IRS Proposed Regulations – Important Guidance Regarding the Employer Play or Pay Mandate

Posted January 24, 2013 Company News

Over the past few months many of our clients have been asking similar questions regarding the Shared Responsibility for Employers provision of health reform. This provision, often referred to as the “Play or Pay” or “Employer Mandate”, has caused confusion and alarm. On December 28, 2012, the IRS issued additional guidance in the form of proposed regulations that provides clarification in many areas with regards to this employer mandate. The proposed regulations, along with new Q&As, close the gap on many issues involving the measurement of hours worked for variable hour and seasonal employees. The new IRS guidance also illustrates additional affordability safe harbors and paves the way for plan sponsors with non-calendar year plans to transition into 2014 more smoothly than anticipated.

Summarized below is information from the new regulations that we feel deserves extra attention. Please refer to the links at the bottom of this document for the actual IRS proposed regulations and the new Q&As for more comprehensive information.


Revisiting Play or Pay

Companies that employ 50 or more full-time employees or full-time equivalent employees are obligated by the Affordable Care Act to provide affordable, minimum value health coverage to their employees. If this coverage is not provided, the employer could be assessed a penalty.


Determining Large Employer Status – The counting of seasonal workers

If an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that period were working no more than 120 days and were seasonal employees, the employer is not considered an Applicable Large Employer. This is because the employer exceeded 50 full-time employees while employing seasonal help and the seasonal help was employed for a period of time no more than 120 days (or 4 months). The 120-day period referred to in the proposed regulations is not part of the definition of the term seasonal employee; the 120-day limit is used solely for the purposes of the seasonal worker exception when determining whether an employer is an “Applicable Large Employer” with regards to the mandate.


New Variable Hour Employee – Hours worked are greater right after hire

The proposed regulations provide that a new employee is a variable hour employee if, based on the facts and circumstances at the employee’s start date, it cannot be determined that the employee is reasonably expected to be employed on average at least 30 hours per week. A new employee, one who is expected to be working at least 30 hours per week for a limited duration, may still be considered a variable hour employee, as long as it cannot be determined that the employee is reasonably expected to work at least 30 hours during the initial measurement period.


Seasonal Employee – Determining full-time status

It is important to understand that the 120-day period referred to in the seasonal worker exception is not part of the definition of the term seasonal worker, so as a result, an employee would not necessarily be precluded from being treated as a seasonal worker merely because the employee works on a seasonal basis for a period of five consecutive months. The IRS Notice provides that, through at least 2014, employers are permitted to use a reasonable, good faith interpretation of the term “seasonal employee” for the purpose of determining full-time status and plan eligibility. The Treasury Department and the IRS have indicated that they are contemplating that the final regulations contain a time limit on employment for workers who are labeled seasonal employees.


Short-Term Employees Working Full-time

The IRS has requested comments as to how to classify short-term full-time employees with regards to the employer mandate, but it is clear that full-time short term employees working for a period of no more than 90 days do not need to be offered affordable minimum value group health coverage.


Transition Relief for Measuring Whether an Employer is a Large Employer

Employers that are struggling with the formula to help them determine whether they are an applicable large employer will be pleased to hear that they have more time to establish their process. Rather than being required to use a full twelve months to measure full-time employees and full-time equivalent employees, an employer may measure its employees using ANY six-consecutive-month period in 2013.


Transition Relief for Non-calendar Year Plans

In response to comments the IRS is providing transition relief for plan sponsors with fiscal year plan renewals. If employees are offered affordable minimum value benefits on the first day of the new plan year in 2014, no assessable payment is due with respect to any employee who enrolls in Exchange coverage and qualifies for premium assistance or a cost sharing reduction prior to the employer’s 2014 plan anniversary date. If at the time of plan renewal in 2014, the employer does not provide group health coverage or the coverage does not provide minimum value and/or is found to be unaffordable, penalties can be assessed.***


***Please Note:

There are certain eligibility terms that must be met in order for fiscal year plan sponsors to qualify for this transition relief. Consult your Henderson Brothers’ consultant to find out if transition relief will apply to your fiscal year plan(s) as you head into calendar year 2014. [Updated as of March 20, 2013]



Transition Relief for First Measurement Period

The Treasury Department and IRS recognize that some employers intending to adopt a 12-month measurement period, and in turn a 12-month stability period, will face time constraints when attempting to establish the first measurement period. As a result, employers may adopt a transition measurement period that is shorter than 12 months but is no less than 6 months long, begins no later than July 1, 2013, and ends no earlier than 90-days before the first day of the plan year beginning on or after January 1, 2014. For example, let’s assume an employer has a fiscal plan year that is July 1st, and the employer begins the first measurement period on July 1, 2013. The employer can establish the first measurement period as a 9-month period, ending March 31, 2014. The administrative period can then be a 90 day period starting on April 1st and then ending on June 30th. The new plan year, July 1, 2014, can be the beginning of the first 12-month stability period. Going forward, the employer can use a 12-month measurement period, beginning April 1st of each year.

