The Patient Protection and Affordable Care Act was signed into legislation on March 23, 2010, and the United States Supreme Court largely upheld this legislation in its ruling June 28, 2012. This landmark legislation will first impact individual taxpayers for the tax year ending December 31, 2013 in the form of an additional 0.9% Medicare hospital insurance tax on wages and self-employment income, and a 3.8% Medicare contribution tax on net investment income.
Another significant piece of this legislation becomes effective January 1, 2014, the Internal Revenue Code (IRC) Section 4980H employer healthcare mandate, also known as the “shared responsibility rules.”
Pursuant to IRC Section 4980H, applicable large employers (employing an average of 50 or more full-time employees) will be subject to an annual assessable payment (the shared responsibility penalty) if:
- A large employer a) fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for any month, or b) offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage in an eligible employer-sponsored plan for any month, but the coverage is unaffordable or does not provide minimum value, and
- At least one full-time employee has been certified as having enrolled in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.
Employers that do not provide healthcare coverage to at least 95% of its FTEs will be liable for an annual assessment of $2,000 per full-time employee, providing at least one FTE receives the premium tax credit or participates in a cost-sharing reduction through a government healthcare insurance subsidy. If the employer does provide coverage to at least 95% of its FTEs, but that coverage is unaffordable or does not provide minimum value and at least one employee receives the premium tax credit or a cost-sharing reduction, the annual assessment is the lesser of increases to $3,000 per FTE receiving the premium tax credit or $2,000 for each FTE. The first 30 employees are excluded from both assessments.
FTEs are those employed, on average, at least 30 hours per week, and includes full-time equivalent employees, determined based on their hours of service. The 50 FTE threshold is a monthly average throughout the year to take into account seasonal businesses or other businesses that may fluctuate significantly in employment during the year. Related entities, or those with common ownership, are generally considered as a single employer for determining whether the 50 FTE test is met.
Healthcare coverage is considered to be “unaffordable” if the employee’s required contribution with respect to the employer’s health plan exceeds 9.5% of the taxpayer’s household income. Because an employer cannot be expected to know an employee’s household income, there exists a safe harbor whereby an employer’s coverage will be considered affordable if the employee’s cost of coverage does not exceed 9.5% of Form W-2 Box 1 wages.
A minimum value calculator will be made available to employers so that they can assess whether their plan provides “minimum value” meaning, the plan’s share of the total allowed costs of benefits provided under the plan is greater than 60% of total costs under the plan.
It is our understanding that the Internal Revenue Service will be contacting employers that may have required assessable payments beginning in 2014. The employer will have the opportunity to respond if it believes that the IRS is in error before any assessment is made.
Schneider Downs will continue to provide insight into the employer healthcare mandate as additional guidance is released. In the meantime, please feel free to contact your Schneider Downs tax advisor with any questions you may have.
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