The 95% Rule: Offering Coverage to “Substantially All” Full-Time Employees

Many school districts and other local governmental employers have employees working 30 hours or more per week as defined by the Affordable Care Act (ACA).[1] Often these workers are not offered Health Insurance coverage. Sometimes the employer offers coverage, but does not contribute toward the premiums.

On January 1, 2014 (or when your fiscal year plan renews), the ACA mandates that large employers (over 50 full-time equivalent employees) offer affordable, minimum value health coverage to “substantially all” full-time employees or risk paying a penalty. “Substantially all” means at least 95% of full-time employees.

Failing to identify full-time employees and offering coverage, or contributing less than the ACA affordability standards may subject your organization to some steep penalties. Additionally, while you can intentionally or unintentionally exclude up to 5% based on the 95% rule, your actions cannot be done in a discriminatory fashion. 

Penalties

Major League Penalty: You may be subject to a $2,000 annual penalty for every full-time employee (minus the first 30 employees) if: 

• you do not meet the 95% threshold, or
• fail to offer coverage of “minimum value”, and
• one or more employees qualify for a premium tax credit or cost-sharing assistance, and
• one or more employees purchase coverage from the public insurance exchange.

Minor League Penalty: You may be subject to a $3,000 annual per employee penalty if:

• you offer coverage that is of minimum value but not affordable to 30-hour employees, and
• any of the employees whom you do not offer affordable coverage qualifies for a premium tax credit or cost-sharing assistance, and
• purchases coverage from the public insurance exchange.

Please note that the $3,000 penalty may apply to only the employees who were not offered affordable coverage who qualify for tax-credit or cost-sharing assistance and purchase coverage on the public exchange.

The intention of the 95% rule is likely a safeguard in cases of miscalculation by an employer who is otherwise in compliance. Caution is advisable on reducing costs by using the 95% rule to expressly exclude coverage for otherwise-eligible full-time employees. Even a slight miscalculation could trigger a very large penalty.

What should you do?

1. Take the necessary steps to identify all employees working 30-hours or more based on ACA measuring standards.
2. Calculate what penalties, if any, you may be subject too. Also determine what the penalty would be if no insurance was offered at all.
3. Together with your medical insurance broker/consultant, develop a strategy that will mitigate any expected cost increases.

It is recommended that you complete this analysis as soon as possible and make the necessary changes to your employment practices now. Once the mandates take effect, it will be more difficult to avoid penalties by making changes at that time. 

For more information on the 95% rule, download: Health Care Reform: FAQs on the Employer Shared Responsibility Provisions. Or to view the IRS publication on this issue, visit http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act.