You may not be completely clear on what has been happening with healthcare reform or where it currently sits — and for good reason. Considering the mixed messages we hear from a polarized Congress, the media spin and the complexity of the law itself, there is reason to be confused.
There are dozens of provisions in the healthcare reform bill called the “Patient Protection and Affordable Care Act” (PPACA or ACA), which was signed into law on March 23, 2010. Effective dates for the provisions were staggered and most were effective by 2015. Among these provisions, there are two that are central to the heart of healthcare reform and which continue to garner a lot of attention and debate: the individual mandate and the employer mandate.
What is the individual mandate?
The individual mandate (technically “individual shared responsibility”) is an ACA provision that authorizes the IRS to assess a tax penalty on individuals who fail to obtain health insurance coverage for themselves and their families. To avoid the penalty, the required level of health coverage is minimal. It is referred to as minimum essential coverage and just about any health coverage is sufficient.
What happened to the individual mandate?
The individual mandate is still technically part of the ACA but on Jan. 1, 2019, the tax penalty goes away. So, practically speaking, it is no longer effective starting next year. The provision reducing the penalty to nothing was included in the U.S. House bill called the “Tax Cuts and Jobs Act,” which passed both the Senate and House on Dec. 20, 2017, and was signed by the president on Dec. 22, 2017.
How does the reduced individual mandate penalty affect employers?
When the individual mandate was effective, employees who previously had no interest in their employer’s health plan now had motivation to participate. When the penalty goes away, individuals may again decide to opt out of the employer’s plan, thus reducing participation, which in turn may have different effects for different employers. For example, for insured plans it might lower employer cost, but for self-funded plans it might increase costs because high-claims employees will likely stay enrolled.
What is the employer mandate?
The employer mandate (technically “employer shared responsibility”) is an ACA provision that authorizes the IRS to assess one of two tax penalties on employers (technically “applicable large employers”) who fail to offer a specific level of coverage to at least 95 percent of their full-time employees and their dependents.
To avoid the larger penalty, the required level of health coverage is the same minimum essential coverage noted above and just about any health coverage is sufficient. However, to avoid the other penalty, the health coverage offered must also provide minimum value (based on an actuarial scale) and must be affordable, defined by the ACA to mean the employee cost (for single coverage only) must not exceed a prescribed percentage of household income (9.86 percent for 2019).
It is important to note here that even if an employer fails to meet these thresholds, no penalty applies unless at least one full-time employee qualifies for a federal subsidy and purchases coverage in the ACA Marketplace/Exchange (an online portal created for individuals to purchase insurance).
What happened to the employer mandate?
The employer mandate is still very much a part of the ACA. There are no changes that remove it or reduce requirements. In fact, in November 2017, the IRS began sending notices of proposed penalties (based on 2015 calendar year obligations) to large employers. So, just because an employer hasn’t received a penalty letter yet doesn’t mean it is in the clear. See the graphic at the bottom of the page to see how penalties are calculated.
What is a large employer?
A large employer under the ACA employer mandate provision is one which employs at least 50 full-time or full-time-equivalent employees. There is a method identified in the employer mandate provisions to calculate size. Generally, a full-time employee is one who works an average of 30 hours per week or 130 hours per month over the prior calendar year. The total number of full-time-equivalent employees in a month is calculated by adding all hours worked that month by all part-time employees divided by 120. Aggregated groups (controlled and affiliated service group) rules as well as contingent worker rules also apply to the calculation.
How does the IRS know which large employers may owe a penalty?
The ACA requires insurance companies, the Marketplace/Exchange, large employers and certain small employers to annually file information returns with the IRS using forms 1094 and 1095. The forms provide specific identifiable information including but not limited to: who was offered coverage, who purchased coverage, the level of coverage, the cost of coverage and who received a subsidy. The IRS cross-references the information provided to determine penalties.
What if a large employer fails to file information returns?
In addition to the proposed penalty letters the IRS is currently sending, it is also sending separate letters to employers who have not filed any 1094-C and 1095-C forms but who are identified as large. The IRS is currently sending these letters based on 2015 and 2016 calendar years. The IRS gleans enough information from the 1094 and 1095 forms it receives from insurance companies and the Marketplace/Exchange to identify large employers who should have filed.
Why must some small employers submit information returns when they aren’t required to offer health insurance?
Some small employers offer plans that are self- or level-funded rather than a traditional plan that is fully insured by an insurance company. Consequently, there is no obligation by an insurance company to provide information to the IRS about who obtained coverage. In this case, a small employer must provide information to the IRS using 1094-B and 1095-B forms. This helps the IRS identify which individuals owe an individual mandate tax. It is currently unclear whether this requirement will continue in 2019 after the individual mandate penalty goes to zero.
What will happen to healthcare reform?
In addition to the individual mandate penalty reduction, a few other ACA provisions have been delayed or adjusted, or enforcement priorities have changed. However, the employer mandate and employer reporting with forms 1094 and 1095 are still very much alive, as are dozens of other ACA provisions affecting employers. Because healthcare reform is so partisan, much of what happens in the future depends on which political party maintains (or obtains) control of the U.S. House, the Senate and the White House. For now, it is wise for employers of all sizes to expect much of the ACA to stay around, become fully educated on requirements and implement changes to become compliant.
Susan L. Grassli is the director of ACA and benefits compliance for GBS Benefits. She is an attorney and an active member of the Utah State Bar. She served as an assistant attorney general with the Utah Attorney General’s office for 14 years.