PPACA Update: Employer Mandates for Full- and Part-Time Employees

Even though the employer shared responsibility provisions of the Patient Protection and Affordable Care Act (PPACA) will not take effect until January 1, 2014, employers should start preparing for their compliance strategies this year. 

For example, business owners and payroll personnel will want to determine if the employer mandate will apply to their company sooner rather than later. If PPACA’s ‘shared responsibility’ provisions do apply, employers need to prepare in 2013 to ensure a smooth transition next year. Several issues need to be addressed to mitigate any potential challenges, covering issues such as how the baseline measurement period is calculated and the adequacy of coverage requirements are met. 

Here are some of the most common questions employers have: 

  • Will my company have to comply with employer-shared responsibility provisions?
  • What kind of insurance will my company have to provide?
  • To whom will I have to provide insurance?
  • What about seasonal, per diem, or part-time employees?

Utilize the below guidelines and our FTE Worksheet to help your clients determine these answers.

Q. Which employers are subject to employer-shared responsibility provisions?

A. Employers are considered “applicable large employers” and therefore subject to the PPACA shared responsibility requirement if they employ 50 or more full-time employees or a combination of full-time and part-time employees that equals 50 full-time equivalent employees (FTEs). 

Applicable large employer status is determined based on the actual hours of work performed by employees in the prior calendar year or other designated measurement period. An applicable large employer must offer health benefits to virtually all of its full-time employees and their dependents to avoid a tax penalty. 

Further, an employer could be subject to a different tax penalty if the coverage offered to full-time employees is either unaffordable or does not provide the requisite level of minimum value with respect to the employee. Likewise, penalties will be assessed based only on full-time employees who are either not offered coverage, or not offered affordable coverage.  FTE employees will be calculated using both full- and part-time employees in the calculation.

Q. What constitutes a full-time employee under PPACA?

A. Under section 4980H(c)(4), a full-time employee is someone employed an average of at least 30 hours of service per week.

Q. What constitutes a part-time employee under PPACA?

A. While the Notice of Proposed Rule Making issued on this topic does not define a part-time employee, it is likely a part-time employee is anyone who does not fall under the full-time designation. It is possible that employers use designations other than part-time for purposes of defining employees who are not full-time. Part-time employees are included in the calculation to determine whether an employer will be required to offer health insurance starting January 1, 2014, as described below. 

Q. How do per diem or non-hourly employees fit in the mix?

A. Per diem or non-hourly employees will be counted as full-time or part-time depending on the average hours of service worked either in the previous month or during the look-back period chosen by the employer. If the employee’s per diem rate is based on an hourly rate, the employer should use the actual number of hours of service worked. If the per diem rate is based on a non-hourly basis, the employer is permitted to use one of the three methods detailed below in the non-hourly hours of service rates.

Q. How does an employer calculate the number of full-time equivalent employees?

A. Employers are considered “applicable large employers” under PPACA and are therefore subject to the Employer Mandate if they employ 50 or more “full-time” employees or a combination of “full-time” and part-time employees that equals 50 “full-time” equivalent employees. "Applicable large employer” status is determined based on the actual hours of work performed by employees in the prior calendar year.

Note:  PPACA allows the calculation of full-time employees and FTEs based upon several different measurement periods.  For purposes of this example, we are using a calendar year.

To determine “applicable large employer” status, an employer must:

  1. Count the number of “full-time” employees (including seasonal employees) who work on average 30 hours or more per week per month
  2. Calculate the number of full-time equivalent employees by aggregating the number of hours worked by all non-full-time employees (including seasonal employees) and dividing by 120
  3. Add the number of “full-time” employees and full-time equivalents calculated in steps (1) and (2) for each of the 12 months in the preceding calendar year, and
  4. Add the monthly totals and divide by 12. If the average exceeds 50 full-time equivalents, the employer must also determine whether the seasonal employee exception applies

The seasonal employee exemption exists for employers whose workforce exceeds 50 full-time employees for no more than 120 days or four calendar months during a calendar year if the employees in excess of 50 employed during that period were seasonal employees. The four calendar months need not be consecutive. Until further guidance is issued, employers may use a reasonable, good faith interpretation of a seasonal worker, but the IRS emphasizes that the category of seasonal worker is not limited to agricultural or retail workers.  

Note: This IRS regulation is confusing. BenefitMall is reaching out to the IRS to see if we can get a clearer explanation of when and how an employer may qualify for a seasonal exemption from the employer mandate requirement. 

