Advanced Underwriting Consultants

Ask the Expert – March 25

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client runs a mid-sized business and asked me whether he is required under the Affordable Care Act to provide health insurance to his employees. What should I tell him? What are the penalties if he doesn’t comply?

Answer: The employer mandate doesn’t take effect until 2015, so he isn’t required to provide health insurance to his employees this year. We don’t have enough information to know whether he is required to provide health insurance next year or beyond, but we can provide you with the general rules regarding to whom the employer mandate applies, and the consequences of noncompliance.

Applicable Employers

In 2015, the employer mandate applies to employers with 100 or more full-time employees. These large employers are required to offer health insurance to their full-time employees and their dependents. A full-time employee is one who averages 30 hours per week of services. Employers are not required to provide health insurance to their employees’ spouses or part-time employees. However, part-time employees are partially counted toward whether the employer mandate applies. Starting in 2016, the employer mandate applies to employers with 50 or more full-time workers (and full-time equivalents).

Penalties

There are two types of penalties under the employer mandate. Each is computed monthly, but based on an annual penalty.

Starting in 2015, if an applicable employer offers health insurance to fewer than 70 percent (and generally 95 percent after 2015) of its employees and their dependents, and at least one employee receives a premium tax credit to help pay for insurance on an Exchange, then the employer faces a $2,000 penalty per year for each of its full-time employees. The first 80 employees are disregarded for the Type A Penalty purposes (30 starting in 2016). The $2,000 penalty is indexed for inflation beginning after 2014. Here’s an example to demonstrate how costly the Type A Penalty can become.

Suppose an employer has 1,000 full-time workers in 2014, but only offers insurance to 699 of its employees. Of the 301 employees not offered health insurance, only one receives a health care premium tax credit to purchase coverage on an Exchange. Nevertheless, the Type A Penalty applies, and the employer faces a $1.84 million penalty (1,000 full-time employees, less the 80 disregarded employees, times the $2,000 penalty for each full-time employee).

If the Type A Penalty does not apply because the employer offered coverage to more than 70 percent of its workers (95 percent starting in 2016), a $3,000 penalty per year may still apply based on the number of workers who received a premium tax credit to purchase insurance on an Exchange.

Assume that the employer offered coverage to 700 of its 1,000 full-time employees in 2015. Of the 300 not offered coverage, 100 obtained a health insurance premium tax credit on an Exchange. The Type B Penalty would apply to the employer, and it would incur a $300,000 penalty (i.e. $3,000 penalty × 100 workers).

Most employers don’t need to worry about the employer mandate because it won’t apply to them. However, the employer mandate rules can be highly technical and costly if not followed correctly. If your client is unsure whether his company is covered by the employer mandate, it’s a good idea for him to contact his business attorney.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.