Employers that are still able to establish a 12-month measurement period for their first measurement period do not need to start measuring hours worked by July 1, 2013. For example, an employer with a November 1st plan year can begin a 12-month measurement period on August 1, 2013. This first 12-month measurement period would end July 31, 2014. The 90 day administrative period would begin August 1st and would end October 31, 2014. Because this employer has a fiscal year plan later in the calendar year, it is possible to establish the first measurement period as a 12-month period starting late this summer.

IRS Proposed Regulations


Employers are not required to establish a 12-month measurement period, a 90 day administrative period, and a 12-month stability period. However, we have determined after discussing this provision with many clients that a vast majority have determined that the 12-month measurement and stability period is the most appropriate for their business operation.


Offer of Coverage to Employee’s Dependents

Under Section 4980H(a) of the code, an applicable large employer is subject to a penalty or “assessable payment” if it fails to offer its full-time employees, and their dependents, the opportunity to enroll in Minimum Essential Coverage (MEC) that is affordable, the employee enrolls in Exchange coverage and qualifies for Federal premium assistance or a cost-sharing reduction. The employer is not assessed a penalty if it fails to offer coverage, or fails the MEC and affordability tests and no one who is eligible for premium assistance enrolls in Exchange coverage. Following review of comments, the IRS has found it Important to provide clarification regarding the definition of “dependents”. The definition, as defined in the proposed regulations, is an employee’s child, who is under 26 years of age. The term dependents does not include spouse or any other individual other than children. Therefore, it is important to note that an employer that does not permit spouses to enroll in the group plan will not be subject to an assessable payment purely because coverage was not extended to spouses.


Affordability Safe Harbors – Three Separate Options

There are now three optional affordability safe harbors that employers can adopt to determine whether an employer’s coverage satisfies the 9.5% affordability test for the employer mandate. The safe harbors enable an employer to pass the affordability test, but they do not preclude an employee from qualifying for Federal premium assistance or a cost sharing reduction if the employee is eligible based on household income (i.e., modified adjusted gross income). Employers can use one or more of these safe harbors as long as they are used in a consistent and uniform manner.


1) Form W-2 Safe Harbor

Under this safe harbor, the total amount of wages as reported inBox1of Form W-2 is to be used. The employer’s minimum essential coverage that is offered to employees, and their dependents, cannot exceed 9.5% of the employee’s W-2 wages for the calendar year. Employers may count wages paid by a third party as long as the third party’s EIN is reported on the W-2.

Application of this safe harbor is determined after the end of the calendar year and on an employee-by-employee basis taking into account the employee’s W-2 wages and the employee’s cost to enroll in single-only health coverage. Although the determination of whether an employer actually satisfied the safe harbor is made at the end of the calendar year, an employer could also use the safe harbor prospectively, at the beginning of the year, to set the employee contribution at a level so that the cost for single-only coverage would not exceed 9.5% of an employee’s W-2 wages.

It is critical to understand that the total wages reported inBox1of the Form W-2 excludes deferrals that an employee elects to contribute to a section 125 plan, 401(k) plan or 403(b) plan. After reviewing comments and requests to modify this test so that elective deferrals are included, the IRS has determined that the proposed regulations will not change. Employers who decide to use this particular safe harbor need to understand that the W-2 wages used for this affordability test are reduced waged for a good portion of their workforce. Companies who employ lower wage workers who contribute quite a bit towards their benefits, especially employees paying several hundred dollars a month towards family premium, may find that one of the other two safe harbor tests are a better fit.


2) Rate of Pay Safe Harbor

Employers that find the Form W-2 safe harbor problematic can use the Rate of Pay safe harbor. This particular affordability test enables employers to take the hourly rate of pay for each hourly employee who is eligible to participate in the plan at the beginning of the plan year and then multiply that rate by 130 hours per month. This calculation determines the monthly wage amount. This wage amount is then compared to each employee’s monthly contribution for single-only coverage. If the employee’s cost for single-only coverage is equal to or less than 9.5% of the employee’s wage amount, the employer passes the affordability test. For salaried employees, monthly salary would be used instead. The Rate of Pay safe harbor is designed to make it easy for employers to apply and allows them to use this formula to prospectively satisfy affordability without the need to analyze every employee’s wages and hours.


3) Federal Poverty Level Safe Harbor

Employers may also rely on a design-based safe harbor using the Federal poverty line for a single individual. With this particular test coverage offered to an employee is affordable if the employee’s cost for single-only coverage under the plan does not exceed 9.5% of the Federal Poverty Line for a single individual. Employers are permitted to use the most recently published poverty guidelines as of the first day of the employer’s plan year.


IRS Proposed Regulations


Please note that the information contained in this document is designed to provide authoritative and accurate information, in regard to the subject matter covered. However, it is not provided as legal or tax advice and no representation is made as to the sufficiency for your specific company’s needs. This document should be reviewed by your legal counsel or tax consultant before use.

Additionally, the messages and content within the Pittsburgh Health Care Reform group do not reflect the advisory services of Henderson Brothers, Inc.


Contributing EXPERT: Shari Herrle