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Potential Employer Penalties Under the Patient Protection and Affordable Care Act

CRS Report for Congress
Prepared for Members and Committees of Congress
Potential Employer Penalties Under the
Patient Protection and Affordable Care Act
(ACA)
Janemarie Mulvey
Specialist in Health Care Financing
April 3, 2013
Congressional Research Service
7-5700
www.crs.gov
R41159
Potential Employer Penalties Under the Patient Protection and Affordable Care Act
Congressional Research Service
Summary
The Patient Protection and Affordable Care Act (ACA, P.L. 111-148), as amended, increases
access to health insurance coverage, expands federal private health insurance market
requirements, and requires the creation of health insurance exchanges to provide individuals and
small employers with access to insurance. To ensure that employers continue to provide some
degree of coverage, ACA includes a “shared responsibility” provision. This provision does not
explicitly mandate that an employer offer employees health insurance; however, ACA imposes
penalties on “large” employers if at least one of their full-time employees obtains a premium
credit through the newly established exchange. Employers are not subject to a penalty if their fulltime
workers are eligible for Medicaid or CHIP. According to the Congressional Budget Office
(CBO), employers are projected to pay $150 billion in penalty payments over a 10-year period.
ACA sets out a two-part calculation for determining, first, which firms are subject to the penalty
(e.g., definition of large), and, second, to which workers within a firm the penalty is applied.
Because the treatment of part-time and seasonal workers differs across these two parts of the
calculation, this has led to some confusion among policymakers and employers. For example,
part-time employees are included in what is termed a full-time equivalent calculation to
determine if an employer has at least 50 full-time equivalent employees (FTEs) and is thus
considered large for purposes of applying the penalty. However, the actual penalty, if applicable,
is levied only on full-time workers (those working at least 30 hours a week on average). This
report discusses these definitions and the application to the employer penalty in greater detail.
The potential employer penalty applies to all common law employers, including an employer that
is a government entity (such as federal, state, local, or Indian Tribal government entities) and an
employer that is a non-profit organization that is exempt from federal income taxes. If a franchise
is owned by one individual or entity, employees in each of the franchises must be aggregated to
determine the number of both full-time equivalent and full-time employees.
The actual amount of the penalty varies depending on whether an employer currently offers
insurance coverage or not. In order for employers who do provide health insurance coverage to
avoid paying a penalty, health insurance coverage that is both affordable and adequate must be
offered to the employee and his/her dependents. Dependent is defined as a child of an employee
who has not attained age 26. Dependent does not include a spouse. Coverage is considered
affordable if the employee’s required contribution to the plan does not exceed 9.5% of the
employee’s household income for the taxable year. However, IRS has provided a safe harbor for
employers to use the employee’s W-2 income for this calculation (since most employers do not
readily have information on an employee’s household income). A health plan is considered to
provide adequate coverage if the plan’s actuarial value (i.e., the share of the total allowed costs
that the plan is expected to cover) is at least 60%. This report provides greater detail on these
requirements.
The total penalty for any applicable large employer is based on its number of full-time
employees. ACA specified that working 30 hours or more a week is considered full-time.
However, the statute did not specify what time period (i.e., monthly or annually) employers
would use to determine if a worker is full-time. To address this issue, the Secretary of Health and
Human Services (HHS) and the Secretary of Labor have published proposed regulations to
provide guidance for employers to use to determine which employees are considered full-time
employees for purposes of administering the ACA employer penalty provision. The proposed
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regulations provide employers some flexibility to designate certain measurement or look-back
periods (up to 12 months) during which they will calculate whether a worker is full-time or not.
Once an employee is determined to be full-time, there will then be an administrative period to
enroll employees in a health plan, if necessary. If an employer penalty is levied under the ACA
requirements, it applies only for the time period following the administrative period, which is
called the stability period. Employers are not penalized if an employee enters the exchange and
receives a premium credit during the measurement period. In addition, because of this latest
guidance, it is unlikely that employers will pay a penalty for seasonal workers who do not work at
least 30 hours, on average over a pre-specified time period (up to 12-months). This report
describes these proposed regulations in greater detail and provides examples of potential dates
when employers will need to begin measuring full-time status for their on-going employees.
