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ACA Final Regulations, Part II: 2015 Transitional Relief for Applicable Large Employers

On February 12, 2014, the Internal Revenue Service issued final regulations with respect to the Affordable Care Act (ACA). Part I of this series of articles provides an overview of the Final Regulations.

Part II, below, addresses the 2015 transitional relief from the “play or pay” penalties available to applicable large employers.

Less Than 100 Full-Time Employees

Employers with less than 100 full-time employees (including full-time equivalents) during 2014 will not be subject to Code Section 4980H penalties in 2015. In addition, for those sponsoring fiscal year plans, the relief will extend to any portion of the 2015 plan year that falls in 2016 (provided that the fiscal year plan was in effect as of December 27, 2012). Certain conditions apply to qualify for this relief, including the employer not reducing its workforce size or employee hours without a bona fide business reason and maintaining the previously offered coverage.

Offering Coverage to 70% vs. 95%

An applicable large employer will not be subject to the Section 4980H (a) - failure to offer minimum essential coverage - penalty during the 2015 plan year if it offers coverage to at least 70% of full-time employees and dependents (instead of the otherwise required 95% level).

Note: this relief does not extend to the failure to offer coverage that is both affordable and provides minimum value. Consequently, if an applicable large employer with 100 or more full-time employees (including full-time equivalents) offers coverage to 70% of the full-time employees and dependents, but the coverage fails either the affordability or the minimum value requirement, then for each month and for each full-time employee who receives a premium tax credit, the employer will be subject to a Section 4980H (a) penalty equal to 1/12 x $3000. See also the limitation on penalties below.

Penalty Limitations

Applicable large employers that fail to offer minimum essential coverage are assessed a penalty equal to the number of full-time employees in a given month minus 30 and this difference is multiplied by 1/12 x $2000 to determine the applicable monthly penalty. For 2015 only, an applicable large employer (with 100 or more full-time employees, including full-time equivalents) that fails to offer minimum essential coverage to at least 70% of its full-time employees, calculates its Section 4980H (a) penalty by subtracting 80 (instead of 30). The monthly penalty in 2015 will be equal to the product of: (full-time employees minus 80) x (1/12 of $2000).

If the applicable large employer offers coverage that fails to meet the minimum value and affordability requirements of Section 4980H (b), they will continue to be subject to a penalty, but the maximum Section 4980H (b) penalty that may be assessed cannot exceed the maximum Section 4980H (a) penalty. Consequently, for 2015 only, by subtracting 80 rather than 30 full-time employees to determine the maximum Section 4980H (a) penalty, the aggregate of the 4980H (b) penalties calculated for each affected employee receiving a premium tax credit is also lowered.

First Year Applicable Large Employer

An employer that was not an applicable large employer in the prior year may avoid penalties with respect to employees not offered coverage in the prior calendar year, provided that the employer offers coverage on or before April 1st of its first year as an applicable large employer.

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