The IRS has issued long awaited regulations proving additional guidance for employers on the employer shared responsibility mandate (“Pay or Play”) of the Affordable Care Act (“ACA” or “Health Care Reform”). By way of background, the Pay or Play mandate requires that large employers, those with more than 50 employees, provide coverage to all full time employees (those working more than 30 hours per week) and their dependents beginning on the first day of the first plan year after January 1, 2014. Such coverage must also pass certain tests to ensure that such coverage is adequate and affordable in regard to the full time employee.
Please note that this new guidance provides some changes to previous assumptions regarding the Pay or Play Mandate that were widely accepted within the benefits community. It is also important to note that these are proposed regulations that could be subject to further change. Unless, or until, a change is issued, employers may rely on the proposed regulations.
Transitional Rule for Non-Calendar Year Plans
The IRS has delayed Pay or Play penalties for some employers with non-calendar year plans. This is a welcome relief since earlier guidance suggested that all plans would be subject to the Pay or Play mandate immediately on January 1, 2014. Rather, an employer will not incur a Pay or Play penalty for any month prior to the first day of its 2014 plan year if:
• The non-calendar year plan was in existence as of December 27, 2012;
• At least ¼ of the employees are enrolled in the mid-year plan or at least 1/3 of the employees were offered coverage under the mid-year plan during open enrollment; and
• The full-time employees, or full time equivalent employees (“FTE”) are offered affordable and adequate coverage no later than the first day of the 2014 plan year.
This communication is provided for informational purposes only and does not constitute legal advice. It contains only a summary of the applicable legal provisions and does not purport to cover every aspect of any particular law, regulation, or requirement.
Common Ownership Issues
• Companies under common control, or under common ownership, should be counted together for purposes of determining whether the employer is a “large employer” (over 50 employees) and thus subject to the mandate.
• Although employers need to count affiliated entities together to determine if it is a “large employer”, any penalties would be calculated separately for each entity.
Substantial Compliance / The De Minimus Rule / The 95% Rule
• An applicable large employer can avoid a penalty for not offering coverage so long as it offers coverage to 95% of its full-time employees (and the employees’ children)
• The failure to offer coverage to the other 5% will not trigger a penalty, regardless of whether the failure is inadvertent or by design.
• If a large employer has fewer than 100 full time employees, the employer can avoid penalty by offering coverage to all by five (5) of its full time employees, even if the offer of coverage would be less than 95% of the member’s full-time employees.
Requirement to Cover Dependents
• Large employers will have to offer coverage to the children (those 26 and under) of full time employees in order to avoid a non-coverage penalty
• Spouses are not considered dependents under this provision
• The children that will have to be covered include:
o Children by birth, adoption and placement for adoption;
o Foster children
• If a plan currently does not offer to coverage to all such children listed (ex. Foster Children), a large employer will have until 2015 to change its definition of eligible children. This will also require an amendment to existing plan documents.
• A large employer will not be subject to a no-offer penalty for failing to offer coverage to a full-time employee’s children (as defined) until 2015 so long as efforts are undertaken in 2014 to cover those children.
• While an employer must offer coverage to these children, the employer is not under an obligation to offer unsubsidized family coverage. In other words, the coverage of the children need not meet the “affordable and adequate” standards required for single coverage.
Clarification of Measurement Periods, Stability Periods, Administrative Periods
• As set forth in detail, in prior guidance, employers will have to determine the status of variable hour and seasonal employees.
Safe Harbors to Determine If Health Coverage is Affordable
• The Pay or Play Mandate requires not only that large employers offer coverage to their full-time employees, but also that such coverage is “adequate and affordable” in order to avoid a penalty.
• “Affordable” is defined as the employee’s share for single coverage not exceeding 9.5% of the employee’s household income. Since it is nearly impossible to accurately determine an employee’s “household” income, the IRS has developed three safe harbor options to ascertain “affordable”:
o Form W-2 Safe Harbor. The employer can rely on Box 1 income for the months during which the employee was eligible for coverage.
o Rate of Pay Safe Harbor. A salaried employee’s monthly salary or an hourly employee’s rate of pay multiplied by 130 hours for the months during which the employee was eligible for coverage.
o Federal Poverty Line (“FPL”) Safe Harbor. The federal poverty line for a single individual. In 2012, the federal poverty line for a single individual was $11,170.
• While these safe harbors are used for determining whether a penalty will apply, these safe harbors will not be used to determine subsidies. Subsidies will be based solely on employee’s household income. Such amounts will be determined through the exchange.
Determining Full-Time Employees
• A “full-time” employee is a person who is employed an average of 30 hours per week.
• An employee’s hours of service include:
o Each hour for which an employee is paid, or entitled to payment for the performance of duties for the employer; and
o Each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence).
• Proposed guidance sets for specific hours of service requirements for teachers, commissioned employees, adjunct faculty, transportation employees, temporary staff members, and other special employment situations.
Grace Period for Payment of Employee Contributions
• If an employee’s pay is not sufficient to withhold the employee’s contribution for health care coverage (e.g., tipped employees, reduced work schedules, leave of absence). An employer may bill the employee for missed contributions and will not be treated as failing to offer health coverage if the employer ends health coverage because the employee fails to pay the required contribution within a 30 day grace period. This rule is comparable to the grace period for COBRA premiums.