Minimum Essential Coverage and the Individual Mandate Tax
Beginning in 2014, the Patient Protection and Affordable Care Act (PPACA) requires nearly all individuals to demonstrate and maintain proof of “minimum essential coverage,” which includes: qualified employer-sponsored health insurance plans, qualified plans purchased in the individual market, government-sponsored health insurance programs (e.g., Medicare, Medicaid), and grandfathered individual and group health plans.
Failure to demonstrate and maintain minimum essential coverage by March 31, 2014 will leave an individual subject to the individual mandate tax. For an individual, the tax begins in 2014 and will be $95 or 1 percent of household income above the filing threshold (whichever is greater). In 2015, the individual tax rises to $325 or 2 percent above the filing threshold. In 2016, the mandate tax reaches $695 or 2.5 percent above the filing threshold. After 2016, the amount will rise annually by a cost-of-living adjustment.
Employer Mandate Penalties
Beginning in 2015, the healthcare law requires “large” employers—businesses with 100 or more full-time or full-time equivalent (FTE) employees—to either offer minimum essential coverage to full-time employees or pay a penalty tax. If a “large” employer does not offer minimum essential coverage to at least 70 percent full-time employees, and one or more full-time employees claim a subsidy on the individual exchange (income between 100 and 400 percent of the federal poverty level), then the employer will be subject to a $2,000 per full-time employee penalty (minus 80 full-time employees).
In 2016, mid-size businesses with 50-99 full-time or FTE employees will also be subject to the employer mandate. Mid-size and large businesses will be required to offer minimum essential coverage to at least 95 percent of full-time employees and their dependents or pay penalties. Dependents are defined as children up to age 26. Spouses are not considered dependents.
If a “midsize” or “large” employer does offer minimum essential coverage to full-time employees and their dependents, but it is deemed unaffordable (self-only premiums exceed 9.5 percent of employee’s taxable income) or not of minimum value (60 percent actuarial value) for certain full-time employees, then the employer will be subject to the lesser of a $3,000 penalty for those certain full-time employees or $2,000 per full-time employee (minus 30 full-time employees).
The employer mandate was originally scheduled to begin in 2014, but regulations from the Treasury Department issued during July 2013 originally delayed the reporting requirements and penalties by one year to 2015. In February 2014, the Treasury Department further delayed and modified the employer mandate offering requirements and penalties for midsize businesses (50-99 FTEs) until 2016. Midsize businesses must still report and verify coverage with the IRS for the 2015 tax year.
PPACA defines a full-time employee as an individual who is employed an average of at least 130 hours per month (30 hours per week).
Large employers may either determine current employees’ full-time status by using actual monthly hours or looking back at a standard measurement period of not less than three but not more than twelve consecutive months to determine whether the employee averaged at least 130 hour of service per month (30 hours per week).
Large employers must then offer minimum essential coverage to full-time employees and their dependents for a corresponding 6-12 month stability period if an employee averages full-time hours during the look-back measurement period. If an employer chooses not to offer minimum coverage to full-time employees and their dependents, and if one or more employees claim a tax credit on the individual exchange, they will pay employer mandate penalties annually.
Part-time employees’ hours will be converted into FTE employees for the purposes of determining whether the employer is a large employer subject to the employer mandate. Conversion is done by adding all monthly hours worked by employees who are not full-time and dividing the total by 120. For example, if 6 part-time employees each work 20 hours per month, they will count as if the firm has one additional FTE employee, calculated monthly (6 employees x 20 hours per month = 120 monthly hours/120 = 1 FTE employee).
Large employers will not be required to offer minimum essential coverage to part-time employees, but part-time employee hours will be used to determine whether the employer is large and subject to the employer.
Seasonal employee hours will count toward an employer’s FTE monthly total. An employee is seasonal if they are employed for 6 months or fewer during a calendar year. An employer is not considered “large” (and thus, subject to the employer mandate) if the employer has 50 FTE employees for 120 days (or 4 calendar months) or fewer during a calendar year. This situation is known as the seasonal worker exception.