Potential Employer Penalties Under the Patient Protection and Affordable Care Act
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Contents
Employer Penalty Calculation ......................................................................................................... 1
Employers Subject to the Potential Penalty ............................................................................... 1
Potential Tax Penalties on Large Employers ............................................................................. 3
Penalty for Large Employers Not Offering Coverage ......................................................... 3
Penalty for Large Employers Offering Coverage ................................................................ 4
Implementation Issues ..................................................................................................................... 5
Definition of Employer .............................................................................................................. 5
Definition of Seasonal Workers ................................................................................................. 6
Definition of Variable Hour Employees .................................................................................... 7
Methodology to Determine Full-Time Status ............................................................................ 7
On-Going Employees .......................................................................................................... 7
New Employees Reasonably Expected to Work Full-Time ................................................ 9
Variable Hour and Seasonal Employees .............................................................................. 9
Effective Dates for Employer Penalty ..................................................................................... 10
Coverage Requirements for Employers ................................................................................... 11
Definition of Dependent Coverage.................................................................................... 11
Definition of “Affordable” Coverage ................................................................................ 12
Definition of Adequate Coverage ...................................................................................... 13
Reporting and Other Requirements ......................................................................................... 13
Figures
Figure 1. Determining If an Employer Will Pay a Penalty .............................................................. 5
Figure 2. Determining Full-Time Employees ................................................................................ 10
Tables
Table 1. Determination and Potential Application of Employer Penalty for Categories of
Employees .................................................................................................................................... 3
Table 2. Time Frame for Determining Full-Time Status .................................................................. 8
Table 3. Examples of Start and End Dates During Transition Period ............................................ 11
Contacts
Author Contact Information........................................................................................................... 14
Acknowledgments ......................................................................................................................... 14
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mployer-sponsored health insurance is an important source of coverage for the nonelderly,
covering about 58% of workers in 2011. Large firms were more likely to provide
health insurance to their employees as compared to small firms. According to Kaiser
Family Foundation, 99% of firms with 200 or more employees offered health insurance coverage
to their workers, while 59% of firms with 3 to 199 employees offered health insurance coverage
in 2011. Among very small firms (with 3 to 9 employees), 48% offered health insurance
coverage.
The Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended) was intended
to expand insurance coverage in the U.S. To ensure that employers continue to provide some
degree of coverage ACA includes a “shared responsibility” provision.1 The provision does not
explicitly mandate that employers offer their employees acceptable health insurance. However, it
does impose penalties on certain firms with at least 50 full-time equivalent employees, if one or
more of their full-time employees obtain a premium tax credit through the newly established
health insurance exchanges.2 An individual may be eligible for a premium tax credit if his or her
income is below certain thresholds and the individual’s employer does not offer health coverage,
or offers insurance that is “not affordable” or does not provide “minimum value,” as defined by
ACA. The employer penalties are effective beginning in 2014.
This report describes the potential employer penalties, as well as proposed regulations to
implement the ACA employer provisions. The regulations address insurance coverage
requirements; methodologies for determining whether a worker is considered full time; provisions
relating to seasonal workers and corporate franchises; and other reporting requirements.
Employer Penalty Calculation
ACA sets out a two-part calculation for determining, first, which firms are subject to the penalty,
and, second, to which workers within a firm the penalty is applied. Specifically, ACA establishes
a rule for determining whether an employer is considered “large” under the ACA definition and,
therefore, potentially subject to a penalty. The actual amount of the penalty, if applicable, will
depend on whether the employer currently provides health insurance coverage or not and if the
coverage meets certain criteria with respect to adequacy and affordability. The penalty is only
applicable to full-time workers. The following discusses this calculation in greater detail.
Employers Subject to the Potential Penalty
According to ACA, only a large employer is subject to penalties regarding employer-sponsored
health insurance. A “large employer” is defined in ACA (as related to the employer penalty) as an
employer who employed an average of at least 50 full-time equivalent employees (FTE) on
business days during the preceding calendar year.3 As shown in Table 1, in order to determine
1 §1513 of ACA enacted IRC Section 4980(H).
2 For more information about exchanges under ACA, see CRS Report R42663, Health Insurance Exchanges Under the
Patient Protection and Affordable Care Act (ACA), by Bernadette Fernandez and Annie L. Mach. For more information
on premium credits in particular, see CRS Report R41137, Health Insurance Premium Credits in the Patient Protection
and Affordable Care Act (ACA), by Bernadette Fernandez and Thomas Gabe.
3 Internal Revenue Code (IRC) §4980H(c)(2), as amended by §1513 and §10106 of ACA, and as amended and
renumbered by §1003 of P.L. 111-152. The statute uses the term full-time employee in the definition of large employer,
(continued...)
