The Patient Protection and Affordable Care Act (the "ACA") added a new Section 4980H to the Internal Revenue Code of 1986, as amended, which generally requires employers to offer health coverage to their employees or face a penalty (the "Employer Mandate"). Following are Q&As discussing this provision. These Q&As are designed to address some of the more commonly asked questions, including which employers are subject to the mandate, who must be offered coverage to avoid a penalty, the type of coverage that must be offered to avoid that penalty, and the penalties that apply for not offering coverage. These Q&As were initially prepared based on proposed regulations but have been updated to reflect the final regulations issued on February 12, 2014. 

  1. What is the Employer Mandate?
  2. Who is Eligible for a Premium Tax Credit or Cost-Sharing Reduction?
  3. When is the Employer Mandate Effective, and What Transition Rules Apply?
  4. Which Employers are Subject to the Employer Mandate?
  5. Who Must Be Offered Coverage?
  6. What are the Methods for Determining "Full-Time" Status?
  7. What Health Coverage Satisfies the Employer Mandate?
  8. What is the Penalty for Noncompliance and How is it Collected? 

Q&A 1: What Is the Employer Mandate? 

On January 1, 2015, the Employer Mandate will change the landscape of health care in the U.S. by requiring large employers to offer health coverage to full-time employees and their natural and adopted children up to age 26 or risk paying a penalty. Large employers will be forced to make a choice: to either "play" by offering affordable health coverage that provides minimum value or "pay" by potentially owing a penalty to the Internal Revenue Service if they fail to offer such coverage. This "play or pay" scheme, called "shared responsibility" in the statute, has become known as the Employer Mandate. Although the effective date of the Employer Mandate has generally been deferred until January 1, 2015, the effective date is further deferred for employers with non-calendar year plans that meet certain requirements, as well as for certain smaller employers.  

Only "large employers" are required to comply with the Employer Mandate. Generally speaking, "large employers" are employers that had an average of 50 or more full-time and full-time equivalent employees on business days during the preceding year. However, this threshold is 100 full-time and full-time equivalent employees for the 2015 calendar year only. "Full-time employees" include all employees who work at least 30 hours on average each week. The number of "full-time equivalent employees" is determined by aggregating the hours worked by all non-full-time employees. In determining large employer status, certain related employers under common control are considered to be a single employer. (However, as discussed below, while large employer status is determined based on counting the full-time employees and full-time equivalents of all members of a group of related employers under common control, whether any penalty is owed and the amount of such penalty is calculated separately for each related employer.)  

To "play" under the Employer Mandate, a large employer must offer health coverage that is "minimum essential coverage," is "affordable," and satisfies a "minimum value" requirement to its full-time employees and their children. "Minimum essential coverage" includes coverage under an employer-sponsored group health plan, whether it be fully insured or self-insured, but does not include stand-alone dental or vision coverage, employee assistance plans, or flexible spending accounts. For this purpose, employer-sponsored group health coverage may include coverage offered on behalf of an employer by a multiemployer plan, Multiple Employer Welfare Arrangement ("MEWA"), or staffing organization (provided certain requirements are satisfied). Coverage is "affordable" if an employee’s required contribution for the lowest-cost self-only coverage option offered by the employer does not exceed 9.5 percent of the employee’s household income. Coverage provides "minimum value" if the plan’s share of the actuarially projected cost of covered benefits is at least 60 percent. More detail about these requirements is included in later Q&As. 

If a large employer does not "play" for some or all of its full-time employees, the employer will have to pay a penalty in two scenarios.  

The first scenario occurs when an employer does not offer health coverage to "substantially all" of its full-time employees and any one of its full-time employees both enrolls in health coverage offered through a state insurance exchange, which is also called a marketplace (an "Exchange"), and receives a premium tax credit or a cost-sharing reduction (an "Exchange subsidy"). In this scenario, the employer will owe a "no coverage penalty." The no coverage penalty is $2,000 per year (adjusted for inflation after 2014) for each of the employer’s full-time employees, excluding the first 80 employees for the 2015 calendar year and the first 30 for years thereafter. This is the penalty that an employer should be prepared to pay if contemplating not offering group health coverage to its employees. 

The second scenario occurs when an employer does provide health coverage to its employees, but that coverage is deemed inadequate for Employer Mandate purposes, either because it is not "affordable," it does not provide at least "minimum value," or the employer offers coverage to substantially all (but not all) of its full-time employees, andone or more of its full-time employees both enrolls in Exchange coverage and receives an Exchange subsidy. In this second scenario, the employer will owe an "inadequate coverage penalty." The inadequate coverage penalty is $3,000 per year (also adjusted for inflation after 2014) and is calculated based not on the employer’s total number of full-time employees (as is the case for the no coverage penalty) but only on each full-time employee who receives an Exchange subsidy. Furthermore, the penalty is capped by the maximum potential "no coverage penalty" discussed above. 

Because Exchange subsidies are available only to individuals with household incomes of at least 100 percent and up to 400 percent of the federal poverty line (in 2015, a maximum of $46,680 for an individual and $95,400 for a family of four), employers that pay relatively high wages may not be at risk for the penalty, even if they fail to provide coverage that satisfies the affordability and minimum value requirements. Likewise, because Exchange subsidies are not available to individuals who are eligible for Medicaid, employers may be partially immune to the penalty with respect to their low-wage employees, particularly in states that elect the Medicaid expansion. To be sure, Medicaid eligibility is based on household income. Because an employee’s household may have more income than the wages he or she receives from the employer, the employee might not be Medicaid eligible, even though the employer pays a very low wage. Thus, it may be difficult for an employer to assume its low-paid employees will be eligible for Medicaid and not eligible for Exchange subsidies. But for employers with low-wage workforces, examination of the extent to which the workforce is Medicaid-eligible may be worth exploring. 

In addition, Exchange subsidies will not be available to any employee whose employer offers the employee affordable coverage that provides minimum value. Thus, by "playing" for employees who would otherwise be eligible for an Exchange subsidy, employers can ensure that they are not subject to any penalty, even if they don’t "play" for all employees.

