesses must follow Internal Revenue Service (IRS) aggregation rules. Firms that use independent contractors must follow IRS rules for determining whether the contractor is an employee. Firms that contract with a temporary staffing agency must determine which entity is the employer (i.e., the firm or the staffing agency) for ACA purposes. Finally, businesses that hire seasonal workers have special rules on how to count hours worked by seasonal employees.7 Employers Such as Franchise Owners or Multiple Business Owners The ACA large-employer calculation requires that an employer of multiple entities (such as a franchise owner with several restaurants) must follow the IRS aggregation rules governing 4 IRC §4980H(c)(4). 5 Section 4980H(c)(2)(E) specifies that for purposes of determining full-time equivalents (FTEs), the aggregate number of hours of service of employees who are not full-time employees for the month is divided by 120 to get an FTE. However, for purposess of determining who is a full-time worker for the assessment of the actual penalty, proposed regulations released on December 28, 2012, would treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week (52 x 30). Thus, a worker who worked 130 hours a month would be considered full-time for purposes of the penalty payment. 6 For information on a potential impact of the ACA provisions on smaller (but potentially determined to be large for the purpose of the ACA) businesses, see CRS Report R43181, The Affordable Care Act and Small Business: Economic Issues, by Sean Lowry and Jane G. Gravelle. 7 IRC §4980H(c)(2)(B). An employer will not be considered a large employer if its number of FTEs exceeds 50 for 120 days or less and it is solely the seasonal workers who push the employer into the large employer designation. Congressional Research Service 3 ACA: Employer Shared Responsibility Determinations and Potential Penalties controlled groups.8 Specifically, if one individual or entity owns (or has a substantial ownership interest in) several franchises, all those franchises are essentially considered one entity. In this case, for purposes of the 50-FTE rule, the employees in each of the franchises must be added together to determine the number of FTEs. Independent Contractors The ACA definition of an employer is based on the common law standard in which a worker is considered to be an employee if the worker is subject to the will and control of the employer not only as to what shall be done but how it shall be done. The potential employer penalty applies to all common law employers, including government entities (such as federal, state, local, or Indian tribal government entities) and nonprofit organizations that are exempt from federal income taxes. An independent contractor is a worker who controls what will be done and how it will be done and for whom the contract dictates the desired result of the work. The IRS provides further guidance on the distinction between employees and independent contractors.9 An independent contractor would not be considered an employee for the purposes of the employer penalty calculation. Temporary Staffing Firm Workers In general, the employer of a temporary agency worker is the employing agency rather than the firm that has contracted with the agency to provide workers on a temporary basis.10 Calculating Large Employer Status When the Firm Employs Workers Covered by TRICARE or Veterans Assistance Hours worked by individuals receiving care under the TRICARE program, or individuals enrolled and receiving coverage through certain Department of Veterans Affairs11 health care programs, are excluded from calculations to determine if an employer is large.12 Calculating Large Employer Status When the Firm Employs Seasonal Workers When determining whether a firm meets the ACA definition of an applicable large employer, the hours worked by seasonal employees13 may be treated differently if (1) an employer would be 8 The controlled group rule applies under §414(b), (c), (m), or (o) of the IRC and includes employees of partnerships, proprietorships, etc., which are under common control by one owner or a group of owners. 9 See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or- Employee. When in doubt, a business should file an IRS form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding,” available at http://www.irs.gov/pub/irs-pdf/fss8.pdf. 10 For details, see the discussion of “temporary staffing firms” within the Internal Revenue Service Bulletin 2014-9, February 24, 2014, http://www.irs.gov/irb/2014-9_IRB/ar05.html. 11 These are the health care programs under Chapters 17 and 18 of 38 U.S.C. 12 Section 4007 of P.L. 114-41. For information on TRICARE, see CRS Report RL33537, Military Medical Care: Questions and Answers, by Don J. Jansen. For information on health coverage provided by the Department of Veterans Affairs, see CRS Report R42747, Health Care for Veterans: Answers to Frequently Asked Questions, by Sidath Viranga Panangala. 