Treasury’s Final Rule and State Medicaid Decisions
Treasury just released the final rule for the Affordable Care Act’s employer mandate, otherwise known as the “employer shared responsibility payments” or § 4980H tax penalties. We summarize the background, key points, implications, and a few technical issues below. We would call particular attention to the Medicaid implications, which are a fascinating, if perhaps unintended, consequence of the final rule released today.
Final Rule on ACA’s Employer Mandate
Certain employers must pay a § 4980H tax penalty if one or more of their employees enroll in the ACA’s premium assistance tax credits. Under the statute, the § 4980H tax penaltiesapply to employers with more 50 or more full-time employees. The tax penalties may be substantial: an employer that does not offer coverage to employees could face penalties totaling $2,000 times the number of full-time employees (minus 30) if at least one employee enrolls in the tax credit program. An employer who offers coverage might also have to pay penalties if such coverage is unaffordable or does not provide minimum value; the penalties for these employers would be equal to $3,000 per employee qualifying for the credits up to a maximum of $2,000 times the number of employees (minus 30). While the provision was to take effect in 2014, Treasury had earlier delayed implementation of the § 4980H tax penalty provisionuntil 2015.
Key Points in Final Rule
The final rule again delays the tax penalties for employers with 50-99 employees. These employers will remain exempt from the § 4980H tax penalties for one additional year (until 2016).
The rule reduces the percent of employees that large employers must cover in 2015 to avoid penalties. Large employers who offer coverage to at least 70% of their full time employees will not face tax penalties under § 4980H(a) in 2015. (The previous threshold was 95%.) However, the final rules clarify they will face penalties under § 4980H(b) if they offer coverage that is either unaffordable or does not meet the minimum value standard.
In the words of a senior Treasury official, the final rule “is not very different” from the proposed rule. Even so, we include a technical summary of some key distinctions below.
States may now face more pressure from business interests to expand Medicaid. The preamble to the final rule formally clarifies that persons eligible for Medicare or Medicaid are not eligible for tax credits – and the employer would incur no assessable penalty for enrollments in these programs. However, if a state does not expand Medicaid and more employees become eligible for the tax credits, then employers will incur larger amounts of §4980H tax penalties. According to a January 2014 report from Jackson Hewitt Tax Service,* employers would incur $1.03 to $1.55 billion in additional §4980H tax penalties in the 25 states that have not yet expanded Medicaid for low-income adults.
The final § 4980H
rule will have an impact on the structure and dynamics of U.S. employment. The Administration stressed that the employer penalty would affect only about 4% of employers. This may be true, but data from the Small Business Administration indicates that 72% of American workers are employed by an employer that has 50 or more employees.** While the final rule may seem like an obscure accounting matter, it gets to the heart of whether (and how) employers hire new workers – and whether these workers will have the opportunity to transition from part-time to full-time or seasonal to permanent employment.
Employers must generally aggregate all hours worked by employees in order to determine whether the employer is a “large employers” subject to 4980H. However, the final rule excludes volunteer firefighters and emergency responders, student “work study” employees, and members of religious orders. The rule also provides guidance with respect to calculating hours worked by adjunct faculty, airline employees subject to layovers, and “on call” employees.
Employers must generally pay a § 4980H penalty for full-time employees who lack affordable coverage. The final rule provides guidance about the treatment of both part-time and seasonal employees – and also how to treat periods of unpaid leave. (The rules also formally define “seasonal employees” as those whose annual employment is six months or less.) The final rule largely adopts the earlier proposal of “look back” period. Importantly, the final rule clarifies that employers cannot take into account expected breaks in service (e.g., summer breaks for teachers) when using this method. The final rule also spells out special provisions for “variable hour employees” whose work schedules may vary significantly. However, the final rules adopt no specific provisions related to “short-term” employees. The preamble further notes that the Department declined to give special consideration to the home health and other specific industries that may be adversely affected by the rule.
The final rules offer some relief to employers that employ seasonal employees. Under these rules, employers would have the flexibility to apply a “look-back measurement method” to new variable hour and seasonal employees for an employer-defined initial measurement period. The employer would look to the employee’s hours of service during a measurement period to determine if they are full or part-time employees for the purposes of calculating § 4980H penalties, which again are based on an employer’s number of full-time employees. Employers would not be subject to the tax penalties during the measurement period.
The rule confirms the earlier definition of dependent. For purposes of § 4980H, large employers must make an offer of coverage to employees and their dependents in to order to avoid the penalty. However, Treasury declined to change the definition of “dependent” so as to include spouses.
We expect reporting rules in the coming weeks. Senior Treasury officials also noted that the Department would publish the employer reporting requirements under §§ 6055 and 6056 (which are related to the enforcement of the § 4980H tax penalties) within a few weeks.
* Haile, Brian and George Brandes, “State Medicaid Choices and the Hidden Tax Surprises for Employers,” Jackson Hewitt Tax Service Policy Brief (January 2014), available at http://www.jacksonhewitt.com/uploadedFiles/JacksonHewitt2014com/Content/Resource_Center/Healthcare_and_Taxes/Resources/MedicaidChoices_TaxSurprises.pdf/.
** U.S. Small Business Administration, Office of Advocacy, based on data provided by the U.S. Census Bureau, Statistics of U.S. Businesses, available at http://www.sba.gov/advocacy/849/12162.