Academic journal article Journal of Accountancy

The Sec. 4980H Assessable Payment for Large Employers: Businesses Need to Understand the Rules for Counting Workers and Prepare Now to Avoid a Tax Penalty for Failing to Provide Employees Minimum Essential Health Coverage

Academic journal article Journal of Accountancy

The Sec. 4980H Assessable Payment for Large Employers: Businesses Need to Understand the Rules for Counting Workers and Prepare Now to Avoid a Tax Penalty for Failing to Provide Employees Minimum Essential Health Coverage

Article excerpt

EXECUTIVE SUMMARY

* Employers need to determine whether they are large employers potentially liable for the Sec. 4980H assessable payment for failing to provide minimum essential health coverage by tracking their full-time and full-time-equivalent employees' (FTEs) hours or equivalencies. Transition relief for 2015 allows a lookback period of any six consecutive months in 2014, but otherwise, the determination is made by using a calendar-year lookback method.

* For 2015, the requirement is phased in for employers with 100 or more full-time employees and FTEs, who must offer coverage to at least 70% of full-time employees. For 2016 and after, large employers are those with 50 or more full-time employees and FTEs, and they must offer coverage to at least 95% of fulltime employees.

* Employers may qualify for the exemption from the large-employer mandate if their fulltime employees plus FTEs exceed 50 for 120 days or less in a calendar year and the employees over 50 are seasonal workers.

* Once employers determine they are large employers, a still more complex system of rules may be required to determine whether employees are full-time for purposes of offering coverage or determining the penalty amount, especially for variable-hour and seasonal employees. Final regulations provide rules for measurement, administrative, and stability periods.

* Employers must also report to employees and to the IRS information including the number of full-time employees during each calendar year, whether those employees were offered minimum essential coverage, and the number of months the employees and their dependents were covered.

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Employers near the threshold of 50 full-time and full-time-equivalent employees (FTEs) or with a high proportion of seasonal workers should be taking measures now to record employees' daily hours of service and other data relevant to the Sec. 4980H assessable payment for large employers regarding minimum essential health coverage. To avoid unanticipated penalties, employers also need to fully understand this major facet of the Patient Protection and Affordable Care Act (PPACA), PL. 111-148. An employer could be liable for the penalty either by not offering coverage to its full-time employees or if any of those employees obtain coverage through a health care exchange for which they are allowed a premium tax credit.

Although the IRS has provided transition relief (Notice 2013-45 and final regulations in T.D. 9655) effectively delaying until Jan. 1, 2016, liability for the penalty for employers with between 50 and 99 FTEs (midsize employers), the penalty is being phased in for employers with 100 or more FTEs effective Jan. 1,2015, meaning that the lookback period by which these larger employers must determine whether the provision applies to them began Jan. 1 this year (unless they elect to use a period of six consecutive calendar months, allowed in 2014 only) and thus is well underway The penalty phase-in requires applicable employers to offer qualifying health coverage to at least 70% of their full-time employees in 2015 and 95% in subsequent years.

This article examines some of the parameters in determining whether an employer is a large employer within the meaning of Sec. 4980H(c)(2) and the transition relief and thus potentially subject to the penalty. In addition, it discusses how an applicable large employer can determine which employees need to be offered coverage and related reporting requirements.

COUNTING FULL-TIME EMPLOYEES AND FTES IN THE LOOKBACK YEAR

Beginning in 2015 under transition relief, an employer is a large employer if it employed an average of at least 100 full-time employees and FTEs (beginning in 2016 for employers with between 50 and 99 FTEs) on business days each month during the preceding calendar year. A full-time employee is one who is employed on average at least 30 hours of service a week or 130 hours in a calendar month (Sec. …

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