E
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whether an employer is a “large employer,” both full-time and part-time employees are included
in the calculation. “Full-time” is defined as having worked on average at least 30 hours per
week.4 However, full-time seasonal employees who work under 120 days during the year are
excluded from this calculation.5 Hours worked by part-time employees (i.e., those working less
than 30 hours per week) are converted into FTEs and are included in the calculation used to
determine whether a firm is a large employer. To do this, overall hours worked by part-time
employees during a month are added up, and the total is divided by 130 and added to the number
of full-time employees to get the number of FTE workers.6
For example, consider a firm with 35 full-time employees (30 or more hours). Assume the firm
also has 20 part-time employees who all work 24 hours per week (104 hours per month). These
part-time employees’ hours would be treated as equivalent to 16 full-time employees for the
month, based on the following calculation:
(20 employees x 104 hours) / 130 = 2080 / 130 = 16
Thus, in this example, the firm would be considered a “large employer,” based on a total FTE
count of 51—that is, 35 full-time employees plus 16 FTEs based on the number of part-time
hours worked.
ACA also specifies how an employer of multiple entities (such as a franchise owner with several
restaurants) is treated with respect to the 50-FTE requirements. Specifically, the ACA follows the
Internal Revenue Service (IRS) aggregation rules governing controlled groups.7 What that means
is that if one individual or entity owns (or has a substantial ownership interest in) several
franchises, all those franchises are essentially considered one entity. In this case, for purposes of
the 50-FTE rule, the employees in each of the franchises must be aggregated to determine the
number of FTEs.
This calculation only determines if an employer is considered “large” for purposes of potentially
being subject to a penalty. The actual penalty is only applicable to full-time workers and is
discussed in the next section.
(...continued)
but then expands on the definition of large employer to include both full- and part-time workers. For employers not in
existence throughout the preceding calendar year, the determination of large employer is based on the average number
of employees a firm reasonably expected to be employed on business days in the current calendar year. Any reference
to an employer includes a reference to any predecessor of that employer.
4 IRC §4980H(c)(4).
5 IRC §4980H(c)(2)(B). In addition, an employer will not be considered a large employer if its number of full-time
employees exceeded 50 for 120 days or less.
6 Section §4980H(c)(2)(E) specifies that for purposes of determining FTEs, the aggregate number of hours of service of
employees who are not full-time employees for the month is divided by 120 to get an FTE. However, proposed
regulations released on December 28, 2012 state that the proposed regulations would treat 130 hours of service in a
calendar month as the monthly equivalent of 30 hours of service per week (52 x 30), thus yielding a slightly different
number.
7 The controlled group rule applies under §414 (b), (c), (m), or (o) of the IRC and includes employees of partnerships,
proprietorships, etc., which are under common control by one owner or group of owners.
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Table 1. Determination and Potential Application of Employer Penalty for
Categories of Employees
Employee category
How is this category of employee
used to determine “large
employer”?
Once an employer is determined
to be a “large employer,” could
the employer be subject to a
penalty if this type of employee
received a premium credit?
Full-time Counted as one employee, based on a
30-hour or more work week
Yes
Part-time Prorated (calculated by taking the
hours worked by part-time employees
in a month divided by 130)
No
Seasonal Not counted, for those working up to
120 days in a year
Not likely under current “safeharbor”
options
Temporary Agency Employees Generally counted as an employee of
the temporary agency (except for
those workers who are independent
contractors)a
Yes, for those employed by the
temporary agency and who are
determined to be full-time, on
average, for up to 12 months
Franchise Employees For franchise owners, if they own
more than one entity, all employees
across the entities must be counted
Yes, for those counted as working for
the franchise and who are full-time, on
average, for up to 12 months
Source: CRS analysis of P.L. 111-148 and P.L. 111-152.
a. The controlled group rule applies under §414 (b), (c), (m), or (o) of the IRC and includes employees of
partnerships, proprietorships, etc., which are under common control by one owner or group of owners.
Potential Tax Penalties on Large Employers
Regardless of whether or not a large employer offers coverage, it will be potentially liable for a
penalty only if at least one of its full-time employees obtains coverage through an exchange and
receives a premium tax credit. For purposes of determining the penalty, a “full-time employee”
includes only those individuals working on average 30 hours or more per week. As shown in
Table 1, part-time workers are not included in the penalty calculations (even though they are
included in the determination of a “large employer”). An employer will not pay a penalty for any
part-time worker, even if that part-time employee receives a premium credit. As discussed under
implementation issues below, employers are not likely to pay a penalty for seasonal workers if
they work less than 30 hours on average over a pre-specified time period (up to 12 months).
Penalty for Large Employers Not Offering Coverage
Individuals who are not offered employer-sponsored coverage and who are not eligible for
Medicaid or other programs may be eligible for premium tax credits for coverage through an
exchange. Eligible individuals will generally have income of at least 100% and up to 400% of the
federal poverty level (FPL).8
8 CRS Report R41137, Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA), by
Bernadette Fernandez and Thomas Gabe.
