CLIENT ALERT TO: FROM: RE: Clients and Contacts D. Brent Wills, Esq. Affordable Care Act Employer Mandate Review #7: Section 4980H(b): What are the other penalties? DATE: November 15, 2014 Earlier this year, the Internal Revenue Service ( IRS ) published final regulations (the Final Rule, or the Rule ) 1 to implement Section 4980H of the Internal Revenue Code ( Section 4980H, and the Code ), the so-called Employer Mandate, enacted as part of the Patient Protection and Affordable Care Act (the ACA ) in 2010. 2 As you may be aware, Section 4980H requires, among other things, that certain large employers (in general, employers with 50 or more employees, but subject to transition relief next year) offer certain, minimum essential health insurance coverage to their full-time employees or pay a penalty. Initially, Section 4980H was scheduled to take effect beginning in 2014. Last year, however, the IRS delayed enforcement of Section 4980H until 2015. 3 Moreover, the Final Rule includes transition relief that, subject to certain conditions, (i) may exempt certain large employers with fewer than 100 employees from the penalty provisions of Section 4980H until 2016; and (ii) may exempt certain large employers that have non-calendar year health plans (i.e., plans with plan years that begin on a date other than January 1) from certain Section 4980H penalties until the first month of their plan year that begins in 2015 (in the case of certain large employers with 100 or more employees) or the first month of their plan year that begins in 2016 (in the case of large employers that qualify for the transition relief described in item (i) for large employers that have fewer than 100 employees). The ACA also established certain reporting rules to support enforcement of Section 4980H (the Reporting Rules ). The Reporting Rules are set forth in Section 6055 and 6056 of the Code and final regulations published earlier this year 4 and will apply to all large employers (i.e., regardless of whether the employer has fewer than 100 employees) beginning in 2015. 1 See Shared Responsibility for Employers Regarding Health Coverage (Final Rule), Department of the Treasury Internal Revenue Service, 79 Fed. Reg. 8544 (Feb. 12, 2014). 2 See Patient Protection and Affordable Care Act, Public Law 111-148 (Mar. 23, 2010). 3 See Treasury Notice 2013-45 (July 9, 2013). 4 See Department of the Treasury, Internal Revenue Service, Information Reporting of Minimum Essential Coverage (Final Regulations), 79 Fed. Reg. 13220 (Mar. 10, 2014) and Department of the Treasury, Internal Revenue Service, Information Reporting by Applicable Large Employers on Health Insurance Coverage Offered Under Employer-Sponsored Plans (Final Regulations), 79 Fed. Reg. 13231 (Mar. 10, 2014). The Reporting Rules are addressed in more detail in a separate Gilpin Givhan Client Alert. 00753900-2 1
Section 4980H penalties in general The IRS will impose penalties under Section 4980H on a month-to-month basis. Beginning in 2015 or 2016, as the case may be, a large employer may be subject to any one of the following penalties in a given month: Under Section 4980H(a), a large employer must offer minimum essential health insurance coverage to its full-time employees and their dependents (subject to certain transition relief and other qualifications) or pay a penalty. The amount of the penalty will be $167 per month multiplied by the employer s total number of full-time employees for the month (subject to certain transition relief and other qualifications). The penalty under Section 4980H(a) will apply if any full-time employee qualifies for and obtains a premium tax credit authorized by the ACA to obtain health insurance coverage on a health insurance marketplace (i.e., a premium tax credit) for the month. If a large employer offers minimum essential coverage to its full-time employees and their dependents, the employer may still be subject to a penalty under Section 4980H(b) if the coverage does not provide minimum value (in general, if the employer s health plan does not cover at least 60 percent of the cost of plan benefits). The amount of the penalty will be $250 per month multiplied by the number of full-time employees who qualify for and obtain a premium tax credit in that month. If a large employer offers minimum essential coverage to its full-time employees (and their dependents, if required, that provides minimum value, the employer may still be subject to a penalty under Section 4980H(b) with respect to any fulltime employee (i) for whom the coverage is not affordable (in general, the fulltime employee s cost to obtain the coverage exceeds 9.5 percent of the employee s household income); and (ii) who qualifies for and obtains a premium tax credit for the month. The amount of the penalty will be $250 per month multiplied by the number of full-time employees who meet the criteria described in both (i) and (ii) above. 5 We addressed the big penalty under Section 4980H(a) in a prior Client Alert. This Client Alert is focused on the penalty provisions in Section 4980H(b) relating to minimum value and affordability. Premium tax credits As noted above, the IRS may impose a penalty under Section 4980H(b) only with respect to a full-time employee who qualifies for and obtains a premium tax credit. In Alabama (and other states that, at least so far, have not expanded Medicaid), individuals 5 Whether, and in what circumstances, minimum essential coverage offered by a large employer provides minimum value and/or is affordable to a full-time employee and related issues are addressed in more detail in a separate Gilpin Givhan Client Alert. 00753900-2 2
