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Meet Your ACA Employer Requirements
Many businesses offer some form of qualified retirement plan and, in doing so, they fall under the governance guidelines of the Employee Retirement Income Security Act of 1974, better known as ERISA.
ERISA establishes guidelines and minimum standards designed to protect employees of private sector companies who participate in retirement and welfare benefit plans. Businesses administering a qualified retirement plan that aren’t in full compliance with ERISA could be subject to costly penalties.
If your employee retirement plan provides a future retirement income or allows employees to defer earnings for retirement, then it is an ERISA plan. As an employer who provides these ERISA plan benefits, you are also considered by ERISA to be a named fiduciary who takes on the responsibility of administering these plans and, likewise, the liability should your plans not comply with the guidelines and standards established by ERISA.
ERISA implements rules preventing retirement plan fiduciaries from misusing plan assets and sets minimum standards for participation, vesting, benefit accrual, and funding of retirement plans.
Firms that offer qualified retirement plans to employees must be ERISA compliant to maintain tax-favored status, and will often seek out a third-party administrator to ensure all guidelines are met.
ERISA compliance involves both start-up procedures as well as maintaining ongoing requirements.
Getting Compliant With ERISA:
Meeting ERISA compliance requirements does not have to be overly burdensome. While there are a lot of requirements, a good third-party administrator (TPA) can shoulder much of the burden. Many of the requirements are calendar-driven, requiring filing forms by specific deadlines.
These deadline dates form one checklist that can be managed by a TPA or a human resources staff person. Other requirements are to be met on an ad hoc basis as circumstances dictate.
ERISA Calendar Checklist:
Administering 401(k) plans involves performing certain ERISA compliance tasks according to an annual schedule. These are the most common tasks that should be a part of most companies’ checklists
- First Quarter of the Plan Year: Provide fourth-quarter benefit statements to plan participants no later than 45 days after the end of the quarter. Make prior-year employer contributions for a tax deduction to count in the prior year.
Second Quarter: Provide first-quarter benefit statements to plan participants. Distribute excess deferrals made above the IRC Section 402(g) limit. For plan participants turning age 72 in the prior year, distribute first-year required minimum distributions (RMDs).
Third Quarter: Provide second-quarter benefit statements. File Form 5500 for the prior year or file Form 5558 for a 2.5-month extension. If the plan document was modified during the prior year, distribute a new Summary Plan Description to plan participants. Distribute a Summary Annual Report for the prior year to plan participants.
Fourth Quarter: Provide third-quarter benefit statements. Send applicable notices to participants, including installments of or changes to a safe harbor 401(k) plan, Qualified Default Investment Alternative (QDIA), or automatic enrollment. Correct any ADP/ACP test failures, and pay 10% excise tax.
Ongoing ERISA Requirements:
Some ERISA requirements are ongoing as part of the plan administration or triggered by occurrences. Below are some of the most common notifications and guidelines which must be followed by ERISA-compliant firms:
Adherence to Plan Document: Ensure the plan management continuously adheres to the plan document's terms. The IRS considers any failure to strictly follow the plan document's terms an operational defect, which, if not remedied, can result in plan disqualification.
Annual Participant Fee Disclosure: All plan-eligible employees, terminated employees, and beneficiaries with an account balance must receive a participant fee disclosure every 12 months.
Notice of Plan Change: Participants must be notified of any changes to the plan 30 to 90 days before the effective date of the change.
Opportunity to Enroll: All employees who have met the plan age and service requirements must be given the opportunity to enroll. They should receive all necessary forms and instructions along with a Summary Plan Description and any applicable participant notices.
Loan Compliance: Ensure outstanding loans are being repaid in accordance with the plan’s policy terms and the borrowers’ promissory note.
Timely Deposits: Ensure that employee deferrals and loan payments are deposited on time, typically at the same time as payroll tax deposits.
Conduct Quarterly Housekeeping: Cash out small account balances for terminated employees. Process loan defaults, and use any unallocated forfeitures.
Although most of these requirements can be managed by a TPA, the employer-plan sponsor has the fiduciary duty to ensure they are met and performed correctly.
Meet Your ACA Employer Requirements
The Affordable Care Act (ACA) has made a number of significant changes to group health plans since its enactment in 2010. Our team makes sure your company is compliant and meets all ACA employer requirements each year. See below for list of requirements.
ACA Employer Requirements
Cost Sharing Limits: your plan’s out-of-pocket maximums for essential health benefits (EHB) must not exceed a specified limit each year.
