Last July, when the Obama administration announced the one-year delay, until Jan. 1, 2015, in imposing the employer-shared-responsibility penalties of the Patient Protection and Affordable Care Act (often referred to as health care reform), many Idaho employers slammed the brakes on their compliance efforts.
Last week the IRS further delayed until 2016 the effective date of these penalties for companies with less than 100 full-time employees (including full-time equivalents). However, the penalties will become applicable to companies with 100 or more full-time employees (including full-time equivalents) in 2015.
Even though 2015 is still nearly a year away, large Idaho employers should start (or restart) their shared responsibility compliance efforts. In particular, employers should focus on identifying their full-time employees.
Shared responsibility requirements
Under the shared responsibility requirements, large companies must offer health care coverage to their full-time employees or face significant penalties.
To comply with the shared-responsibility requirements, or to calculate penalties for noncompliance, companies must identify all of their full-time employees. For many companies, identifying full-time employees for shared-responsibility purposes will be a significant new administrative burden because the IRS rules for determining full-time employees are complex and may be unfamiliar.
Employers should take a close look at their workforce to confirm that they identify all common-law employees, focusing on independent contractors, leased employees, and other workers that they do not currently treat as employees. They should confirm that these types of workers are not common-law employees, as defined by the IRS. Employers often misclassify these types of workers and misclassification can result in significant shared responsibility penalties.
For 2015, large employers that do not offer coverage to 70% or more of their full-time employees will be subject to an all-or-nothing penalty of $140,000 for their first 100 employees and $2,000 for each employee thereafter.
Beginning in 2016, the penalty will apply if coverage is not offered to 95% or more of full-time employees. For example, a company could have 100 full-time employees in 2016 who are offered health coverage and 10 additional workers who have traditionally been classified as independent contractors and not offered coverage. If the IRS audits the company and determines that the 10 workers classified as independent contractors were actually full-time employees, the company could be subject to a shared-responsibility penalty of $160,000.
Large employers also must comply with IRS rules for determining whether employees are full-time or part-time.
In the past, many employers have offered health coverage to employees expected to work 40 hours per week. For shared-responsibility purposes, the threshold for full-time status is 30 hours per week and full-time status must be determined based on actual hours worked, rather than expected hours worked.
Companies should carefully review and put into practice procedures for determining the full-time status of employees in compliance with IRS-provided requirements. These requirements may be particularly burdensome for employers with a significant variable-hour or seasonal workforce.
Companies need to document that each employee not offered health coverage is not a full-time employee under the IRS rules for determining full-time status. Otherwise, the employer could be subject to a penalty of $140,000 for its first 100 employees and an additional $2,000 for each employee thereafter. As in the example above, if an employer has 110 employees the penalty is $160,000.
Although the IRS has provided transition relief that will assist large employers with compliance, they should begin preparing soon so that they are ready for the shared responsibility requirements when they become effective in 2015.
Bret Clark, an attorney at Holland & Hart, provides legal services to the firm’s employee-benefits and executive-compensation clients. He can be reached at [email protected]