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Small Business Employee Benefits and HR Blog

Guide to Calculating Employer Shared Responsibility Fees in 2016

February 5, 2016
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It’s no secret that the world of health insurance benefits is complex and always Guide to Calculating Employer Shared Responsibility Fees in 2016changing. Learning how to calculate Employer Shared Responsibility fees this year requires answering a handful of essential questions, but first let’s take a look at what the provision really boils down to.

Under the Affordable Care Act’s Employer Shared Responsibility provision, employers that qualify as Applicable Large Employers (ALEs) must either:

  1. Offer affordable "minimum essential coverage" that provides minimum value to at least 95 percent of their full-time employees and their dependents.
  2. Make an Employer Shared Responsibility payment to the IRS. This also is sometimes called the “employer mandate” or “pay-or-play provisions.” 

The IRS levies two types of fees for employers who fail to meet the Employer Mandate. If your company offers coverage to fewer than 95 percent of its full-time employees and at least one full-time employee receives federal assistance (a Premium Tax Credit), your company will be fined based on your total number of full-time employees. The second type of fee is for employers who do offer coverage to 95 percent or more of full-time employees, but still have at least one full-time employee receive a Premium Tax Credit. In this scenario, the employer is fined based on how many employees received this tax credit. While the penalty is calculated on a monthly basis, any fines incurred are paid yearly. Keep in mind that the penalty is adjusted annually for inflation

For 2016, here is a guide to calculating Employer Shared Responsibility fees — and determining whether you’ll owes fees at all:

Are We an Applicable Large Employer?

If your company is labeled an ALE, it falls subject to Employer Shared Responsibility provisions. Whether your company is an ALE in 2016 depends on the size of your company's workforce in 2015. 

You will be labeled an ALE if you averaged at least 50 full-time and full-time equivalent (FTE) employees combined in 2015. To calculate this, you add the total number of full-time employees for each month of the prior calendar year to the total number of FTE employees for each calendar month of the prior calendar year and divide that total number by 12. This averaging lets you account for fluctuations that many employers experience in their workforce across the year.

How to calculate the number of full-time employees

The IRS considers a full-time employee for any calendar month to be an employee who has on average at least 30 hours of service per week during the calendar month, or at least 130 hours of service during the calendar month.

How to calculate the number of full-time equivalent (FTE) employees

A full-time equivalent is the sum of all hours of service of all part-time employees for the month, divided by 120. 

  • EXAMPLE — 480 Total Part-Time Hours per Month ÷120 = 4 FTE Employees per Month
  • The 480 total part-time hours could come from 5 or more part-time employees. Those hours will always calculate to 4 full-time equivalent employees. 

How to sum full-time and full-time equivalent employees

In order to determine the size of your workforce during the preceding year, you add the total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each calendar month of the prior calendar year and divide that total number by 12. 

Number of full-time employees each month + number of FTE employees each month = Final number of FTE employees for the calendar year

Final number of FTE employees for the calendar year ÷ 12 months = Average FTE employees for the year. 

  • EXAMPLE — 48 Full-Time Employees Each Month (576 Full-Time Employees For The Year) + 4 FTE Employees Each Month (48 FTE Employees For The Year) = 624 FTE Employees For The Calendar Year
  • 624 FTE Employees For The Calendar Year ÷ 12 months = Average Of 52 FTE Employees For The Year
  • RESULT — Business is an ALE and is subject to Employer Shared Responsibility provisions

What’s the Penalty for Not Offering Health Benefits to all Employees?

An ALE must offer minimum essential coverage to at least 95 percent of full-time employees. 

An ALE must pay a penalty only if BOTH of these factors take place:

  • The business does not offer health coverage, or offers coverage to fewer than 95 percent of full-time employees.
  • At least one full-time employee receives a Premium Tax Credit to help pay for coverage on a Health Insurance Marketplace.

Tip An individual is only eligible for a Premium Tax Credit if their employer does not offer them health insurance, or if that employer-sponsored health insurance does not meet minimum value or is unaffordable. 

When at least one employee receives a Premium Tax Credit through a Health Insurance Marketplace in a given month, the employer must pay a monthly penalty based on the number of full-time employees employed during that month.

How to calculate the minimum essential coverage penalty

This penalty applies to employers who don't offer health insurance, or offer it to less than 95 percent of full-time employees. The fee is calculated monthly for each month a full-time employee receives a Premium Tax Credit. 

  • Annual per employee penalty is $2,000.
  • Monthly per employee penalty is $2,000 ÷ 12.
  • Employers receive credit of up to 30 employees. This means employers get to not-count 30 of their full-time employees when calculating how large their fine will be. 

Total Monthly Penalty = Number of Full-Time Employees That Month – 30-Employee Credit × 2,000 ÷ by 12

  • EXAMPLE — 95 Full-Time Employees –30-Employee Credit (65 Full-Time Employees) × 2,000 ÷ by 12 = $10,833 Total Monthly Penalty

Is Our Minimum Essential Coverage “Affordable” Or Of "Minimum Value?"

Minimum essential coverage is the minimum amount of health insurance coverage that ALEs must offer employees in order to avoid paying the Employer Shared Responsibility fee. Minimum essential coverage means that a health insurance policy provides "minimum value" and is "affordable." 

An employer-sponsored plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred. 

The health insurance plan is unaffordable if any employee's share of the premium for employer-sponsored coverage is more than than 9.5% of his or her annual household income. Since employers are not likely to know the exact household income of their employees, they are allowed to use employees' W-2 wages with the company as a proxy when making the affordability determination.

If any full-time employees do enroll in a health insurance exchange and receive federal subsidies, the employer is required to pay a monthly penalty based on the quantity of full-time employees who received federal assistance.

How to calculate the affordability penalty

This penalty applies to ALEs who offer coverage to 95 percent of full-time employees (and dependents), yet have a full-time employee qualify for and receive a Premium Tax Credit. 

  • Annual per employee penalty is $3,000.
  • Monthly per employee penalty is $3,000 ÷ 12.

Total Penalty = # of full-time employees who receive federal assistance × monthly per employee penalty

  • EXAMPLE — 2 Employees Receiving Federal Subsidies × $3,000 ÷ by 12 = $500 Total Monthly Penalty
Tip The affordability penalty is designed so that it can never be more than the fine for not offering health insurance at all. 

Conclusion

Health insurance benefits can be complex. Keeping up with yearly adjustments to provisions such as Employer Shared Responsibility can be difficult, but with this guide you will be able to identify what, if anything, you will be paying. 

The Comprehensive Guide to the Small Business HRA

What questions do you have about Employer Shared Responsibility fees? Ask us in a comment below.

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