ACA quicksand: Gotchas in the 95% rule

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August 25, 2016
By HELEN KARAKOUDAS, CHRS | Director, ACA Insights


There is a saying that perfect is the enemy of good. This always-welcome sentiment echoes in the world of Affordable Care Act compliance.

  • It’s called the 95% rule.
  • It applies to employers large enough to have to comply with the play-or-pay mandate.
  • And it sounds like a great thing – wow, a break from 100% ACA perfection.
  • But making this rule an iron-clad ACA penalty shield for your organization can be tricky.

Miss a step, or mess up on a step, and what sounds like a break turns into a pitfall – and a huge one at that.


FYI: Also available as a 14-minute audio lesson.

So let’s delve into how the 95% rule – or the ACA coverage threshold – applies for Tax Year 2016 and beyond, as well as the problem that this change from the 70% mark for 2015 creates for employers making the conscientious effort to offer health insurance to their employees.

  • In referring to employers “making the effort to offer” health insurance to their employees, we are talking about employers with the Play strategy of offering quality coverage that’s affordable. We're also talking about employers offering a basic plan that’s enough for their employees to accept and show they’re compliant with the ACA individual mandate – but not enough to fully shield the employer from the penalty for offering non-compliant coverage.
  • For employers with non-calendar-year plans, the 95% rule is the standard to watch for the month that your plan renews for 2016.
  • For employers with calendar-year plans, the 95% standard was in place as of January 1, 2016. This is the standard for all plan years from now on.

In this discussion, we will see that an accidental miss of the 95% mark by businesses diligent enough to work toward providing coverage – whether they offer a souped-up plan or a bare-bones plan – puts them at the same penalty risk as a business making no effort to offer coverage.


Sledgehammer territory

The penalty in question here is the one nicknamed the sledgehammer, the greater of the two ACA coverage penalties. The other is nicknamed the tack hammer, the penalty for offering substandard coverage. (They also are called the A penalty and the B penalty, respectively.) For Tax Year 2016, the sledgehammer penalty is $180 a month per employee and would be multiplied by all eligible employees in a given month – not counting the first 30.

We’ll do more math on this shortly.

For now, trust the fact that a sledgehammer hit as a result of a focused effort to do right by the spirit of the law is a hit you need to take deliberate steps to avoid. To get to those steps, let’s first break down the 95% rule.

Under this standard, businesses have protection from the sledgehammer penalty only when, for the month that a penalty was triggered – that is, for a month when a full-time employee received subsidized coverage on an exchange – the business can show that it offered at least a bare-bones plan to all but 5% of the organization’s full-time employees and their dependents – or that they made such an offer to all but five full-time employees: whichever number is greater.


Missing the 95% mark can be expensive – monthly

To see the financial impact of coming close to the 95% mark but still missing it, let’s take the example of a fictitious company: Gulf Coast Privies.

  • This company is not part of an aggregated group.
  • It has a variable-hour workforce that averages 800 ACA full-time employees a month.
  • Its management has opted to comply with the ACA employer mandate by offering quality coverage that is affordable – so they are committed to investing in ACA compliance beyond just offering a bare-bones plan.
  • Theirs is a calendar year plan, which renewed January 1, 2016.
  • Their goal is to do what’s required to offer a standard of coverage that protects them from both the sledgehammer penalty and the tack hammer penalty.

In January 2016, Gulf Coast Privies had 795 employees who were full-time. A review of their records shows that in that month, they offered quality coverage that was affordable to 742 of these eligible employees and their dependents. The ACA team sees that they somehow missed getting coverage offers out in time to the other 53 full-time employees. A marketplace notice has just come in for one of the 53 employees inadvertently left out that month. This boilerplate notice says that, for at least one month during 2016, the employee was determined eligible for a subsidy to help pay for coverage they enrolled in through an exchange.

What can we learn from this situation?

A lot.

IF January was one of the months for which this employee got a marketplace subsidy, then – for that month – the company would be on the line for the sledgehammer penalty, which would come to $137,700.


Because even though coverage that exceeded the minimum required was, in fact, offered to a considerable part of the eligible population that month – 93%, mind you – the coverage threshold of 95% wasn’t met for that month.

Yes, this is the reality of the 95% rule. It’s an all-or-nothing deal.

Miss it, and the IRS will treat your company as if you didn’t offer any coverage to any full-time employee that month.


