Small Business Employee Benefits and HR Blog

ICHRA and the employer mandate. What are the penalties?

What’s the cost if your business doesn’t meet the employer shared responsibility provision requirements?

October 11, 2019
What’s the cost if your business doesn’t meet the employer shared responsibility provision requirements?

The Affordable Care Act’s (ACA’s) employer shared responsibility provision defines employers with an average of 50 or more full-time employees during the previous year as applicable large employers, or ALEs. They must offer minimum essential coverage to 95% or more of full-time equivalent employees and their dependents. They’re also required to provide coverage that provides minimum value and is affordable to all full-time employees. This requirement is called the employer mandate. 

With the individual coverage HRA (ICHRA) as an option for employers of any size beginning in January of 2020, some businesses want to know what the penalties will be for offering an ICHRA that doesn’t meet the employer mandate requirements. This post will explain how to calculate the number of full-time employees, explore the requirements of the employer mandate, and explain the penalties for not meeting the requirements. 

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Calculating the number of full-time employees

According to the IRS, a full-time employee is an employee who works an average of 30 or more hours per week in a given month. To determine if a company is an applicable large employer, the business must include all full-time employees plus the full-time equivalent of its part-time employees.

To calculate the full-time equivalent of its part-time employees, a company should add the total number of hours worked by all part-time employees and divide the total by 120.

If the sum of the full-time employees and the full-time equivalent of the part-time employees is equal to 50 or more in the previous calendar year, the company is an ALE. These companies will be required to follow the requirements of the mandate or face penalties. 

What qualifies as minimum essential coverage?

Minimum essential coverage (MEC) is the minimum amount of health insurance coverage an ALE must provide to 95% of full-time equivalent employees to avoid paying the maximum penalty. 

To avoid paying the maximum penalty, the employer must offer employees the ability to enroll in MEC through an eligible plan, which is:

  1. Any plan or coverage offered in the small or large group market within a state (including small business exchanges)
  2. Coverage under a grandfathered health plan
  3. Any qualified health plan certified by the Health Insurance Marketplace 

What is the penalty for not offering minimum essential coverage?

An ALE who doesn't offer minimum essential coverage to 95% of full-time equivalent employees will be required to pay a penalty if at least one full-time employee enrolls in coverage through a health insurance exchange and also qualifies for a premium tax credit. 

When determining the amount of the penalty, the employer only has to count full-time employees in excess of 30. (For example, a company with 50 full-time employees only has to count 20 employees for purposes of the penalty).

Based on the inflation adjustment factor provided in the 2020 Notice of Benefit and Payment Parameters final rule released by the Department of Health and Human Services, the annual penalty for 2020 is assumed to be $2,570 per employee.

To get the monthly per employee penalty, simply divide the annual penalty by 12.

To calculate the total monthly penalty, you multiply the number of full-time employees employed during the month minus 30 by the monthly per employee penalty. To participate in the ICHRA, employees must enroll in coverage that meets the MEC requirements. This means, as long as an employer is offering the ICHRA to 95% of full-time equivalent employees, the MEC portion of the employer mandate will be met. Employers can structure the plan to limit eligibility to predefined employee classes, such as full time, part time, salaried, hourly and seasonal. When determining eligibility, employers should be aware of the percentage of employees that might be excluded. 

Example:

In March, Smith Manufacturing employed 60 full-time employees and offered the ICHRA to less than 95% of their full-time equivalent employees. In the same month, at least one full-time  employee purchased health insurance through the Health Insurance Marketplace and received a premium tax credit.

The annual per employee penalty is $2,570.

The calculation for the monthly per employee penalty is $2,570*(1/12).

For purposes of this calculation, we only need to consider 30 full-time employees due to the 30-employee credit. 

The calculation for the total monthly penalty ,in this case, is 30*2,570(1/12) which equals $6,425

What qualifies as affordable coverage? 

For an ICHRA contribution to be considered affordable, the cost of health insurance for an employee can’t be more than 9.78% of the employee’s household income, using the lowest-cost silver plan on the local exchange as the baseline. That means the monthly premium for the lowest-cost silver plan, minus the monthly contribution being offered, shouldn’t be more than 9.78% of the employee’s household income for the month. 

What is the penalty for not offering affordable or minimum value coverage? 

An ALE that offers MEC to 95% of full-time equivalent employees might still be required to pay a penalty if the coverage is not affordable or doesn’t provide minimum value for one or more employees.

To participate in the ICHRA, employees must purchase plans from the Health Insurance Marketplace or the private individual market that are compliant with PHS Act sections 2711 and 2713. They can also utilize a Medicare policy. This means in almost all cases the minimum value requirement won’t be an issue for employers offering an ICHRA. 

The following plans don’t meet minimum value or don’t qualify as required individual coverage for an ICHRA plan:

  • Short-term medical plans
  • Ministry sharing plans
  • Group health insurance plans
  • Tricare

If an employer offers an ICHRA, and one or more of their full-time employees receive a premium tax credit due to an offer of unaffordable coverage, the employer is subject to pay a penalty. 

The annual per employee penalty for offering unaffordable coverage for 2020 is assumed to be $3,750.

As before, to get the monthly per employee penalty, divide the annual penalty by 12.

To calculate the total monthly penalty, multiply the number of full-time employees who receive a premium tax credit by the monthly per employee penalty.

Example:

In June, Big Build Construction employed 60 full-time employees and offered an ICHRA to all full-time employees. The contribution they provided was unaffordable for three employees based on their income and the cost of the lowest-cost silver plan in their area. They opted out of the ICHRA and received premium tax credits from the federal government. In this case, the business must pay a penalty for the three employees offered unaffordable coverage. The annual per employee penalty is $3,860.

The calculation for the monthly per employee penalty is $3,860*(1/12)

The calculation for the total monthly penalty ,in this case,  is 3*$3,860*(1/12) which equals $965. 

Conclusion

Knowing the penalties associated with the employer mandate can help ALEs make decisions about who to include when offering an ICHRA as a benefit and what amount to contribute. While following the requirements of the mandate when offering an ICHRA is recommended in most cases, there may be some situations where an employer finds that paying a penalty is still more cost-effective than other benefit options (like group health insurance or taxable stipends). Employers can use the penalty amounts outlined in this post to make an informed choice regarding what’s best for their business.

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