The Impact of the US Affordable Care Act on Canadian Employers with Cross-Border Employees

Canadian employers who have employees working in the US face a complicated and challenging regulatory environment—one that became more complex on March 23, 2010, when the Patient Protection and Affordable Care Act, or Affordable Care Act (ACA), became law in the United States and imposed a requirement to maintain health-care coverage. Through this legislation, President Barack Obama sought to realize his objective of ensuring that all Americans receive affordable health care. While the new law included phased-in effective dates for many of its provisions, the most important employer-related provisions became effective on January 1, 2015.

The 2010 law not only affects US employers—it also applies to foreign employers and their employees who have relocated to the US. There are both individual and employer mandates to consider.

Individual mandate

The individual mandate requires that individuals maintain health-care coverage—referred to as minimum essential coverage (MEC)—for each month throughout the year for themselves and their dependants, or face penalties[1] that are paid with and reported on their US federal income tax return for the year (referred to as a “shared responsibility” payment). This mandate applies to all US citizens, green card holders, and tax residents, but does not apply to individuals who are non-resident aliens throughout the entire taxable year. Therefore, the individual mandate applies to US citizens and green card holders who are employed by a non-US company while working outside the US; however, for any month in which an individual is eligible for the foreign-earned income exclusion, that individual is deemed to have MEC for the given month.

Employer mandate

The employer mandate requires that large employers[2] offer coverage to their employees and their dependants. If a large employer fails to offer 95% of its full-time employees the opportunity to enrol in MEC, it will face penalties for failing to provide coverage.[3] When determining whether an employer is a large employer, a controlled group test applies; note, however, that only work performed in the US is considered when determining whether a company meets the large employer threshold of 50 full-time (or equivalent) employees. Therefore, if a foreign employer has a large global workforce, the foreign employer would generally be exempt from the employer penalties, as employees who are living and working outside the US and who do not have US-sourced income would be excluded from the determination.

During the term of the assignment, it is important to determine the identity of the employer. Under the “common law employer” standards, the IRS defines an employer as the entity that has the right to control and direct the individual who performs the services. This is a question of fact; typically, however, the employer will be the entity that is referred to in the employment or secondment agreement.

The employer is required to provide each full-time employee with a statement outlining their health-care offer and coverage on Form 1095-C on an annual basis. In addition, the employer must file Form 1094-C with the IRS annually, and attach each Form 1095-C that has been prepared. Failure to file these forms in a timely manner will result in information-reporting penalties.

Acceptable health-care coverage

Acceptable health-care coverage includes US programs and eligible employer-sponsored group health plans. However, foreign group health insurance plans must satisfy specific requirements in order to qualify as MEC; these requirements include the following:

• The plan must be provided by an insurance company that is regulated by a foreign government;
• The plan sponsor must notify the participants that the coverage is intended to be MEC; and
• The plan sponsor must file an annual return report with the IRS that details the plan and the individuals covered under the plan (Forms 1094-B and 1095-B).

It is worth noting that Canadian universal health care is not considered MEC for US purposes.[4]

Let’s consider two examples:

Example #1 – Canadian secondment to US

The employee remains an employee of CANco but is seconded to an affiliated USco for three years to avoid the possibility of having CANco create a permanent establishment in the US. The secondment agreement, by its nature, gives USco the right to control the employment services while the employee works in the US. On arrival in the US, the employee becomes a US resident and begins participating in an employer-sponsored health-care plan.

Prior to beginning the assignment, the employee is not subject to the individual mandate. However, once the assignment begins, the employee is required to maintain health-care coverage for their family; as such, the coverage provided by USco is considered MEC.

USco is required to offer the employee affordable health-care coverage and must issue a statement to the employee[5] that reports the coverage for the employee and their family. In addition, USco is required to file Form 1095-C for each full-time employee and Form 1094-C with the IRS—both on an annual basis.

Example #2 – Employee works in the US for CANco

CANco secures a contract in the US and relocates employees there to service the contract for a two-year period. On arrival in the US, the employees become US residents. During their foreign assignment, the employees are covered under a private health-care plan that is sponsored by CANco and provided by a Canadian insurance company.

Prior to beginning the assignment, the employees are not subject to the individual mandate. However, once the assignment begins, the employees are required to maintain health-care coverage for their families, and, as such, the coverage provided by CANco is considered MEC as long as the requirements of acceptable health-care coverage are satisfied.

If CANco sends more than 50 employees to the US, it is required to offer each employee affordable health-care coverage and must issue a statement to each one[6] that reports the coverage for the employee and their family. In addition, CANco is required to file Form 1095-C for each full-time employee and Form 1094-C with the IRS—both on an annual basis.

By contrast, if fewer than 50 employees were sent to the US, CANco would not be considered a large employer and would not be subject to the employer mandate.

It is also worth noting that if the employees are considered non-resident for US tax purposes, neither the individual mandate nor the employer mandate would apply.[7]

A final note

Employers that offer tax-equalization programs may face an increased cost due to the fact that penalties for the individual mandate are paid through an individual’s US tax return and treated as an assignment-related cost.

Lawrence Bell, CPA, CA, is a senior manager with the personal advisory services – global mobility and rewards practice of Ernst & Young LLP in Vancouver.

Footnotes

1. For 2016, the annual penalty is $695 per adult and $347.50 per child, up to a maximum of $2,085 per family or 2.5% of the family income, whichever is greater.
2. Defined as an employer with an average of 50 or more full-time employees (i.e., someone who works at least 30 hours per week) during the previous calendar year (or the equivalent combination of full-time and part-time employees). The deadline for this requirement was delayed by one year to January 1, 2016, for employers with fewer than 100 full-time employees.
3. US$2,000 multiplied by the number of full-time employees, for any month in which coverage is not offered. Alternatively, if the coverage offered is not affordable and does not provide minimum value for an employee who then receives subsidized coverage, the penalty is 1/12 of US$3,000 each month for each such employee.
4. As of June 1, 2016, the United States Department of Health and Human Services, the agency responsible for approving plans as MEC, has not approved Canadian universal health care.
5. This is usually done by furnishing a copy of the 1095-C form provided to the IRS.
6. Again, this is usually done by furnishing a copy of the 1095-C form provided to the IRS.
7. Code of Federal Regulations, Title 26 (Internal Revenue), Chapter I, Subchapter A, Part 1, Section 1.5000A-3(c)(2).