With last year’s Supreme Court ruling upholding the constitutionality of the Patient Protection and Accountable Care Act (ACA), dealers are now faced with the reality of implementing the most sweeping health care reform change to date – the Employer Shared Responsibility, otherwise called, the “Pay or Play” provision.
Beginning January 1, 2014, the new Employer Shared Responsibility rules require “large” employers to offer their full-time employees health insurance that provides “minimum essential coverage”, at a “minimum value”, and is considered “affordable.” If these employers fail to meet any of the minimum requirements and have at least one full-time employee who receives a premium tax credit for purchasing coverage through one of the new insurance marketplaces or “Exchanges”, they will be assessed an Employer Shared Responsibility penalty.
In light of these new rules, what does your dealership need to do to be prepared? First of all, a dealership will need to determine whether or not it is a “large” employer (addressed below) for purposes of the Employer Shared Responsibility rules. Once that question is answered, the next questions that generally follow are:
1) If your dealership currently offers employer-sponsored health insurance coverage, will that coverage satisfy the “minimal essential coverage”, “minimum value” and “affordability” requirements?
2) If your dealership does not offer coverage, or it does offer coverage but it does not satisfy the minimum requirements, what Employer Shared Responsibility penalties will it pay?
3) Once your dealership knows the new rules and what penalties it may have to pay, what’s the next step?
Is your dealership a “large” employer for purposes of the Employer Shared Responsibility rules?
To be subject to the Employer Shared Responsibility provisions, an employer must employ at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50 (for example, 40 full-time employees employed 30 or more hours per week on average plus 20 half-time employees employed 15 hours per week on average are equivalent to 50 full-time employees). Employers will determine each year, based on their current number of employees, whether they will be considered a large employer for the next year. For example, if an employer has at least 50 full-time employees, (including full-time equivalents) for 2013, that employer will be considered a large employer for 2014.
For purposes of the large employer rules, if two or more companies have a common owner or are otherwise related, they are combined for purposes of determining their number of employees. This is very important, because a single dealership entity might have less than 50 employees on its own but might still be a “large” employer when combined with other dealerships in a related group. Refer to the IRS rules on “controlled group” and common ownership if you are unsure about your specific situation.
If your dealership does not meet the definition of a “large employer”, you can stop here as these rules will not apply to you.
If your dealership does meet the large employer definition, you will need to answer the next few questions.
Does your dealership’s existing health plan satisfy the “minimum essential coverage” requirement?
Most broad-based medical coverage typically provided by employers should satisfy the minimum essential coverage requirements. Specific coverage, such as coverage only for accident or disability income insurance, stand-alone dental and vision insurance, or workers' compensation insurance would not meet the requirement.
Does your health plan provide “minimum value”?
Under the minimum value requirement, a health plan must cover at least 60% of the total allowed costs of benefits provided under the plan. The IRS and the U.S. Department of Health and Human Services will make available an online minimum value calculator where employers can enter certain plan information and obtain a determination of whether the plan provides minimum value.
Is your health plan “affordable”?
If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement.
Because employers generally will not know their employees’ household incomes, employers can take advantage of one of the IRS affordability safe harbors. Under the safe harbors, an employer can avoid a payment if:
1. the cost of the coverage to the employee would not exceed 9.5% of the wages the employer pays the employee that year, as reported in Box 1 of Form W-2, or
2. the employee’s monthly contribution amount for the self-only premium is equal to or lower than 9.5% of the employee’s computed monthly wages (130 hours times rate of pay), or
3. the employee’s cost for self-only coverage doesn’t exceed 9.5% of the federal poverty line for a single individual.
What are the Employer Shared Responsibilities penalties that may apply?
1. Employers that fail to offer 95% of full-time employees and their dependents (defined as an employee’s children under age 26) health coverage, that meets the essential minimum coverage requirement, will be assessed a penalty if one of their full-time employees receives a premium tax credit when buying insurance from the new insurance marketplaces or Exchanges. The annual penalty is $2,000 per full-time employee in excess of 30 full-time employees.
2. Employers that provide their full-time employees (and their dependents) with coverage that isn’t deemed affordable or that fails to provide minimum value and have at least one employee who receives a premium tax credit for buying insurance from an Exchange, will pay an annual penalty of $3,000 for each employee receiving the credit (but in no case more than $2,000 (annually) for each full-time employee beyond the first 30 full-time employees).
Examples of penalty calculation:
1. Chevy Store, Inc. has 120 employees and does not provide health insurance. In June 2014, five (5) employees buy coverage from an insurance exchange and receive premium tax credits.
The penalty is calculated based on total employees less 30 and is applied monthly.
120 employees less 30 = 90 employees x $166.67 ($2,000/12 mos.) = $15,000/mo.
Chevy Store, Inc. would pay a non-deductible $15,000 penalty for June or $180,000 for a full calendar year.
2. Chevy Store, Inc. has 120 employees and offers insurance that meets the essential minimum coverage and minimum value requirement to 95% of full-time employees. However, in June 2014, four (4) employees go to the Exchange, buy insurance and receive premium tax credits because Chevy Store Inc.’s insurance coverage did not meet the affordability requirement for those employees (it was more than 9.5% of each employee’s annual household income).
4 employees x $250 ($3,000/12 mos.) = $1,000/mo.
Chevy Store, Inc. would pay a non-deductible $1,000 penalty for June or $12,000 for a full calendar year.
Once you know the new rules and possible penalties, what do you do next?
If a dealer’s first reaction to the new Employer Shared Responsibility rules is to contemplate dropping their employer-sponsored plans and opt instead to just pay the penalties, they might want to first take a close look at the after-tax cost of what they are currently paying.
It is important to note that the Employer Shared Responsibility penalties are NOT tax-deductible; but employer healthcare costs ARE. This means that in any comparison of healthcare costs to penalty costs, you need to look at the after-tax dollars spent.
For example, assume Chevy Store Inc. currently pays $306,000 for their employer-sponsored plan. If the dealership decides to not offer the coverage and has at least one employee receive a premium tax credit from an Exchange, they will pay the non-deductible penalty of $180,000 (example #1 above for a full calendar year.) On the surface, the penalty amount of $180,000 sounds much better than the insurance cost of $306,000; that is, until you look at the after-tax cost. Assuming a tax rate of 42% (max could be near 45%), the after-tax cost of the employer sponsored plan is only $177,480 ($306,000 x 58%); an amount that is very close to the penalty amount.
Another way to look at this example is to say, instead of paying an IRS penalty amount of $180,000, the dealer could offer an employer-sponsored healthcare plan costing $310,345 ($180,000/.58) on a pre-tax basis for the same amount after-tax. In this case, it may make sense for a dealership that has not offered a plan in the past to now offer one.
If a dealership decides to provide a sponsored healthcare plan but does not feel that it can meet the minimum value or affordability requirement for all employees, it will need to weigh the cost of paying a $3,000 non-deductible penalty for any employee receiving a premium tax credit against the tax-deductible increase in costs to get the plan up to minimum value and affordability requirements. In this case, paying the $3,000 penalty for just a few employees receiving a tax credit may or may not outweigh increased employer plan costs.
Comprehending the new Employer Shared Responsibility rules will likely be very overwhelming for most employers. In light of the complexity of the new rules, dealers should consider requesting professional assistance. Insurance brokers and advisors can help with plan costs and design, attorneys can advise on labor and ERISA laws, and accountants can help with cost-to-benefit and cash flow analysis. All of these advisors working together as a team will help you successfully prepare and navigate through the changes successfully.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.