The IRS is clear in its guidance

This severity shows in the calculation of the penalty. Let’s look at what the IRS tells us about it. The following sentence is a direct quote for the Employer Shared Responsibility Provisions page on the IRS’s ACA site:

“This calculation is based on all full-time employees (minus 30), including full-time employees who have minimum essential coverage under the employer’s plan or from another source.”

This means there’s no consideration given with respect to whether all the people in your eligible population that month actually do have health insurance – and perhaps even because of your diligence as an employer. No, not at all. The focus instead, at that point, is on assessing consequences to the employer for the employee in those ranks whom you didn’t manage to get an offer of coverage to and who, to meet his or her own obligation under the ACA, enrolled in coverage through an exchange and, in the process, happened to qualify for a subsidy for it.

So $137,700 is what you get when you multiply $180 by 765. $180 comes from dividing the $2,160 yearly amount for the sledgehammer penalty by 12 to get the monthly number for it. And 765 comes from subtracting 30 – the number of allowable exemptions – from 795, the number for all the employees who were eligible for coverage that month.

That’s correct, this is the risk for just one month when a company working to do right by the spirit of the law messes up as it gets its processes in place to follow through on what there is to do according to the letter of the law.


What are the takeaways?

Had the ACA team at Gulf Coast Privies gotten the offers out in time to another 13 of their full-time employees in January – just enough to meet the 95% mark – the company would not be facing any coverage penalty, even if one of the full-time employees in the 5% of those who were not offered coverage did go to an exchange that month and qualified for a subsidy.

The company’s investment in offering their employees quality coverage that is affordable would be just that – the upfront investment to comply directly with the law. There would have been no added compliance payment at the back end for missing a step along the way.

Another takeaway is that, like other aspects of ACA compliance, the checkpoints for the 95% rule are monthly. So if you’re good with the target for one month, don’t blink. You still have to make sure you’re good with that coverage threshold for the rest of the months in the year.

Going back to our example, had the ACA team at Gulf Coast Privies not gotten its act together in time to extend coverage offers to 95% of their full-time employees in February and subsequent months – and the employee named on the marketplace notice got subsidized coverage in those months – the sledgehammer calculation we just went through, perhaps with a slightly different multiplier for the employee count, would also apply then.

At the January rate of missing the 95% coverage threshold, the company could be looking at a $1.7 million penalty for the year. Mind you, this eventual ACA compliance payment to the IRS cannot be deducted as a business expense.


Don’t take the 30 exemptions for granted

One related point to consider:

Had Gulf Coast Privies not been independent and instead was part of a group – like the fictitious Coastal Privies group that we imagine was looking to acquire them – those 30 exemptions that lowered the employee-count multiplier in the penalty calculation would not have all been available.

This is quite a gotcha for companies that are members of a commonly controlled or affiliated group:

It is not 30 exemptions per member. It is 30 exemptions for the group – to be shared among the companies in the group according to their relative count of full-time employees.

So, for example, if Gulf Coast Privies had been acquired by Coastal Privies where it would have turned out to be one of the smaller companies in the group and rated only 5 of the 30 exemptions, their sledgehammer penalty for the month we looked at could have been $4,500 more.

That’s correct: The 95% rule may sound like a saving grace, but – when you’re not cautious – it can be ACA quicksand.


So what’s an organization to do?

Month after month, you need to shoot for 100% accuracy in the numbers driving your compliance processes. When the numbers you need aren’t immediately available, you need business intelligence for them. This is especially true when there’s frequent turnover in your workforce and when you employ many workers whose schedules vary.

Remember, eligibility is determined by the number of hours of service within a month – and that payroll data may not be available until after the month ends. With tracking for the 95% rule being monthly, you need detailed forecasting to ensure the 5% is not exceeded.

If you are a large employer and want to use the 95% rule to reduce your offers of coverage, be particularly attentive to your recordkeeping.

Keep in mind that full-time employees who have not completed their first three months of employment – and variable-hour employees in their initial measurement period – would not be included among those who are eligible. Make sure you have software and processes that identify these people and account for them accordingly.

Helen Karakoudas

By Helen Karakoudas, CHRS

The same goes for employees who switch positions and move from being variable-hour to being full-time. They, too, will be in a brief period when they would not immediately be counted in the eligible population, but they eventually will join those ranks. You will need to know exactly when they do, and you will need to extend them coverage offers right away.

In the ACA world, good intentions won’t save you. Perfect vigilance of your 5% breather will.

A version of this article first appeared on LinkedIn Pulse.

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