Under the terms of the Patient Protection and Affordable Care Act of 2010 (ACA), all large employers—those that have 50 or more full-time equivalent employees—are required to provide affordable coverage of minimum value to all full-time employees (FTEs) and their dependents, or face penalties. The Department of Health and Human Services has not yet defined all the details related to this requirement, but what we do know is that:
- The law defines a “FTE” as one who works an average of 30 hours per week per month. However, employers with transitional or part-time workforces may have trouble determining who their FTEs are under this definition, so the Treasury Department may provide clarification.
- Coverage is only considered “affordable” if the employee’s share of the premium does not exceed 9.5% of household income. However, because employers do not have the ability to determine an employee’s household income, Treasury is considering whether to provide a safe harbor that would allow employers to calculate affordability based on individual wages rather than household income.
- “Minimum value” is not yet fully defined, but it has been established that a plan must pay 60% of the total allowed cost of benefits, which is generally understood as an actuarial value test.
If a large employer fails to offer coverage to FTEs and their dependents, the employer will incur a penalty of $2,000 x the number of FTEs it employs if at least one FTE has received a tax credit from the Exchange.
Similarly, if a large employer offers coverage that is unaffordable or not of minimum value, the employer will incur a penalty of $3,000 x the number of FTEs receiving tax credits. (The maximum penalty may not exceed $2,000 times the total number of all FTEs.)
It’s important to keep in mind that employees who are eligible for Medicaid will not be eligible for tax credits, which means employers will not face penalties on these employees. When calculating these penalties, employers may subtract the first 30 workers.