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A large employer who does not offer coverage will be subject to a penalty if any of its full-time
employees obtain coverage through an exchange and receive a premium tax credit. For 2014, the
monthly penalty assessed to an employer who does not offer coverage will be equal to the number
of its full-time employees minus 30 (the penalty waives the first 30 full-time employees)
multiplied by one-twelfth of $2,000 for any applicable month (see Figure 1). After 2014, the
penalty payment amount will be indexed by a premium adjustment percentage for each
subsequent calendar year.9
Penalty for Large Employers Offering Coverage
Individuals who are offered employer-sponsored coverage can only obtain premium credits for
exchange coverage if, in addition to the criteria above, their employer’s coverage fails to meet
one of two criteria. The first criterion relates to affordability. The individual’s required
contribution toward the plan premium for self-only coverage cannot exceed 9.5% of his/her
household income. The second criterion has to do with adequacy. The health plan must pay for at
least 60%, on average, of covered health care expenses to be considered adequate. Employers
who offer health insurance coverage that is inadequate or unaffordable will not be treated as
meeting the employer requirements if at least one full-time employee declines their coverage and
obtains a premium credit in an exchange plan.
If a penalty is assessed in 2014, the monthly penalty assessed to an employer for each full-time
employee who receives a premium credit will be one-twelfth of $3,000 for any applicable month.
However, the total penalty for an employer is limited to the total number of the firm’s full-time
employees minus 30, multiplied by one-twelfth of $2,000 for any applicable month. After 2014,
the penalty amounts are indexed by a premium adjustment percentage for each subsequent
calendar year (see Figure 1).
9 Per IRC §4980H(c)(5) and PPACA §1302(c)(4), the premium adjustment percentage is the national average premium
growth rate.
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Figure 1. Determining If an Employer Will Pay a Penalty
Source: CRS analysis of P.L. 111-148 and P.L. 111-152.
Note: These penalties are for 2014; penalties in future years will be adjusted.
Implementation Issues
While ACA specifies certain rules about how the employer penalty is calculated and the amount
of the penalty, the law directed the Secretary of Health and Human Services (HHS) and the
Secretary of Labor to provide more detailed guidance to distinguish between an employer and an
independent contractor, develop methodologies to determine which employees are considered
full-time, and address other implementation issues. The discussion below is based on proposed
regulations issued on December 28, 2012.10
Definition of Employer
The ACA definition of an employer is based on the common law standard which states that an
employment relationship exists if an employee is subject to the will and control of the employer
not only as to what shall be done but how it shall be done. In contrast, an independent contractor
is an individual who controls what will be done and how it will be done and the contract dictates
10 The proposed regulation can be found at http://www.irs.gov/pub/newsroom/reg-138006-12.pdf.
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the desired result of the work. The IRS provides further guidance on the distinction between an
employee versus independent contractor.11 In this context, a temporary worker is not an employee
of the firm he or she is “leased” to but rather an employee of the temporary agency.
The potential employer penalty applies to all common law employers, including an employer that
is a government entity (such as federal, state, local or Indian Tribal government entities) and an
employer that is a non-profit organization that is exempt from federal income taxes.
As noted earlier, ACA follows the controlled group IRS rule, in that an employer of multiple
entities must aggregate employees across all entities to determine if the employer met the 50-
FTE requirement. However, recent guidance from the IRS does not make a determination about
whether the controlled group rule applies to government entities or churches, or a convention or
association of churches. In the December 28, 2012 proposed regulation, IRS has said that until
further guidance is issued, government entities, churches, and a convention or association of
churches may rely on a reasonable good faith interpretation of the IRC controlled group rule.
Definition of Seasonal Workers
The definition of seasonal worker differs across the two-part calculation used to determine the
ACA employer penalty. Specifically, the seasonal worker definition varies depending on whether
it is used in the first part of the calculation, which determines whether an employer is considered
large (i.e., the 50-FTE calculation), or the second part of the calculation, which determines how
many employees are considered full-time for purposes of setting the dollar amount of the penalty.
For the first part of the calculation—determining whether a firm meets the ACA definition of an
applicable large employer—if a seasonal employee works less than 120 days during a year, he or
she is not included in the FTE calculation. In this instance, the definition of a seasonal worker is
not limited to agricultural or retail workers.
For the second part of the calculation—determining how many employees are considered fulltime
for purposes of applying the penalty—the 120-day period is not used to determine whether
someone is a seasonal worker. Instead, IRS Notice 2012-58 Determining Full-time Employees for
Purposes of Shared Responsibility for Employers Regarding Health Coverage12 provides that, at
least in 2014, employers are permitted to use instead a reasonable, good faith interpretation of the
term “seasonal employee.” However, the notice further states that it is not a reasonable, good
faith interpretation of the term “seasonal employee” to treat an employee of an educational
organization, who works during the active portions of the academic year, as a seasonal employee.
