On February 10, 2014, the IRS and Treasury released final regulations that provide guidance to employers for section 4980H of the Internal Revenue Code (i.e., the ACA “Play or Pay”). A good portion of the notice along with a new Q&A confirms that previously issued guidance is remaining intact under the final rules; the rest of the information in the 227 page document provides clarity and new guidance in response to numerous comments and testimony reviewed by regulators back in 2013.
The notice indicates that there will be a delay with respect to the Employer Shared Responsibility provision (“Play or Pay” or “Employer Mandate”) for a second year, now exempting employers with between 50 to 99 full-time workers from complying with the provision until 2016. Please note that certain conditions do apply.
Employers with 100 or more full-time employees will still need to comply in 2015 or face potential penalties (i.e., $2,000 or $3,000). The IRS is also providing an extension on a good portion of the transition relief for non-calendar year plans that was communicated previously in the proposed rule – i.e., most employers with 100 or more FT employees that have non-calendar year plans won’t need to comply until their 2015 plan year date.
A Review of the Play or Pay (4890H)
We know that an “Applicable Large Employer” with respect to a calendar year, is an employer that employed on average at least 50 full-time employees on business days during the preceding calendar year. When counting employees for this purpose, full-time equivalents (FTEs), as well as full-time employees, are taken into account. We also know that an applicable large employer may consist of multiple entities due to the application of the aggregation (controlled group) rules and the determination of any potential assessable payment under the Play or Pay will apply separately for each applicable large employer member. When the subsection (a) $2,000 annual penalty applies, an applicable large employer member’s number of full-time employees is reduced by that member’s allocable share of the 30 person reduction.
The regulators have also stated that an employer is not considered to employ more than 50 full-time employees if the employer’s workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year, and the employees in excess of 50 employed during this 120-day period are “seasonal workers”.
Section 4980H generally provides that an applicable large employer is subject to an assessable payment if either of the following occurs:
1.) The employer fails to offer substantially all (at least 95%) full-time employees and their dependents the opportunity to enroll in minimum essential coverage (i.e., group health coverage) and any full-time employee is certified to the employer as having enrolled in Exchange coverage and has received premium assistance or a cost-sharing reduction. The subsection (a) annual penalty of $2,000 ($166.67 per month) per FT employee will apply.
2.) The employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage but one or more employees is certified by the employer as having enrolled in Exchange coverage and has received premium assistance or cost-sharing reduction because the group health plan does not meet the “minimum value coverage” standard and/or is not “affordable”. In this scenario the subsection (b) annual penalty of $3,000 ($250 per month) will apply for each FT employee enrolled in subsidized Exchange coverage as summarized directly above.
Hours of Service
The final regulations adopt the general definition of hours of service set forth in the proposed regulations. The definition follows the rules for crediting hours of service under a qualified retirement plan with some minor modifications. Hours of service is defined as “each hour for which an 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 by the employer for 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” (as defined in 29 CFR 2530.200b-2(a)).
For hourly employees, the employer is required to calculate actual hours of service from records of hours worked and hours for which payment is due. An employer is not required to use the same method for tracking hours of service for non-hourly employees and has flexibility to use one of three methods for different categories of non-hourly personnel, providing that the categories are reasonable and consistently applied.
Reasonable expectation that at the time of hire an employee will be full-time
An employer’s determination as to whether a new hire will be a full-time employee is based on the facts and circumstances at the time of hire. Consider the following:
Is the employee replacing an employee who was full-time?
Are employees in comparable positions full-time?
How was the position advertised?
How was the position communicated to the applicant?
Was there a job content:encoded shared with the individual that reflects the position as full-time?
The final regulations clarify under the monthly measurement period that an employee must be treated as a continuing employee unless the employee had a break of at least 13 weeks during which no hours of service were credited. For educational organizations 26 weeks with no hours credited is considered a break in service. At the employer’s option, an employee may be treated as a new hire if the employee has not been credited with any hours of service during a period that is at least four consecutive weeks in duration AND is longer than the employee’s previous period of employment.
