Effective January 1, 2015, a penalty is being phased in for large employers with 100 or more full-time equivalent employees who fail to offer qualifying minimum essential health insurance coverage to their full-time employees.  Beginning in 2016, employers with between 50 and 99 full-time employees will also be considered large employers. Due to the complexity of the new regulations, businesses should start taking a look at the new rules now.

The first step for employers is to find out if they meet the definition of a large employer.  If analysis leads to the conclusion that a business is a large employer, it will then need to determine whether employees are considered full-time for purposes of offering health insurance coverage, or risk incurring a penalty. Companies need to ensure compliance with new IRS reporting requirements.  In some situations employers will qualify for an exemption from the large employer mandate (explained below).

A full-time employee is defined as one who works an average of 30 hours each week, or 130 hours in a calendar month.  A full-time equivalent employee is a combination of part-time employees whose combined hours total at least 120 hours in a month.  All the part-time hours are added up and then divided by 120 to arrive at the number of full-time equivalent employees.  This number is then added to the number of full-time employees to see if they meet the minimum full-time employee number threshold for being a large employer.  In both full-time employees and full-time equivalents, seasonal workers are included.  It is important to note that there is little guidance on determining seasonal status.

There are some optional methods for determining full-time employees for non-hourly basis employees, as long as the alternative methods do not significantly understate actual hours.  These include employees working 40 hours per week or eight hours per day.  There is another weekly rule that can be found in IRS Regulation Sec. 54.4980H-1(a)(21)(iii), which discusses using a full-time measurement period of 120 hours in a month with four weeks, and 150 hours in a month with five weeks.  Either method may be used.  Interestingly, the same method is not required to be used for all non-hourly employees.  The methods must be applied consistently and reasonably across similar classifications of workers.

In 2015 only, an employer must utilize a look-back calculation to determine if they are a large employer.  Any consecutive six-month period in 2014 may be used for the look-back period to see if there are 100 employees or more.  Once it is established that a company is a large employer there is a second calculation that takes into account current year hours for employees to determine whether they must be offered minimum essential coverage, as well as calculating any penalties (which is based on the current year number of full-time employees) that may be due.

Large employers must establish a standard measurement period to determine whether an employee is full-time and in need of being offered coverage.  For existing or ongoing employees in a similar category, the same look-back period must be applied.  The company decides when their standard measurement period begins and ends.

Once employees are determined to be full-time or part-time, the status is locked in for the subsequent stability period.  Health coverage must be offered to a full-time employee during the subsequent stability period.  If an employee averages at least 30 hours a week during the standard measurement period, the employee must be treated as a full-time employee for a subsequent stability period.  Employees averaging under 30 hours each week during the standard measurement period do not need to be treated as full-time during the subsequent stability period as long as the stability period is no longer than the standard measurement period.

There are different rules for new employees.  When hired, if a new employee is expected to be a full-time employee, a large employer must offer coverage by the first full day of the fourth full calendar month of employment.  An initial measurement period may be used for new variable hour employees whose status as full or part-time is unknown.  The employer may decide upon an initial measurement period between three and 12 months long.  The variable hour employee is considered full-time if the employee averages 30 hours per week during the initial measurement period, and must be offered coverage.  Large employers must also test variable hour employees under the same standard measurement period as other ongoing employees, and the periods may overlap.

There are a few exceptions from the large employer mandate.  One exception is when the number of full-time employees and full-time equivalents is greater than 50 for no more than four calendar months or 120 days in a calendar year.  Another exception to the mandate occurs when the full-time employee numbers exceed 50, and the excess over 50 are seasonal workers.  For the exceptions the days and months do not need to be consecutive.

Large employers are now required under IRS Section 6056 to submit information annually to the IRS.  2015 is the first calendar year the annual return under Section 6056 needs to be filed.  This return needs to be filed no later than February 29, 2016 if paper filed, or March 31, 2016 if a company wishes to electronically file.  The IRS provided a consolidated form in March 2014 (T.D. 9660) to avoid duplicate reporting to employees and the IRS.  T.D. 9661 was also issued in the same month giving a simplified reporting method if insurance is provided to 98% of the employees being reported.  The IRS is granting penalty relief for the 2015 reports for companies attempting to comply in good faith.  For calendar years after 2015, companies not complying with the annual reporting requirements will be subject to penalties for failure to file correct payee statements and failure to file correct information returns.

For many employers, extensive analysis will be required to determine whether they qualify as a large employer due to the complexity of these new regulations and additional time needed in meeting the new reporting requirements.  For most companies, new accounting systems will need to be instituted to determine all this so companies should not delay in figuring out if they are subject to the new rules.  Please feel free to contact your Dermody, Burke & Brown tax advisor to further discuss any questions you may have.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.