Employer Shared Responsibility (ESR) Questions and Answers.

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1 Employer Shared Responsibility (ESR) Questions and s. Recent ESR Questions asked by members of the accounting community, answered by senior members of Paychex Compliance Department. Question 1. When using hours of service to determine if an employer is an applicable large employer, hours used would include time an employee experiences a layoff. Does that mean that if an employer lays off employees for the winter, such as a construction business, their hours are still included in the computation even if they are not on the payroll during that time? 2. If you are a company that doesn t offer health insurance coverage and has 49 fulltime employees and 1 part-time employee and the part-time employee works over 30 hours/week during only one month of the year, does the company have to pay penalties for that month? 3. If one owner has a business and another business with different shareholders, is it considered the same group? 4. Is it correct that if an employer has 30 or less full-time employees it doesn't matter if he has more than 50 full-time equivalents, since only full-time employees have to be covered and there is a 30-employee exclusion? 5. Is an ESR penalty imposed on an employer deductible? 6. With the ESR requirements, are there any exceptions for tipped employees in restaurants? IRS Notice states that the employee must be paid or entitled to be paid by the employer. If the employee on layoff has a continuation of payment from the employer, the hours would be counted, but that is not likely in the situation described. That employee is probably on unemployment compensation and receiving UC benefits from the state. Although the penalties under ESR are collected annually, they are assessed on a monthly basis. If the employee is considered a full-time employee for this one month, the employer may be responsible for paying a penalty for this employee for the one month. All member entities within a Controlled Group or an Affiliated Service Group under Code Section 414(b), (c), (m), and (o) are taken into account when determining if an employer is an applicable large employer subject to the ESR provisions. If an applicable large employer does not offer minimum essential coverage (MEC) to substantially all its full-time employees, then they may be subject to an annual penalty of $2,000 per full-time employee above 30. No assessment will be charged to an applicable large employer who has fewer than 30 full-time employees. Even if an applicable large employer is not subject to assessments, the business will still be subject to reporting requirements beginning with the 2015 plan year. An ESR penalty is NOT tax deductible. The guidance released does not provide specific exceptions for tipped employees in restaurants. 1

2 7. Businesses on the Cape and islands have 20-week seasonal employees who work 40 hours per week, many of whom are here on work visas from foreign countries. How does this law impact such an employer? 8. If you lease your employees, are you considered in a pool of all the leased employees, or based on your own company s count? 9. When calculating the full-time equivalents, do you exclude owner and/or family members? 10. Does the employer need to provide to the employees the validity of whether the insurance provided meets all the requirements? 11. If you have a client that pays their employees by percentage of their sales, not by the hour, how are you to figure out if they are full-time or part-time employees? If the employer employs the seasonal workers for up to 120 days and no more, and without counting them he would not be an applicable large employer, then he would remain a small employer and not be subject to the large employer shared responsibility provisions. If they are employed more than 120 days, then they are not considered seasonal employees and count as part of the employer s headcount to determine if he is a large employer. Provided that there isn t a co-employer relationship between the leasing company and the employer, the leased employee(s) will not count toward the headcount of the leasing employer, nor will the leased employees have to be offered insurance coverage by the employer that is leasing them. The definition of an employee for purposes of ESR is based on the common law standard of employees. It does not include individuals such as a leased employee, a sole proprietor, a partner in a partnership, or a two-percent S-Corp shareholder. There is nothing in the regulations that will assess a penalty to the employer if he does not offer this information, but it may be in his best interest to do so. If an employee decides to go to the marketplace for coverage, part of the Model Exchange Notice has a section for the employer to complete, but it is optional. It comments on minimum value and actuarial value, etc. There are two other guidelines other than actual hours worked described in IRS Notice (pg. 7); Days Worked Equivalency and Weeks Worked. They do not look at the actual hours of work. 2

3 12. Is an employer with less than 50 employees subject to the non-discrimination rules? 13. Does the fact that the penalties are really an Excise Tax make them deductible? 14. Can an employer change the standard measurement period from year to year? 15. Would you say that if a large employer is already offering insurance to the full-time employees, then there is no reason to track hours and track who is full-time versus part-time employees? Would employers only need to track part-time employees to make sure they would not be considered full-time? 16. I was under the impression that to determine affordability we could use W-2 wages of the previous year. Is that incorrect? When offering benefits for 2015 would we use W-2 wages for 2014? The penalty associated with non-discrimination has not been put in effect. Employers will not face any penalties until the plan year after the final guidelines are released. If the employer that you are describing has a rich plan for the owners and a lesser plan for the employees, he will not face any penalties for the time being. However, this may change once the final regulations are issued. That said, if the employer discriminated against someone because of illness or disability, there would be ERISA consequences. Also, the employer may have differing health insurance plans for his employees, but should not discriminate within job classifications. An ESR assessable payment imposed under Code 4980H is not deductible. Yes. However, an employer cannot change the standard measurement period or stability period once the standard measurement period has begun. If all of the employees are full-time and offered coverage, there is really nothing to measure. However, if you have part-time employees, then you need to monitor their hours to be sure that one does not work so many hours as to average 30 or more per week, and become a full-time employee. W-2 wages for the prior year is one of the safe harbor solutions. IRS Notice has full details. 3