Rules for employers not in existence in preceding year
The regulations provide that in the case of an employer that was not in business throughout the preceding calendar year, the determination of whether the employer is an applicable large employer for the current year is based on the average number of employees that it reasonably expects to employ on the business days in the current year. The final regulations clarify that an employer is treated as not having been in existence throughout the calendar year only if the employer was not in existence on any business day in the preceding calendar year. The following example is illustrated in the notice:
Employer comes into existence May 1 of year 1. The employer’s status as an applicable large employer is determined based on the average number of employees that it is reasonably expecting to employ on the business days in the current year (year 1). To determine status for year 2, the employer’s status as an applicable large employer is determined based on the number of employees that it employed on business days from May 1 through December 1 of year 1, rather than relying on the employer’s reasonable expectations again for year 2. Furthermore, the determination of whether a new employer is an applicable large employer during its first year is based on the employer’s reasonable expectations at the time the business comes into existence, even if subsequent events cause the actual number of full-time employees, including full-time equivalents, to exceed that reasonable expectation.
Monthly equivalency when measuring hours of service
The final regulations adopt the 130 hour standard which means that 130 hours of service per calendar month can be used instead of “30 hours of service per week” for determining whether an employee is averaging full-time under the look-back measurement period (or monthly measurement period).
New term, “Part-Time”
A part-time employee is an individual working less than an average of 30 hours per week, is not working variable hours and is not a seasonal worker. Part-time employees should be treated like variable hour and seasonal employees for the purposes of the Play or Pay.
Definition of Volunteer
The final regulations provide that hours of service do not include hours worked as a “bona fide volunteer”. This definition allows for length of service awards offered to certain volunteer firefighters and emergency medical providers under a municipal deferred compensation plan. For Play or Pay purposes, however, bona fide volunteers are not limited to volunteer firefighters and emergency medical staff, rather, the term is more expansive and includes certain volunteers who are employees for a government entity or an organization.
Until further guidance is issued, employers are required to use a reasonable method for crediting hours of service that is consistent with section 4980H. Employers may use an optional method illustrated in the regulations that would be deemed reasonable for this purpose and would credit an adjunct faculty member with 2 1/4 hours of service to address teaching time and classroom paperwork and a separate hour of service to address required time spent outside the classroom, like office hours and attendance at faculty meetings.
The final regulations provide that hours of service do not include hours of service performed by students in positions subsidized through the federal work study program, or a substantially similar program of a State or political subdivision. However, hours of service do count when a student employee of an educational organization or outside employer is paid or entitled to payment in a capacity other than a federal work study program or other program as identified above.
The regulators continue to consider additional rules for this category of work. Until further notice, employers with on-call employees are required to use a reasonable method for crediting hours of service that is consistent with section 4980H. For now, the regulators seem to expect that any on-call hour for which payment is made or due, for which the employee is required to remain on premises or for which the employee’s activities are substantially restricted is classified as “hours of service”.
Change in employment status for employee
An employer will not be subject to an assessable payment when an employee experiences a change in employment status that makes he/she eligible for coverage during the initial measurement period as long as affordable, minimum value coverage is offered to the employee the first day of the fourth calendar month following the change in employment status. This rule also applies to employee changes during the initial measurement period from variable hour, part-time, seasonal to full-time status.
Definition of Seasonal Employee for determining full-time status
The final regulations provide that a seasonal employee is an employee in a position for which “customary” annual employment is six months or less. Customary means that by nature of the position an employee in the 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.
Maximum Administrative Period for new hires
Some employers are beginning to measure hours of service the first of the month following a new employee’s hire date. The final regulations indicate that the combined length of the period before the start of the measurement period and the period beginning immediately after the measurement period ends, is subject to the limit of 90 days. Both periods combined represent the “Administrative Period”.
