For large employers, “pay or play” extends to dependent children
Must provide coverage for workers' dependent children to age 26 or face a penalty
The latest guidance from the federal government on health care reform clarifies the steps large employers must take to comply with the law. To avoid the penalty for failing to provide coverage, large employers must extend insurance to their employees' dependent children up to age 26.
New guidance released December 28, 2012, further clarified parts of the law, which was originally passed in 2010. Some large employers — defined as those with 50 or more full-time equivalent employees (FTEs) — had previously argued that the law required them to provide coverage only to employees and not to families.
The latest guidance from the Internal Revenue Service makes clear that "dependent" means a child under age 26.
Spouses, "affordable coverage" not specified
This guidance does not include spouses in the definition of "dependents." Therefore, employers do not have to extend health insurance to an employee’s spouse.
In addition, the proposal does not require that coverage offered to dependent children be "affordable" or subsidized at the same level as employee coverage.
To comply with reform, the coverage that employers offer their employees must be considered "affordable." In the guidance, the IRS says coverage is "affordable" for an employee (under an employer-sponsored plan) if the employee's premium cost for employee-only coverage does not exceed 9.5% of the employee's household income."1
Penalties for not extending coverage
The penalties for declining to offer coverage to full-time employees and dependent children will take effect in 2014. Large employers that don’t comply will face a penalty of $2,000 per full-time worker per year if any employee:
- qualifies for a tax credit from the federal government to purchase health insurance; and
- uses that tax credit to purchase insurance through a Health Insurance Exchange.
Employers won't have to pay for the first 30 workers who are included in the penalty calculation.
If an employer is in the process of amending its coverage to comply with reform, penalties for not covering dependents will take effect in 2015.
Additionally, the regulation further clarifies how to determine if an employer has at least 50 FTEs. Companies with a common owner, or companies that are “otherwise related,” would usually be counted as one employer.
For example, this proposal could affect the owners of franchised businesses, whose individual locations might previously have been counted separately — thereby exempting them from the coverage requirement. If such an employer chooses not to provide coverage to employees in one location, however, the penalty might not apply to the whole business.2
What you need to know now
- Impact on employers —
- Employers will need to determine if they have 50 or more FTEs. When calculating FTEs, they may have to look beyond single locations. They will then need to decide whether to offer coverage to their full-time employees and dependent children — and how much, if any, to subsidize dependent coverage.
- They will need to consider their benefit offering in the context of attracting and retaining talent in the marketplace.
- Enrolling dependents and determining eligibility may create an administrative burden on employers who choose to provide coverage. In addition, they will see additional costs related to health insurance premiums.
- Impact on employees — Employees may be able to provide coverage, purchased through the workplace, to their dependent children under the age of 26. However, they may face additional expenses if their employer chooses to pass along a portion of any increased premium costs.