ACA PAY OR PLAY – TESTING (Part 3 ACA Series)

Published by Mary Lou F. on April 17, 2014

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Now that you know from our last blog post that the end result is the report you’ll file with the IRS, how do you determine in advance of the reporting where you (the employer) and your employees stand?

There are a series of tests that you can, and should, use to determine if you need to comply. These tests identify if you need to comply with the employer shared responsibility mandate and if you do, if you are satisfying the requirements or are you facing a penalty.

Large Employer
Briefly, an applicable large employer is an employer with at least 50 full-time employees, including full-time equivalent employees. The first test you need to perform is to determine if you meet that condition. So the task is to look at each individual employee and consider if they work 30 or more hours per week on average. There are quite a few rules regarding the categorization of employees and the definition of service hours. So the task of classifying your employees is a daunting exercise in and of itself. The large employer determination is made on a calendar year basis and is made by calculating the number of full-time and full-time equivalent employees for each calendar month in the preceding calendar year, adding these figures together, and dividing the total by 12 to get an average number of full-time employees for the preceding calendar year. It is important to note that whether or not you are subject to the pay or play requirement is made on a calendar year basis.

How do you do this? The easiest method would be to extract data from a time and labor management system or payroll system either by month or by pay period. Remember, you need to be able to prove that you are compliant. The best way to do this is to have systems in place that track and monitor the hours employees work and maintain them in a way that will be efficient, easy, and reliable when it comes to providing proof to the IRS. If you do not have a system in place, consider implementing one. The alternative is to gather paper timesheets, manually enter them into a spreadsheet, or manually enter them into a third-party system that can take that data and provide test results with your large employer determination.

There are many, many considerations to keep track of that become cumbersome when attempting a manual solution—what types of employees are they (full-time, part-time, seasonal, variable hour, volunteer, educational employees, student work-study, adjunct faculty, religious order), how would you define their service hours (hourly, salary, on-call), have you remembered to count time for which payment would be due even if not worked (vacation, holiday, illness, incapacity, layoff, jury duty, military leave or leave of absence), and do you clearly understand the definitions of each type of employee and how to apply the rules regarding their services hours.

Substantially All
If you are a large employer, the next test is to determine if you offer coverage to substantially all of your employees. The Final Regulations released in February of 2014 added some short-term changes in the definition of substantially all (applicable for 2015). For 2015 the definition was temporarily redefined for employers with 100 or more employees to offer coverage to 70% of full-time employees and their dependents. However, after January 1, 2016 substantially all will refer to offering coverage to 95% of your full-time employees and their dependents. In terms of long-term planning, aim for offering coverage to 95% or more of your employees. Failure to offer coverage or offering coverage to less than substantially all (94.99% or lesser) could trigger the Subsection A penalty ($2,000 multiplied by the number of your full-time employees minus the allowed reductions) if just one employee receives subsidized coverage from the Exchange.

So how do you test this? Determine who your full-time employees are. For each eligible employee, was a formal offer of coverage made to that employee? If so, was the coverage available to both the employee and his/her eligible dependents? Put a documentation system in place that tracks what the offer was (exactly what coverage was offered) and when it was made. You can do this through an enrollment/eligibility system or through a formal paper-based process. Once you have information on each eligible you can then calculate if minimum essential coverage was offered to substantially all of your full-time employees and dependents. For efficiency, the best solution here would be an ACA-compliance system that incorporates eligibility management; however, meticulous paper enrollment records could be utilized as well.

Affordable
Coverage is considered affordable for an employee if the employee’s required contribution for self-only coverage under an applicable large employer’s health plan does not exceed 9.5% of the employee’s household income for the year. As employers generally will not know their employees’ household incomes, there are several safe harbors in place to determine affordability: W-2 earnings, rate of pay, and federal poverty line safe harbors.

Each of the safe harbors provides a method to determine if an offer of coverage is deemed affordable. Generally, you will need to know the amount of the contribution for self-only coverage for the least expensive coverage option that the employee is eligible for and at least one of the following: the employee’s W-2 wages (Box 1), the employee’s hourly rate of pay, or the monthly amount determined as the Federal Poverty Line for a single individual for the applicable calendar year (for the state in which the employee is employed). Specific conditions apply to each Safe Harbor to be able to be utilized (e.g. the rate of pay safe harbor is available as long as the employer does not decrease an employee’s rate of pay during the year). To test this you need to understand fully what the three safe harbors are. Ideally, you would want to integrate your benefits management system with your payroll system and incorporate the ACA affordability safe harbor rules to test each employee in an automated manner. To do this manually you would want to set up a spreadsheet to track each employee’s contribution for the least costly plan they are eligible for and the information necessary for the safe harbors to build a formula to run the calculation for each employee. Don’t forget, if at least one full-time employee receives an Exchange subsidy because coverage is unaffordable, you would be liable for a Subsection B penalty ($3,000 multiplied by the number of each full-time employee who receives an Exchange subsidy).

Minimum Value
Your health plan is considered minimum value if the plan’s share of the total allowed cost of benefits provided to an employee is at least 60% of the covered health and drug benefits. Testing to ensure compliance with this requirement is challenging for an employer to tackle alone. The IRS and the U.S. Department of Health and Human Services have developed a minimum value calculator to help with testing. As the minimum value test really refers to the plan benefits and the plan’s share of costs, a safe harbor allows that a plan may determine minimum value through an actuarial certification from a member of the American Academy of Actuaries. A plan may also satisfy minimum value if it meets the requirements for any of the levels of metal coverage as defined (i.e., bronze, silver, gold, or platinum). If the plan you offer does not provide minimum value, and if at least one full-time employee receives an Exchange subsidy, you would be liable for a Subsection B penalty ($3,000 multiplied by the number of each full-time employee who receives an Exchange subsidy).

If you don’t feel equipped to perform any or all of these tests, this is the time to put the partners and systems in place to help you. Determine your testing strategy. You will likely want to run tests now to see where you are at-the results will provide a roadmap to what you need to do to mitigate penalties. You may test as you go, month-by-month, so you can be aware of any changes that would impact your stability period. You would also test your “look back” data during the administrative period so you know exactly what to put in place for your stability period.

Join us next week for a look at how to determine your plan year and measurement period.