How Does the Patient Protection and Affordable Care Act Affect Your Tax-Exempt Organization?
When the Affordable Care Act (ACA) was enacted in 2010, it fundamentally altered the health insurance landscape in the U.S. Although the ACA become law five years ago, it still has not been fully implemented. Instead, the federal agencies tasked with implementing the law, namely, the Department of Health and Human Services, the Internal Revenue Service, and the Department of Labor, consistently release new guidance and regulations, adding to the already complex web of statutory provisions. As the regulations pile up, are you confident you understand the requirements of the ACA as it pertains to your tax-exempt organization?
Nonprofits and Churches Are Subject to the ACA
All employers, including tax-exempt employers, are required to comply with the ACA. That means that all nonprofits and churches must become familiar with the requirements of the ACA and understand the potential penalties for non-compliance.
The Large Employer Mandate: All Employers with 50 or More Full-Time Employees Must Provide Health Insurance to Its Full-Time Employees.
The Affordable Care Act mandates that all employers with 50 or more full-time employees, or a combination of full-time and part-time employees that equals 50 full-time equivalent (FTE) employees, provide health insurance to its full-time employees (but not to part-time employees). These employers are referred to as “applicable large employers” (ALE). Only employees, both full-time and part-time, (not independent contractors) are included in determining whether the employer reaches the 50 FTE threshold. Note that employers are not required to offer a health care plan to independent contractors, only employees.
Does the Employer Mandate Apply to Your Organization?
The employer mandate applies to any employer with 50 or more full-time equivalent (FTE) employees in the preceding year. There is a special transition rule for 2015, however, which allows an employer to measure any consecutive 6 month period in 2014, rather than the whole year, to calculate the number of employees for the purposes of determining whether it is an applicable large employer.
Full-Time Equivalent (FTE)
A full-time equivalent (FTE) is a number that represents the hours worked by part-time employees which, when aggregated, are considered to equal a full-time employee. For example, two part-time employees working 15 hours each would be roughly equivalent to one full-time employee, and thus the employer would be credited with having one FTE employee, in addition to its full-time employees.
A quick calculation of FTEs may be made by combining all the hours worked by part-time employees in a month and dividing that number by 120. For example, if a company has 10 part-time employees each working 15 hours a week (60 hrs./mo.), the PT employees are working 600 hours monthly. 600 divided by 120 equals 5, which means that the employer has 5 FTEs. (If the number is a fraction, round down to the nearest whole number). The number of FTEs is added to the number of full-time employees to determine whether it is an applicable large employer.
But even though the FTEs are factored in for purposes of determining whether the employer is an “applicable large employer,” remember that the mandate only requires that employers provide coverage to full-time employees, not part-time employees.
- A full-time employee is someone that works an average of 30 or more hours per week. (There are also other methods of calculations – 120 hours per month etc…).
- The Final Regulations define an employee, for purposes of the employer mandate, as an “individual who is an employee under the common law standard” and does not include a leased employee, a sole proprietor, a partner in a partnership, a 2% S corporation share common holder, or a real estate agent.
- Concerning foreign and expatriate workers, the Final Regulations issued by the IRS state that the definition of “hours of service” does not include hours for which the compensation constitutes income from sources outside the United States. This means that if compensation is taxed as income from outside the U.S., those hours are not included when determining worker classification.
If An Employer Voluntarily Offers a Health Care Plan to Employees, The Plan Must Provide Minimum Essential Coverage and Minimum Value.
All employer-provided health care plans must provide minimum essential coverage (MEC), be affordable, and must provide minimum value. This applies across the board, from large employers with 50 or more employees that are required to provide a health care plan, to small employers that want to help their employees by providing health coverage but are not mandated to provide such coverage.
What is minimum value?
If an employer-sponsored plan covers at least 60% of the total allowed cost of benefits under a plan, it is considered to provide minimum value.
What is affordable?
If an employee pays more than 9.5% of his annual household income for his share of the premium for employer-provided healthcare, then that coverage is not considered affordable for that employee. Because an employer will not know the exact annual income of the employee, the employer is permitted to use one or more of the following “safe harbors:” (1) determine affordability by reviewing the employee’s W-2 wages, (2) by reviewing employee’s rate of pay, or (3) by ensuring that the employee contribution does not exceed 9.5% of the federal poverty line for a single individual.
What is minimum essential coverage?
Plans are designated as providing MEC either explicitly in a section of the ACA itself, or upon application for recognition to the Department of Health and Human Services. Plans purchased on the Marketplace, government plans, and other plans are considered to provide MEC. Plans that are not considered MEC are those that provide only vision or dental care, workers’ compensation plans, or plans that only offer discounts on medical services.