4 17. Please explain the 30-employee exception for penalties. 18. One corporation is owned by 10 members, and three members of those 10 are members in the other corporation. Is this considered a controlled group? 19. Is there any reporting requirement for small employers? 20. Is it still considered one company if the affiliated service group has different ownership, (i.e., Bob owns 25% of one company, 30% of company 2, and 75% of company 3)? 21. How should an employer treat employees hired under an employee leasing arrangement? If an employer is considered an applicable large employer (50 or more full-time employees including full-time equivalent employees), and fails to offer health insurance coverage to employees, they may be subject to accessible fees (penalties) if one of the employees receives coverage and a premium tax credit from the (marketplace) exchange. However, before calculating the fee, the employer may subtract 30 employees from their total full-time employee number. The fee will be based on $2,000 multiplied by the number of fulltime employees minus 30. Not necessarily. It would depend on the percent of ownership. More information is necessary. The information reporting requirements under IRS Code 6056 that have been delayed until 2015 apply to employers that are subject to the ESR provisions. These would be applicable large employers with 50 or more full-time employees (including full-time equivalent (FTE) employees). If an employer is not an applicable large employer, the reporting requirement under 6056 would not apply. All member entities within a Controlled Group or Affiliated Service Group under IRS Code Sections 414(b), (c), (m),and (o) are taken into account when determining if an employer is an applicable large employer subject to the ESR provisions. The ESR provisions define an employee as an individual who is an employee under the commonlaw standard. A leased employee (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, or a 2-percent S-corporation shareholder is not an employee under ESR. 4

5 22. If a company has 100 part-time employees, which is the equivalent of 50 full-time employees, does the company need to provide health insurance for all employees? 23. In 2012 there was a credit to employers who provided coverage. Is there still this credit and how does one qualify for it? 24. It appears the calculation of full-time equivalents means that reducing people to fewer hours so that they work less than 30 hours while adding workers to keep total hours for all employees the same will NOT reduce full-time equivalents; and thus, not get the employer down to a small employer. Is that the case? The ESR provisions do not require that an employer offers health insurance to its employees. However, if an applicable large employer does not offer coverage to its full-time employees and their dependents, it may be subject to a penalty if one or more full-time employee(s) receives a premium tax credit for coverage obtained through an exchange. The penalties are based on the number of full-time employees and do not take into account FTEs. If the employer does not have any employees which meet the definition of full-time (averaging 30 or more hours per week or 130 or more hours per month), they would not be subject to a penalty. Beginning in 2012, the Small Business Tax Credit may be available to employers if they: have fewer than 25 employees; have average annual wages of less than $50,000; and contribute at least 50 percent of the aggregate single premium cost for each enrolled employee. This credit is still available, but beginning in 2014, it is only available to small businesses that offer coverage to their employees through the Small Business Health Options Program (SHOP). Correct. The determination of whether an employer is an applicable large employer and thus subject to the ESR provisions, is based upon the number of full-time employees including full-time equivalent employees. However, any penalties that may apply are based on the number of fulltime employees and do not take into account FTEs. But, even if the employer is not subject to penalties under ESR, they would still be subject to the reporting requirements under ESR. 5

6 25. If an employer has a company owner who has less than 50 employees of a company where he owns 100% of the company, and this same person owns different percentages of two other companies that puts him over 50 full-time equivalents, how is that handled? In this case, he only actively runs one company. He participates with management decisions of the other companies but does not run them. How is his situation treated? All member entities within a Controlled Group or Affiliated Service Group under IRS Code Sections 414(b), (c), (m),and (o) are taken into account when determining if an employer is an applicable large employer subject to the ESR provisions. We cannot advise on specific scenarios and how these rules would apply. 26. Can you discuss PCORI fee filing due 07/31? The Affordable Care Act imposes a fee on issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans to help fund the Patient-Centered Outcomes Research Institute. The fee, required to be reported annually on the second quarter Form 720 and paid by its due date, July 31, is based on the average number of lives covered under the policy or plan. The fee applies to policy or plan years ending on or after Oct. 1, 2012, and before Oct. 1, I was told if you had less than 50 employees you were okay. So if an employer just makes all 200 employees part-time, he could still be in trouble? The determination of whether an employer is an applicable large employer and thus subject to the ESR provisions is based upon the number of fulltime employees including full-time equivalent employees. So even if an employer only has parttime employees, if the number of full-time equivalent employees is 50 or more, the employer would still be considered an applicable large employer and subject to the ESR provisions. However, any penalties that may apply are based on the number of full-time employees and do not take into account FTEs. But, even if the employer is not subject to penalties under ESR, they would still be subject to the reporting requirements under ESR. 6