The Treasury and the IRS have indicated that final ACA regulations may tighten the definition of
seasonal employee to include a specific time limit in the form of a defined period.
11 See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-(Self-Employed)-
or-Employee%3F.
12 See Internal Revenue Service Notice 2012-58, http://www.irs.gov/irb/2012-41_IRB/ar07.html.
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Definition of Variable Hour Employees
The proposed regulations provide that a new employee is a variable hour employee if, based on
the facts and circumstances at the start date, it cannot be determined that the employee is
reasonably expected to be employed on average at least 30 hours per week. In some cases,
variable hour employees may not work the necessary 30 hours on average over a specified time
period (up to 12 months) to be considered full-time. However, a new employee who is expected
to be employed initially at least 30 hours per week may be a variable hour employee, if, based on
the facts and circumstances at the start date, the period of employment at more than 30 hours per
week is reasonably expected to be of limited duration.
Methodology to Determine Full-Time Status
The total penalty for any applicable large employer is based on its number of full-time
employees. ACA specified that working 30 hours or more a week is considered full-time.
However, the statute did not specify what time period (i.e., monthly or annually) employers
would use to determine if a worker is full-time. ACA directed the Secretary of HHS and the
Secretary of Labor to provide regulatory guidance to employers to determine full-time status of
their employees.13
IRS Notice 2012-58 describes safe harbor methods that an employer may use to determine which
employees are considered full-time employees for purposes of administering the ACA employer
penalty provision.14 The safe harbor methods include a measurement, or look-back, period that
allows an employer to measure how many hours an employee averaged per week during a defined
period of not less than three and not more than 12 consecutive months. If an employee is
determined to have worked full-time during the measurement period, an employer will then have
the option of entering an administrative period during which the employee may be enrolled in a
health plan. Following the administrative period, the employee would be treated as a full-time
employee during a stability period. (The full-time classification would remain in place during the
stability period so long as the worker remained an employee, regardless of how many hours he or
she worked.) The IRS notice defines how the measurement, administrative, and stability periods
are determined for three groups of workers (see Table 2 and Figure 2):
• on-going employees;
• new employees: reasonably expected to work full-time;
• new employees: safe-harbor for variable hour and seasonal employees.
On-Going Employees
An on-going employee is generally an employee who has been employed for at least one
complete standard measurement period. This is a defined period of not less three, but not more
than 12 consecutive months. Under the safe-harbor method for on-going employees, an employer
determines each on-going employee’s status by looking back at the standard measurement period.
13 IRC Code Section 4980H(c)(4)(B).
14 See Internal Revenue Service Notice 2012-58, http://www.irs.gov/irb/2012-41_IRB/ar07.html.
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According to the IRS, an employer has the flexibility to determine the months when the standard
measurement period starts and ends, provided that the determination is made on a uniform and
consistent basis for all employees in the same category. During this measurement period, if the
employer determines that an employee averaged at least 30 hours per week, then the employer
treats the employee as a full-time employee during a subsequent “stability period,” regardless of
the number of hours the employee works during the stability period, so long as he or she remains
an employee.
Table 2. Time Frame for Determining Full-Time Status
Measurement Period Administrative Period Stability Period
Definition Measure (on average)
whether employees are full
time or not
Identify and enroll full-time
employees
Period in which penalty
may be due relative to
employees found to be
full-time during
measurement period
On-going Employees 3 to 12 monthsa Up to 90 days (may
neither reduce nor
lengthen the measurement
or stability period - can
overlap prior stability
period)
At least 6 months but
cannot be shorter in
duration than
measurement period
New employees hired
as full-time
Not applicable Up to 90 days to enroll Not applicable
New variable hour and
seasonal employees
3 to 12 monthsb Up to 90 days
(measurement period and
administrative period
cannot exceed 13
months)c
3 to 12 months but cannot
be longer than
measurement period
Source: CRS interpretation of IRS Notice 2012-58: Determining Full-time Employees for Purposes of Shared
Responsibility for Employers Regarding Health Coverage.
a. For ongoing employees, this is referred to as the “standard” measurement period.
b. For new employees, this is referred to as the “initial” measurement period.
c. Technically, the initial measurement and administrative period cannot last beyond the final day of the first
calendar month beginning on or after the one year anniversary of the employee (about 13 months).
A penalty, if applicable, is incurred only during the stability period which lasts at least six
consecutive calendar months and is no shorter in duration than the standard measurement period
designated by the employer. If an employer determines that an employee did not work full-time
during the standard measurement period, the employer would not be required to treat the workers
as full-time during the subsequent stability period. However, if an employee was full-time during
the measurement period, then the employer could potentially pay a penalty during the stability
period if all other criteria were met (e.g. full-time employees entered the exchange and received a
premium tax credit, and any health insurance coverage offered was not adequate or affordable).
