If your business or organization has 50 or more full-time equivalent employees but excludes certain classes of employees from health and welfare plan eligibility, you should review your eligibility rules now to minimize the risk of incurring Affordable Care Act (ACA) penalties.
Many health and welfare plans include eligibility rules that categorically exclude certain classes of employees—such as part-time, seasonal, and variable hourly employees and interns—from participating in the plan. Historically, these kinds of rules have not been a problem because employers have had a lot of discretion as to which employees should be offered coverage. But the ACA’s employer responsibility rules have changed the playing field, and now these kinds of categorical exclusions can become problematic, especially if any of these excluded employees count as “full-time” employees.
The ACA’s employer responsibility rules impose penalties on employers with 50 or more full-time equivalent employees who fail to offer medical coverage to substantially all of their full-time employees. During 2015, the target that you have to hit each month is an offer of coverage to at least 70% of your full-time employees; but in 2016 and succeeding years, the monthly target increases to 95% of your full-time employees. If your organization fails to hit the target for any particular month, then the IRS will assess a penalty for that month—which is $166.67 times the total number of your full-time employees that month reduced by up to 30 (with the penalty amount to be adjusted each year for inflation). For these purposes a “full-time employee” is any employee who averages at least 30 hours of service per week. The monthly equivalent is 130 hours of service during the month.
The IRS allows two methods to determine who is a full-time employee:
Whether you use the month-to-month method or the look-back measurement method to determine who is a full-time employee, categorical exclusions of entire classes of employees from your medical plan increase the risk that you will miss your targets, especially beginning in 2016, when you’ll have much less margin for error:
The discussion above has focused on the § 4980H(a) penalty for failure to offer coverage, but categorical exclusions also increase the risk of incurring the § 4980H(b) penalty, which applies when your organization avoids the (a) penalty but any of your full-time workers end up purchasing health insurance on the Exchange and qualifying for the tax subsidy. Any employee who has been categorically excluded from the medical plan is potentially eligible for a subsidy on the Exchange. If an employee who is considered full-time for any particular month (under either the month-to-month method or the look-back measurement method) obtains the subsidy, your organization will be assessed a $250 monthly penalty for that employee (with the penalty amount subject to adjustment every year for inflation).
In the coming weeks, you should review your plan’s eligibility rules to see if any employees are categorically excluded from your medical plan. If so, consider whether you need to amend your eligibility rules or change the method you use to determine full-time employees. If you have questions about these issues, or any other Affordable Care Act issues, please contact Norbert F. Kugele (at firstname.lastname@example.org or 616.752.2186), April A. Goff (at email@example.com or 616.752.2154), or any other member of the Warner Employee Benefits/Executive Compensation practice group.