ELIZABETH L. LOH and TIFFANY N. SANTOS —
On February 12th, the Internal Revenue Service (“IRS”) published the much anticipated final regulations, and a helpful set of Questions and Answers, implementing the Affordable Care Act’s Employer Shared Responsibility Provisions under Section 4980H of the Internal Revenue Code (often referred to as the “Employer Mandate” or the “Pay or Play Rules”). Beginning in 2015, an “applicable large employer” may be subject to one of the following penalties if at least one of its full-time employees purchases coverage through a State or Federal Exchange (i.e., the “Marketplace”) with a premium tax credit:
- The “A Penalty” applies to an applicable large employer if it fails to offer health plan coverage to “substantially all” of its full-time employees and their dependent children, and is generally assessed based on the number of the applicable large employer’s “full time employees” (reduced by the 30 or 80 full-time employee exclusion described below).
- The “B Penalty” applies if the applicable large employer offers “substantially all” of its common-law full-time employees and their dependent children with health plan coverage, but the coverage is either not “affordable” or does not provide “minimum value”. Unlike the A Penalty, calculation of the penalty is assessable only with respect to those full-time employees who actually purchase Marketplace coverage with a premium tax credit.
The final regulations provide helpful clarifications and transition relief to help employers comply with the mandate. This article discusses those clarifications and transition relief including:
- The delay of the compliance deadline until 2016 for employers with 50 to 99 full-time employees
- The lowering of the “substantially all” threshold requirement for offering coverage in 2015 from 95% of full-time employees to 70% of full-time employees
- The delay until the first day of the plan year beginning January 1, 2015 for employers with non-calendar year plans
- The exclusion of up to 80 full-time employees (instead of 30 full-time employees) from the calculation of the A Penalty for 2015 (note: for an employer that is subject to the B Penalty, the B Penalty amount is capped at the amount of the A Penalty)
- No penalty for 2015 for failing to offer coverage to the dependent children of full-time employees, if the employer takes reasonable steps to offer such coverage starting in 2016
- A shorter “measurement period” of six months in 2014 that is permitted:
- To determine the number of full-time employees for ascertaining “applicable large employer” status in 2015.
- To determine a variable hour employee’s full-time status in 2014 for 2015 coverage during the following “stability period”. The final regulations permit a 12-month stability period to “lock-in” full-time or part-time status.
Subject to the issuance of future relief, the above referenced transitional relief will expire at the end of 2015. Please see our October 2012 article for a more detailed discussion of the look back measurement period for determining an employee’s full-time employee status.
Compliance Delayed until 2016 for Employers with Fewer than 100 Full-Time Employees
Recognizing that smaller employers may need additional time to comply with the Employer Shared Responsibility provisions, the final regulations delay the applicability date of Section 4980H until 2016 for employers with 50 to 99 full-time employees (taking into account full-time equivalents). To qualify for this 2015 transition relief, the employer must certify the following:
- It employs on average at least 50 full-time employees (including full-time equivalents) but fewer than 100 full-time employees (including full time equivalents) on business days during 2014
- Unless it can demonstrate a bona fide business reason, the size of its workforce during the period from February 9, 2014, through December 31, 2014, has not been reduced to under 100 full-time employees
- It has not eliminated or materially reduced its health coverage during the period from February 9, 2014, through December 31, 2015
For Employers with 100 or More Full-Time Employees in 2015, Coverage Must Only Be Offered to At Least 70% of Full-Time Employees
Although applicable large employers with 100 or more full-time employees must comply with the Employer Shared Responsibility provision beginning in 2015, the final regulations decrease the percentage of full-time employees to whom an employer must offer coverage in 2015 for purposes of calculating the A Penalty from 95% to 70%. This means that if an employer offers coverage to at least 70% of its full-time employees and their dependents, it will not be subject to the A Penalty in 2015. This transition relief provides employers additional time to meet the Employer Shared Responsibility provisions’ 95% coverage threshold in 2016 and beyond, for example because the employer offers coverage to employees who work 35 or more hours per week, but not yet to employees who work between 30 and 34 hours per week.
