Beginning in 2015, applicable large employers may be subject to the employer shared responsibility penalties under the Affordable Care Act if they do not offer full-time employees (and their dependents) health insurance coverage that meets certain criteria.
In order to avoid penalties, any applicable large employer has to determine which of its current employees must be offered affordable health insurance. They must offer affordable health insurance coverage to full-time employees (and their dependents).
Full-time and part-time employee hours are used to figure out if the employer is an applicable large employer, but the employer won't face a penalty if they do not offer health insurance to part-time workers.
In order to avoid penalties under the Affordable Care Act, applicable large employers must offer affordable health insurance coverage that provides minimum value to substantially all of its full-time employees or at least 95-percent.
Generally, a full-time employee for any calendar month is an employee who is employed (i.e., entitled to payment) for an average of at least 30 hours of service per week. To take into account that the average month consists of more than four weeks, employers can treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week, provided the employer applies this equivalency rule on a reasonable and consistent basis.
(52 weeks x 30 hours) ÷ 12 months = 130 hours
The penalties are applied on a monthly basis. However, determining each employee's status each month creates practical difficulties for the IRS, employees, and employers, especially with regard to variable-hour employees. Therefor, the IRS allows an employer to determine an employee's status (e.g., full-time or not full-time) during a look-back measurement (i.e., testing) period. That status is then used for a corresponding stability (i.e., coverage) period. The procedures for determining the measurement and stability periods may vary depending on whether the employee is an ongoing employee, a new employee, or an employee whose employment status changes during the year.
Dependents Who Must Be Offered Coverage
In order to avoid penalties under the Affordable Care Act, applicable large employers must also offer affordable health insurance coverage that provides a certain minimum value to all full-time employees' dependents. Generally, an employer meets this requirement by offering coverage to at least 95% of full-time employees (and their dependents).
The Affordable Care Act did not define the term dependent. However, in the proposed regulations, dependent is defined as a child who is under age 26. The child is no longer considered a dependent when he or she reaches his or her 26th birthday.
A child is a:
Son or daughter
Stepson or stepdaughter
Adopted child - an individual who is legally adopted or lawfully placed with the employee for legal adoption
Eligible foster child - an individual placed with the employee by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction
Generally, an employee's children must be offered affordable health benefits until they reach age 26. The child does not have to be a dependent for income tax purposes.
The term dependent for this purpose does not include an employee's spouse. Many employers offer health benefits to employees and their spouses and children, and they can continue to do so. However, an applicable large employer will not be subject to these penalties for not offering coverage to an employee's spouse. Next week we will continue to examine the requirements of the employer mandate.
Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.