Rules for Stability Periods that are longer than the Measurement Period
Employers that have decided to measure for three months should understand that the minimum length of the stability period will vary – i.e., for employees deemed full-time at the conclusion of the three month measurement period the stability must last six months, however, for those found to be working less than 30 hours per week on average during the three month measurement period, their stability period must be three months in duration. This unequal arrangement in the stability period duration is creating major confusion for employers trying to track eligibility properly. Unfortunately, the final regulations do not alter the stability duration requirements; they just attempt to make the process of tracking eligibility more manageable for employers using the three month measurement arrangement.
Gap between initial stability period and standard stability period for new hires
In some cases when an employee is enrolled in coverage during their initial 12 month stability period there is a gap between the end of this initial stability period and the beginning of the 12 month standard stability period when the new hire is transitioned to “ongoing employee” status. The regulators have addressed this by requiring employers to bridge the gap by continuing to offer coverage up until the standard stability period begins when an employee has be treated as full-time during his/her initial stability period.
Definition of “Full-time” for the purposes of calculating the subsection (a) $2,000 penalty
When determining the Employer Shared Responsibility subsection (a) $2,000 penalty do not include full-time equivalents, calculate total full-time employees only.
Transition Relief for determining Applicable Large Employer status
For 2015, an employer may select any consecutive six-month period in 2014 to determine whether it employs 50 or more full-time (including FTEs).
Transition Relief for employers with 50 to 99 employees
Applicable large employers with fewer than 100 full-time employees (including FTEs) in 2014, will qualify for transition relief from the subsection (a) and (b) penalties for 2015 and potentially any calendar month in 2016 that is part of the 2015 plan year if the following conditions are met:
- The employer must employ on average at least 50 full-time employees (including FTEs) but fewer than 100 full-time (including FTEs) on business days in 2014. The same measuring rule applies that is used for determining applicable large employer status as addressed above – i.e., under transition relief the employer may select any consecutive six-month period in 2014 to determine how many full-time and full-time equivalents it employs.
- During the period beginning on February 9, 2014 and ending December 31, 2014, the employer is not permitted to reduce the size of its workforce or the overall hours of service of its employees in order to qualify for this transition relief. However, an employer is permitted to reduce workforce size and overall hours if there is a bona fide business reason for the reductions, in which case, transition relief will still apply.
- Employers that eliminated or materially reduced health coverage between February 9, 2014 and December 31, 2015 will qualify for transition relief but the following conditions must be met:
The employer continues to subsidize the cost of employee-only (single-only) coverage that: is at least the same percentage of the cost of coverage that the employer was subsidizing on February 9, 2014. In the event of a change in benefits under the employee-only coverage, the benefits provided meet the minimum value standard, and The employer does not alter the terms of its group plan to narrow or reduce the class or classes of employees who are eligible from what was stated under the eligibility terms of the plan on February 9, 2014.
Transition Relief in 2015 for employers with 100 or more FT employees
Under transition relief, an applicable large employer is treated as offering coverage to its full-time employees and their dependents for each calendar month in 2015, or any month during the 2015 plan year that falls into 2016, if the employer offers coverage to at least 70 percent of its full-time employees. When the threshold of 70 percent is met, the subsection (a) annual $2,000 will not apply. Instead, if any one of the 30 percent ineligible full-time enroll in Exchange coverage with premium assistance and/or cost sharing reductions, the subsection (b) $3,000 penalty will apply to each member as described. This transition relief does not eliminate exposure to a penalty entirely; it just limits the penalty to the subsection (b) assessable payment.
For 2015, the 30 person reduction for the subsection (a) $2,000 penalty has been increased to 80. Employers subject to this penalty can subtract 80 full-time employees from their total full-time population. Example: Employer has 150 employees and does not offer minimum essential coverage. 150 – 80 = 70. 70 x $2,000 = $140,000 annual subsection (a) penalty is due.
Transition relief for non-calendar year plans
The new guidance adopts the eligibility transition guidance and the significant percentage transition guidance proposed previously for 2014. Transition relief applies for the period between January 1, 2015 and the plan year date in 2015 for certain categories of employees and for a majority of our fiscal year clients, this relief will apply to all employees. The following rules apply for applicable large employers that maintained a non-calendar year plan as of December 27, 2012, and the plan was not modified after December 27, 2012 to begin at a later date:
Eligibility Transition Relief – This relief applies with respect to all employees (whenever hired) who, under the eligibility terms of the plan as in effect on February 9, 2014, would be eligible for coverage as of the first day of the 2015 plan year.