Q&A 2: Who Is Eligible for a Premium Tax Credit or Cost-Sharing Reduction? 

As noted in Q&A 1, merely failing to offer full-time employees minimum essential coverage, or coverage that meets the affordability or minimum value requirements, is not enough to trigger liability under the Employer Mandate. Two additional things must occur before any penalty will be assessed. First, one of the employer’s full-time employees must enroll in health coverage offered through an Exchange. Second, that full-time employee must receive an Exchange subsidy (a premium tax credit or cost-sharing reduction). Thus, an employer should consider which of its employees are potentially eligible for an Exchange subsidy when deciding how to comply with the Employer Mandate. Premium tax credits are claimed on a single Form 1040 for the taxpayer and all tax dependents; receipt of an Exchange subsidy by an employee’s dependent who is not a tax dependent of the employee will not give rise to an Employer Mandate penalty.

Coverage Through an Exchange

In order to be eligible to receive an Exchange subsidy, an individual must enroll in health coverage offered through an Exchange. Under the ACA, an Exchange has been established in each state, either by the state or by the federal government (or a combination of the two). An Exchange is a governmental entity or nonprofit organization that serves as a marketplace for health insurance for individuals and small employers. Health insurance offered through the Exchanges must cover a minimum set of specified benefits and must be issued by an insurer that has complied with certain licensing and regulatory requirements.

Eligibility for an Exchange Subsidy

There are two Exchange subsidies available: the premium tax credit and the cost-sharing reduction. The premium tax credit is intended to help individuals and families purchase health coverage through an Exchange. The credit is available only to legal U.S. residents whose household income is 100 percent to 400 percent of the federal poverty line ("FPL"). Legal resident aliens also qualify for the credit if their household income is below 100 percent of the federal poverty line and they are not eligible for Medicaid because they are aliens. Individuals who are eligible for Medicaid or Medicare, or certain other government-sponsored coverage like the Children’s Health Insurance Program ("CHIP") – a Medicaid-like program for children, or veterans’ health care, are not eligible for premium tax credits.

The FPL is set annually by the U.S. Department of Health and Human Services ("HHS") and is based on household size. For 2015, the FPL in the continental U.S. is $11,670 for an individual and $23,850 for a family of four; 400 percent of the FPL is $46,680 for an individual and $95,400 for a family of four. The amounts are slightly higher in Alaska and Hawaii.

An individual is not eligible for a premium tax credit if the individual is either (i) enrolled in an employer-sponsored plan or (ii) eligible for an employer-sponsored plan that meets the affordability and minimum value requirements.

Cost-sharing reductions, which reduce cost-sharing amounts such as copays and deductibles, are available to individuals who have a household income no greater than 250 percent of the FPL and enroll in "silver-level" coverage through an Exchange. An individual whose household income is, for example, 200 percent of the FPL may therefore be eligible for a premium tax credit to help defray the cost of monthly insurance premiums, and a cost-sharing reduction to help reduce the amount of out-of-pocket copays and deductibles to which the Exchange-enrolled individual otherwise would be subject. 

 "Certification" of Eligibility for an Exchange Subsidy to Employer

The Employer Mandate penalty applies only when the employer has first received "certification" that one or more employees have received an Exchange subsidy. The IRS will provide this certification as part of its process for determining whether an employer is liable for the penalty, which will occur no earlier than the calendar year following the year for which the employee received the Exchange subsidy. Under procedures to be issued by the IRS, employers that receive one or more certifications will be given an opportunity to contest the certification before any penalty is assessed.

In addition, Exchanges are required to notify employers that an employee has been determined eligible to receive an Exchange subsidy. The notification, provided contemporaneously with the determination, will identify the employee, indicate that the employee has been determined eligible to receive an Exchange subsidy, indicate that the employer may be liable for an Employer Mandate penalty, and notify the employer of the right to appeal the determination. (It appears that most Exchanges did not send these notices during the first open enrollment period.) These notices will be useful in giving employers an opportunity to correct erroneous Exchange information and protect against erroneous penalty notices from the IRS. These notices also will be useful in budgeting for any penalties that may be owed. However, employers should be aware that because the standard for what is affordable coverage is different for employees than it is for employers, it is possible for an individual to be eligible for a premium tax credit, even though the employer’s coverage is "affordable" under the Employer Mandate rules. Therefore, employers should be wary of contesting an employee’s premium tax credit eligibility. If, on the other hand, an employee receives this notification regarding a person who is not an employee (for example, an independent contractor), the employer would be well served to correct the error.

Planning Consideration

The Employer Mandate penalty applies only to an employer failing to offer health coverage if one or more of its full-time employees enrolls in insurance coverage through an Exchange, and actually receives an Exchange subsidy. Unless a full-time employee enrolls in coverage through an Exchange and obtains an Exchange subsidy, the employer is off the hook. This can lead to some surprising exemptions from the penalty.

Assume Employer X is a software development company with 50 full-time employees—40 are software developers whose annual income exceeds $120,000, and 10 are administrative assistants with annual income, after overtime, of no more than $40,000. None of the 40 software developers will be eligible for an Exchange subsidy; they are too highly compensated. Thus, Employer X is in a position of being able to avoid the penalty merely by offering health coverage to 10 of its 50 employees, which it should be able to obtain on a small business (SHOP) Exchange. It may exclude its 40 highly compensated employees from eligibility for this coverage (or require them to pay the full cost of coverage) without being exposed to the Employer Mandate penalty. And by either narrowing the eligibility for health coverage only to its 10 administrative assistants, or passing on the full cost of coverage to its software developers, it considerably reduces the risk of having to bear the inflation in health costs associated with providing health coverage to the entire workforce.

This method of avoiding the Employer Mandate penalty can also be used with employees of larger employers whose income is too high for them to qualify for a premium tax credit. It should be noted that it is possible to avoid the Employer Mandate penalty but, at the same time, incur liability under certain nondiscrimination rules. Therefore, any new structure should be reviewed for compliance under both sets of rules.

Q&A 3: When Is the Employer Mandate Effective, and What Transition Rules Apply?

