What are the ramifications for employers and for individuals if an individual does not have health coverage as of January 1, 2014?  For individuals, the result is always the same:  an individual who does not have “minimum essential coverage” (MEC) as of January 1, 2014 will be subject to the Individual Mandate tax, unless they meet one of the exceptions.  (The Individual Mandate is the requirement that individuals have or purchase health coverage.)  For employers, however, the result will vary depending on whether:  1) the individual is full-time or part-time, 2) the individual buys health insurance in the Exchange/Marketplace and receives a subsidy, 3) the employer is a “large” employer, and 4) the employer’s plan is a calendar-year or non-calendar-year plan (and if such plan qualifies for a delayed effective date).

Small Employer

Small employers are not subject to the Employer Shared Responsibility provisions (in Code section 4980H), so there are no ramifications for a small employer if an employee purchases health insurance in the individual Marketplace and receives a subsidy.  A small employer is one who employed fewer than 50 full-time employees and/or “full-time equivalent” employees during business days in the prior calendar year.   A full-time equivalent employee is two or more part-time employees whose hours add up to 30 hours per week.

Large Employer with Calendar-Year Group Health Plan

A large employer with a calendar-year group health plan will not be subject to a penalty if one or more of its full-time employees purchases health insurance in the individual Marketplace if the following conditions apply:

As of January 1, 2014, the employer offers to at least 95% of its full-time employees and dependents group health coverage that: is “affordable” as defined by the ACA (i.e., the employee cost for employee-only coverage (under the lowest-cost option) is not more than 9.5% of the employee’s income (as defined under one of the three safe harbors in the proposed regulations), and provides at least minimum value (defined as at least 60% actuarial value).

“Full-time” employees are those who work on average at least 30 hours per week or 130 hours per month.If the employer offers coverage to at least 95% of its full-time employees, but such coverage is either not affordable or does not provide at least minimum value, the employer will be subject to a penalty of $3,000/year ($250/month) for each affected full-time employee who declines (the unaffordable or less-than-minimum-value) coverage and purchases health insurance in the individual Marketplace and receives a subsidy.

Individuals are eligible for subsidies only if their household income is between 100% and 400% of the “federal poverty level” (FPL), they are US citizens or legal residents, and they do not have “minimum essential coverage” (MEC) available.  MEC includes employer group health plan coverage and government health care programs such as Medicare, Medicaid and State Children’s Health Insurance Programs.  Additionally, employees will be eligible for subsidies if they buy health insurance in the individual Marketplace and they were offered group health coverage but it did not meet ACA’s definitions of affordable or minimum value.  In such cases, large employers will be subject to a penalty of $250 per month for each affected employee, for each month such employee receives a subsidy.

Large Employer with Non-Calendar-Year Group Health Plan

If an employer group health plan has a non-calendar year ERISA plan year (e.g., May 1st ERISA plan year start date), there are several possible scenarios for full-time employees who do not enroll in the employer group health plan as of May 1, 2013:

Individuals who do not have coverage as of January 1, 2014 will be subject to the Individual Mandate tax, unless they meet one of the exceptions (e.g., incarcerated, religious exemption, household income is less than the threshold amount to file a federal tax return, not a US citizen or lawful resident, etc.).

The tax is calculated monthly but is not due until 2015 when individuals file their federal tax returns.

Individuals who do not have group health coverage can go to the individual Marketplace and either buy individual health insurance or enroll in Medicaid if they qualify.

Full-time employees who purchase health insurance in the individual Marketplace and receive a subsidy will cause the employer to have a penalty (equal to $250 per month per affected full-time employee who receives a subsidy) if either:

A transition rule in the January 2, 2013 proposed regulations on the Employer Shared Responsibility rules allows an employer who has a non-calendar year plan and a cafeteria plan through which participants can pay for benefits on a pre-tax basis to amend its plan:

To allow eligible but un-enrolled employees to make a prospective pre-tax election for health coverage and to enroll as of January 1, 2014, and

To allow current participants to prospectively revoke or change their health coverage elections as of January 1, 2014,

Regardless of whether the employee had a change event that would meet the definition of an allowable mid-year change event (under Cafeteria Plan regulations).

The plan amendment must be made by December 31, 2014 and must be retroactive to the first day of the 2013 plan year.  Employers with insured health benefits should confirm with their carriers that the carriers will allow such employees to enroll for coverage as of January 1,2014.

The Preamble to the proposed regulations explains the reason for this special transition rule:  As of January 1, 2014, some employees who previously enrolled in employer-sponsored group health plans may wish to buy health insurance in an Exchange/ Marketplace instead, and some employees who did not previously enroll in employer-sponsored coverage may wish to do so to avoid the tax that will apply for non-compliance with the Individual Mandate.  These events are not currently included as “change in status” events under IRS rules for cafeteria plans, so employees would not be able to make such mid-year changes if their employers offer health coverage on a pre-tax basis through cafeteria plans.  The special amendment will allow employees to make that change.

No Penalty.

Employer cannot be subject to any penalty if it offers coverage that meets MV and affordability to at least 95% of FT EEs

Large Employer – offers health coverage to at least 95% of FT EEs, but coverage is not affordable for all employees or does not provide minimum value

Any employee can decline employer’s coverage, but only employees for whom coverage is not affordable or does not meet MV will qualify for a subsidy if they purchase health insurance in the individual Marketplace (and their household income is 100-400% of FPL).

Possible Penalty.

For each affected employee who receives a subsidy to buy health insurance in the Marketplace, the employer will incur a penalty = $3,000 annually. ($250/month)

Large Employer – does NOT offer health coverage to at least 95% of FT EEs, or does not offer health coverage to any employees

Employee can purchase health insurance in the individual Marketplace and might qualify for a subsidy.

For additional information on the delayed effective date and this special transition rule, see the following two articles that were previously published on HealthReformUpdates.com: