Affordable Care Act (ACA) Update: Which Employers Are Subject to the Shared Responsibility Provisions?

Note: This is from ADP’s Eye on Washington Series, which focuses on legislative changes and clarifications per the Affordable Care Act.  Click here to check out the Eye on Washington Series, and register to receive the newsletter:

Disclosure: I work for ADP.  This information is purely educational, and based on Gov’t Regulation.

Eye On Washington: Health Care Reform

Updated: February 28, 2013

Affordable Care Act (ACA) Update: Which Employers Are Subject to the Shared Responsibility Provisions?

As discussed in a recent Eye on Washington, the Internal Revenue Service (IRS) published a Notice of Proposed Rulemaking entitled “Shared Responsibility for Employers Regarding Health Coverage” on January 2, 20131, which set forth many important elements concerning the determination of full-time employee status under the Affordable Care Act. This Eye on Washington is the second in a series, which serves to highlight the most relevant provisions that employers should know in preparation for the Shared Responsibility elements of the ACA.

One of the first questions that employers must ask is whether they are an “applicable large employer,” and therefore subject to the Shared Responsibility provisions, which is an annual determination. Generally, Shared Responsibility applies to large employers with an average of at least 50 full-time employees [also taking into account full-time equivalent employees (FTEs)] employed on business days during the preceding calendar year.

The ACA provides that a “full-time employee” is an employee who is employed, on average, for at least 30 hours of service per week in any month. The number of FTEs for a given month is determined by calculating the aggregate number of hours of service (up to 120 hours of credited service per employee) for all employees (including seasonal workers) who had less than 30 hours of credited service per week in a month, and dividing the total hours of service by 120. For example, if employees who were not full-time have an aggregate of 1,260 hours of service for a calendar month, there would be 10.5 FTEs for that month. To determine whether an employer is subject to Shared Responsibility requirements, the monthly totals of full-time employees and FTEs are combined and divided by twelve. If the result is 50 or more, the employer is subject to Shared Responsibility. (Fractions are disregarded in this calculation; e.g., 49.9 FTEs for the preceding calendar year would be rounded down to 49.)

FTEs are only relevant for determining which employers are subject to Shared Responsibility. Any actual Shared Responsibility penalties will be based on the number of full-time employees only — not full-time equivalents.


“Controlled Groups” and Related Employers

The proposed regulation clarifies the treatment of related employers (“controlled groups”). The 50-employee threshold applies on a “controlled group” basis, which generally means that companies with 80% or more common ownership or control — or that are otherwise treated as a single employer under Internal Revenue Code section 414(b), (c), (m), or (o) — are treated as a single employer, and combined together for purposes of determining whether they employ at least 50 full-time employees, including FTEs. If the combined total meets the threshold, then each member of the controlled group is subject to the Shared Responsibility provisions, even if the individual member companies employ fewer than 50 full-time employees, including FTEs.

All employees of a controlled group are combined in determining whether the employer is an applicable large employer (has 50 or more full-time employees, including FTEs) and is, therefore, subject to Shared Responsibility requirements. However, Shared Responsibility penalties under Section 4980H are assessed on a member-by-member basis and related entities can make different decisions as to coverage offered, whether to provide coverage or pay penalties, and in establishing measurement and stability periods.

Example: For 2014, Parent A has 25 full-time employees, including FTEs. Subsidiary B has 25 full-time employees, including FTEs. Both entities are combined to determine that they meet the 50 full-time employee and FTE threshold for Section 4980H. Subsidiary B may offer qualified affordable health coverage to full-time employees, while Parent A does not. Parent A would be subject to a penalty, which is generally calculated as $2,000 times the total number of full-time employees of Parent A, minus the first 30.

However, the 30-employee reduction, when calculating Shared Responsibility payments, applies to the entire controlled group, so that the reduction must be allocated ratably among members of the controlled group based on each member’s population of full-time employees.

In the example above, Parent A would be assessed an annual penalty equal to $2,000 times 10 full-time employees (25 minus 15, the proportionate share of the 30-employee reduction).

If an employer has more than 30 employer-members, with some or all of the members receiving a ratable allocation of a fraction of one full-time employee, the proposed regulation provides that each member’s share of the 30-employee reduction will be rounded up to one full-time employee (which may result in an overall reduction to all members of the employer of more than 30 employees).

Each employer within a controlled group will be liable for (and assessed) Shared Responsibility payments separately.

New Employers

The proposed regulation provides that a new employer — not in existence during an entire preceding calendar year — is an applicable large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during the current calendar year and it actually employs at least 50 full-time employees (taking into account FTEs) during the calendar year.

Services Performed Outside the United States

The proposed regulation clarifies that “hours of service” do not include hours worked outside the United States, regardless of employees’ residency or citizenship status. Employers should exclude hours of service that constitute foreign-source income in determining whether the employer is subject to the Shared Responsibility provisions; as well as determining an employee’s full-time status, and in calculating any Shared Responsibility penalty. However, all hours of service for which an individual receives U.S.-source income are hours of service for purposes of Section 4980H.

What’s Next in the Shared Responsibility Series?

Employers that are subject to the Shared Responsibility provisions will have several new administrative responsibilities, whether or not they offer qualifying health coverage. The next installment of the Eye on Washington Shared Responsibility series will explain new “safe harbor” measures available to employers to determine whether health coverage offered to employees qualifies as “affordable” under the ACA, and will clarify who must be offered coverage to avoid a Shared Responsibility penalty. Additionally, regulations remain pending as to the new health coverage reporting requirements that will be effective in 2014. A future Eye on Washington will focus on new employer reporting obligations.


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