The Employer Mandate was originally scheduled to take effect as of January 1, 2014; however, the IRS granted transition relief under which no Employer Mandate penalty will be assessed through 2014. Large employers are generally now subject to the Employer Mandate beginning on January 1, 2015. The effective date is further deferred for employers that sponsor non-calendar year health plans if certain requirements are met, and for certain smaller employers. There are also special transition rules for offering coverage for January 2015, offering coverage to dependents, offering coverage through multiemployer plans, determining large employer status, and determining who is a full-time employee.

Non-Calendar Year Health Plans

An employer with a health plan maintained on a non-calendar year basis faces unique challenges in complying with the Employer Mandate. Because terms and conditions of coverage may be difficult to change mid-year, a January 1, 2015 effective date would, in many cases, force employers with non-calendar year plans to be compliant for the entire fiscal 2014 plan year. Recognizing the potential burdens, the IRS has granted special transition relief for employers that maintained non-calendar year health plans as of December 27, 2012 and did not modify the plan year after December 27, 2012 to begin at a later date. These transition relief rules apply separately to each employer in a group of related employers under common control.

The first transition rule applies just to full-time employees who are eligible for coverage under the pre-2015 plan terms. Specifically, under the first transition rule, an employer will not be subject to a penalty for the period prior to the first day of the 2015 non-calendar plan year based on any full-time employee who, under the 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. The transition rule applies only if that employee is offered coverage no later than the first day of the 2015 plan year that otherwise meets the requirements of the Employer Mandate.

The second transition rule is broader and applies to all full-time employees, even those who are only eligible for coverage due to a change in eligibility effective for the 2015 plan year. The second transition rule applies for employers that have covered (or offered coverage to) a significant percentage of their employees. A separate threshold is used depending on whether the test is applied with reference to all employees or restricted only to full-time employees. This transition rule applies if an employer has one or more non-calendar year plans (that each have the same plan year as of December 27, 2012) and, collectively, either:

  1. actually covered at least one quarter of the employer’s employees (or one third of the full-time employees) as of any date in the 12 months ending on February 9, 2014, or 
  2. offered coverage to at least one third of the employer’s employees (or one half of the full-time employees) during the most recent open enrollment period that ended prior to February 9, 2014. 

If one of these prerequisites is met, the employer will not be subject to a penalty for the period prior to the first day of the 2015 non-calendar year plan year on the basis of any full-time employee who (i) is offered coverage, no later than the first day of the 2015 plan year, that otherwise meets the requirements of the Employer Mandate, and (ii) would not have been eligible for coverage under any calendar year group health plan maintained by the employer as of February 9, 2014. 

Employers With Fewer Than 100 Full-Time and Full-Time Equivalent Employees

The final regulations provide that no Employer Mandate penalty will be assessed for the 2015 plan year for employers with at least 50, but fewer than 100, full-time employees or full-time equivalent employees, if the following conditions are met: (i) the employer does not reduce the size of its work force during 2014 in order to qualify for this relief, (ii) the employer generally maintains the same level of coverage it provided as of February 9, 2014, and (iii) the employer certifies to the IRS that it meets the eligibility requirements for this relief.

Offers of Coverage for January 2015

To be treated as offering coverage for the month, a large employer must, in general, offer coverage to a full-time employee on all of the days of a calendar month. Solely for purposes of January 2015, if a large employer offers coverage to a full-time employee by the first day of the first payroll period beginning in January 2015, the employer will be treated as having offered coverage to the individual for January 2015.

Coverage of Dependents

To avoid the Employer Mandate penalty, large employers must offer coverage not just to their full-time employees but also to their employees’ dependents. A "dependent" for this purpose is defined as a full-time employee’s natural or adopted child, or a child placed with the employee for adoption, but only through the end of the month in which the child turns age 26. A dependent does not include a spouse or domestic partner, a stepchild, or a foster child. It also does not include a child who is not a citizen or national of the U.S. unless the child is either a resident of the U.S., Canada, or Mexico, or is a tax dependent due to being placed for adoption. Because this requirement may result in changes to eligibility for some employer-sponsored plans, the IRS is providing transition relief for 2015. As long as employers "take steps" during the 2015 plan year to comply and offer coverage that meets this requirement no later than the beginning of the 2016 plan year, no penalty will be imposed during the 2015 plan year solely due to the failure of the employer to offer coverage to dependents. This relief, however, is not available to the extent dependent coverage was offered for the 2013 and 2014 plan years and subsequently dropped.

Multiemployer Plans

Multiemployer plans represent a special circumstance because their unique structure complicates application of the Employer Mandate rules. These plans are operated under collective bargaining agreements and include multiple participating employers. Typically, an employee’s eligibility under the terms of the plan is determined by considering the employee’s hours of service for all participating employers, even though those employers generally are unrelated. Moreover, contributions may be made on a basis other than hours worked, such as days worked, projects completed, or a percentage of earnings. Thus, it may be difficult for some participating employers or the plan to determine how many hours a particular employee has worked over any given period of time or whether a given employee is eligible for coverage under the plan.

To ease the administrative burden faced by employers participating in multiemployer plans, special interim guidance has been issued. (Any future guidance that limits the scope of the interim guidance will be applied prospectively and will apply no earlier than January 1 of the calendar year beginning at least six months after the date of such guidance.) The interim rule applies if an employer is required to contribute to a multiemployer plan with respect to some or all of its employees under a collective bargaining agreement or participation agreement, and the multiemployer plan offers coverage to eligible individuals and their dependents that is affordable and provides minimum value. If the interim rule applies, the employer will be treated as offering Employer Mandate compliant coverage to employees for whom the employer is required to make contributions regardless of whether they are in fact eligible under the terms of the multiemployer plan. To determine affordability, in addition to the safe harbors discussed in Q&A 7, coverage under a multiemployer plan will be considered affordable if the employee’s required contribution, if any, toward self-only health coverage under the plan does not exceed 9.5 percent of the wages reported to the qualified multiemployer plan (which may be determined based on actual wages or an hourly rate under the applicable collective bargaining agreement).

