The affordable care act's employer mandate: Part 1

Determining Applicable Large Employer Status

This article is Part 1 in a series intended to provide an overview of the Employer Shared Responsibility provisions (also known as the “employer mandate”) under the Affordable Care Act (ACA).  The employer mandate generally requires certain employers – known as applicable large employers – to offer medical coverage to full-time employees in order to avoid certain potential penalties. 

This article will explain if and when the employer mandate applies.  Future articles will address how to determine who is a full-time employee, offers of coverage, and how to report this information to the IRS.

What’s in a Name?

In 2015, the employer mandate changed the landscape of employer-provided group health plans for insurance carriers and employers alike.  The employer mandate is filled with many defined terms, including: 

• Full-time employee (FTE) – An employee who is expected to work at least 30 hours per week on average and/or who does average at least 30 hours of service per week over the course of a measurement period.
  
  
• Applicable large employer (ALE) – An ALE is an employer who employs 50 or more FTEs (including full-time employee equivalents) on average during the prior calendar year.  ALE status is also determined in the aggregate for certain groups of related legal entities identified under the Internal Revenue Code, and each member employer of an aggregated ALE group is known as an applicable large employer member (ALEM).
  
  
• Dependent – An FTE’s natural or adopted child (or a child placed for adoption) who has not reached age 26.  For employer mandate purposes, “dependent” does not include a spouse or any other child including a stepchild or foster child.[1]
  
  
• Minimum essential coverage – This is broadly defined to include most traditional job-based health plans (including retiree and COBRA coverage).
  
  
• Minimum value – Minimum value means the plan covers at least 60% of the total allowed cost of covered services expected to be incurred by a standard population and must include coverage for hospital and physician services. In layman’s terms, it’s a bronze-level plan.
  
  
• Affordable – Affordable coverage means the employee’s share of self-only coverage in the lowest-cost available plan providing minimum value doesn’t exceed an indexed percentage (9.86% in 2019) under any of three employer safe harbors: (1) Federal Poverty Limit, (2) Rate of Pay, and (3) Form W-2. These safe harbors will be addressed in a later article in this series.
  
  
• Section 4980H(a) Penalty – This penalty is triggered when an ALE/ALEM fails to offer minimum essential coverage to at least 95% of its FTEs and at least one FTE qualifies for a subsidy in the public health insurance exchange.  This penalty amount is indexed and pro-rated monthly ($208.33/month or $2,500/year in 2019) and is multiplied by all of the ALE/ALEM’s FTEs.  An ALE may exclude 30 FTEs from this penalty calculation.  This 30 FTE exclusion limit applies at the aggregated ALE group level, and an ALEM is limited to excluding its proportional share of the 30 FTEs.  We will also refer to this as the “no offer” penalty in this article. 
  
  
• Section 4980H(b) Penalty – This penalty is triggered when an ALE/ALEM offers minimum essential coverage to at least 95% of its FTEs but fails to offer affordable, minimum value coverage to an FTE who qualifies for a subsidy in the public health insurance exchange.  This penalty is also indexed and pro-rated monthly ($312.50/month or $3,750/year in 2019) but is limited to those FTEs who actually qualify for subsidies. 
  We will also refer to this as the “inadequate offer” penalty in this article. 

This article focuses on how to determine ALE/ALEM status.  The other terms and their employer mandate definitions will be covered in greater detail in later articles in this series.

Defining an ALE (or ALEM)

As indicated earlier, an ALE is an employer who employs 50 or more FTEs (including full-time employee equivalents) on average during the prior calendar year. With this definition fresh in mind, it’s clear that the first step is to determine if the employer has 50 or more FTEs in “Year 1” making it an ALE for “Year 2.”  Sounds simple, right?

How to Determine ALE Status

Step 5 in Action

What about First-Timers? Transitional Relief is Available.

Both ALE status determinations and the employer mandate apply on a calendar year basis without regard to an employer’s actual plan year.  Employers who are on the brink of becoming ALEs need to continuously monitor their employee count.  If an employer grows during the year or has employees logging extra hours, it may cross the 50 FTE threshold in that year (Year 1) and face the employer mandate the following year (Year 2).  This can pose a particular problem for an employer with a non-calendar year plan that could be left scrambling to comply with the employer mandate in the middle of its plan year.  Remember, the employer mandate imposes monthly penalties for non-compliance beginning January 1st of Year 2. 

Luckily the final regulations contain some relief for first-time ALEs. The regulations give “first-timers” three months (January through March of Year 2) to:

1. Do the math for Year 1 to determine if it is an ALE for Year 2;
2. Find a broker;
3. Negotiate a plan;
4. Put together open enrollment materials;
5. Have open enrollment; and
6. Make coverage effective by April 1st of Year 2.

If the new ALE does not offer coverage to its FTEs (and dependents) by April 1st, the employer may be subject to the subsection (a) “no offer” penalty for those months (January-March) in addition to any subsequent calendar month for which coverage is not offered.

The first-time ALE also gets a break from the subsection (b) penalty if the coverage offered by April 1st provides minimum value and is affordable.  If the employer does offer coverage by April 1st but the coverage is “inadequate,” the employer may be subject to the subsection (b) penalty for January, February and March in addition to any subsequent calendar month for which the penalty may apply.

So, Should You Care?

If you’re an employer who reaches the magic number of 50 or is over 50 FTEs, then you should care a lot – and prepare.  The transitional relief is only available for the first year in which an employer is an ALE, even if the employer goes back and forth between ALE and non-ALE status. Neglecting or not being prepared for the employer mandate and the responsibilities it entails could be very costly.  We will cover how to determine FTE status and the offer of coverage in Part 2 of this series.

[1] By contrast, stepchildren and foster children do count as dependents for other ACA provisions such as the ACA’s dependent coverage to age 26 mandate.