IRS webinar reviews ALE status, employer shared responsibility provisions

In a May 12 IRS webinar, IRS officials continued efforts to educate employers on the employer shared responsibility and information reporting provisions under the Patient Protection and Affordable Care Act (ACA). The webinar covered the definition of applicable large employer, full-time equivalent employee, hour of service, affordable coverage, minimum value and more. These terms are important for employers to understand in preparation for the upcoming effective date for the employer shared responsibility provisions under Code Sec. 4980H and the requirement to comply with information reporting requirements under Code Secs. 6055 and 6056, officials explained.

Applicable large employers. In general, the requirement to provide minimum essential coverage and, therefore, the employer shared responsibility provisions of Code Sec. 4980H do not apply to employers with fewer than 50 full-time employees, explained Jeff Campbell, tax law specialist, IRS Tax-Exempt and Government Entities (TE/GE) Division. The requirements apply to employers that meet the definition of “applicable large employer” (ALE) under the law.

“If an employer has fewer than 50 full-time employees, the employer is generally considered to not be an applicable large employer,” Campbell said. “The vast majority of businesses fall below the applicable large employer threshold.”

ALEs can include for-profit companies, tax-exempt organizations, include federal, state and local government entitles, and Indian tribal government entities—in other words, anyone who is an employer and who meets the ALE requirements, said Timothy Berger, tax law specialist, TE/GE.

In general (and effective beginning January 1, 2015), the ACA requires ALEs to either: (1) offer health coverage that is affordable and that provides minimum value to their full-time (FT) employees (and their dependents); or (2) make an employer shared responsibility payment.

Comment. A transition rule for 2015, however, is available to certain ALEs with between 50 and 99 full-time and full-time equivalent employees. ALEs that had fewer than 100 full-time employees (including full-time-equivalent employees) in 2014 will not be subject to the employer shared responsibility provisions in 2015, provided they meet certain conditions regarding the employer’s maintenance of workforce and preexisting health coverage, IRS officials stated.

Determining ALE status. In order to determine whether it is an ALE, an employer must understand several definitions and make several calculations, Campbell explained. First, he noted that an employer must determine its ALE status for the current year based on the average number of employees it had and their hours of service during the preceding year.

Comment. A temporary transition rule provides that, for 2015, ALEs may instead base their ALE status on any consecutive six-month period—as chosen by the employer—during 2014.

For purposes of determining ALE status, a full-time employee is defined as an employee who works an average of either 30 hours a week or 130 hours per month. An employer then must determine how many full-time equivalent employees it has by adding up all the hours of service of its non-full time employees for that month and dividing by 120. The hours of certain seasonal workers are excepted, Campbell explained.

Hours of service. An hour of service for purposes of determining whether an employee is full-time or full-time equivalent is defined as: (1) each hour for which an employee is paid for the performance of duties; and (2) each hour for which an employee is paid on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

Comment. Campbell explained in response to an audience member’s question that paid interns would be treated like all other employees for purposes of determining hours of service.

Common ownership and controlled groups. Another important rule to note affects employers that are commonly owned or part of a controlled group. In such cases ALE status is generally determined by adding all employees of all employers within the controlled group. Therefore, even if, individually, each employer does not have 50 or more full-time employees (and full-time equivalents), if the entire controlled group has 50 or more full-time employees and full-time equivalent employees, then each member in the group is an ALE member subject to the requirement to provide minimum essential coverage and the employer shared responsibility provisions, Campbell explained.

Employer shared responsibility. Berger and Campbell briefly reviewed the employer shared responsibility payments under Code Secs. 4980H(a) and 4980H(b).

In general, an ALE that fails to offer minimum essential coverage to less than 95 percent of its full-time employees (70 percent for 2015) will be subject to a penalty under Code Sec. 4980H(a) equal to the applicable payment amount, which is 1/12 of $2,000 for any month (adjusted for inflation), times the number of full-time employees for the month reduced by 30 (or 80 for 2015).

Similarly, an employer that fails to provide coverage with minimum value will be liable for a penalty under Code Sec. 4980H(b) in the amount of 1/12 of $3,000 (also adjusted for inflation) per premium tax credit-receiving full-time employee, per month. The total penalty is capped: an employer cannot be held liable for a larger penalty for offering coverage that does not meet affordability/minimum value standards than for not offering coverage at all.

Information reporting. Finally, Berger and Campbell covered the information reporting requirements under Code Secs. 6056 and 6055. The requirement to report coverage is effective for 2015, meaning that the first returns must be filed in 2016.

Code Sec. 6056 requires ALEs who are subject to the Code Sec. 4980H provisions to file an information return to report health care coverage offered to the employer’s full-time employees for the calendar year. The information contained on these returns will be is used to administer the employer shared responsibility provisions and to determine an employee’s eligibility for the premium tax credit, Berger explained.

Code Sec. 6055 reporting applies to all insurers, providers of government-sponsored programs and self-insured employers. The requirement applies to all self-insured employers, regardless of size Campbell explained. ALEs and ALE members that sponsor self-insured group health plans are eligible to use the combined reporting option available on Form 1095-C, Employer–Provided Health Insurance Offer and Coverage, to meet the requirements for both Code Secs. 6056 and 6055. The benefit for the ALE is that it need provide only one form to each employee and submit only one form to the IRS.

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