This rule applies only to an employer’s employees for whom the employer makes contributions to the multiemployer plan; the employer must comply with the Employer Mandate under the general rules with respect to its other full-time employees. In addition to this interim guidance, as discussed in Q&A 8, the final regulations treat an offer of coverage from a multiemployer plan as an offer of coverage made on behalf of the contributing employer.

Determining Large Employer Status and Who is a Full-Time Employee

The IRS has also issued transition rules for determining large employer status and determining who is a full-time employee. In general, large employer status is determined based on the number of employees employed during the immediately preceding year. In order to allow employers to have sufficient time to prepare for the Employer Mandate before the beginning of 2015, for purposes of determining large employer status for 2015 only, employers may use a period of not less than six consecutive calendar months in 2014 to determine their status for 2015 (rather than using the entire 2014 calendar year). See Q&A 4 for a discussion of the general rule for determining who is a large employer. Likewise, employers may use a special transition measurement period for purposes of determining whether certain employees who work variable schedules are to be considered full-time employees for the 2015 plan year. See Q&A 6 for a discussion of how worker schedules can affect the determination of full-time or part-time status.

Q&A 4: Which Employers Are Subject to the Employer Mandate? 

Beginning January 1, 2015, the Employer Mandate requires "large employers" to offer health coverage to full-time employees and their children or risk paying a penalty. The Employer Mandate applies not only to for-profit employers but also to federal, state, local, and Indian tribal governmental entities, as well as to tax-exempt organizations.

Large Employers

An employer is a "large employer" for a calendar year if it employed an average of at least 50 full-time and full-time equivalent employees on business days during the preceding calendar year. The threshold is increased to 100 for the 2015 calendar year only. The following discussion is intended to help employers determine the employees who must be counted and how to calculate the number of full-time and full-time equivalent employees.

Related Employers In a Controlled Group

Groups of related employers that are in a controlled group are treated as a single employer for purposes of determining large employer status, although Employer Mandate penalties are determined separately for each employer. Whether employers are in a controlled group is determined under the same rules that apply to tax qualified retirement plans, often called the controlled group rules, which are found in Sections 414(b), (c), (m), and (o) of the Internal Revenue Code. Companies in a controlled group include (i) parent-subsidiary groups (80 percent ownership threshold); (ii) brother-sister groups (five or fewer persons owning at least 50 percent of each entity); (iii) groups consisting of three or more corporations that are a combination of parent-subsidiary and brother-sister groups; (iv) trades or businesses (whether or not incorporated) that are under common control; and (v) affiliated service groups consisting of a service organization (such as a doctor’s practice) and another related organization that provides services to or with the first organization (such as the office administrative staff if employed by a separate organization). In the context of non-profit organizations, the controlled group rules are applied based on control of the board, rather than on ownership. Church entities may be treated as separate if certain requirements are met.

For example, suppose Company A owns 85 percent of the voting stock of each of Company B and Company C. Company A has 25 full-time employees, while Companies B and C each have 40 full-time employees. None of these companies is subject to the Employer Mandate on its own. However, because Company A owns more than 80 percent of the voting stock of each of Companies B and C, the three companies are members of a controlled group, and the employees of all three companies are aggregated to determine large employer status. Thus, all three companies are large employers subject to the Employer Mandate because together they employ 105 full-time employees.

Definition of Employee

Under the Employer Mandate, the term "employee" means a common law employee. Generally speaking, an individual who provides services to an employer is a common law employee if the employer has the authority to direct and control the manner in which services will be performed by the employee. An employer need not actually direct and control the work; the mere right to do so creates the employment relationship. Under the final regulations, sole proprietors, partners in partnerships, two-percent shareholders in Subchapter S corporations, qualified real estate agents, and certain direct sellers are not considered to be "employees" for purposes of the Employer Mandate. In addition, the special rule that requires leased employees to be treated as employees of the service recipient for purposes of qualified retirement plans does not apply for the Employer Mandate. Rather, whether the leasing company or the client has the obligation to offer coverage to a leased employee is based on which of the two is the common law employee.

Definition of "Full-Time Employee"

In general, a full-time employee is a common law employee who is credited with an average of at least 30 hours of service each week or 130 hours of service each calendar month. A more detailed discussion of who is a full-time employee is provided in Q&A 5 and 6, including treatment of variable-hour employees, seasonal employees, and rehires.

Determination of Full-Time Equivalent Employees

The term "full-time equivalent employees" reflects the number of full-time employees an employer would have based on the hours for all employees who are not full-time employees (under the definition above). To determine the number of full-time equivalent employees for a calendar month, you first calculate the aggregate hours of service (including fractional hours, but not including more than 120 for any one employee) for all employees who are not full-time employees for that month. Then, you divide the total number of hours worked by non-full-time employees by 120. 

For example, an employer has 40 employees who each have 90 hours of service per calendar month during 2014. This means the employer has 30 full-time equivalent employees for each calendar month in 2014 (40 employees x 90 hours = 3,600 hours, which divided by 120 hours equals 30).

Full-time equivalent employees are counted solely for purposes of determining whether an employer is a large employer. There is no penalty for failing to offer coverage to any employee who is not a full-time employee.

Determining Large Employer Status

To determine whether an employer is a large employer, you add the number of full-time employees and the number of full-time equivalent employees for each calendar month of the prior year and divide the total by 12 to determine the average. If this number is 50 or higher (100 or higher for purposes of 2015 only), the employer is a "large employer" for the current year and is subject to the Employer Mandate, unless an exception applies as discussed below. Remember that for members of a controlled group, this calculation includes employees of all related employers under common control.

In determining large employer status for 2015, a transition rule applies. Under the rule, an employer may use a period of not less than six consecutive calendar months in 2014 to determine its status as a large employer for 2015 (rather than using the entire 2014 calendar year). This allows an employer to determine by as early as mid-2014 whether it is subject to the Employer Mandate for 2015 and, if so, to have sufficient time to assess its response prior to open enrollment for 2015.

