Finally! IRS provides final play-or-pay guidance
20 March 2014
Posted by: Authors: P.K Bradley, A.C Greer and others
Authors: P.K Bradley, A.C Greer and others (Hodgson Russ LLP)
On February 11, 2014, the IRS released final regulations implementing the employer shared responsibility provisions of the Affordable Care Act, also known as the "employer mandate” and "play-or-pay” requirement. In this article, we summarize some of the most salient provisions of the final regulations. The final regulations provide the guidance employers need to finalize their play-or-pay compliance strategy for 2015.
Determining Large Employer Status for 2015
Only applicable large employers are subject to the employer mandate. An applicable large employer is, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. All employees of a controlled group of entities or an affiliated service group must be counted in determining whether the members of the controlled group or affiliated service group together are an applicable large employer.
There are two important pieces of guidance that apply here:
1. For the 2015 calendar year, only employers with 100 or more full-time employees (including full-time equivalent employees) during 2014 would be treated as "applicable large employers.”
2. For the 2015 calendar year, an employer may determine its status as an applicable large employer (100 or more full-time employees) by reference to a period of at least six consecutive calendar months, as chosen by the employer, during the 2014 calendar year.
Thus, an employer with 50 or more but fewer than 100 full-time employees for calendar year 2014 would not be considered an applicable large employer for 2015 and, therefore, cannot be assessed penalties for failure to offer affordable, minimum value coverage to its full-time employees.
This transition relief applies only if:
1. During the period beginning February 9, 2014, and ending December 31, 2014, the employer does not reduce the size of its workforce or the overall hours of service of its employees in order to get below the 100 employee mark. A reduction in workforce size or overall hours of service for bona fide business reasons (e.g., sale of a division, changes in market conditions, terminations on account of poor performance) will not be considered to have been made in order to satisfy the workforce size condition.
2. During the "coverage maintenance period,” the employer does not eliminate or materially reduce the health coverage it offered, if any, as of February 9, 2014. For calendar year plans, the coverage maintenance period is the period beginning February 9, 2014, and ending December 31, 2015. For non-calendar year plans, the coverage maintenance period is the period beginning February 9, 2014, and ending the last day of the plan year that begins in 2015.
3. The employer certifies on a prescribed form that it meets the eligibility requirements (i.e., that it has fewer than 100 full-time employees, it did not reduce the size of its workforce or hours of service to get below the 100 mark, and it did not eliminate or materially reduce its health coverage).
Employer Action Items
Now that we have the final rules, employers should finalize their play-or-pay compliance plans.
Smaller employers (i.e., 50 or more but fewer than 100) should confirm they qualify for the one-year reprieve from the play-or-pay penalties, keeping in mind that the employer will be required to certify that it qualifies for this relief.
Employers that sponsor non-calendar year plans should not assume that the transition rule applies to them and should consult with a qualified advisor to confirm the availability of the transition relief.
Employers should carefully review their contractual arrangements with independent contractors to ensurethat the independent contractors have been properly classified.
If an employer plans to take credit for health coverage provided to its leased and temporary employees by a PEO or staffing firm, the employer must confirm that it will pay the leasing agency more for employees who enroll in the leasing agency’s health plan than foremployees who do not.
Non-Calendar Year Plan Transition Guidance
For non-calendar year plans, the final regulation provides three pieces of transition guidance that apply for the period from January 1, 2015, through the beginning of the 2015 plan year.
This transition relief applies to employers that maintained non-calendar year plans as of December 27, 2012 but applies only if the plan year was not modified after December 27, 2012, to begin at a later calendar date.
Employers that change their plan year during 2013 for any reason (e.g., to delay the 2014 changes) are not eligible for this transition relief.
These transition rules are fairly complex. For now, suffice it to say that to be eligible for the relief, an employer must ensure that affordable, minimum value coverage is available to full-time employees as of the first day of the 2015 plan year.
