The bottom line for you to avoid free-rider penalties under the Affordable Care Act (ACA) health care reform law is not to have employees obtain health insurance on the individual exchange and qualify for premium tax credits or other cost sharing reductions. Three sets of regulations steer you through this maze.
Qualifying for premium tax credits. Employees become eligible for premium tax credits and other cost sharing reductions when their group health plan doesn’t cover minimum essential benefits and their contributions for the lowest-cost plan for self-only coverage exceed 9.5% of their household income (even if they opt for family coverage).
Final regs, which become effective for tax years beginning after Dec. 31, 2013, offer penalty relief to employers by loosening two key requirements.
- Employees who actually enroll in employer-sponsored group coverage aren’t eligible for premium tax credits, even if the group coverage exceeds 9.5% of their household income or wasn’t minimum essential coverage.
- Employees who could have enrolled in group coverage, either through a regular open enrollment period or a special enrollment period, and who didn’t enroll, also aren’t eligible for a premium tax credit. (78 F.R. 7264, 2-1-13)
In addition, you won’t be liable for penalties if you use a safe harbor.
Safe harbor No. 1: Benefits are affordable if employees’ contributions don’t exceed 9.5% of their W-2, Box 1 income.
Safe harbor No. 2: Benefits are affordable if employees’ contributions don’t exceed 9.5% of their hourly rates of pay on the first day of the plan year, multiplied by 130.
Safe harbor No. 3: Benefits are affordable if employees’ contributions don’t exceed 9.5% of the federal poverty line for an unmarried individual, divided by 12.
NO RETALIATION: Since free-rider penalties apply if even one employee buys insurance through the individual exchange and receives a premium tax credit or other cost sharing reduction, it may be tempting to lash out at him or her, or even not to hire someone whom you suspect would be eligible for a tax subsidy. Avoid that temptation.
Under an interim final rule, which became effective Feb. 27, 2013, employees or prospective employees who are fired, intimidated, threatened, coerced, blacklisted or disciplined because they obtained a tax subsidy may file retaliation complaints with OSHA. Should OSHA determine retaliation occurred, you could be ordered to reinstate employees and be on the hook for back pay, attorneys’ fees, etc. (78 F.R. 13222, 2-27-13)
Contesting free-rider liability. Free-rider penalties will be collected by the IRS, and, as with all tax penalties, you will have a chance to contest your liability. But, in addition to the IRS appeals route, regs proposed by the Department of Health and Human Services would require exchanges to notify you if an employee qualifies for a tax credit and give you 90 days to respond to an exchange’s decision that an employee qualifies for a tax credit. Information you might need: To be successful, you’ll probably need to submit information on the company’s coverage options, whether the employee has taken up coverage, the employee’s income and the employee’s portion of the lowest cost plan for self-only coverage. These regs won’t become effective until final regs are issued. (78 F.R. 4593, 1-22-13)
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