Employers may create different measurement and stability periods for different categories of
employees. These periods can differ either in length or in their starting and ending dates for the
following categories of on-going employees:
• collectively bargained and non-collectively bargained employees;
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• salaried and hourly employees;
• employees of different entities (i.e., controlled groups); and
• employees located in different states.
The rules also provide an option to use an administrative period (between the measurement and
stability periods) to determine which ongoing employees are eligible for coverage and to notify
and enroll employees in health care plans. However, any administrative period between the
standard measurement period and stability period may neither reduce nor lengthen the
measurement period or stability period. The administrative period following the standard
measurement period may last up to 90 days, and overlaps with the prior stability period to prevent
any gaps in coverage.
New Employees Reasonably Expected to Work Full-Time
If an employee is reasonably expected at his or her start date to work full-time, an employer that
offers group health plan will not face an ACA penalty if it covers new workers within three
calendar months of their start date. This provision applies to new workers who are expected to
work full-time.
Variable Hour and Seasonal Employees
The IRS guidance allows employers to use an initial measurement period of three to 12
consecutive months (as selected by the employer) to determine whether new variable hour
employees or seasonal employees are full-time. The employer measures the hours of service
completed by the new employee during the initial measurement period, and determines whether
the employee completed an average of 30 hours of service per week or more during this period. If
an employee is determined to be full-time during the initial measurement period, the employer
would have up to three months to enroll him or her in a health insurance plan. However, the
initial measurement period and administrative period cannot last beyond the final day of the first
calendar month beginning on or after the worker’s one year anniversary (about 13 months). For
example, an employer takes 12 months to measure whether workers are full-time, the employer
then has up to one month to enroll them in a plan. Similarly, if employers choose 10 months as
the initial measurement period, they have three months to enroll them.
During this 13-month period, workers without coverage can enroll in the newly created health
insurance exchanges and receive premium tax credits. Employers are not required to pay a
penalty for this 13-month period. As noted above, the penalty period begins only after the
administrative period if the employer does not provide adequate and affordable coverage and at
least one of its employees enters an exchange and receives a premium credit.
The definition of full-time is based on the entire 12-month measurement period. So, if a variablehour
employee works full-time some weeks and part-time others, the total hours worked in the
12-month period, divided by the number of weeks as an employee works, would result in the
average number of hours worked per week.
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The following is an example from the December 28, 2012 proposed regulation15 regarding how to
account for the hours of seasonal employees. Employer D offers health plan coverage only to fulltime
employees (and their dependents). Employer D uses a 12-month initial measurement period
for new variable hour employees and seasonal employees that begins on the start date and applies
an administrative period from the end of the initial measurement period through the end of the
first calendar month beginning after the end of the initial measurement period. Employer D hires
Employee S, a ski instructor, on November 15, 2015 for an anticipated season during which
Employee S will work through March 15, 2016. Employer D determines that Employee S is a
seasonal employee based upon a reasonable good faith interpretation of that term. Employee S’s
initial measurement period runs from November 15, 2015, through November 14, 2016.
Employee S is expected to have 50 hours of service per week from November 15, 2015 through
March 15, 2016, but is not reasonably expected to average 30 hours of service per week for the
12-month initial measurement period.
Figure 2. Determining Full-Time Employees
Time periods under Proposed IRS Guidelines
Source: CRS based on IRS Notice 2012-58 Determining Full-time Employees for Purposes of Shared
Responsibility for Employers Regarding Health Coverage.
Effective Dates for Employer Penalty
Under ACA, the employer penalty is effective for months beginning after December 31, 2013.
Thus, employers that intend to utilize the look-back measurement period for determining fulltime
status for ongoing employees for 2014 will need to begin their measurement period in 2013
to have a corresponding stability period for 2014. IRS and the Treasury recognize that employers
who want to have a 12-month measurement period and a 12-month stability period may face
15 The proposed regulation can be found at http://www.irs.gov/pub/newsroom/reg-138006-12.pdf.
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constraints the first year, given that the regulation has not yet been finalized. Thus, IRS is offering
a transitional measurement period that can be (for first year of implementation only) shorter than
the stability period. IRS recognizes that these periods may differ depending on whether the
employer’s health plan or the firm’s financial operations are based on a calendar or a fiscal year.
Also, the guidance states that employers who use a full 12-month measurement period are not
required to begin the measurement period before July 1, 2013 (see example in Table 3 for
employer with fiscal year starting on November 1, 2014). Table 3 shows some examples IRS
provides in its guidance of start and end dates for the measurement, administrative, and stability
periods which meet requirements outlined in the proposed rule (dated December 28, 2012).