Example of calculation for determining large employer status for years after 2015: Assume that for each of the first six calendar months of a year, Company C has 32 full-time employees and 30 non-full-time employees (whose hours equate to 15 full-time equivalent employees). Company C’s business increases during the last half of that year, and all the persons who were non-full-time employees during the first half of the year work enough hours to be full-time employees for each of the last six calendar months. In other words, Company C has 62 full-time employees for the last six months of 2015. To determine whether Company C is a large employer for the next year, add the number of full-time and full-time equivalent employees it has for each month of the year and then divide the total by 12, illustrated as follows:

Click here to view table.

654 divided by 12 equals 54.5, which is rounded down to the next lowest whole number. Thus, Company C has an average of 54 full-time or full-time equivalent employees for the year. Because this number is at least 50, Company C is treated as a large employer for the following year.

Example of calculation for determining large employer status for 2015: Assume that for each of the first six calendar months of 2014, Company B has 32 full-time employees and 30 non-full-time employees (whose hours equate to 15 full-time equivalent employees). Company B’s business increases during the last half of that year, and all the persons who were non-full-time employees during the first half of the year work enough hours to be full-time employees for each of the last six calendar months. In addition, Company B hires an additional 40 employees for each of the last six calendar months of 2014. Thus, Company B has 102 full-time employees for the last six months of 2015. Under the special transition rule, to determine whether Company B is a large employer for 2015, you only need to use the number of full-time and full-time equivalent employees it has for six consecutive months of 2014, add these amounts together and then divide by 6, illustrated as follows:

Click here to view table.

Because Company B had fewer full-time and full-time equivalent employees in the first six months of 2014, it is more advantageous to use those six months in determining whether Company B is a large employer for 2015. Any six consecutive months in 2014 may be used under the special transition rule. The total for the first six months is 282 (47 for each of six months) and 282 divided by 6 equals 47. Thus, Company B has an average of 47 full-time or full-time equivalent employees for the year. Because this number is less than 100, Company B is treated as not being a large employer for 2015 and is not subject to the Employer Mandate. However, because large employer status must be determined every year, if Company B continues to employ 102 full-time employees throughout 2015, or even a lesser number that is 50 or higher, Company B will be a large employer and subject to the Employer Mandate in 2016.

Seasonal Worker Exception

Seasonal workers generally are included in the count of full-time and full-time equivalent employees. However, a special rule applies to employers that exceed the 50 full-time equivalent employee threshold for only part of a year, solely because of a seasonal workforce. If the employer has more than 50 full-time and full-time equivalent employees for periods totaling 120 days or less (or totaling four months or less) during a calendar year, and the full-time and full-time equivalent employees in excess of 50 during that period or periods were seasonal workers, the employer is not subject to the Employer Mandate during the following calendar year. Seasonal workers include individuals employed to do work that is exclusively performed at certain seasons of the year, for example, seasonal agricultural workers and retail workers employed only during holiday seasons. Thus, for example, a summer resort that has a large work force of full-time employees for a 100-day vacation season and a small staff that stays year-round would not be a large employer even if the summer increase caused the average number of full-time employees for the year to be over 50. Until further guidance is issued, employers are permitted to make a reasonable, good-faith determination of who is a seasonal worker.

New Employers and Successor Employers

An employer that did not previously exist is a large employer for the current calendar year if it reasonably expects to employ an average of at least 50 full-time and full-time equivalent employees on business days during the current calendar year (100 for purposes of 2015 only). An employer that is a "successor employer" must take into account any predecessor employers for purposes of determining large employer status.

Foreign Employers and Foreign Employees

An employee’s hours worked outside of the U.S. for which the employee does not receive U.S. source income are disregarded, both for purposes of determining large employer status and for purposes of determining whether the worker is a full-time employee. Thus, for example, a U.S. entity that is a member of a multinational controlled group may, for purposes of determining whether it is a large employer, exclude individuals who do not work in the U.S. at all, even if they are U.S. citizens. 

Planning Consideration

Employers that are part of a controlled group have a planning opportunity because the Employer Mandate penalty applies separately to each related employer in the controlled group. To illustrate, assume there are three companies in a controlled group that together have more than 50 full-time employees and full-time equivalents, so all three companies are subject to the Employer Mandate. Two of the companies offer coverage to their employees and the third does not. The Employer Mandate penalty applies only to the third company and is computed only with respect to the third company’s employees. Because the penalty applies separately to each related employer, a controlled group can substantially reduce the aggregate amount of the "no coverage" penalty, in particular, if it is able to assign employees who are offered coverage to work under the direction and control of different subsidiaries from those that do not offer coverage. In considering this option, however, it is important for employers to be aware that there are nondiscrimination rules (and penalties) related to providing health coverage, which apply on a controlled group basis. The nondiscrimination rules for self-insured plans are already in force through long-standing regulations. The rules for fully insured plans have not yet been issued. Additional nondiscrimination rules apply if employee contributions are paid through a cafeteria plan. Therefore, employers will want to evaluate implications under the nondiscrimination provisions before engaging in any restructuring designed to limit Employer Mandate penalties.

Q&A 5: Who Must Be Offered Coverage?

Under the Employer Mandate, large employers are required to offer health coverage to full-time employees and certain of their dependents. This Q&A describes who falls into the categories of "full-time employees" and "dependents" who must be offered coverage, as well as a provision that allows employers to avoid the "no coverage" penalty if coverage is offered to "substantially all" full-time employees. 

Under the Employer Mandate, the term "employee" means a common law employee. As described in more detail in Q&A 4, an individual who provides services to an employer is a common law employee if the employer has the authority to direct and control the manner in which services will be performed by the employee.