What does this mean?
This means that a large employer will not be penalized under 4980H between January 1, 2015 and the plan anniversary date in 2015 if the employees eligible for coverage as of February 9, 2014 are not provided minimum value coverage and/or affordable coverage until the plan year date in 2015. An eligible employee of the company who is enrolled in Exchange coverage with premium assistance or cost-sharing reduction will not trigger a penalty between January 1, 2015 and the plan year date in 2015 as long as the employer provides minimum value and affordable coverage to that eligible employee as of the 2015 plan year date. This relief applies only with respect to employees who would not have been eligible for coverage under any group health plan maintained by an applicable large employer as of February 9, 2014 that has a calendar year plan. Note: As of the plan year date in 2015, 70% of all FT must be offered coverage or the subsection (a) $2,000 could be triggered beginning January 1, 2015. Beginning in 2016, the standard will be increased from 70% to 95% as communicated in previous guidance.
Significant Percentage Transition Relief– This relief applies to all employees, even those who were not eligible for the plan under the eligibility terms of the plan in effect on February 9, 2014 if:
- at least 1/4 of total employees (all, employees including part-time, seasonal) were covered as of any date in the 12 months ending on February 9, 2014 under the non-calendar year plan(s), or
- at least 1/3 or more of total employees were eligible and offered coverage in the non-calendar plan(s) during the open enrollment period that ended most recently before February 9, 2014.
Note: As of the plan year date in 2015, 70% of all FT must be offered coverage or the subsection (a) $2,000 could be triggered beginning January 1, 2015. Beginning in 2016, the standard will be increased from 70% to 95% as communicated in previous guidance.
New, Additional Significant Percentage Transition Relief using FT- This relief is provided to employers that, as of December 27, 2012, maintained a non-calendar year plan that was not modified to begin at a later date and had:
- at least 1/3 of its full-time employees covered under the non-calendar year plan(s) or,
- offered coverage under the plan(s) to 1/2 or more of its full-time employees during the open enrollment period that ended most recently before February 9, 2014.
This new transition relief applies to all employees and is designed to address employers with a large percentage of part-time employees.
Employer moves from small employer to applicable large employer status
The final regulations provide some relief for employers whose status as an employer is affected by data from the final months of the calendar year. An employer that is close to the 50 full-time threshold during the year that is pushed over the threshold as a result of growth in the final calendar months will appreciate the latitude provided in the final regulations. The notice indicates that with respect to an employee who was not offered coverage at any point in the prior calendar year, if the applicable large employer offers coverage on or before April 1 of the first year in which the employer is an applicable large employer, the employer will not be subject to an assessable payment (penalty) by reason of its failure to offer coverage January 1 to March 31. If the employer does not offer coverage to the FT employee or the coverage offered does not provide minimum value and/or is affordable, a penalty could apply.
Interim guidance will apply to an applicable large employer member that is required by a collective bargaining or an appropriate participation agreement to make contributions to a multiemployer plan for some or all of its employees who satisfy the plan’s eligibility conditions and are offered affordable, minimum value coverage. Under this guidance, the employer will not be treated, with respect to employees for whom the employer is required by the collective bargaining agreement to make contributions to the multiemployer plan, as failing to offer the opportunity to enroll in minimum essential coverage (subsection (a) $2,000 annual penalty). The employer will also not be subject to the $3,000 annual penalty under subsection (b) of 4980H.
Additional information is also included in the notice for the following:
- Details on when dependent coverage must be offered for employers not offering dependent coverage now
- Information on when to measure hours for employees working abroad
- Additional information for “Affordability” safe harbors
- Guidance for “layover hours”
- Guidance on “offer of coverage” when employee is employed by multiple applicable large employer members
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.