Table 3. Examples of Start and End Dates During Transition Period
To Determine Full-Time Status of On-Going Employees
Plan Year
Transitional
Measurement Period Administrative Period Stability Period
Calendar Year April 15, 2013 – Oct. 14,
2013a
Oct. 15, 2013 – Dec. 31,
2013
Jan. 1, 2014 – Dec. 31,
2014
Fiscal Year Starting On:
April 1, 2014 July 1, 2013 – Dec. 31,
2013
Jan. 1, 2013 – March 31,
2014
April 1, 2014 – March 31,
2015
July 1, 2014b June 15, 2013 – April 14,
2014
April 15, 2014 – June 30,
2014
July 1, 2014 – July 1, 2015
Nov. 1, 2014 September 1, 2013 –
August 31, 2014
September 1, 2014 – Oct.
31, 2014
November 1, 2014 –
November 1, 2015
Source: CRS analysis based on IRS Proposed Regulation posted on December 28, 2012.
a. During the transition period, an employer with a calendar year could have a later start date if they shorten
the administrative period.
b. An employer with a fiscal year beginning on July 1, 2014 must use a measurement period that is longer than
6 months to comply with the required measurement period beginning by no later than July 1, 2013 and
ending no earlier than 90 days before the stability period.
Coverage Requirements for Employers
To avoid a potential penalty, employers who do provide health insurance coverage must provide
affordable and adequate coverage to employees and their dependents. The following defines
affordable and adequate in greater detail.
Definition of Dependent Coverage
According to the proposed regulation, the term dependent means a child of an employee who has
not attained age 26.16 Absent knowledge to the contrary, applicable large employers may rely on
an employee’s representation about that employee’s children and the ages of those children.
Dependent does not include the spouse of an employee.
16For more information about dependent coverage under ACA, see CRS Report R41220, Preexisting Condition
Exclusion Provisions for Children and Dependent Coverage under the Patient Protection and Affordable Care Act
(ACA), by Bernadette Fernandez.
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Definition of “Affordable” Coverage
Under ACA, coverage under an employer-sponsored plan is affordable to a particular employee if
the employee’s required contribution to the plan does not exceed 9.5% of the employee’s
household income for the taxable year.17 Household income is defined as the modified adjusted
gross income of the employee and any members of the employee’s family (which would include
any spouse and dependents) who are required to file an income tax return. Modified adjusted
gross income is adjusted gross income plus certain foreign income and tax-exempt interest. A
concern was raised that employers may not be able to determine household income of a worker in
a cost-effective manner. To address this concern and provide employers a more workable option
for determining the affordability of their health insurance coverage, Treasury and the IRS have
proposed a safe harbor provision, whereby affordability of an employer’s coverage would be
measured by reference to an employee’s wages from that employer. Wages for this purpose would
be the total amount of wages as defined on a worker’s W-2 Tax and Wage Statement.18 According
to the IRS, by allowing employers to base their affordability calculations on each employee’s W-2
wages (which employers know) instead of each employee’s household income (which employers
generally do not know), the safe harbor could provide a more “workable and practical method”
for measuring the affordability of an employer’s coverage. In most instances, if employersponsored
coverage were affordable based on the employee’s W-2 wages, it would also be
affordable based on the employee’s household income because household income is equal to or
greater than the employee’s W-2 wages.
Under this safe harbor, employer coverage would be deemed affordable if the employee’s portion
of the self-only premium for the employer’s lowest cost coverage that provides minimum value
(see below for definition of minimum value) must not exceed 9.5% of the employee’s W-2 wages.
Although the determination of whether an employer met the safe-harbor provision would be made
after the end of the calendar year, an employer could also use the safe harbor prospectively, at the
beginning of the year, by structuring its plan and operations to set the employee contribution at a
level so that the employee contribution for each employee would not exceed 9.5% of the
employee’s W-2 wages for that year. If an employee’s contribution is more than 9.5% of his W-2
wage income, and he wanted to enter the exchange and receive a premium credit, the exchange
would have to validate that his premium contribution also would have exceeded 9.5% of his
household income.
In the rare case that an employee’s household income is less than the employee’s W-2 wages
(e.g., because of adjustments to gross income for alimony paid or losses due to self-employment),
the proposed safe harbor would address those situations by allowing the employer to rely on an
employee’s W-2 wages for analyzing the affordability of the employer’s health coverage with
respect to that employee. The safe harbor, however, would not affect an employee’s eligibility for
a premium credit which would continue to be based on the affordability of employer-sponsored
coverage relative to an employee’s household income.