Additional Employees May Be Disregarded When Calculating the A Penalty Amount for 2015
To determine the amount of the A Penalty, an applicable large employer may disregard a certain number of full-time employees from the calculation. For 2015, an employer may disregard up to 80 full-time employees, as opposed to 30 full-time employees for 2016 and beyond. The monthly A Penalty is determined as follows:
- For 2015: 1/12 of $2,000 x the number of full-time employees (minus up to 80)
- For the 2016 and beyond: 1/12 of $2,000 x the number of full-time employees (minus up to 30).
- Note: If an applicable large employer is subject to the B Penalty, the penalty is capped at the A Penalty amount using the applicable formula above.
Guidance Regarding Full-Time Employee Status Determination
The final regulations provide guidance for determining full-time employee status for purposes of ascertaining:
- Whether the employer is an “applicable large employer” subject to the Employer Shared Responsibility provision
- The full-time employees to whom coverage must be offered for purposes of the A and B Penalties
In the proposed regulations, the IRS set forth two voluntary safe-harbors for an employer to use when identifying its full-time employee population.
- Monthly Measurement Method
- Under this method, an employer looks back at the end of each month to determine if an employee has worked on average at least 30 “hours of service” per week (or 130 “hours of service” per month).
- Look Back Measurement Method
- Under the look back measurement method, if an employee averages 30 hours of service per week over a certain measurement period, the employer must treat the employee as a full-time employee during the subsequent stability period (regardless of the employee’s actual hours during this stability period). Under this method, an applicable large employer knows the employees to whom it must offer coverage, thereby minimizing the monthly measurement method’s risk of failing to offer coverage to an employee who is later determined to be full-time.
The final regulations make clear that if an employer decides to use the look back measurement method for one group of employees, it generally must use that method for all groups of employees. Accordingly, an employer is not allowed to use the look back measurement method for variable hour employees, and the monthly measurement method for employees with more predictable work schedules. An employer may only use different measurement methods with respect to the following groups of employees:
- Salaried versus hourly employees
- Employees whose primary places of employment are in different states
- Collectively bargained employees versus non-collectively bargained employees
- Each group of collectively bargained employees covered by a different collective bargaining agreement
Shorter Look Back Measurement Periods Available in 2014
Generally, a look back measurement period must be the same length of time as the subsequent stability period. Recognizing that employers who want to have a 12 month look back and 12 month stability period may face certain time constraints (given the final regulations were published in February of 2014), the final regulations allow employers to use a shorter look back period in 2014. An employer may use a look back measurement period as short as six months during 2014, even if the employer intends to use a subsequent 12 month stability period. For example, an employer with a calendar year plan may use a measurement period from April 15, 2014, through October 14, 2014, (i.e., six months), followed by an administrative period ending on December 31, 2014 — even if it plans on utilizing a 12 month stability period in 2015.
Final Regulations Clarify the Definition of Hours of Service to Be Used When Determining Full-Time Employee Status
Hours that May Be Excluded
The final regulations clarify what is considered an “hour of service” for purposes of determining whether an individual is a “full-time employee.” The following hours of service may be excluded from such determination:
- Volunteer hours worked for a government or tax exempt agency (e.g., as a volunteer firefighter or emergency medical provider)
- Student work study hours under any federal or state sponsored work study program
The final regulations clarify that a “seasonal employee” is defined as an individual who is employed for six months or less during the year. Seasonal employees meeting this definition generally will not be considered full-time employees. However, the final rules provide some flexibility where an employee may be considered a seasonal employee even if the seasonal employment is extended in a particular year beyond 6 months. For example, if a ski instructor at a resort usually works for six months out of the year, but is asked in a particular year to work an additional month because of an unusually long or heavy snow season — he or she may still be classified as a seasonal employee.
Other Challenging Categories
The final regulations recognize that employers may face difficulties with tracking the hours of service for certain categories of employees (e.g., adjunct faculty, commissioned salespeople, on-call employees, and airline employees). Until further guidance is issued, the regulations require employers to use a reasonable method for crediting these employees’ hours of service. For example, the final regulations state it is reasonable to credit an adjunct faculty member with 2¼ hours of service per week for each hour of teaching or classroom time.
Break in Service Decreased to 13 Weeks for Most Employers
Under the proposed regulations, for purposes of determining an employee’s full-time status, an employer could treat an employee as a new hire if the employee had a break in service of at least 26 consecutive weeks. The final regulations reduce the length of break in service from 26 consecutive weeks to 13 consecutive weeks. Accordingly, if an employee experiences a break in service of at least 13 consecutive weeks, the employer may treat the employee as a “new hire” and subject the employee to a new measurement period before having to offer the employee coverage.
