Recently, the Internal Revenue Service released two notices, Notice 2012-58 and Notice 2012-59, regarding the employer shared-responsibility penalties and the 90-day waiting period limitation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the "Act"). Both of these provisions of the Act will become effective beginning in 2014 and employers may generally rely upon the guidance under these notices through at least the end of 2014.

90-Day Waiting Period Limitation

The Act adds new Section 2708 to the Public Health Service Act (the "PHSA"). PHSA Section 2708 provides that, for plan years beginning on or after January 1, 2014, a group health plan may not impose a waiting period that exceeds 90 days. A waiting period is defined as the period that must pass before coverage for an individual that is otherwise eligible to enroll under the terms of the plan can become effective. Eligibility for coverage means having met the plan's substantive eligibility conditions (e.g., eligible job classification, achieving job-related licensure requirements, etc.).

The Act does not require any employer to offer coverage to any particular class of employees, including part-time employees. PHSA § 2708 merely prevents an otherwise eligible employee (or dependent) from having to wait more than 90 days before coverage becomes effective. Eligibility criteria that are based solely on the lapse of time may not exceed 90 days. Other eligibility criteria will generally be considered permissible unless "designed to avoid compliance with the 90-day waited period limitation."

If a plan conditions eligibility on an employee regularly working a specified number of hours per period (or working full-time), and it cannot be determined that a newly hired employee is reasonably expected to regularly work that number of hours per period (or work full-time), the plan may take a reasonable period of time to determine whether the employee meets the plan's eligibility condition, which may include a measurement period of up to 12 months that is consistent with the timeframe permitted for such determinations under Code Section 4980H (described further below).

Shared Responsibility Penalties

The Act also adds new Section 4980H to the Internal Revenue Code (the "Code"). Beginning on January 1, 2014, Code Section 4980H imposes penalties on "applicable large employers" that either:

  1. fail to offer "full-time employees" (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan and any one of their employees is certified as eligible to receive an applicable premium tax credit or cost-sharing reduction, or
  2. offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan, but such coverage is unaffordable (generally because the employee's cost for coverage under the employer's plan exceeds 9.5% of that employee's household income for the taxable year, which under Notice 2011-73 may be determined by reference to the employee's income as reported on Box 1 of his W-2) or does not provide minimum value (generally because it does not pay for at least 60% of all plan benefits without regard to co-pays, deductibles, co-insurance, and employer premium contributions), and one or more full-time employees receives an applicable premium tax credit or cost-sharing reduction.

The amount of the penalty for a failure to offer full-time employees coverage is $166.67 per each full-time employee employed by the employer, excluding the first 30 employees, for each month that no coverage is offered. Thus, the employer can be assessed a penalty on each of their employees, including those that are not certified as eligible to receive a premium tax credit or cost-sharing reduction.

On the other hand, the penalty for a failure to offer affordable or minimum value coverage is $250 per month per each employee who qualifies for and actually enrolls in a federal premium tax credit or cost-sharing reduction program. The amount of this penalty is capped at the amount that would be charged if no coverage were offered to full-time employees.

For these purposes, an "applicable large employer" is an employer that employed at least 50 full-time equivalent employees on business days during the preceding calendar year. "Full-time equivalent employees" may include both full-time and part-time employees. However, the above penalties are assessed with respect to only "full-time employees" despite the fact that all full-time equivalent employees are counted in determining whether an employer is subject to Code Section 4980H.

Code Section 4980H(c)(4) defines a "full-time employee" as "with respect to any month, an employee who is employed on average at least 30 hours of service per week."

Guidance on Determining Full-Time Employees for Purposes of Shared Responsibility Penalties

Generally, whether an employee is full-time (i.e., works an average of 30 hours or more per week) must be determined on a monthly basis under Code Section 4980H. Given the challenges with such an approach, particularly for employers with a large variable hour or seasonal workforce, IRS Notice 2012-58 permits employers to use look-back/stability safe harbors to determine whether ongoing and newly hired employees are "full-time" for purposes of Code Section 4980H. These safe harbors are designed to give employers more flexibility and provide employers and employees with more stability and predictability in their health care coverage. These safe harbors are quite complex, but described generally below.

