The Affordable Care Act (ACA) has transformed group health plans since the law was enacted more than four years ago, and plan sponsors must work diligently to keep pace with tax-related compliance requirements. Among the most notable reforms effective in 2015 is the shared responsibility mandate and reporting requirements for large employers. Here's an overview of this and other significant reporting requirements for this year.

Employer Shared Responsibility Mandate

Section 4980H of the Internal Revenue Code requires "applicable large employers" with 50 or more full-time employees (including full-time equivalent, or FTE, employees) to offer health coverage to full-time employees and their children or pay a penalty. The effective date of the employer shared responsibility mandate — often referred to as the "play-or-pay mandate" — was January 1, 2015. (It was originally scheduled to take effect in 2014 but the IRS postponed that start date.)

Because the penalty is only applicable to full-time employees, the determination of FTE status is critical to compliance with the employer play-or-pay mandate. For the purposes of ACA, a FTE is defined as someone who works "30 hours per week, averaged over the course of a month" — not the traditional definition of 40 hours worked per week. The IRS also specifies: "the monthly equivalency of 30 hours per week is 130 hours."

According to the IRS, an employee's hours of service include:

• Each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and
• Each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

While the rules are still being finalized, at this point the statute mandates that for coverage to be considered affordable for low-income employees — defined as those between 100-400 percent of federal poverty level — the employee's portion of the premium for individual coverage "cannot exceed 9.5 percent of his/her household income." In addition, "the plan must pay, on average, at least 60 percent of the costs of covered services" — which include a variety of health benefits such as prescriptions and maternity care — in order to meet the ACA's "minimum value" requirement.

Employers that offer some coverage still may incur a penalty if that coverage is not considered affordable or does not provide minimum value to plan participants. These requirements have tempted some employers to simply reimburse employees for purchasing their own health insurance policies rather than offering an employer plan. In an effort to discourage this practice, the IRS imposes substantial excise taxes on employers choosing this path.

For employers offering coverage — but coverage that does not meet minimum value requirements — penalties may apply if "at least one full-time employee qualifies for a premium tax credit and uses it to purchase coverage in the health insurance exchange." That penalty is $2,000 for each FTE beyond 30 employees (indexed to inflation). Note that for 2015, the penalty exempts the first 80 FTEs rather than 30. The penalty is $3,000 for each FTE who receives a premium tax credit to enable him/her to buy coverage through a health insurance exchange. (Employers with between 50 and 99 FTEs have until 2016 to comply.)

Specifically, employers will pay a penalty under Section 4980H(b) if "a full-time employee receives a premium tax credit to purchase health insurance on an exchange because:

1. The employer health coverage offered did not provide 'minimum value,' that is the plan's share of the total allowed costs of benefits provided under the plan is not at least 60 percent of those costs;
2. The employer health coverage offered was 'unaffordable,' or
3. The employee was not among the 95 percent (70 percent in 2015) of full-time employees offered coverage."

Cost-Share Limits

For 2015, the out-of-pocket limits relevant to insured plans offered in the marketplace, as well as for insured and self-funded plans offered outside of the marketplace, are $6,600 for an individual and $13,200 for coverage of more than one person. The limits applicable to high-deductible plans used with health savings accounts are $6,450 and $12,900 respectively. 

New Employer Reporting Requirements Effective for 2015

All large employers that are subject to the play or pay requirement must now report to the IRS each year on anyone who was a FTE for at least one month, providing information such as whether that person was offered health coverage and the lowest employee cost of coverage that meets minimum value requirements. The IRS mandates that employers collect data in 2015 and submit the first round of information reports in 2016. The returns must be provided to employees by January 31, 2016 and filed with the IRS by February 28, 2016 (paper) or March 31, 2016 (electronic).

If an employer offers a fully insured plan, the health insurance carrier is required to submit the return on behalf of the employer. Employers that offer self-insured health plans must report on all employees and dependents covered under the plan. A self-insured employer that is an applicable large employer (either by itself or as a member of a controlled group) for purposes of the play or pay requirement must submit the reports on Form 1095-C. Insurance companies, small employers and some others should use Form 1095-B.

The IRS' final regulations offer three reporting methods, including options that may simplify the process in some cases.

• Under the general method, an employer files a return for each individual who is a FTE for one month or more during the calendar year using Form 1095-C.
• The first alternative reporting method removes the requirement that the employer report month-by-month information for employees who received a "qualifying offer" for all 12 months of the year. A qualifying offer is "an offer to an employee and his or her spouse and children of coverage that provides minimum value and for which the employee's share of the self-only premium does not exceed 9.5 percent of the single federal poverty level, for an individual in the lower 48 states," according to the IRS. The employer still must report identifying information for each employee, regardless of whether he or she receives a qualifying offer.
• The second alternative method eliminates the need for the employer to identify which employees are full-time. An employer may use this method if it "provides qualifying offers of minimum essential coverage that provides minimum value and is affordable to at least 98 percent of its employees and their children." The employer still must report identifying information for each employee, regardless of full-time status, and the employer must report all the information required month by month under the general method.

Safe Harbor

To cope with escalating health care plan-related expenses, many employers are exploring options to avoid or minimize penalties, as well as contain health coverage costs. In 2015 the IRS permits employers to take advantage of one of three safe harbors to determine whether the health plan they offer is affordable. As mentioned previously, health coverage is deemed affordable "if that employee's required contribution for the calendar year for the employer's lowest cost self-only coverage that provides minimum value during the year does not exceed 9.5 percent of:

1. That employee's Form W-2 wages from the employer for the calendar year;
2. An amount equal to 130 multiplied by the employee's hourly rate of pay as of the first day of the coverage period or the lowest hourly rate during the calendar month or 9.5 percent of the employee's monthly salary for salaried employees; or
3. The federal poverty level for a single individual. Because a plan's affordability is based on self-only coverage, some employers may have shifted costs to family coverage, while keeping employee-only coverage affordable."

Take Action Now

With these new reporting requirements, employers sponsoring plans of all sizes should immediately review the terms and conditions of their plans, assess their shared responsibility risk and revise or amend plans as necessary.

Employers must become familiar with the reporting requirements and determine who is responsible for reporting to the government and to employees. Employers who are responsible for reporting must begin the process of gathering monthly data now so that they may meet the filing deadlines.

We can offer guidance regarding the tax implications of the ACA requirements effective for 2015, as well as help you prepare for changes coming in 2016.

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