Note: The final regulations clarify that educational organizations are still subject to the 26 consecutive week break in service rules.
Stepchildren and Foster Children Excluded from Definition of Dependent
To avoid the A and B Penalties, an applicable large employer must offer coverage to substantially all of its full-time employees and their dependents. The proposed regulations defined “dependent” as the employee’s biological child, stepchild, adopted child, or foster child under age 26. The final regulations narrow this definition by excluding foster children and stepchildren. Accordingly, if an employer does not offer coverage to foster children and/or stepchildren, the employer will not be subject to the A or B Penalty. The final regulations also affirm that an employer is not required to offer coverage to an employee’s spouse.
Note: An employer will not be penalized for failing to offer coverage to dependent children in 2015, provided that the employer takes reasonable steps (during 2014 and/or 2015) toward offering dependent coverage in 2016.
Clarifications Regarding Affordability Safe Harbors
An employer may be subject to the B Penalty if the coverage it provides fails to meet the “minimum value” threshold or is “unaffordable”. The coverage offered by an employer is “affordable” if the employee’s share of the premium for self-only coverage would cost the employee less than 9.5% of her annual household income. Because employers generally do not know an employee’s household income, the final regulations provide three optional affordability safe harbors (i.e., the “Form W-2 wages safe harbor”, the “rate of pay safe harbor,” and the “federal poverty line safe harbor”). The final regulations change the rate of pay safe harbor and the federal poverty line safe harbor as follows:
- The rate of pay safe harbor may be applied to an hourly employee even if the employee’s rate of pay is reduced during the year, provided the reduction stemmed from a bona fide business reason (e.g., the employee transfers to a new position with his employer). Note: Affordability must be calculated monthly.
- When using the federal poverty line safe harbor, an employer may use the poverty guidelines in effect six months prior to the beginning of the plan year. This gives employers additional time to establish premiums in advance of the plan’s open enrollment period.
Satisfying the Offer of Coverage Requirement
The final regulations clarify that an employer may avoid the A and B Penalty if it offers full-time employees coverage via:
- The employer’s own plan
- A plan provided by a temporary staffing agency that has contracted with the employer, provided the employer incurs an additional fee when the employee enrolls in this coverage (over and above the normal fee the employer would pay to the temporary staffing agency if the employee did not enroll in coverage)
- A multiemployer plan or single-employer Taft-Hartley plan
- A multiple employer welfare arrangement (“MEWA”)
If a full time employee works for the employer for less than three months, the employer will not be subject to penalties if it does not offer coverage to such employee. However, if an employee continues in employment with the employer, he or she must be offered coverage by the first day of his or her fourth month of employment to avoid the A or B Penalty with respect to that employee.
How and When Will the IRS Assess the Penalty?
While assessment procedures have yet to be adopted by the IRS, the preamble to the final regulations state that no penalty will be assessed until the IRS provides the employer with a certification that one or more of its full-time employees has purchased Marketplace coverage with a premium tax credit. Under Q&A 27 of the new Q&As, no penalty will be assessed until the IRS contacts the employer about its potential liability and the employer has an opportunity to respond. Following the employer’s response, the IRS will send the employer a notice and demand for payment.
This means that the IRS will notify an employer of its potential liability some time after the due date for employees to file their individual tax returns (i.e., April 15) and the due date for employers to file their information returns identifying the full-time employees to whom coverage was offered, if any. Under proposed regulations implementing the reporting requirement under Section 6056, the employer reporting deadline to the IRS is either February 28, 2016 (or March 31, 2016, if filed electronically), for coverage provided in 2015. The IRS has stated that it will soon issue final reporting regulations that will “simplify and streamline” an employer’s reporting obligations under the Affordable Care Act.
Now that the final regulations have been issued, employers should promptly take steps to comply with the Employer Shared Responsibility Provisions. Such actions might include:
- Identifying its full-time employee population (e.g., through implementing measurement periods)
- Reviewing and updating plan documents, summary plan descriptions, and participant communications for the Pay or Play Rules (e.g., amending plan eligibility provisions)
- Re-negotiating agreements with temporary staffing agencies
Please contact the authors of this article, or the attorney you normally work with if you have any questions regarding compliance.