17 See IRC Section 5000A(e)(1)(B) and Section 36B(c)(2)(C)(i).
18 In either case the calculator would permit an employer-sponsored plan to enter information about the plan’s benefits,
coverage of services, and cost-sharing terms to determine whether the plan provides minimum value. See IRS Notice
2011-73, http://www.irs.gov/pub/irs-drop/n-11-73.pdf.
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Definition of Adequate Coverage
Under ACA, a plan is considered to provide adequate coverage (also called minimum value) if the
plan’s actuarial value (i.e., share of the total allowed costs that the plan is expected to cover) is at
least 60%.19 According to a preliminary analysis done by the Actuarial Research Corporation for
CRS, the majority of employer-sponsored plans would meet the actuarial value requirements in
ACA.
On November 26, 2012, HHS issued final regulations on how to calculate actuarial value when
determining the minimum value of a plan that allows employers to use one of three potential
approaches for determining whether an employer plan provides minimum value.
• An actuarial value calculator (AV calculator) is available to employers from the
Department of Health and Human Services (HHS).20
• An array of design-based safe harbors in the form of checklists that would
provide a simple, straightforward way to ascertain that employer-sponsored plans
provide minimum value (MV) with the need to perform any calculations or
obtain the assistance of an actuary.
• For plans with nonstandard features that preclude the use of the AV calculator or
the MV calculator without adjustments, an appropriate certification by a certified
actuary.
The actuarial value calculation for determining minimum value includes the employer
contributions to health savings accounts (HSAs) and health reimbursement accounts (HRAs) that
are part of a high deductible health plan (HDHP).
Reporting and Other Requirements
The Department of Labor has delayed release of regulations requiring employers to provide
employees written notice concerning (1) the existence of an exchange, including services and
contact information; (2) the employee’s potential eligibility for premium credits and cost-sharing
subsidies if the employer plan’s share of covered health care expenses is less than 60%; and (3)
the employee’s potential loss of any employer contribution if the employee purchases a plan
through an exchange. According to a recent Frequently Asked Questions (FAQs), the Department
of Labor expects the timing for distribution of notices will be the late summer or fall of 2013
which will be coordinated with the open enrollment period for Exchanges.21
19 Actuarial value is a summary measure of a plan’s generosity, expressed as a percentage of medical expense estimated
to be paid by the issuer for a standard population and set of allowed charges. In other words, actuarial value reflects the
relative share of cost-sharing that may be imposed. On average, the higher the actuarial value of a plan, the greater the
cost-sharing for the enrollee. Actuarial value does not consider the cost of premiums and the adequacy of provider
networks, and plans with the same actuarial value do not necessarily include the same set of covered benefits.
20 The data underlying the MV calculator are expected to be claims data reflecting typical self-insured employer plans.
Further information on the AV methodology can be found at http://ccio.cms.gov//resources/files/Files2/0242012//Avcsr-
bulletin.pdf. The AV calculator is available at http://cciio.cms.gov/resources/regulations/index.htm/#pm.
21 See Frequently Asked Questions at http://www.dol.gov/ebsa/faqs/faq-aca11.html.
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Beginning in 2014, large employers will have certain reporting requirements with respect to their
full-time employees.22 As prescribed by the Secretary of Labor, they will have to provide a return
including the name, address, and employer identification number; a certification as to whether the
employer offers its full-time employees (and dependents) the opportunity to enroll in minimum
essential coverage under an eligible employer-sponsored plan; the length of any waiting period;
months coverage was available; monthly premiums for the lowest-cost option; the employer
plan’s share of covered health care expenses; the number of full-time employees; and the name,
address, and tax identification number of each full-time employee. Additionally, an offering
employer will have to provide information about the plan for which the employer pays the largest
portion of the costs (and the amount for each enrollment category). The employer must also
provide each full-time employee with a written statement showing contact information for the
person required to make the above return, and the specific information included in the return for
that individual. The Secretary is to work to provide coordination with other requirements, and an
employer may enter into an agreement with a health insurance issuer to provide necessary returns
and statements. IRS Notice 2012-33 invited comments on issues arising from these requirements,
including on possible approaches for coordinating and minimizing duplication.23
Finally, those firms with more than 200 full-time employees that offer coverage must
automatically enroll new full-time employees in a plan (and continue enrollment of current
employees). Automatic enrollment programs will be required to include adequate notice and the
opportunity for an employee to opt out.24 According to Notice IRS 2012-17, in view of the need
for coordinated guidance between the Department of Labor (DOL) and other agencies to
implement ACA, and the goal to provide employers sufficient time to comply, DOL has
concluded that its automatic enrollment guidance will not be ready to take effect until 2014.25

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