The "No Coverage” Penalty
The so-called "no coverage” penalty applies for any calendar month beginning January 2015, if, for that month, an applicable large employer does not offer to substantially all of its full-time employees and their dependents the opportunity to enroll in an eligible medical plan, effective as of the first day of that month, and one of the employer’s full-time employees receives a subsidy for that month for medical insurance purchased by the employee through a public exchange. The amount of the monthly penalty is $166.67 multiplied by the number of full-time employees of the employer for that month (up to $2,000 per year). The first 30 full-time employees are excluded from the count (80 full-time employees for 2015, as discussed below).
There are five important pieces of guidance that apply here:
1) Transition Relief
"Substantially All” Means at Least 70 Percent for 2015
For each calendar month during 2015, and for non-calendar year plans, any calendar months during the 2015 plan year that fall in 2016, an applicable large employer member that offers coverage to at least 70 percent of its full-time employees will not be exposed to the no coverage penalty. After 2015, an employer is treated as offering coverage to substantially all of its full-time employees (and their dependents) for a month if, for that month, it offers coverage to all but five percent (or, if greater, five) of its full-time employees. An employee is treated as having been offered coverage only if the employer also offered coverage to that employee’s dependents.
The 30 Employee Exclusion Is 80 Employees for 2015
In addition, for 2015 plus any calendar months of 2016 that fall within the employer’s 2015 plan year, the no coverage penalty will be calculated by excluding the first 80 full-time employees rather than 30. This means that an applicable large employer with 80 or fewer full-time employees for each month in 2015 will not be exposed to penalties in 2015. For non-calendar year plans, this would include calendar months of 2016 that fall within the employer’s 2015 plan year.
2) New Dependent Definition
For purposes of the no coverage penalty, only an employee’s biological and adopted children under age 26 are considered dependents; foster children and stepchildren are not considered dependents for the purposes of the no coverage penalty. For this purpose, a child is a dependent for the entire calendar month during which he or she attains age 26.
3) Transition Relief for Employers That Do Not Offer Dependent Coverage
If an employer does not currently offer dependent coverage, the requirement to maintain coverage will be postponed until 2016, provided the employer takes steps during 2015 to ensure that coverage is available for 2016.
4) Leased and Temporary Employees
If a leased worker is an applicable large employer’s employee under the common law standard, the employer could be exposed to the no coverage penalty if the failure to offer coverage to the leased employee (either under the employer’s plan or the leasing company’s plan) results in an offer of coverage to less than 5 percent of the employer’s full-time employees (30 percent for 2015).
The final regulations provide that an offer of group health plan coverage by a professional employer organization (PEO) or other staffing firm to a worker who is the client-employer’s employee under the common law standard will be treated as an offer of coverage made by the client-employer.
For this purpose, an offer of coverage is treated as made on behalf of a client-employer only if the fee the client-employer would pay to the staffing firm for the employee is higher than the fee the client employer would pay to the staffing firm for the same employee if the employee did not enroll in health coverage under the plan. This means that if the leasing contract provides a fixed fee for an employee regardless of whether the staffing firm provides health benefits to that employee, the employer will notbe considered to have made an offer of coverage.
5) Independent Contractors
The final regulations, like the proposed regulations, use a common law definition of employee. Thus, an IRS audit that results in a finding that an employer’s "1099” workers are actually common law employees could result in significant penalty exposure to the employer. If the number of 1099 independent contractors who are reclassified as common law employees exceeds 5 percent of the employer’s full-time work force (30 percent in 2015), the no coverage penalty could be triggered.
Crediting Hours of Service for Certain Employees
Hours of service are used for determining the full-time status of an employee under the employer shared responsibility rules. Employees are entitled to credit for each hour for which the employee is paid, or entitled to payment, for the performance of duties for the employer; and each hour for which the employee is paid, or entitled to payment, for certain periods of time during which no duties are performed. With certain exceptions, credit is not required to be given for unpaid leaves. An employee is entitled to credit for hours of service while in the employ of a member of the employer’s controlled or affiliated service group. Hours of service do not include hours to the extent the compensation for those hours constitutes income from sources outside of the United States.
