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4980H "Play or Pay" tax and FTE


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In determining whether an large employer offers insurance with minimum essential coverage to at least 95% of full-time employees, is there any exclusion for employees who will not qualify for either the premium tax credit or the cost-sharing reduction. I'm thinking of employers where at least 6% of the full-time workforce is composed of young adults or teenagers who are still claimed as dependents of their parents Form 1040. It's my understanding those young adults and teenagers would not qualify for either the tax credit or cost-sharing reduction because they are dependents. So, it seemed to me unfair that counting these young people would cause the employer to fail the 95% test and be thrown in a possible 4980H tax situation when the young people would never get a tax credit or cost-sharing reduction. But I couldn't find any authority for excluding them from the FTE count. Thoughts?

Ken

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Two comments: First, an employer needs to take the FTE count into account only when determining whether or not it is an applicable large employer. Second, an employer will not be subject to a 4980H penalty unless an employee obtains coverage on the exchange and gets a tax credit/subsidy.

So, if the employer is careful enough to exclude only those employees who won't get a tax credit or subsidy, it should not be subject to the penalty. It's unclear to me, however, how an employer will know at all times for sure whether an employee is eligible to be claimed as a dependent.

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The first step is for an employer to determine if they are a large group or small group as defined by PPACA. If they are a small group it stops here, if they are a large group, then they need to consider the play or pay issue.

A large group who decides to play, and wants to avoid the $3,000 penalty, will need to; 1) offer coverage that is qualified, and, 2) at a cost that is affordable (9.5% of the employees’ w-2 wages). If the group does not satisfy either one of requirements, there is not an automatic penalty imposed. The $3,000 penalty is applied to each employee that obtains subsidized coverage at the exchange.

It would be very difficult for most employers to know who is eligible for the subsidy and then to legally make them not qualified for coverage. I am sure there are some employers who will be able, but it will be the exception. And don’t forget, the $3,000 penalty is only applied to the individual(s) who get the subsidy. So if a group of 80 has one person get the subsidy, the employer is paying $3,000.

Does this help?

Sorry, just saw that Chaz posted a similar answer a few moments before mine.

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No exclusion of young, Marketplace ineligibles from the count for the "no coverage" penalty, just like there's no exclusion for employees over 400% FPL, covered by spouse, covered by Medicare, Medicaid, Tricare, etc. even though they can't get Marketplace subsidies.

In theory you can purposely fail to offer coverage to all your "Marketplace ineligibles" (no matter what % of workforce) but would IMHO be very risky

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Two comments: First, an employer needs to take the FTE count into account only when determining whether or not it is an applicable large employer. Second, an employer will not be subject to a 4980H penalty unless an employee obtains coverage on the exchange and gets a tax credit/subsidy.

So, if the employer is careful enough to exclude only those employees who won't get a tax credit or subsidy, it should not be subject to the penalty. It's unclear to me, however, how an employer will know at all times for sure whether an employee is eligible to be claimed as a dependent.

I see it differently. In addition to taking full-time employee equivalents into account when determining applicable large employer status, you also must take the number of full-time employees into account to see if you meet the 95% test provided in the tax regs. If you fail that test, then the 4980H(a) $2,000 tax applies, because under the tax regs (if I'm reading them correctly) the employer has failed to offer its full-time employees MEC. That was the point of my post. Including those employees who would never get the credit (because they are dependents of another) can push the employer into an especially burdensome 4980H tax situation. For example, if the employer offers coverage to 96% of its full-time employees who are not dependents of another, but fails the 95% test because full-time employees who ARE dependents of another must be counted, then the employer is faced with the possibility that the 4980H tax would be calculated under 4980H(a) at the rate of $2,000 per full-time employee and not under 4980H(b) at the rate of $3,000 per full-time employee who gets the premium tax credit. Is my analysis incorrect?

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Guest Taxxy McTaxerson

Two comments: First, an employer needs to take the FTE count into account only when determining whether or not it is an applicable large employer. Second, an employer will not be subject to a 4980H penalty unless an employee obtains coverage on the exchange and gets a tax credit/subsidy.

