Just before Christmas in a blast of holiday cheer, the Internal Revenue Service (“IRS”) issued Notice 2015-87, which contains additional guidance on various aspects of the Employer Mandate under Affordable Care Act (“ACA”). In this newsletter, we address the most significant aspects of this guidance.
Requirements. To avoid potential penalties, the ACA’s Employer Mandate requires Applicable Large Employer Members (“ALEMs”) to offer their full-time employees (“FTEs”) the opportunity to enroll in employer-sponsored group medical plan coverage (“Minimum Essential Coverage”) that provides Minimum Value and is Affordable. The ACA defines an “FTE” as an employee who averages 30 hours per week.
Penalties. The potential penalties for failing to comply with the Employer Mandate are:
- Sledge Hammer Penalty. An ALEM that fails to offer Minimum Essential Coverage to 95% (70% for 2015) of its FTEs may be subject to the Sledge Hammer Penalty if one FTE obtains coverage on an Exchange and receives a subsidy. The amount of the Sledge Hammer Penalty would be equal to $2,000 in 2014 (increased by cost-of-living adjustments in future years), times the number of all but a few FTEs.
- Tack Hammer Penalty. An ALEM may be subject to the Tack Hammer Penalty (i) if the ALEM either (A) did not offer an FTE Minimum Essential Coverage or (B) offered him/her Minimum Essential Coverage that was either not Affordable or did not provide Minimum Value; and (ii) if the FTE obtains coverage on an Exchange and receives a subsidy. The amount of the Tack Hammer Penalty with respect to an FTE would be equal to $3,000 in 2014 (increased by cost-of-living adjustments in future years).
Affordability. In order for coverage to be Affordable, the cost of employee-only coverage may not exceed 9.5% of an FTE’s household income. IRS regulations provide ALEMs with Affordability safe harbors (based on W-2 wages, rate of pay, and the federal poverty level) that are also calculated using 9.5%. Early in 2015, the IRS announced that the percentages used to calculate premium subsidies would be subject to increase each year based on a cost-of-living adjustment. However, the IRS did not state whether or not this cost-of-living adjustment would also apply to the 9.5% used to determine Affordability.
Hours of Service. For purposes of determining whether an employee is an FTE, the ACA defines Hours of Service as all hours for which an employee is paid, whether or not he/she is providing services during those hours. In regulations, the IRS has provided that, for ACA purposes, Hours of Service generally will be the same as under the definition of “hours of service” used under the Department of Labor regulations that apply to qualified retirement plans. This led to some confusion about whether or not certain hours for which an employee is paid when the employee is not working should be counted towards determining FTE status.
Clarification under Notice 2015-87
Adjustment in Affordability Percentage. In Notice 2015-87, the IRS announced that the annual cost-of-living adjustment will apply to the Affordability percentage, beginning in 2015. In particular, the IRS provided the following increased percentages for determining affordability for 2015 and 2016:
|Maximum Affordable Employee-Only Monthly Premium Based on Mainland Federal Poverty Line||$92.39||$93.76||$94.75|
Of course, the notice was released too late to allow employers to adjust employee premiums for 2015 and (for most employers) for 2016. However, the increased percentages can provide some breathing room, especially for employers relying on the W-2 wages and rate of pay affordability safe harbors.
Adjustment in Penalty Levels. The IRS also announced the adjusted amount of the Sledge Hammer and Tack Hammer penalties for 2016.
|Sledge Hammer||$2,080 ($173.33 per month)||$2,160 ($180 per month)|
|Tack Hammer||$3,120 ($260 per month)||$3,240 ($270 per month)|
Counting Hours of Service. In Notice 2015-87, the IRS provided clarification in regard to whether certain hours for which an employee is paid but does not work are counted in Hours of Service for determining FTE status:
|Hours Paid But Not Worked||Counted/Not Counted|
|Hours for which an employee is paid after terminating employment (e.g., post-employment payment of accrued but unused vacation)||Not Counted|
|Hours for which an employee receives payment to reimburse him/her for medical expenses||Not Counted|
|Hours for which an employee receives workers’ compensation||Not Counted|
|Hours for which an employee receives short-term disability or long-term disability benefits that were paid for by the employee on an after-tax basis||Not Counted|
|Hours for which an employee receives short-term disability or long-term disability benefits that were paid for with employer contributions (i.e., either employer funds or employee pay contributed on a pre-tax basis through a cafeteria plan)||Counted|
|All countable hours for which an employee is paid but does not work and which exceed the 501-hour limit that applies to retirement plans||Counted|
Opt-Out Payments and Affordability.
Opt-Out Payment Rule. Based on tortured logic, the IRS has formally decided that opt-out payments are counted as part of the cost of coverage for determining whether an ALEM has offered Affordable coverage to an FTE. For example, if an ALEM offers FTEs medical coverage for $90 per month (well under the federal poverty level affordability safe harbor), but also offers a payment of $2,400 per year if an FTE opts out of coverage, the IRS has taken the position that the FTE’s cost of coverage is $290 per month. In other words, the IRS views the cost to the FTE as the $90 he/she must pay, plus the monthly amount he/she must give up by turning down the opt-out payment.
Effective Date. ALEMs that had opt-out arrangements formally adopted and in effect prior to December 16, 2015, do not need to include the opt-out payment when determining the cost of coverage until the IRS issues final regulations adopting this rule. However, for opt-out arrangements that were not in existence prior to December 16, 2015, ALEMs must include the opt-out payment when determining the cost of coverage for Affordability calculations.
In addition, based on earlier IRS guidance, under the same tortured logic, an opt-out arrangement provided only to a subset of employees participating in a self-insured medical plan could result in impermissible discrimination. This could result because the IRS treats the opt-out amount as increasing the contribution amount charged to employees eligible for the opt out.
Impact. While belated, this guidance will provide employers some clarity in attempting to satisfy their Employer Mandate obligations going forward. In addition, this guidance casts doubt on the future viability of opt-out arrangements.
Contact Information. For more information from Mazursky Constantine, please contact Don Mazursky, Kelly Meyers, or Alex Smith. For additional information from VCG Consultants, please contact Leslie Schneider (770.863.3617).