Essential Health Benefits (EHB)
The ACA requires that all health care plans cover at least the following ten categories of “essential health benefits” (ESB). The states are granted discretion to identify additional services as ESB for plans sold in their state. These ten benefits are:
- Ambulatory Patient Services
- Emergency Services
- Maternity and Newborn Care
- Mental Health and Substance Use Disorder Services, Including Behavioral Health Treatment, Counseling, and Psychotherapy
- Prescription Drugs
- Rehabilitative and Habilitative Services and Devices
- Laboratory Services
- Preventive and Wellness Services, and Chronic Disease Management
- Pediatric Services, Including Dental and Vision Care for Children
The Department of Health and Human Services is authorized by the ACA to create regulations that further define these health benefits.
An Applicable Large Employer (ALE) Faces Two Different Penalties
Penalty #1: For Failure to Offer Coverage
First, if an ALE does not offer minimum essential coverage to its employees, and at least one of the employees receives a premium tax credit or cost-sharing reduction when he or she buys an individual insurance plan on an Exchange, then a fine of $2,000 per full-time employee (minus 30 full-time employees) will be imposed. Employees whose household income is between 100% and 400% of the federal poverty level are eligible for a premium tax credit.
Penalty #2: Offering Unaffordable Coverage
Second, if an ALE does offer insurance, but it is unaffordable or does not provide minimum value, and at least one employee received a premium tax credit or cost-sharing reduction when he or she purchased coverage on an Exchange, the employer will face a penalty of $3,000 per employee who received a premium tax credit. Coverage is “unaffordable” if the employee’s share of the cost exceeds 9.5% of the employee’s household income, and does not provide minimum value if the employer pays less than 60% of the cost for covered claims.
These penalties will not be imposed in 2014 and 2015 on employers with 50-99 FTEs, provided that these employers maintain the structure of their workforce and do not change their health coverage during those years.
To be eligible for this transition relief, the following conditions must be satisfied:
- Limited workforce size: employer employs an average of 50 to 99 FTEs
- Maintenance of workforce and aggregate hours of service: From February 9, 2014 to December 31, 2014, the employer does not reduce the size of its workforce or reduce workers’ hours in order to meet the first condition.
- Maintenance of previously offered health coverage: Employer does not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014.
Section 4980D Excise Tax
It has been common practice for churches and nonprofits to allow their employees to purchase insurance on their own, and then seek reimbursement for the cost of premiums from the church or nonprofit. This arrangement has been considered a nontaxable fringe benefit for decades. Now, however, this arrangement threatens to expose employers to significant penalties.
Reporting requirements and Notices to Employees
Section 6056 Reporting Requirements
The ACA added section 6056 to the Internal Revenue Code, which imposes two reporting requirements on applicable large employers:
- ALEs must provide employees with a statement, no later than January 31of the year following the calendar year to which it applies, that includes information about the health care plan offer to the employee. This information is submitted to employees on IRS Form 1095-C.
- ALEs must report to the IRS information about the health care coverage that they offer their employees (if any). This information is filed with the IRS by transmitting each and every 1095-C form that the employer sent to employees, along with Form 1094-C, which is a transmittal sheet that must accompany each 1095-C. These forms must be filed no later than February 28 (or March 31, if filed electronically), of the year following the calendar year to which it relates.
These reporting requirements will kick in next year, 2016, to report on the 2015 year. They are likely to be a headache for human resources departments across the country, so plan ahead and be sure that your organization is prepared to deal with the extra paperwork. Failure to timely submit the 1094-C and 1095-C will result in steep penalties ($250 per late submission). Additionally, employees need Form 1095-C to meet the requirements of the individual mandate on their individual tax returns. Failure by their employer to provide the 1095-C exposes the employee to the individual mandate penalty.
Summary of Benefits and Coverage
In addition, both small and large employers must provide their employees with a “Summary of Benefits and Coverage” (SBC), which provides essential information about the health plan. The Department of Labor has provided a template for employers’ use.
Purchasing Health Insurance: SHOP Marketplace
Small businesses with no more than 50 FTEs may purchase insurance coverage for their employees through the Small Business Health Options Program (SHOP), which is part of the Exchanges. The SHOP is designed to be a cost effective means of obtaining coverage for small business employees. However, employers may still purchase insurance through other means, such as on the open market or through a broker.
Small Business Tax Credit
For some small businesses that purchase insurance through the SHOP, the Small Business Tax Credit may provide a significant tax credit for the cost of premiums. For 2014, eligible small business employers are eligible to receive a tax credit of up to 50% of the cost for their employees’ health insurance premiums for a qualified health plan. Tax-exempt small employers may receive up to 35% of the premium costs. Read here for more information on the tax credit and how to claim it.
This article covered only a fraction of the myriad compliance issues that your tax-exempt organization faces. As transition rules and grace periods fade into full enforcement of the ACA, make sure that your organization is ready. Contact Simms Showers LLP for individualized legal advice on how to bring your organization into compliance.
Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Robert Showers at firstname.lastname@example.org or Elyse Smith at email@example.com for legal advice that will meet your specific needs.