The final regulations provide some additional guidance for employers of employees not paid on a typical hourly or salaried basis. This includes adjunct faculty, coaches, employees with layover hours, employees with on-call hours, and commissioned salespeople. Under the final regulations, employers are required to use a reasonable method of crediting hours of service that is consistent with the employer shared responsibility mandate. For certain employment categories (e.g., adjunct faculty and on-call hours), the regulation provides examples of methods that would (and would not) be considered reasonable. For example, with respect to adjunct faculty members compensated on the basis of courses or credit hours assigned, one method that would be considered reasonable would credit an adjunct faculty member with 2 1/4 hours of service (representing a combination of teaching or classroom time and time performing related tasks, such as class preparation and grading of examinations or papers) per week for each hour of teaching or classroom time. Additional credit of one hour of service per week would be given for each additional hour outside of the classroom (e.g., required office hours or required attendance at faculty meetings). This method may be relied upon at least through the end of 2015.
New Monthly Measurement Period
Employers are not required to use the look-back measurement methods described in the final regulations. Employers that choose to not use these periods must identify full-time employees based on the hours of service for each calendar month. The final regulations provide new guidance for employers who do not wish to use the look-back measurement period. The monthly measurement period, like the look-back period, can be elected separately for members of a related group and for certain categories of employees (e.g., union vs. non-union groups that are covered by separate bargaining agreements, salaried vs. hourly, and employees in different states).
Under the monthly measurement method in the final regulations, an employer will not be subject to the no coverage penalty with respect to an employee because of a failure to offer coverage to that employee before the end of the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible for an offer of coverage if the employee is offered coverage no later than the day after the end of that three-month period. If the coverage provides minimum value, the employer also will not be subject to the "unaffordable” plan penalty during that three-month period.
The final regulations include the following example:
Employer Z uses the monthly measurement method. Employer Z hires Employee A on January 1, 2016. For each calendar month in 2016, Employee A averages 20 hours of service per week and is not eligible (or otherwise eligible) for an offer of coverage under the group health plan of Employer Z. Effective January 1, 2017, Employee A is promoted to a position that is eligible for an offer of coverage under a group health plan of Employer Z following completion of a 90-day waiting period. For January 2017 through March 2017, Employee A meets all of the conditions for eligibility under the group health plan other than completion of the waiting period. The coverage that would have been offered to Employee A under the terms of the plan but for the waiting period during those three months would have provided minimum value. Effective April 1, 2017, Employer Z offers Employee A coverage that provides minimum value. Employee A averages 40 hours of service per week for each calendar month in 2017.
Because Employer Z offers minimum value coverage to Employee A no later than the first day following the period of three full calendar months beginning with the first full calendar month in which Employee A is otherwise eligible for an offer of coverage under a group health plan of Employer Z, Employer Z is not subject to an assessable payment for January 2017 through March 2107 under section 4980H by reason of its failure to offer coverage to Employee A during those months. For calendar months after March 2017, an offer of minimum value coverage may result in an assessable payment under section 4980H(b) with respect to Employee A for any month for which the offer is not affordable and for which Employer Z has received a Section 1411 Certification. Employer Z is not subject to an assessable payment under section 4980H by reason of its failure to offer coverage to Employee A during each month of 2016 because Employee A was not a full-time employee for each month of 2016.
Identifying Variable Hour Employees
Under the proposed and final regulations, an employee is a variable hour employee if, based on the facts and circumstances at the employee’s start date, the employer cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee’s hours of service are variable or otherwise uncertain.
The status of an employee as a variable hour employee has no application if an employer decides to use the new monthly measurement period referenced above.
Under the final regulations, factors to consider in determining variable hour status for an employee include, but are not limited to,
- whether the employee is replacing an employee who was a full-time employee or a variable hour employee,
- the extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods, and
- whether the job was advertised or otherwise communicated to the new employee (for example, through a contract or job description) as requiring hours of service that would average at least 30 hours of service per week, as requiring less than 30 hours of service per week, or having hours that may vary above and below an average of 30 hours of service per week.
These factors are only relevant for a particular new employee if the employer has no reason to anticipate that the facts and circumstances related to that new employee will be different. In all cases, no single factor is determinative.