Applicable Large Employer Status: The ACA’s employer shared responsibility rules apply only to ALEs. ALEs are employers with 50 or more full-time employees (including full-time equivalent employees, or FTEs) on business days during the preceding calendar year. Employers determine each year, based on their current number of employees, whether they will be considered an ALE for the following year.
Employer Shared Responsibility Rules: applicable large employers (ALEs) are required to offer affordable, minimum value (MV) health coverage to their full-time employees (and dependent children) or pay a penalty. An ALE will be subject to penalties if one or more full-time employees receive a subsidy for purchasing health coverage through an exchange.
- Offering Coverage to Full-Time Employees: ALEs must determine which employees are full-time employees under the employer shared responsibility rule definition. A full-time employee is an employee who was employed, on average, at least 30 hours of service per week (130 hours per month). The IRS provides two methods for determining full-time status for purposes of offering coverage - the Monthly Measurement Method and the Look-Back Measurement Method:
Monthly Measurement Method - Involves a month-to-month analysis where full-time employees are identified based on their hours of service for each month. This method is not based on averaging hours of service over a prior measurement method. Month-to-month measuring may cause practical difficulties for employers that have employees with varying hours or employment schedules, and could result in employees moving in and out of employer coverage on a monthly basis.
Look-Back Measurement Method - An optional safe harbor method for determining full-time status that can provide greater predictability for determining full-time status. The details of this method are based on whether the employees are ongoing or new, and whether new employees are expected to work full time or are variable, seasonal or part time. This method involves a measurement period for counting hours of service, an administrative period that allows time for enrollment and disenrollment, and a stability period when coverage may need to be provided, depending on an employee’s average hours of service during the measurement period. If an employer meets the requirements of the safe harbor, it will not be liable for penalties for employees who work full time during the stability period, if they did not work full-time hours during the measurement period.
An ALE is only liable for a penalty under the employer shared responsibility rules if at least one full-time employee receives a subsidy for coverage purchased through an Exchange. Employees who are offered health coverage that is affordable and provides MV are generally not eligible for these Exchange subsidies.
Depending on the circumstances, one of two penalties may apply under the employer shared responsibility rules—the 4980H(a) penalty or the 4980H(b) penalty.
The 4980H(a) Penalty—Penalty for ALEs not Offering Coverage:
Under Section 4980H(a), an ALE will be subject to a penalty if it does not offer coverage to “substantially all” full-time employees (and dependents) and any one of its full-time employees receives a premium tax credit or cost-sharing reduction toward his or her Exchange plan. The 4980H(a) penalty will not apply to an ALE that intends to offer coverage to all of its full-time employees, but that fails to offer coverage to a few of these employees, regardless of whether the failure to offer coverage was inadvertent.
An ALE will satisfy the requirement to offer minimum essential coverage to “substantially all” of its full-time employees and their dependents if it offers coverage to at least 95%—or fails to offer coverage to no more than 5% (or, if greater, five)—of its full-time employees (and dependents). According to the IRS, the alternative margin of five full-time employees is designed to accommodate relatively small ALEs, because a failure to offer coverage to a handful of full-time employees might exceed 5% of the ALE’s full-time employees.
Under the ACA, the monthly penalty assessed on ALEs that do not offer coverage to substantially all full-time employees and their dependents is equal to the ALE’s number of full-time employees (minus 30) X 1/12 of $2,000 (as adjusted), for any applicable month.
The 4980H(b) Penalty—Penalty for ALEs Offering Coverage:
ALEs that do offer coverage to substantially all full-time employees (and dependents) may still be subject to penalties if at least one full-time employee obtains a subsidy through an Exchange because:
The ALE did not offer coverage to all full-time employees; or
The ALE’s coverage is unaffordable or does not provide minimum
The monthly penalty assessed on an ALE for each full-time employee who receives a subsidy is 1/12 of $3,000 (as adjusted) for any applicable month. However, the total penalty for an ALE is limited to the 4980H(a) penalty amount.
Affordability of Coverage
Under the ACA, an ALE’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.83% (for 2021) of the employee’s household income for the taxable year (as adjusted each year).
“Household income” means the modified adjusted gross income of the employee and any members of the employee’s family. Because an employer generally will not know an employee’s household income, the IRS provided three affordability safe harbors that ALEs may use to determine affordability based on information that is available to them. These safe harbors allow an ALE to measure affordability based on the employee’s Form W-2 wages, the employee’s rate of pay or the federal poverty level for a single individual. ALEs using an affordability safe harbor may rely on the adjusted affordability contribution percentages.