The safe harbors permit an employer to select a fixed 3-month to 12-month "measurement period" for determining whether its employees worked an average of 30 hours per week during such measurement period. If an employee works sufficient hours during the measurement period, the employer must offer coverage to the employee during a "stability period," which generally must be no shorter than the employer's selected standard measurement period and may never be shorter than 6 full, consecutive calendar months. So long as the employee remains employed, coverage must be offered during the stability period regardless of the employee's actual hours worked during such period. An employer is also permitted to impose an optional, overlapping "administrative period" between the measurement and stability periods for determining whether employees worked sufficient hours to become eligible for coverage, notifying such employees of their plan eligibility, collecting enrollment forms, etc. This optional administrative period may not exceed 90 days.

Notice 2012-58 makes clear that an employer's selected measurement and stability periods, for both new and continuing employees, may not vary in length and/or in starting and ending dates except with respect to (1) collectively bargained and non-collectively bargained employees; (2) salaried employees and hourly employees; (3) employees of different entities; and (4) employees located in different states.

Many employers will likely elect to have their stability period coincide with their plan year. Assuming a calendar year plan with a full 12-month measurement period, such employer could elect to have its stability period run from each January 1 through December 31, its standard measurement period for ongoing employees run from October 15 through the following October 14, and an administrative open enrollment period from October 14 through January 1. Any ongoing employee who worked an average of 30 hours per week during the October 15, 2012 through October 14, 2013 period would have to be offered coverage in the employer's plan beginning January 1, 2014, and must remain covered under the Plan (so long as still employed by the employer) until December 31, 2014 regardless of the employee's actual hours worked during 2014. The employer could use the October 14, 2013 - January 1, 2014 administrative period to determine which employees worked full time during the measurement period, notify them of their plan eligibility, and allow such employees to complete any needed paperwork for plan enrollment.

Under Notice 2012-58, if a newly hired employee is reasonably expected at his or her start date to work full-time, an employer that offers coverage to such employee before the end of the employee's initial 3 calendar months of employment will not be subject to the employer responsibility penalties under Code Section 4980H. Note that compliance with this safe harbor may not necessarily ensure compliance with the 90-day waiting period limitation of PHSA Section 2708, which requires coverage that becomes effective by the 91st day after the employee becomes eligible.

For newly hired variable hour and seasonal employees, an employer may use an "initial measurement period" that is unique to each employee and reflects such employee's actual start date or may begin a new employee's initial measurement period on the first day of the calendar month following such employee's start date. In no event may the initial measurement period and administrative period for a newly hired employee extend beyond the last day of the first calendar month following the employee's start date (i.e., 13 months plus a fraction of a month). In addition, the length of the stability period for new employees must be the same length as the employer's standard stability period for ongoing employees.

In addition to tracking new employees' hours during the initial measurement period, employers will also need to track such employees' hours during the next full standard measurement period commencing after the new employee's date of hire. This period will typically overlap with the initial period. If a new hire does not become eligible for coverage during his initial measurement period, he will have a second opportunity to become eligible for coverage during this overlapping standard measurement period.

The term "seasonable employee" is not defined in the IRS notice and employers may rely upon any reasonable, good faith interpretation of the term through at least the end of 2014. An employee is a "variable hour employee" if based on the facts and circumstances at his or her start date, it cannot be determined that the employee is reasonably expected to work an average of at least 30 hours per week. The term includes employees who may work more than 30 hours per week for a period of limited duration, but are expected to work fewer hours after such period. For example, this term would include a retail worker that is expected to work more than 30 hours per week during a busy holiday season, but is not reasonably expected to work at least 30 hours per week for the portion of the initial measurement period remaining after the holiday season.

Employer Action Items

Even though the 90-day waiting period limitation and employer shared responsibility penalties do not take effect until 2014, employers should begin considering these matters immediately.

  1. Employers should determine whether their workforce warrants compliance with the Notice 2012-58 safe harbors. The safe harbors will be particularly relevant to employers with large numbers of seasonal and variable hour employees. This should be done as soon as possible, as employers may be required to begin tracking employee hours as early as October of 2012 in order to take advantage of a 12-month long measurement period.
  2. Employers should evaluate their current hours tracking systems to determine whether they are capturing sufficient data for compliance with the safe harbors.
  3. Employers using the safe harbors will need to determine what measurement, administrative, and stability periods will apply to coverage under their plans.
  4. Eligibility and coverage provisions in employer plan documents and employee communication materials should be reviewed for compliance with these requirements and amended as needed.