13 An employee may be a seasonal employee if the employee is hired into a position for which the customary annual employment is six months or less and the period of employment begins each calendar year in approximately the same part of the year (e.g., summer or winter). Congressional Research Service 4 ACA: Employer Shared Responsibility Determinations and Potential Penalties considered a large employer for fewer than 120 days, and (2) for those days the hours worked by seasonal employees are what push the employer’s FTE calculation above 50 FTEs. If these two conditions are met, the employer may exclude the hours worked by seasonal employees and thus would not be considered a large employer. Otherwise, all hours by all employees (including seasonal workers) are applied to determine large-employer status. Potential Penalties on Large Employers Regardless of whether a large employer offers coverage, it will be potentially liable for a shared responsibility tax (penalty) only if at least one of its full-time employees obtains coverage through an exchange and receives a premium tax credit. For purposes of determining the penalty, a full- time employee includes only those individuals working on average 30 hours or more per week. As shown in Figure 1, part-time workers are not included in the penalty calculations (even though they are included in the determination of a “large employer”). An employer will not pay a penalty for any part-time worker even if that part-time employee receives a premium credit. As discussed under implementation issues below, employers are not likely to pay a penalty based upon seasonal workers receiving a premium credit if they work less than 30 hours on average over a pre-specified time period (up to 12 months). Large Employers Determined to Not Offer Health Coverage A large employer that does not offer health coverage will be subject to the ACA employer penalty only if any of its full-time employees obtain coverage through an exchange and receive a premium tax credit.14 In 2016, the monthly penalty assessed to an employer that does not offer coverage is equal to the number of its full-time employees minus 30 multiplied by one-twelfth of $2,160 for any applicable month. That penalty is indexed by a premium adjustment percentage for each calendar year.15 14 Individuals who are not offered employer-sponsored coverage and who are not eligible for Medicaid or other programs may be eligible for premium tax credits for coverage through an exchange. Eligible individuals will generally have income of at least 100% and up to 400% of the federal poverty level. For details, see CRS Report R44425, Eligibility and Determination of Health Insurance Premium Tax Credits and Cost-Sharing Subsidies: In Brief, by Bernadette Fernandez. 15 The premium adjustment percentage is the national average premium growth rate (IRC §4980H(c)(5) and ACA §1302(c)(4)). The adjustments for 2015 and 2016 were published in Internal Revenue Service Bulletin 2015-87, p. 20 at https://www.irs.gov/pub/irs-drop/n-15-87.pdf. Congressional Research Service 5 ACA: Employer Shared Responsibility Determinations and Potential Penalties Example 1: Calculating an Employer Penalty When the Employer Does Not Offer Health Coverage in 2016 A large employer of 200 FTEs (of which 120 are full-time employees) does not offer adequate health coverage to at least 95% of its full-time employees. At least one full-time employee receives a premium subsidy. In 2016, the monthly employer penalty would be calculated as: 1/12 x (number of full-time employees less 30) x $2,160 = monthly penalty 1/12 x (120 - 30) x $2,160 = $16,200. Large Employers Determined to Offer Health Coverage Large employers that offer health coverage may face a penalty if the employer’s coverage fails to meet one of two criteria: 1. Affordability—The individual’s required contribution toward the plan premium for self-only coverage cannot exceed 9.66% of his/her household income in 2016. 2. Adequacy—The health plan must pay for at least 60%, on average, of covered health care expenses to be considered adequate. Employers that offer unaffordable or inadequate health insurance coverage do not meet the employer requirements if at least one full-time employee declines the coverage and obtains a premium credit in an exchange plan. The penalty amounts are indexed by a premium adjustment percentage for each subsequent calendar year.16 In 2016, the penalty payment amount is the lesser of  the number of full-time employees who receive a premium credit multiplied by one-twelfth of $3,240 for any applicable month, or  the total number of the firm’s full-time employees minus 30, multiplied by one- twelfth of $2,160 for any applicable month. Example 2: Calculating an Employer Penalty When the Employer Offers Health Coverage in 2016 A large employer of 200 FTEs (of which 120 are full-time employees) offers adequate (but perhaps not affordable to some employees) health coverage to at least 95% of its full-time employees. In one month, 77 of the employer’s full- time employees received a subsidy. The monthly employer penalty in 2016 would be calculated as the lesser of 1/12 x (number of full-time employees receiving subsidy) x $3,240=$20,790 or 1/12 x (number of full-time employees less 80) x $2,160+ $16,200 Since $20,790 > $16,200, the monthly employer penalty would be $16,200. 16 Ibid. Congressional Research Service 6