whose income is between 100 and 400 percent of the federal poverty line (up to $94,000, for example, in the case of a family of four) may qualify for the tax credit. 6 On the other hand, individuals eligible for coverage under Medicare, Medicaid or another government health insurance program, or eligible for other affordable, minimum value health insurance coverage (for example, through a plan sponsored by the employer of a spouse or family member), may not qualify for a premium tax credit. Likewise, an employee who elects to enroll in health insurance coverage through his or her employer (notwithstanding that the coverage may not be affordable to the employee or provide minimum value, as discussed below) may not obtain the credit. Minimum value As indicated above, if minimum essential coverage offered by a large employer to its full-time employees does not provide minimum value, the employer will be subject to a penalty under Section 4980H(b) in the amount of $250 per month for each of the employer s full-time employees who qualifies for and obtains a premium tax credit for that month. The Final Rule confirms that a large employer s health plan does not provide minimum value if the plan s share of the total allowed costs of the benefits under the plan is less than 60 percent. The Final Rule provides multiple methods whereby large employers may determine whether their plan meets the 60 percent minimum value threshold, including an online minimum value calculator. 7 As a practical matter, large employers should be able to look to their health insurance carriers to confirm that the plan they offer their employees provides minimum value. 8 To illustrate this minimum value Section 4980H(b) penalty, if, in a particular month, a large employer has 200 full-time employees to whom it offers minimum essential health insurance coverage (including dependent coverage) that does not provide minimum value, and 115 of the employer s full-time employees qualify for and obtain a premium tax credit for that month, the employer would be subject to a penalty under Section 4980H(b) for that month in the amount of $28,750 (i.e., 115 full-time employees who qualified for and obtained the credit for the month x $250). If the above facts were 6 The continuing availability of the premium tax credits, in the State of Alabama and other states that did not implement a health insurance exchange in accordance with the ACA, may be subject to certain litigation currently pending in the United States Supreme Court. The Supreme Court is scheduled to hear oral arguments in King v. Burwell, on appeal from the United States Fourth Circuit Court of Appeals; Halbig v. Burwell, on appeal from the United States Circuit Court of Appeals for the District of Columbia; Pruitt v. Burwell, on appeal from the United States District Court of Appeals for the Eastern District of Oklahoma; and Indiana v. IRS, on appeal from the United States District Court of Appeals for the Southern District of Indiana, beginning on March 4, 2015. The Court is expected to issue a ruling in the case this summer. 7 The online minimum value calculator may be accessed at https://www.google.com/?gws_ rd=ssl#q=hhs+minimum+value+calculator. 8 For example, information posted to the Blue Cross Blue Shield of Alabama website indicates that the Blue Saver Bronze level plan available from Blue Shield (similar to the bronze plans offered on health insurance exchanges established by the ACA) provides minimum value. For additional information, please see the Blue Cross website, at https://www.ibcbsal.com/sales/documents/1102395/1300608/blue+saver+ Bronze.pdf/cd0db0e1-86c4-479e-bb4d-9ff6d5e87f76 (last visited January 20, 2015). 00753900-2 3
true for every month during a calendar year, the employer would be subject to a penalty in the amount of $345,000 (i.e., $28,750 penalty per month x 12 months) for the year. 9 Affordability Even if a large employer offers its full-time employees minimum essential coverage and the offered coverage provides minimum value, the employer may still be subject to a penalty under Section 4980H(b) if the offered coverage is not affordable for one or more of the employer s full-time employees and the employee qualifies for and obtains a premium tax credit. The Final Rule confirmed that minimum essential coverage offered by a large employer to a full-time employee will be deemed to be affordable so long as the employee s required contribution to the cost of the employer s lowest cost self-only coverage (regardless of whether the employee is eligible for family coverage) that provides minimum value does not exceed 9.5 percent 10 of the employee s household modified adjusted gross income. The same test applies with respect to every full-time employee; Section 4980H(b) does not take into account the cost of family coverage. Because large employers generally will not know their employees household incomes, Section 4980H(b) provides that large employers may rely on certain indicators of the employee s personal income as safe harbors against the Section 4980H(b) affordability penalty specifically, the employee s W-2 wages, 11 the employee s rate of pay 12 or the applicable federal poverty line. If the employee s required contribution to obtain the employer s lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of the employee s personal adjusted gross income, determined based on one of the safe harbors, the employer will not be subject to a penalty under Section 4980H(b) with respect to the employee. Moreover, even if the lowest cost option for self-only coverage exceeds 9.5 percent of the employee s personal income, based on the safe harbors, the employer still will not be subject to a penalty unless (i) the cost exceeds 9.5 percent of the employee s household income; and (ii) the employee qualifies for and obtains a premium tax credit. 