Minimum Value: Under the ACA, a plan provides MV if the plan’s share of total allowed costs of benefits provided under the plan is at least 60% of those costs. Three approaches may be used for determining MV: a Minimum Value (MV) Calculator, design-based safe harbor checklists or actuarial certification. In addition, any plan in the small group market that meets any of the “metal levels” of coverage (that is, bronze, silver, gold or platinum) provides MV.
In addition, plans that do not provide inpatient hospitalization or physician services (referred to as non-hospital/non-physician services plans) do not provide MV. An employer may not use the MV Calculator (or
any actuarial certification or valuation) to demonstrate that a non-hospital/non-physician services plan provides MV.
Reporting of Coverage: The ACA requires ALEs to report information to the IRS and to their full-time employees regarding the employer-sponsored health coverage they offer. The IRS will use the information that ALEs report to verify employer-sponsored coverage and administer the employer shared responsibility provisions. This reporting requirement is found in Code Section 6056.
The ACA also requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs and any other entity that provides MEC to file an annual return with the IRS reporting information for each individual who is provided with this coverage. Related statements must also be provided to individuals. This reporting requirement is found in Code Section 6055.
The individual mandate penalty has been reduced to zero, beginning in 2019. As a result, an individual does not need the information on Form 1095-B in order to calculate his or her federal tax liability or file a federal income tax return. However, reporting entities required to furnish Form 1095-B to individuals must continue to expend resources to do so.
Both of these reporting requirements took effect in 2015. Returns are due in early 2021 for health plan coverage offered or provided in 2020:
Returns generally must be filed with the IRS by 28 (or March 31, if filed electronically) of the year after the calendar year to which the returns relate. For the 2020 calendar year, returns must be filed by March 1, 2021 (since Feb. 28 is a Sunday), or March 31, 2021, if filed electronically.
Written statements generally must be provided to employees no later than 31 of the year following the calendar year in which coverage was provided. For the 2020 calendar year, the deadline to furnish individual statements was set to be Feb. 1, 2021 (since Jan. 31 is a Sunday). However, the IRS has provided an additional 30 days for furnishing the 2020 Form 1095-B and Form 1095-C, extending the due date to March 2, 2021.
ALEs with self-funded plans are required to comply with both reporting obligations, while ALEs with insured plans will only need to comply with Section 6056. To simplify the reporting process, the IRS allows ALEs with self-insured plans to use a single combined form for reporting the information required under both Section 6055 and 6056.
Any reporting entity that is required to file at least 250 returns under Section 6055 or Section 6056 must file electronically. The 250-or-more requirement applies separately to each type of return and separately to each type of corrected return. Entities filing fewer than 250 returns during the calendar year may choose to file in paper form, but are permitted (and encouraged) to file electronically. Electronic filing will be done using the ACA Information Returns (AIR) Program. More information on the AIR Program is available on the IRS website.
Individual statements may also be furnished electronically if certain notice, consent and hardware and software requirements are met (similar to the process currently in place for the electronic furnishing of employees’ Forms W-2).
Penalties: A reporting entity that fails to comply with the Section 6055 or Section 6056 reporting requirements may be subject to the general reporting penalties for failure to file correct information returns (under Code Section 6721) and failure to furnish correct payee statements (under Code Section 6722).
Penalties may be waived if the failure is due to reasonable cause and not to willful neglect, or may be reduced if the failure is corrected within a certain period of time. Also, lower annual maximums apply for reporting entities that have average annual gross receipts of up to $5 million for the three most recent taxable years. The penalty amounts for failures related to returns and statements required to be filed or furnished in 2021 have not been released at this time.
Employee Notice of Exchange: Employers are required to provide all new hires with a written notice about the ACA’s health insurance Exchanges. This notice must be provided at the time of hiring. In general, the notice must:
Inform employees about the existence of the Exchange and describe the services provided;
Explain how employees may be eligible for a premium tax credit or a cost-sharing reduction if the employer’s plan does not meet certain requirements; and
Inform employees that if they purchase coverage through the Exchange, they may lose any employer contribution toward the cost of employer-provided coverage, and that all or a portion of the employer contribution to employer-provided coverage may be excludable for federal income tax purposes.
The DOL provided model Exchange notices for employers to use, which will require some customization. The notice may be provided by first-class mail, or may be provided electronically if the requirements of the DOL’s electronic disclosure safe harbor are met
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Bedrosian & Associates