Signed into law in March of 2010, the Patient Protection and Affordable Care Act has been the center of
one of the most contentious political debates this country has seen in the last decade. Arguably, the
most debated provision in the law is the employer mandate – the requirement for employers with 50 or
more employees, known as “applicable large employers”, to provide “affordable” health coverage
generally effective January 1, 2014. Non-compliance will result in employer penalties.
Definition of “Applicable Large Employer”
The first step in determining if an employer is subject to the mandate is to determine if the employer
has 50 or more full time equivalent (FTEs) employees. When determining employer size, controlled
group, or employer aggregation rules, must be applied to businesses with common ownership. Under
ERISA, two or more trades or businesses are treated as a single employer if they have 80% or more
common ownership by the same five or fewer persons (“persons” includes entities). Note that
businesses or corporations with separate tax identification numbers does not establish separate
employer groups for the purposes of determining group size. Ownership is the test to be applied and
controlled group rules are complex, so consultation with an attorney may be necessary.
Determining The Employee Count
An “Applicable Large Employer” is one who employed, on average, at least 50 FTEs on business days
during the previous calendar year. Full time employees are those that work at minimum 30 hours per
week for any given month. The following are simplified steps to determining FTE count:
1. For every month in the prior calendar year, identify the number of employees working
30 or more hours per week.
2. For every month, add up all of the hours worked by part time employees and divide by
120 to get the FTE hour count for part time employees.
3. Add the results of numbers 1 and 2 above to get the total FTE hours worked per month
for every month of the prior year.
4. Add up all of the totals for every month to get the grand total.
5. Divide the grand total by 12 to get the average FTEs per month.
If the average is 50 or more FTEs, the employer would be considered an Applicable Large Employer.
For employers who employ seasonal workers, there is a special rule that can be applied. If the
employer’s FTE count only exceeds 50 for 120 days (4 months) or less because of seasonal employees,
they would not be considered a large employer for the purposes of the Play or Pay rule. A seasonal
employee is one who performs labor or service on a seasonal basis as defined by the DOL.
Minimum Essential Coverage
The next test an employer must apply to avoid Play or Pay penalties is the minimum essential coverage
test. Employers must provide plans that offer a minimum amount of coverage - dubbed minimum
essential coverage. Luckily, the definition of minimum essential coverage is very broad and basically
includes any employer sponsored group health insurance that is either 1) a government plan or 2) any
group plan offered in a state’s small or large group market. What it does not include are excepted
benefits such as fully insured, standalone dental and/or vision, accident-only coverage or disability
coverage, for example.
Minimum Value
Employers must also offer plans that provide “minimum value”, sometimes referred to as a basic plan.
Minimum value means the plan covers at least 60% (actuarial value) of the cost of covered services to
full time employees. On February 24th of this year HHS issued guidance on a possible approach health
plans could use to determine actuarial value for individual and small group plans offered in the
Exchanges. As part of that guidance, an actuarial value calculator was made available on the CMS web
site. Unfortunately, that calculator cannot be used to calculate the actuarial value of large group plans
as the assumptions and data used to create it are only relevant for individual and small groups. A
minimum value calculator for large group plans is expected to be released in the very near future.
There are a number of details that HHS and the IRS need to provide for compliance to be possible. We
expect to get a considerable amount of additional guidance around this requirement in the coming
weeks.
Affordable Coverage
Finally, coverage provided by the employer must be affordable. In the regulation, affordable meant the
employee’s portion of the employee-only premium for the lowest-cost employer plan was not to exceed
9.5% of that employee’s household income for the taxable year. In September of this year, the IRS
released Notice 2012-58, which confirmed a safe harbor at least through 2014 that allows employers to
use employee W-2 wages for this measurement rather than household income.
Effective Date for Compliance
On December 28th, 2012, the IRS proposed rules to help employers be compliant with this provision. As
originally interpreted, all employers subject to the provision had to be in compliance as of January 1,
2014. Now, plans that run on a fiscal plan year will be required to be in compliance on the first day of
their fiscal plan year in 2014, but only under the following circumstances:
1. The employer must be offering health coverage via a fiscal year plan as of December 27,
2012, and
2. The fiscal year plan has had to have been offered to at least 1/3 of the employees, full and
part-time combined, at the most recent open enrollment period, or
3. The fiscal year plan covered at least ¼ of the employees, full time and part time combined.
For example, if during the most recent open enrollment period prior to December 27, 2012, an
employer offered coverage under a fiscal year plan with their next plan year starting on July 1, 2013 to
at least one third of its employees, the employer could avoid a penalty if, by July 1, 2014, it expanded
the plan to offer coverage satisfying the ER mandate to the full-time employees who had not been
offered coverage before. For purposes of determining whether the plan covers at least 1/4 of the
employer’s employees, an employer may look at any day between October 31, 2012 and December 27,
2012.
The Penalties for Non-Compliance
Employers will only be assessed penalties for non-compliance with the requirements discussed above if
they have at least one full-time employee receiving a tax subsidy for coverage offered by a qualified
health plan offering coverage in an Exchange. Eligibility for this tax subsidy is based on household
income, not W-2 wages. So, it is possible for an employee to be receiving a subsidy for Exchange plan
coverage that will not result in an employer penalty since W-2 wages may exceed the 9.5% test
threshold but household income is between 100% and 400% of the federal poverty level.
Not Offering Minimum Essential Coverage
This penalty is sometimes referred to as the No-Offer Penalty. If an employer does not offer minimum
essential coverage to all full-time employees (and dependents) the employer must pay an annual tax of
$2,000 for each full-time employee (less the first 30 full-time employees), if at least one full-time
employee obtains federally-subsidized coverage through an Exchange. Penalties are applied on a
monthly basis - not annualized. This means that, for 2014, the applicable monthly payment would be
$166.67 per full time employee for each employee above 30. The amount is 1/12 of $2,000.
Not Offering Affordable Coverage
If an employer does offer minimum essential coverage to all full-time employees but at least one fulltime employee obtains federally-subsidized coverage through an Exchange, the employer must pay an
annual tax of the lesser of:


$3,000 per subsidized full-time employee; or
$2,000 for each full-time employees (less the first 30 full-time employees)
Here, the applicable monthly payment would be $250 per each employee receiving a premium tax
subsidy in an Exchange (1/12 for $3,000) capped by amount owed in the second bullet above.
Starting 2015 and beyond, penalty amounts will be adjusted for inflation.
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