The Affordable Care Act (ACA) and its “play or pay” provision are jam-packed with terms of art, says attorney Ashley Gillihan. Let’s talk about “applicable large employer,” “full time,” and “hours of service” for starters.
Employer shared responsibility or “play or pay” provisions (aka 4980H) of the ACA are effective January 1, 2014; however, no penalties will be assessed until 2015. Nevertheless, says Gillihan, your planning must be ongoing now if you plan to use a 12-month measurement period—that period has already started.
ACA Full of Terms of Art (that You Need to Know)
Gillihan is counsel in the Atlanta office of Alston & Bird LLP. His tips came at a recent webinar sponsored by BLR® and HR Hero®.
The provisions of 4980H apply only to applicable large employers, says Gillihan.
Penalties (excise tax) are assessed for any month that the following occur:
- Coverage was not “offered” to a full-time employee in accordance with 4980H; OR
- Coverage was offered but it was unaffordable and/or did not provide minimum value (as defined for purposes of 4980H); AND
- The full-time employee received a premium subsidy in the Exchange.
There are two types of penalties that Gillihan refers to as the sledgehammer and tack hammer penalties.
Sledgehammer Penalty. Failure to offer minimally affordable coverage to at least 95 percent of employees and one received a subsidy from the Exchange.
The monthly penalty amount is 1/12 of $2,000 x total number of full-time employees (reduced by allocable share of 30).
Tack Hammer Penalty: Failure to offer affordable/minimum value coverage.
The monthly penalty is 1/12 of $3,000 x total number of full-time employees who received a subsidy in the Exchange.
Note that although the amount per employee of the tack-hammer penalty is greater, the number of employees it is based on is much smaller.
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Who Is an Applicable Large Employer?
An applicable large employer (ALE) is any control group employer that averaged 50 or more full-time employees plus full-time equivalents on business days during the preceding calendar year.
There are two common mistakes that employers make, says Gillihan:
“We have only 40 employees, including part-timers.” This misses something huge if there are other companies under the same ownership. Say, for example, a person owns 80 percent of company A, company B, and company C. If each company has 40 employees, they each will say they don’t have enough employees, but play or pay is based on a control group, and these companies would be a control group.
“We have only 40 full-time employees, and we are not in a control group.” You still have to ask how many part-time employees there are, and add their full-time equivalents to the 40, says Gillihan.
Additional terms and considerations:
- A full-time employee is a common-law employee of a controlled group member who is credited, on average, with 30 or more hours of service during a week in a month. The Internal Revenue Service (IRS) has a 20-factor test to determine who is a common-law employee that boils down to this: if you have the right to control not what the person does, but the manner in which he or she does it, the person is a common-law employee, Also, 130 hours of servicein a month is considered full-time.
- Full-time equivalent. Divide total hours of servicefor employees who are NOT full-time employees (not to exceed 120 hours of service) by 120.
- Only common-law employees are counted. (See the IRS 20-factor common-law employee test, Gillihan says.)
- There are special rules for temporary and leased employees. (The common-law employer is responsible.)
- There is a special rule for seasonal employees. If you have over 50 employees for no more than 4 calendar months or 120 days (not necessarily consecutive) AND the employees in excess of 50 during those months are seasonal, the employer is not an ALE.
- Hours of service performed outside of the United States are NOT counted.
- There are special rules for educational institutions.
- There are special rules for “special” unpaid leave:
- FMLA, and
And there are certain safe harbor rules for making determinations about affordability and other aspects of the ACA.
If you are not an ALE, you are not subject to 4980H, but the other aspects of the ACA still apply (health coverage mandates, etc.), says Gillihan.
If you are an ALE, you must comply with Section 4980H, but note that it is NOT:
- A mandate to offer coverage, or
- A mandate to offer coverage that is affordable and provides minimum value.
The rule doesn’t mandate that you have to provide coverage, just that you have to accurately calculate the excise taxes (assessable penalties) that you owe and that you pay them.
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Hours of Service—A Term of Art
Another ACA term of art is “hours of service,” defined as:
- Each hour for which an employee is paid or is entitled to payment for performance of services; AND
- Each hour for which an employee is paid or is entitled to payment on account of a period for which no services were performed due to the following (i.e. Paid Leave), including:
- Jury Duty,
- Military Duty, and
There is no limit on the amount of paid leave that must be taken into account.
In tomorrow’s Advisor, reasons for maintaining or dropping coverage, plus an introduction to the all-things-HR-in-one-place website, HR.BLR.com.