Dangers of Worker Misclassification

In the context of employment taxes, employers may be afforded relief from liability under section 530 of the Revenue Act of 1978 for misclassifying an individual as an independent contractor, unless the employer had no reasonable basis for not treating the individual as an employee. The preamble to the final Employer Mandate regulations, however, makes clear that similar relief is NOT available with respect to worker misclassification in the context of liability for the Employer Mandate penalty. Thus, if workers were treated as independent contractors (or employees of another entity, like a leasing organization) and not offered health coverage by an employer, are later reclassified as employees of the employer for past periods, and those workers had sufficient hours of service to be full-time employees for such past periods, the reclassification may impact whether the employer is subject to an assessable penalty for the failure to offer coverage to substantially all of its full-time employees for a particular calendar month. In addition, even if the reclassification does not result in the employer failing to cover substantially all of its full-time employees, the employer could still be liable for an assessable payment for a particular employee if that reclassified full-time employee received an Exchange subsidy.

Definition of "Full-Time Employee"

For purposes of the Employer Mandate, a "full-time employee" is a common law employee who is credited with an average of at least 30 "hours of service" per week for an employer (including all related employers in a controlled group). Employers may elect to treat 130 hours of service in a calendar month as equivalent to 30 hours of service per week. In addition, as discussed in Q&A 6, if the monthly method is used to determine who is a full-time employee, a special weekly equivalency may be applied in order to align the determination with standard pay periods. Note that this threshold for full-time status is different from, for example, the 40-hour threshold for overtime eligibility under the Fair Labor Standards Act.

An employee’s "hours of service" include all hours for which the employee is paid or entitled to payment from an employer (including all related employers in a controlled group) for performing services or for holidays, vacation, sick leave, jury duty, layoff, military duty, or other leave of absence. However, hours of service performed outside the U.S. are not taken into account, except in the rare case when the compensation for those services is considered U.S. source income for tax purposes. Special rules are provided for determining hours of service for adjunct faculty to take into account preparation for class as well as for airline employees and others who have special scheduling requirements to account for such things as layovers.

Note that an individual who has more than one role (for example, an employee director) may constitute an employee to the extent, and for the number of hours, that the individual serves as an employee. In this case, an employer will need to calculate how many of the individual’s hours of service constitute "employee" hours when determining whether the individual is a "full-time employee" entitled to coverage.

Coverage for "Substantially All" Full-Time Employees

The statutory language of the Employer Mandate applies a penalty if an employer fails to offer coverage to "its employees." To avoid the harsh result that would come from reading the language to require the employer to cover all of its employees, the regulations treat an employer as having offered coverage to its full-time employees during any month if it offers coverage to all but the greater of five full-time employees or five percent of its full-time employees. This rule applies whether the failure to offer coverage is intentional or unintentional. However, this rule does not shield the employer from the penalty for offering inadequate coverage if any of the full-time employees, including those who are not offered coverage at all, receive an Exchange subsidy (a premium tax credit or cost-sharing reduction) for purchasing coverage through an Exchange. For the 2015 plan year only, the final regulations provide transition relief under which an employer will be treated as offering coverage to its employees if the employer offers coverage to at least 70 percent of its full-time employees. 

Planning Consideration

The news media have highlighted stories about employers considering limiting employee hours to less than 30 per week to keep their employees from being treated as full-time for purposes of the Employer Mandate. Based on current guidance, this may be a viable option for reducing the potential Employer Mandate liability. Of course, employers will need to consider whether this is a realistic strategy from a business perspective. In addition, employers should be aware that certain nondiscrimination laws may impact whether and how employee hours can be limited. First, ERISA section 510 (29 U.S.C. § 1140) prohibits "discrimination against a participant … for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan…." At present, there is no regulatory guidance on how this section may apply to employer actions to limit employee hours when they would cause the affected employees to lose eligibility to participate in the employer’s group health plan. Second, under current nondiscrimination rules for self-insured health plans, employees who work at least 25 hours per week may need to be taken into account in determining whether the health coverage improperly discriminates in favor of highly compensated individuals. Therefore, in making decisions about limiting hours or limiting coverage to employees with certain hours, employers should consider the impact of applicable nondiscrimination rules.

Estimation of Hours for Salaried Employees

In general, an employer must calculate an employee’s hours of service based on the actual number of hours for which the employee is paid or entitled to pay. However, in the case of salaried employees (where hours typically are not tracked), employers can estimate an employee’s hours of service using one of two methods: the "days-worked method" and the "weeks-worked method."

Under the days-worked method, each salaried employee is treated as having eight hours of service for each day on which the employee has at least one actual hour of service. Under the weeks-worked method, each salaried employee is treated as having 40 hours of service for each week during which the employee has at least one actual hour of service.

An employer may apply a different estimation method to different categories of salaried employees, as long as the categories used are reasonable and applied consistently. However, an estimation method may be used only if it generally reflects the employee’s actual hours of service. For example, if an employee generally works three 10-hour days per week (30 hours of service per week), the days-worked method could not be used because it would understate the employee’s hours of service by crediting the employee with only 24 hours of service (3 days x 8 hours of service). This would cause the employee to be treated as a part-time employee rather than a full-time employee. In addition, the estimation method may not be used if the result is to understate the hours of service of a substantial number of employees (even if no particular employee’s hours of service are substantially understated).

Nonresident Alien Employees

Employers with a global presence need not offer coverage to employees who work abroad and have no U.S. source income. Generally, income is not considered to be from a U.S. source if the services to which it relates are performed outside of the U.S. Accordingly, large employers generally do not need to offer coverage to nonresident aliens and U.S. citizens working in another country.

Resident aliens who are paid for services performed in the U.S., however, do receive U.S. source income. Further, such individuals are eligible for a premium tax credit if their household income is at or below 400 percent of the poverty line and they are not eligible for coverage provided by their home country. Therefore, resident alien employees who work in the U.S. may have to be considered when determining whether an employer owes an Employer Mandate penalty.

Definition of "Dependent" 

The Employer Mandate requires large employers to offer coverage not only to full-time employees, but also to their "dependents." Significantly, the regulations exclude spouses from the definition of dependent; thus, employers need not offer coverage to the spouses of employees in order to avoid a penalty.

The definition of "dependent" instead includes only an employee’s children who are below the age of 26. A child includes a natural child, an adopted child, and a child placed with the employee for adoption. The term does not include a stepchild or a foster child. In addition, it does not include a child who is not a citizen or national of the U.S. unless such child is a legal resident of the U.S., Canada or Mexico or a tax dependent due to being placed for adoption. 

