On February 10, 2014, the Internal Revenue Service (IRS) issued final regulations that provide additional guidance and significant transition relief with respect to the “pay-or-play” rules (also called the employer shared responsibility rules) under the Affordable Care Act (ACA). The final rules retain the core structure of the prior rules, but modify deadlines and certain aspects of coverage. These modifications are intended “to ensure a gradual phase-in” and to assist affected employers in implementing pay-or-play policies and procedures. Some of the most significant transition provisions are summarized below.
Pay-or-Play Penalty Refresher
In order to avoid a penalty under the ACA rules as previously issued, a “large employer,” meaning an employer with at least 50 total full-time employees (which includes full-time equivalents), must offer at least 95% of its full-time employees (and their dependents) group health insurance coverage meeting specified affordability and “minimum value” standards. If coverage is not offered to at least 95% of full-time employees, two different pay-or-play penalties may potentially apply:
- The $2,000 Penalty. If a “large employer” offers no coverage, and any employee obtains a premium subsidy through the Health Insurance Marketplace (also known as the exchange), then an employer must pay a penalty for that year of $2,000 per full-time employee (minus 30 full-time employees).
- The $3,000 Penalty. If a “large employer” does offer coverage, but that coverage does not meet the ACA standards for some employees, then the employer will pay a penalty of $3,000 per full-time employee who obtains a premium subsidy through the Health Insurance Marketplace.
Although the originally intended effective date for these rules was January 1, 2014, the IRS previously extended the compliance deadline by one year to January 1, 2015.
Key Transition Relief Provisions
Employers with 50 – 99 Full-Time Employees. The recently issued final regulations provide additional extensions and relief. Specifically, in 2015, the threshold for “large employer” status is 100 instead of 50. This means that employers with between 50 and 99 full-time employees may take advantage of an additional one-year delay. These medium-size employers will not be subject to the pay-or-play rules until January 1, 2016 (or later, for non-calendar year plans), provided the employer certifies that it meets eligibility criteria related to the maintenance of workforce, aggregate hours of service, and previously offered health coverage.
Employers with 100 or More Full-Time Employees. For 2015, “large employers” (i.e., 100 or more full-time employees) need only offer qualifying coverage to 70% (not 95%) of its full-time employees. Even if an employer offers coverage to 70% of full-time employees under this 2015 transition relief, however, the employer remains potentially liable for the $3,000 penalty with respect to any of the 30% of employees not offered coverage. This caveat may undermine the utility of this relief provision in 2015, but should be taken into consideration for planning purposes. Additionally, when calculating the $2,000 penalty (if applicable) for 2015, these larger employers may subtract 80 full-time employees, instead of 30, when calculating the amount of the per capita penalty.
Additional “Monthly” Method for Counting Full-Time Employees. Under the ACA, a full-time employee is defined as an employee who works at least 30 hours per week (or 130 hours per month), on average. It can be difficult to determine full-time status on an ongoing basis, particularly for those employers with employees that work varying hours or those with seasonal employees. To address these difficulties, prior guidance had introduced the concept of using a defined look-back (or “measurement”) period and a prospective eligibility lock-in (or “stability”) period. The final regulations provide guidance on how to use a newly defined monthly measurement system to count full-time employees.
Extension of Prior Transition Rules. The proposed pay-or-play regulations (issued in January 2013) included a number of transition rules intended to apply only in 2014. When the effective date of the pay-or-play rules was deferred to 2015, the IRS did not address the continued viability of those transition rules. The final regulations make clear that those transition rules will be reapplied for 2015. Specifically:
- Six-Month Measurement Period for Determining Which Employees Are Full-Time. Although a look-back measurement period generally must be at least as long as the lock-in (stability) period, the final regulations clarify that a special 6-month measurement period in 2014 may be paired with a 12-month stability period in 2015. Employers desiring to use a 6-month measurement period should begin measuring no later than July 1, 2014.
- Six-Month Period for Determining Average Number of Full-Time Employees. Similarly, the final regulations permit an employer to select any consecutive six-month period during 2014 when determining the employer’s average number of full-time employees. This transition rule will apply regardless of whether an employer falls into the 50-99 or and 100-or-more categories for 2015, although the “seasonal worker” exception must continue to be applied on a twelve-month basis. As a result, this feature of the transition rule may be of less value to employers with a larger percentage of seasonal workers.
Affordability Safe Harbors. One aspect of employer compliance is that the coverage offered must be “affordable” to employees. The final regulations have preserved (with only minor adjustments) the three safe harbors that simplify the employer’s determination as to whether the coverage is affordable under the ACA. Employers can determine affordability based upon the following readily available information: Form W-2 wages, an employee’s hourly rate, or the federal poverty line.
Non-Hourly Employees. Recognizing that calculating “hours of service” can be challenging for certain occupations, the final regulations identify specific methodologies upon which employers may rely for the following: adjunct faculty, layover hours for airline industry employees, and employees with on-call hours. Guidance also has been provided for variable hour employees, temporary staffing firms, seasonal employees, and employees who have been rehired.
Next Steps for Consideration
Now that the IRS has finalized the pay-or-play regulations, employers should focus on preparing for full compliance. Depending upon an employer’s unique circumstances, action items to consider may include the following:
- Determine whether or not the employees of affiliated businesses must be included in the count of full-time employees under the IRS “controlled group” rules.
- Decide whether to take advantage of the transition rule allowing full-time employees to be counted over any 6-month period in 2014.
- If the number of full-time employees during the 2014 counting period is between 50 and 99, determine whether to use the available delay to postpone application of the pay-or-play rules until 2016. Ensure that all steps are taken to ensure that eligibility for the delay is not lost.
- Choose whether employee hours will be counted using the look-back measurement period, or the (newly defined) monthly measurement period.
- If a look-back measurement period will be used, finalize the desired length and operation of the measurement, administration, and stability periods for both new and ongoing employees.
- Review which affordability safe harbors to use with respect to various groups of employees.
Although additional clarity has been provided, there are no one-size-fits all ACA compliance solutions. The ways in which the pay-or-play rules will impact an employer’s benefit and compliance objectives will be as diverse and fact-specific as the businesses and organizations in which they are applied. What is clear for all employers, however, is that the process of preparing for ACA compliance should remain a priority. There remain numerous issues to consider not only with regard to coverage, but also for identifying full-time employees and selecting a method to measure hours of service. An evaluation and review of the final regulations and other requirements under the ACA must be a part of the compliance plan for all employers.
If you have any questions regarding the employer mandate, the legal requirements of the Affordable Care Act, employee benefit plans, or other health care laws, please contact your Davis & Kuelthau, s.c. attorney.