Q. What counts as an hour of service?

A. An employee’s hours of service include:

  1. Each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer;
  2. Each hour for which an employee is paid, or entitled to payment, by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. 

Q. Are hours of service computed differently for hourly and non-hourly employees?

A. Hours of service for employees paid on an hourly basis should be calculated directly from records of hours worked and for hours that payment is due.  For employees that are paid on a non-hourly basis, the employer may use one of three methods:

  1. Count actual hours of service from records using the same methodology as hourly employees;
  2. Use a days-worked equivalency method that credits the employee with eight hours of service for each day that the employee would be required to be credited with at least one hour of service; or
  3. Use a weeks-worked equivalency of 40 hours of service per week for each week that the employee is credited with at least one hour of service.

Q. If an employer has 50 or more FTEs, does coverage have to be offered to all employees?

A. No. If an employer is subject to the employer-shared responsibility provisions, the employer must make an offer of coverage to at least 95% of its full-time employees and their dependents. Employers will be given a certain amount of room for error, in that they must offer coverage to at least 95% of full-time employees.  If an employer meets the 95% threshold, the employer may avoid liability for a tax penalty if some of its employees do not have employer-sponsored coverage.  

Q. What type of coverage must an employer provide?

A. Employers subject to employer-shared responsibility provisions must offer full-time employees affordable health coverage that provides a minimum value of coverage. Coverage offered to an employee’s dependents need not meet affordability thresholds.

Q. How will an employer know if offered coverage is affordable?

A. If the employee’s share of the premium for employer-sponsored coverage would cost the employee more than 9.5% of the employee’s annual household income, the coverage is not deemed affordable. If multiple coverage options are available to the employee, the affordability test will apply to the lowest-cost employee only option available to the employee. 

Because an employer does not know an employee’s household income, there are several safe harbors available. If the cost of coverage does not exceed 9.5% of the wages the employer pays to the employee that year, as reported in Box 1 of the W-2 form, the coverage will be deemed affordable. 

An employer can also use either of the two other design-based affordability safe harbors:

  • The “rate of pay” safe harbor provides that coverage meets the affordability standard if the employee premium share does not exceed the total of the hourly rate of pay multiplied by 130 hours per month. 
  • Employers may also use the “federal poverty line” approach, where coverage meets the affordability standard if employee premium share does not exceed 9.5% of the federal poverty line for one person.  The calculation can be done using the most recently published federal poverty guidelines as of the first day of the plan year.

Q. How will an employer know if offered coverage provides minimum value?

A. A Final Rule was recently released that provides that an employer-sponsored plan provides minimum value if the percentage of total allowed costs of benefits provided is no less than 60%. The Final Rule sets forth the following methodologies to determine if the Minimum Value (MV) criteria is satisfied:

  1. Click here to view the Minimum Value Calculator.
  2. Any safe harbor established by HHS and the IRS;
  3. Certification by an actuary, which is only available if the plan contains non-standard features that are not suitable for the MV calculator or safe harbor checklists. If this options is used, the determination must be made by a member of the American Academy of Actuaries; or
  4. Any plan in the small group market that meets any of the “metal levels” of coverage based on the MV Calculator.

Q. Is there any transition relief available?

A. Transition relief is available to employers that offer health coverage on a fiscal year basis as of December 27, 2012.  

In cases where employees are eligible to participate in a company’s plan under its terms as of December 27, 2012, whether or not they take the coverage, the employer will not be subject to a potential tax penalty payment until the first day of the fiscal plan year starting in 2014.

If the fiscal year plan was offered to at least one-third of the employer’s full- and part-time employees at the most recent open season, or the fiscal year plan covered at least one-quarter of the employer’s employees, then the employer also will not be subject to the tax penalty with respect to any of its full-time employees until the first day of the fiscal plan year starting in 2014, provided that those full-time employees are offered affordable coverage that provides minimum value no later than that first day.  

Please visit www.healthcareexchange.com for blog posts, polls, surveys and numerous resources, or www.benefitmall.com to view previous Legislative Alerts.

The views expressed in this post do not necessarily reflect the official policy, position, or opinions of BenefitMall. The federal regulations offer some basic guidance on how to calculate the total number of employees for purposes of the employer mandate. However because different elements of PPACA are still being finalized through the regulatory process, all employers and other stakeholders are strongly encouraged to hire locally-licensed legal or benefit experts in their jurisdictions to support and document this process. This update is provided for informational purposes. Please consult with a licensed accountant or attorney regarding any legal and tax matters discussed herein.