Large employers that currently offer coverage to their employees, but not to all individuals who meet this definition of "child," will need to expand the eligibility provisions of their plans in order to avoid a penalty. Recognizing the magnitude of this change for employers, the IRS has issued transition relief to the effect that such employers will not incur a penalty for the 2015 plan year due solely to the failure to cover dependents, provided that they "take steps" during the 2015 plan year to comply with the requirement to offer coverage to dependents, and dependent coverage is offered no later than the beginning of the 2016 plan year. This relief is not available to the extent the employer offered dependent coverage during either the 2013 or 2014 plan years.

Delinquent Premium Payments

The final regulations provide that an employer will be deemed to have offered coverage (and not be subject to a penalty) if an employee was initially enrolled for the year but then terminated due to the employee’s failure to timely pay premiums. The employer will be deemed to have offered coverage for the remainder of the "coverage period," which generally is the remainder of the plan year. Thereafter, the employer will again have to offer coverage to the employee. The final regulations incorporate the COBRA rules governing the timeframes for payment of premiums to determine when this rule applies.

Planning Consideration

To comply with the Employer Mandate and avoid a penalty, a large employer must offer coverage to full-time employees and their dependents. "Dependent" is defined as a child of an employee who is under age 26, meaning an employee’s natural or adopted child. Spouses, however, are not included in the definition of dependent. Due to the increasing cost of coverage, some employers are revising eligibility rules to limit spousal coverage to those spouses who are not eligible for coverage through their own employer. Because employees are likely to prefer having all family members enrolled in the same coverage when possible, if many employers in a geographic area have this restriction on spousal coverage, the employers who do not may find more spouses enrolling, and more dependents as well. Employers should consider whether changes to their own eligibility rules are warranted.

Q&A 6: What Are the Methods for Determining "Full-Time" Status? 

As discussed in Q&A 5, for purposes of the Employer Mandate, a "full-time" employee is an employee who is credited with on average at least 30 hours of service per week, or 130 hours of service in a calendar month. The final regulations provide two methods that employers may use to determine who is a "full-time" employee: (i) the monthly method and (ii) the look-back method.

Different Methods for Different Categories of Employees

An employer does not have to use the same measurement method for all employees. It may use either the monthly method or the look-back method for different categories of employees as long as those different categories are based on the following parameters: (i) collectively bargained and non-collectively bargained employees, (ii) each group of collectively bargained employees covered by a separate bargaining agreement, (iii) salaried and hourly employees, and (iv) employees employed in different states. Likewise, each related employer in a controlled group does not have to use the same method that is used by other members of its controlled group. (See Q&A 4 for a brief overview of the controlled group rules.) The employer, however, is not free to develop its own customized categories of employees. In particular, the preamble to the final regulations makes clear that the employer may not adopt the look-back method for variable-hour and seasonal employees while using the monthly method for employees with predictable hours of service.

The Monthly Method

Employers may identify full-time employees by counting their hours of service each month, either based on the calendar month or in connection with their payroll period under the weekly rule.

Weekly Rule. As an alternative to counting employees’ hours each calendar month, the final regulations allow employers to align the recordkeeping requirements for the monthly method with the employer’s payroll periods. Under the weekly rule, an employer can determine an employee’s status for a calendar month based on hours of service over successive one-week periods (i.e., any consecutive seven-day period). The determination of an employee’s full-time status may be based on hours credited over four-week periods for some calendar months and five-week periods for the remaining calendar months. An employee is treated as full-time if he or she is credited with at least 120 hours of service in a four-week period or at least 150 hours of service in a five-week period.

Even if an employer chooses to determine an employee’s status as full-time or non-full-time based on weekly periods, the employer must offer the employee coverage for the entire calendar month to avoid the Employer Mandate penalties.

Rehires and Breaks in Service. An employee who resumes active employment after at least 13 consecutive weeks (26 consecutive weeks if the employer is an educational organization) during which he or she is not credited with any hours of service may be treated as a new hire for purposes of determining the employee’s full-time status. An employer also may treat an employee as a new hire if he or she has no hours of service for a period that continues for at least four consecutive weeks and is greater than the number of weeks of the employee’s prior employment (known as the "rule of parity"). Special rules apply for employees on international assignments. This rule can be useful in reducing the penalty amount because new hires are not included in calculating the Employer Mandate penalty (a) for the first three calendar months of employment if they are offered coverage at the end of such period, and (b) for the month that includes their start date if they start after the first of the month.

Planning Consideration

The monthly method allows an employer to identify a full-time employee after the calendar month has ended; it cannot be used to determine whether an employee should be treated as full-time in future months for purposes of avoiding a penalty. Consequently, this method may not be helpful in determining whether coverage should be offered if an employee’s hours of service may vary from month to month (including due to unpaid leaves of absence).

However, while the monthly method does not allow an employer to determine in advance whether an employee should be treated as full-time, an employer who has already decided whether to offer health coverage to certain groups of employees may prefer the monthly method to avoid the more burdensome recordkeeping requirements and complex software implementation that would likely be required to document compliance with the look-back method described below.

The Look-Back Method

The look-back method allows an employer to determine in advance whether an employee will be considered "full-time" for a later fixed period of time, regardless of the hours actually worked in that later period. In other words, this method allows employers to predict an employee’s "full-time" status for periods of time, allowing them to know whether they must offer coverage or anticipate a penalty for that period. The determination is made by looking at hours of service during a "measurement period" and applying the result to a later "stability period." 

This method is valuable where an employee’s schedule may not be predictable. For example, an employer would not need to use the look-back method for an employee who always works 35 hours per week, because that employee meets the Employer Mandate’s definition of "full-time" employee without the need for further analysis. However, if an employee’s hours vary from week to week, or if the employee works only a few months each year, then an employer may choose to use the look-back method so that the employer can know whether the employee is treated as full-time in deciding who should be offered coverage. There are different rules for applying the look-back method to ongoing employees and to new employees. Due to the administrative burden involved in using the look-back method, it will be of primary interest to large employers that have a lot of variable-hour, part-time or seasonal employees and either (i) want to offer coverage only to full-time employees or (ii) do not offer coverage and want to limit the amount of their Employer Mandate penalty. It is important to note, that the look-back method, if chosen, cannot be applied just to seasonal, variable-hour, or part-time employees, but must be applied for all employees in a particular permitted category, as discussed above.