In determining variable hour status, an employer cannot take into account the likelihood that the employee may terminate employment with the employer (including any member of the applicable large employer) before the end of the initial measurement period.
Under the proposed and final regulations, the look-back measurement method, including the use of the initial measurement period for a newly hired employee, may be applied by an employer to its seasonal employees in the same manner in which the rules apply to variable hour employees. The final regulations provide that a seasonal employee means an employee in a position for which the customary annual employment is six months or less. The reference to customary means that by the nature of the position an employee in this position typically works for a period of six months or less, and that period should begin each calendar year in approximately the same part of the year, such as summer or winter.
Affordability Safe Harbor – Rate of Pay
Under the rate of pay safe harbor in the final regulations, an employer’s offer of coverage to an hourly employee is treated as affordable for a calendar month if the employee’s required contribution for the month for the lowest cost self-only coverage that provides minimum value does not exceed 9.5 percent of an amount equal to 130 hours multiplied by the lower of the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) or the employee’s lowest hourly rate of pay during the calendar month.
The final regulations, unlike the proposed regulations, permit an employer to use the rate of pay safe harbor even if an hourly employee’s hourly rate of pay is reduced during the year. In this situation, the rate of pay is applied separately to each calendar month rather than to the entire year, and the employee’s required contribution may be treated as affordable if it is affordable based on the lowest rate of pay for the calendar month multiplied by 130 hours.
The final regulations clarify that the affordability calculation under the rate of pay safe harbor is not altered by a leave of absence or reduction in hours worked. For example, if a full-time hourly employee earns $10 per hour in a calendar month (and earned at least $10 per hour as of the first day of the coverage period) but has one or more calendar months in which the employee has a significant amount of unpaid leave or otherwise reduced hours, the employer may still require an employee contribution of up to 9.5 percent of $10 multiplied by 130 hours ($123.50).
Consider the following example:
Employer W offers its full-time employees and their dependents minimum essential coverage that provides minimum value. For the 2016 calendar year, Employer W is using the rate of pay safe harbor to establish premium contribution amounts for full-time employees paid at a rate of $10 per hour for each calendar month of the entire 2016 calendar year. Employer W can apply the affordability safe harbor by using an assumed monthly income amount that is based on an assumed 130 hours of service multiplied by $10 per hour ($1,300 per calendar month). To satisfy the safe harbor, Employer W would set the employee monthly contribution amount at a rate that does not exceed 9.5 percent of the assumed monthly income of $1,300. Employer W sets the employee contribution for self-only coverage at $120 per calendar month for 2016.
Because $120 is less than 9.5 percent of the employee’s assumed monthly income at a $10 rate of pay, the coverage offered is treated as affordable under the rate of pay safe harbor for each calendar month of 2016 ($120 is 9.23 percent of $1,300).
Shorter Measurement Periods Permitted for Stability Period Starting During 2015
Like the proposed regulations, the final regulations include an optional alternative method to determine full-time employee status for penalty purposes, referred to as the look-back measurement method. For purposes of stability periods beginning in 2015, employers may adopt a transition measurement period that is shorter than 12 consecutive months. The measurement period must be no less than six consecutive months and must begin no later than July 1, 2014, and end no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015.
Acme Corp. sponsors a calendar year plan. Acme may use a measurement period from April 15, 2014, through October 14, 2014 (six months), followed by an administrative period ending on December 31, 2014.
Acme sponsors a non-calendar year plan that has a plan year that begins on April 1, 2015. Acme may use a measurement period from July 1, 2014, through December 31, 2014 (six months), followed by an administrative period ending on March 31, 2015.
The preamble to the regulation emphasizes that an employer with a plan year beginning on July 1 must use a measurement period that is longer than six months to comply with the requirement that the measurement period begin no later than July 1, 2014, and end no earlier than 90 days before the stability period. For example, the employer may have a 10-month measurement period from June 15, 2014, through April 14, 2015, followed by an administrative period from April 15, 2015, through June 30, 2015.
This article first appeared on lexology.com.