So, if the employer is careful enough to exclude only those employees who won't get a tax credit or subsidy, it should not be subject to the penalty. It's unclear to me, however, how an employer will know at all times for sure whether an employee is eligible to be claimed as a dependent.

I see it differently. In addition to taking full-time employee equivalents into account when determining applicable large employer status, you also must take the number of full-time employees into account to see if you meet the 95% test provided in the tax regs. If you fail that test, then the 4980H(a) $2,000 tax applies, because under the tax regs (if I'm reading them correctly) the employer has failed to offer its full-time employees MEC. That was the point of my post. Including those employees who would never get the credit (because they are dependents of another) can push the employer into an especially burdensome 4980H tax situation. For example, if the employer offers coverage to 96% of its full-time employees who are not dependents of another, but fails the 95% test because full-time employees who ARE dependents of another must be counted, then the employer is faced with the possibility that the 4980H tax would be calculated under 4980H(a) at the rate of $2,000 per full-time employee and not under 4980H(b) at the rate of $3,000 per full-time employee who gets the premium tax credit. Is my analysis incorrect?

I think this analysis is right. In applying the 95% test, you have to include all your full-time employees in that equation. If no one in your population receives a premium tax credit, you will not pay an excise tax under 4980H. However, if even one employee does, the 95% test will determine whether you are liable for the subsection (a) tax (annual $2k x headcount) or subsection (b) tax (annual $3k x number of employees receiving premium tax credit).

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Guest Taxxy McTaxerson

No exclusion of young, Marketplace ineligibles from the count for the "no coverage" penalty, just like there's no exclusion for employees over 400% FPL, covered by spouse, covered by Medicare, Medicaid, Tricare, etc. even though they can't get Marketplace subsidies.

In theory you can purposely fail to offer coverage to all your "Marketplace ineligibles" (no matter what % of workforce) but would IMHO be very risky

Very risky. If you fail to offer to enough ineligibles, you fail the 95% test. What you could do is offer unaffordable coverage or coverage that fails to provide minimum value, thereby reducing your plan costs but taking little risk with the excise tax because you have offered coverage and would only be liable for those individuals who receive the premium tax credit.

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Took me awhile, and a few readings, but I think I understand the question now. Sorry.

1. The wording is "offers to 95% of the FT employees (30 hours or more), so I don't see how the employer could not count the 6% you referenced.

2. I don't agree with your premise that these 6% would not qualify for the subsidy. How could you possible tell? I looked at this from my perspective, I have two grown daughters, one on my plan, the other not. If they both worked at this employer how would the employer know if they were eligible for the subsidy or not? The fact is that both are eligible for the subsidy. The youngest is now eligible for her company's plan and the other has been covered by her company for 3 years.

3. I don't agree with the your comment "unfair that counting these young people would cause the employer to fail the 95% test and be thrown in a possible 4980H tax situation when the young people would never get a tax credit or cost-sharing reduction". I have tried to do the math, but I don't see where it would cause the employer extra dollars.

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I have two grown daughters, one on my plan, the other not. If they both worked at this employer how would the employer know if they were eligible for the subsidy or not? The fact is that both are eligible for the subsidy.

I agree that the employer probably can't know if the daughters are eligible for the subsidy, because the employer doesn't know whether either of their parents has affordable coverage, but I don't understanding why they are eligible for the subsidy in this example.

By law the daughters are both eligible for your plan until age 26, regardless of their employment status, etc. Does your plan not provide "affordable" care coverage? Is it grandfathered? Or am I missing something else? Thanks for the clarification.

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I have two grown daughters, one on my plan, the other not. If they both worked at this employer how would the employer know if they were eligible for the subsidy or not? The fact is that both are eligible for the subsidy.

I agree that the employer probably can't know if the daughters are eligible for the subsidy, because the employer doesn't know whether either of their parents has affordable coverage, but I don't understanding why they are eligible for the subsidy in this example.

By law the daughters are both eligible for your plan until age 26, regardless of their employment status, etc. Does your plan not provide "affordable" care coverage? Is it grandfathered? Or am I missing something else? Thanks for the clarification.

Sorry, I may have been a bit confusing. I was trying to prove my point that it would be difficult to identify who would and would not be eligible. On their own, they each would be eligible for some kind of subsidy. Otherwise, what you have said is correct.

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