9 Note that, if this scenario occurred with respect to a month during calendar year 2015, or with respect to a month in calendar year 2016 but within the large employer s 2015 plan year, the penalty imposed by Section 4980H would likely be limited to $20,040, the amount of the Section 4980H(a) penalty that would apply if the employer had not offered minimum essential coverage to the requisite number (i.e., at least 70 percent) of its full-time employees, taking into account the transition relief that will permit a large employer to calculate the penalty not taking into account the first 80 full-time employees [(200-80) x $167 = $20,040]. As indicated above, a penalty imposed under Section 4980H(b) in a given month may not exceed the potential Section 4980H(a) penalty for the month. 10 The IRS recently issued Revenue Procedure 2014-37 that, among other things, adjusted its definition of affordability to be based on 9.56 percent, up from 9.5 percent, of household income for purposes of applying certain ACA provisions in 2015. Although experts have expressed differing opinions, the language of the ACA statute and applicable regulations seem to indicate that this increase does not apply for purposes of the affordability test under Section 4980H(b). 11 Specifically, the W-2 safe harbor is the amount indicated in Box B-1 in the employee s Form W-2. 12 In general, the rate of pay safe harbor amount is the employee s monthly salary or hourly rate, as the case may be, multiplied by 130 hours per month. The (full time) employee s actual hours during the month are not taken into account. 00753900-2 4
For example, if the employer in the example above offers minimum essential coverage that provides minimum value to its full-time employees, and the required employee contribution to obtain the lowest cost self-only coverage that provides minimum value under the employer s health plan in a given month is $125, the employer will not be subject to a penalty under Section 4980H(b) with respect to any full-time employee whose personal income during the month (relying on the employee s W-2 wages, for example) is greater than approximately $1,316 ($125 /.095). Even if the employer flunks the safe harbor test, moreover, with respect to one or more full-time employees, the employer still will only be subject to a penalty under Section 4980H(b) with respect to such an employee if (i) the employee s household income for the month is less than $1,316; and (ii) the employee qualifies for and obtains a premium tax credit. Going back to the example above, if the personal income for the month of 50 of the 115 full-time employees who qualified for and obtained a premium tax credit for the month is less than $1,316, but only 20 of those 50 have household income less than $1,316 for the month and qualify for and obtain a premium tax credit, the large employer would be subject to a penalty under Section 4980H(b) for the month based on (only) 20 full-time employees, or $5,000 (20 full-time employees x $250). Not tax deductible Large employers should be aware that penalties imposed under Section 4980H(b) may not be deducted for income tax purposes. Consequently, in evaluating its options in regard to Section 4980H(b), large employers should take into account the relative tax effects of offering affordable coverage (e.g., employer may be able to deduct certain of its premium contributions) versus foregoing offering such coverage and just paying the penalty. Low cost plans Since the ACA was enacted, employers in various industries have considered, and at least some likely will implement, some type of low cost or skinny health plan, or perhaps a high deductible plan, or some combination or variation of these. 13 In some cases, employers may offer one or more of these types of plans as an alternative to other, more robust plan options; in other cases, the employer may only offer a low cost plan. These strategies are typically intended to enable a large employer to avoid the big penalty under Section 4980H(a), since even low cost plans, in general, likely will meet the (very low) requirement to offer minimum essential health coverage to avoid the penalty. Before implementing a low cost plan, or similar strategies, however, large employers should take into account their potential penalty exposure under Section 4980H(b). In particular, since low cost plans (and at least some high deductible plans) likely will not provide minimum value, a large employer that offers such a plan, other than as an alternative to a plan that provides minimum value, may be subject, potentially, 13 See, e.g., Jay Hancock, 16% of Large Employers Plan to Offer Low-Benefit Skinny Plans Despite ACA: Survey, Kaiser Health News (Aug. 13, 2014), available at http://www.kaiserhealthnews.org/stories/ 2014/august/13/16-percent-of-large-employers-offer-low-benefit-skinny-plans.aspx. 00753900-2 5
to a non-deductible penalty under Section 4980H(b) in any month equal to $250 for each of its full-time employees that qualifies for and obtains a premium tax credit. Obviously, there is much for large employers to know regarding the employer mandate penalties. As illustrated in this Client Alert, penalty exposure is not limited to the big (non-coverage) penalty under Section 4980H(a). Large employers may also be subject to significant penalties under Section 4980H(b) if coverage they offer to their employees does not provide minimum value, or (comparatively) smaller penalties if and to the extent the coverage is not affordable to the employer s full-time employees. In any case, as large employers strategize and prepare for the onset of the employer mandate, they need to have a clear understanding their potential penalty exposure under Section 4980H(a) and (b), as may be applicable. This Client Alert is provided by Gilpin Givhan, P.C. for informational purposes only. It is not intended to constitute legal advice. For legal advice regarding particular matters, please contact Gilpin Givhan, P.C. or other appropriate legal counsel. 00753900-2 6