7 28. Are employees in other countries counted when determining if an employer is an Applicable Large Employer under ESR provisions? 29. How will the ESR provisions affect employers who offer Section 125 plans at work? Hours of service generally do not include hours of service worked outside the United States. Overseas employees generally will not qualify as full-time employees. However, all hours of service for which an individual receives U.S. source income are counted as hours of service under ESR. The ESR provisions look at the insurance coverage that an employer provides to its full-time employees and their dependents. The coverage offered by the employer must be an eligible employer-sponsored plan, which is defined under IRC 5000(A)(f) as a group health plan or group health insurance coverage offered by an employer to the employee which is [either a governmentsponsored plan] or any other plan or coverage offered in the small or large group market within a state. 30. I have a client who has asked me about PCORI fees under the Affordable Care Act. Is that effective this year? 31. If an owner owns two companies (e.g., two restaurants), do they have to sum up all employees for the calculation of a larger employer? How about if the companies are two different industries, non-related businesses? Do they have to sum up all employees for the calculation? The fee applies to policy or plan years ending on or after Oct. 1, 2012, and before Oct. 1, The fee, required to be reported annually on the second quarter Form 720, must be paid by its due date, July 31 of the calendar year immediately following the last day of the policy year or plan year to which the fee applies. So, the fee for a plan year ending in 2012 will be due by July 31, The fee is based on the average number of lives covered under the policy or plan. All member entities within a Controlled Group or Affiliated Service Group under IRS Code Sections 414(b), (c), (m), and (o) are taken into account when determining if an employer is an applicable large employer subject to the ESR provisions. We cannot advise on how these rules would apply for specific scenarios. 7

8 32. If the measurement period is 6 months, does it mean the number of employees is averaged over a 6-month period to determine if the employer is subject to ESR provisions? 33. How does this law impact temporary employment agencies? Who pays the insurance? The temporary agency or the company the temporary agency is contracting the employee with? 34. Are there any agricultural employer exceptions to ESR provisions? 35. Is it true that employers will not be penalized for not providing health insurance in 2014? The determination of whether an employer is an applicable large employer is based upon the average number of full-time employees (including full-time equivalents) during the previous calendar year. A transition rule was established for 2014 in which an employer was allowed to use a look back period of less than the full calendar year but that period had to be at least 6 consecutive calendar months in length. If during that period, they averaged 50 or more full-time employees (including FTEs); they would be considered an applicable large employer. In the guidance issued on the ESR provisions, the Treasury Department and the IRS acknowledge that temporary staffing agencies present a special challenge and are seeking additional comments on how they should be treated. We can expect that further guidance will be issued pertaining to temporary agencies. While an agricultural employer may be able to apply the seasonal exception when determining if they are an applicable large employer subject to ESR, there are no specific agriculture exceptions. The Internal Revenue Service published Notice on July 9, 2013 confirming that no ESR payments will be assessed for The penalties under the ESR provision have been delayed until

9 36. Why wouldn t employers with less than 50 employees avoid penalties if they are not an applicable large employer anyway? 37. Can an employer change full-time employees to part-time employees as a result of the ESR provisions? 38. If a company has 40 employees and offers no coverage, is there a penalty on 10 employees, or no penalty since they have less than 50 full-time employees? 39. What if an employer offers health insurance but employees don t elect it? 40. Does the employer have to actually pay the cost of the employee s coverage or just offer qualified coverage to their staff at the staff s expense? The ESR provisions only apply to employers that meet the definition of a large applicable employer. An employer would be considered an applicable large employer if the entity employs 50 or more full-time employees (taking into account full-time equivalent (FTE) employees). Employers must be careful when making changes to their workforce in order to avoid potential penalties under ESR. Employers should work closely with their legal counsel and tax advisors to ensure that changes they make do not create issues under other employment or benefit laws such as ERISA. The ESR provision and the applicable penalties only apply to employers that meet the definition of a large applicable employer. An employer would be considered an applicable large employer if they are an entity that employs 50 or more full-time employees (taking into account full-time equivalent (FTE) employees). The ESR provision looks at the coverage offered by an employer and who it is offered to. The provision does not take into account whether the employee elects coverage. ESR does not require that the employer pay the cost of coverage but looks at the coverage that is offered to an employer s full-time employees and their dependents. There are two potential penalties under ESR. If an employer does not offer minimal essential coverage (MEC) to substantially all full-time employees and at least one full-time employee receives a premium subsidy through a marketplace, they may be assessed an annualized penalty of $2,000 per full-time employee (less the first 30). If an employer does offer MEC coverage but it is not affordable (coverage cannot exceed 9.5 percent of an employee s modified adjusted gross household income) or does not meet the minimum value requirements, they may be assessed an annualized penalty of $3,000 for each applicable full-time employee who receives a premium subsidy through a marketplace. Publication date: August The material contained above is current only as of the date of publication. These materials are for informational purposes only. They are not legal advice and should not be relied on as such. You should contact your attorney to obtain advice with respect to any particular issue or problem. 9

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