Each year brings annual compliance responsibilities to employers regarding their health plans and federal Affordable Care Act (ACA) responsibility. It’s important for employers to be aware of – and adhere to – these responsibilities. An overlooked compliance item can result in significant non-compliance penalties in the federal ACA and COBRA spaces.
ACA Applicable Large Employer (ALE) Determination
Each employer must annually determine whether it must comply with the ACA’s employer mandate and related ACA IRS reporting responsibilities. To make this determination, an employer must calculate its ALE status on January 1, in accordance with federal ACA law. ALEs are employers that must comply with the ACA’s shared responsibility “employer mandate.” Under the mandate, ALEs must offer affordable health insurance coverage – that provides minimum value (Bronze tier or better health plan coverage), and is at least Minimum Essential Coverage (MEC) – to all Full Time (FT) employees. ALEs must also offer at least MEC to FT employees’ dependent children up to age 26.
To make the calculation, the employer must evaluate its workforce size on January 1, by averaging its workforce count for all 12 months of the preceding tax year. For each month of 2020, the employer should count its FT employees and its Full Time Equivalent (FTE) employees, then average those 12 results to get its final workforce size. If the group size averages 50 or more FT + FTE, then it is an ALE for all of 2021 – meaning it must comply with the ACA’s employer mandate for all of 2021, and must report on the coverage it offered (or didn’t offer) in accordance with the mandate to the IRS in 2022. If it has fewer than 50 FT + FTE employees, it is not an ALE and is not mandated to offer health coverage in 2020 or report offers of coverage to the IRS.
An employer’s ALE status will remain in place for the entire calendar year going forward, regardless of fluctuations in its workforce size. January 1st is the only time an employer’s ALE status can change.
The ACA considers an employee to be FT if he or she averages at least 30 hours of service per week or 130 hours of service per month. FTEs are fractions of FT employees who, when totaled together, equal the equivalent of one FT employee. To calculate FTE count, total the part-time employees’ hours of service for each month (using a maximum of 120 hours for each PT employee, even if he or she averaged 121-129 hours of service), and divide each month’s total by 120.
Refer to Word & Brown’s exclusive ACA Group Size Calculator and FTE Calculator for California employers and Nevada employers for help making this determination. Also, refer to Word & Brown’s exclusive Employee Count resource for California employers and/or for Nevada employers for additional guidance.
ACA Reporting Responsibilities
If the employer determined on January 1, 2020, that it is an ALE for all of 2020, it must also report on the coverage it offered (or did not offer) to any person employed FT for one full calendar month of 2020. ALEs usually complete this reporting during December or January using IRS Forms 1095 and 1094.
Copies of IRS Form 1095 are due to employees on or before March 2, 2021, which is a 30-day extension of the former January 31, 2021, deadline. IRS Forms 1095 are due to the IRS on or before March 1, 2021, if submitting by paper, or March 31, 2021, if submitting electronically.
Note: The IRS may postpone one or more of these dates further, but employers should not assume date changes until officially announced by the IRS. Refer to Word & Brown’s exclusive IRS Reporting Deadlines chart for details on form submission deadlines, and refer to Word & Brown’s exclusive Employer Reporting Penalties reference sheet for details on reporting non-compliance penalties.
Word & Brown annually hosts a series of webinars for brokers and employers on ACA reporting to the IRS. Please join us for the ACA IRS Reporting Webinar Series: Don’t Fear the Forms scheduled in December 2020 and January 2021.
COBRA Group Size Calculation
Employers that sponsor health plans must also determine COBRA responsibilities annually on January 1, by evaluating workforce size under COBRA law. Unfortunately, it is a different (yet similar) calculation than the ACA’s ALE count.
Employers that have employed at least 20 employees on 50% or more of the typical working days in 2020 are subject to federal COBRA law for all of 2021 if they sponsor a group health plan(s).
Employers domiciled in California, with California group health plan(s), that have employed fewer than 20 employees on 50% or more of the typical working days in 2020 are subject to Cal-COBRA law for all of 2021.
In Nevada, there is no state COBRA continuation; employers with fewer than 20 employees are not subject to COBRA law in Nevada. Federal COBRA law, however, applies in all states.
When making the COBRA determination, both full-time (FT) and part-time (PT) employees are counted. Each PT employee counts as a fraction of a FT employee. To calculate PTs as FTEs in COBRA, the employer should total all PT employees’ hours of service and divide it by whatever the organization considers to be full-time.
Different benefits and administrative billing charges/fees on premiums are associated with federal COBRA and Cal-COBRA, so it is very important for the employer to make the determination accurately at the beginning of the year. An employer must generally notify its carriers and applicable COBRA Third Party Administrators (TPAs) of any changes to COBRA status as soon as the determination has been made.
Just like the ACA calculation, the employer remains in its COBRA category for the entire calendar year – regardless of future fluctuations in workforce size. Refer to Word & Brown’s exclusive Employee Count resource for California employers and/or for Nevada employers for additional guidance on COBRA counts.
IRS Controlled Groups
If an employer has ownership in multiple businesses, its employees can be combined for purposes of determining group size – even if the businesses have separate tax IDs and are otherwise not related.
It is critical for a tax professional to make this determination for employers in accordance with IRC Section 414, subparagraphs (b), (c), (m), and (o).
California’s Individual Mandate Continues in 2021
It is also important to note that California is continuing its state individual mandate in 2021 and into the foreseeable future. The mandate requires all Californians to carry qualifying Minimum Essential Coverage (MEC) for the tax year, obtain an exemption, or pay a tax-penalty when filing California state tax returns. A one-time break in coverage is permitted for up to three months.
California recently released a calculator to help Californians understand potential non-compliance penalty exposure in accordance with this mandate, which began January 1, 2020.
Many other states, including Nevada, do not have individual mandates. The federal ACA individual mandate applies to all 50 states; however, the non-compliance penalty is $0.00 as of 1/1/2019.
Word & Brown’s Commitment to You in 2021 and Beyond
Word & Brown is proud to partner with you all year long to ensure your success. We are committed to keeping you and your clients up to date with changes in the industry. Watch this column for more information on the ACA, IRS reporting, COBRA, the California individual mandate, COVID-19, and more.