Rule for Ongoing Employees Under the Look-Back Method. Under the rule for ongoing employees, an employer looks back to hours of service during a "standard measurement period" of three to 12 months (the length of which is selected by the employer) to determine an ongoing employee’s status as a full-time or non-full-time employee. For administrative ease, the beginning and ending dates of a standard measurement period may be coordinated with an employer’s weekly, biweekly, or semi-monthly payroll periods. For example, a measurement period could begin the day after the last day of the payroll period that includes January 1 of a year and end on the last day of the payroll period that includes December 31 of that year.

An employee’s status (as full-time or non-full-time), determined based on hours of service during the standard measurement period, remains in effect for a "stability period." The stability period, also selected by the employer, must be at least six consecutive calendar months and at least as long as the related measurement period (but no longer than the related measurement period if the employee is determined to be non-full-time). The employee will retain the same full-time or non-full-time status throughout the stability period, even if the employee’s actual hours of service during the stability period would produce the other status. If an employee who is treated as full-time terminates employment during the stability period, the employer is not required to continue to offer the employee coverage, except as required by COBRA or similar state law. However, there are special rules that apply to terminated employees who are rehired, which are discussed later in this Q&A.

An employer can choose to have an "administrative period" of not more than 90 days. The administrative period gives the employer time to determine which employees are eligible for coverage based on the standard measurement period and to complete any required employee notifications and enrollments prior to the beginning of the stability period. The three periods must (measurement, stability, and administration) overlap in a way that ensures that employees who are consistently treated as full-time employees do not have a break in coverage.

The diagram and example below illustrate two full cycles of a 12-month standard measurement period, a 78-day administrative period, and a 12-month stability period that satisfy these requirements.

Click here to view table. 

Example: Employee A averages 30 hours of service per week during the standard measurement periods that begin on each of October 15, 2015 and October 15, 2016. Employee A will be treated as a full-time employee. To avoid a penalty, the employer must offer health coverage to Employee A during the corresponding stability periods (the 2017 and 2018 calendar years) that meets the Employer Mandate requirements. Employee B, on the other hand, averages 30 hours of service per week during the standard measurement period that begins October 15, 2015 but averages less than 30 hours of service per week during the standard measurement period that begins October 15, 2016. To avoid a penalty, the employer must offer health coverage that meets the Employer Mandate requirements to Employee B during the 2017 stability period but not during the 2018 stability period. This means that Employee B must continue to be offered this coverage during the administrative period preceding the 2018 stability period (i.e., October 15, 2017–December 31, 2017) because that period overlaps with the 2017 stability period.


Different Measurement and Stability Periods for Different Categories of Employees. An employer may use measurement and stability periods that differ in either length or in their starting and ending dates for the following categories of employees: (i) collectively bargained and non-collectively bargained employees, (ii) each group of collectively bargained employees covered by a separate bargaining agreement, (iii) salaried and hourly employees, and (iv) employees employed in different states. Each related employer in a controlled group may determine its own measurement and stability periods. (See Q&A 4 for a brief overview of the controlled group rules.)

2014 Transition Relief. In the final regulations, the IRS provides transition relief for employers that want to use a 12-month stability period for the 2015 plan year. As discussed above, the rule that applies to ongoing employees requires that the stability period be at least as long as the related measurement period and cannot be longer than the related measurement period when an employee is being treated as non-full-time. Accordingly, in order to have a twelve-month measurement period and any type of administrative period, an employer would have had to start its measurement period before the final regulations were issued. To give employers a reasonable opportunity to apply the final regulations in connection with a 12-month stability period for 2015, transition relief is provided for the 2015 stability period only. Under this transition relief, an employer may use a measurement period as short as six consecutive months, as long as it begins no later than July 1, 2014. The measurement period must end no sooner than 90 days before the first day of the 2015 plan year, which allows for an administrative period of up to 90 days. For this one cycle, the measurement period may be shorter than the stability period.

For example, an employer with a calendar year plan may define its first measurement period as May 1, 2014 through October 31, 2014 and use the remainder of the 2014 calendar year as the administrative period. The employer would then be permitted to treat an employee as full-time or non-full-time for the entire 12-month 2015 plan year, based on the status determined during the six-month measurement period in 2014.

Rule for New Hires Under the Look-Back Method. Whether a newly hired employee is full-time depends on whether the employee is reasonably expected to be a full-time employee or is, instead, a variable-hour, seasonal or part-time employee as of the employee’s start date.

New Employees Reasonably Expected to be Full-Time. If a newly hired employee is reasonably expected as of his or her start date to be a full-time employee, a large employer must offer the employee health coverage by no later than the first day after the end of the employee’s initial three full calendar months of employment or face a potential Employer Mandate penalty. An employer may consider the following factors in determining whether a new employee, other than a seasonal employee, is reasonably expected to be full-time: (i) whether the employee is replacing a full-time employee, (ii) the extent to which hours of ongoing employees in similar positions average at least 30 hours per week, and (iii) whether the job was advertised or communicated to the new hire as requiring an average of at least 30 hours per week.

Planning Consideration

Compliance with the Employer Mandate requirements does not ensure compliance with the separate 90-day maximum waiting period rule that is effective for plan years beginning on or after January 1, 2014 and applies to all health coverage (not just health coverage provided by a large employer to its full-time employees). Because the 90-day maximum waiting period rule carries a $100 per-person per-day penalty, coverage should be offered no later than the 91st day after an employee who is reasonably expected to be full-time becomes eligible in order to satisfy both rules.

New Seasonal, Variable-Hour and Part-Time Employees. As under the rule for ongoing employees, described above, an employer may determine whether a newly hired variable-hour, seasonal, or part-time employee is full-time or non-full-time based on average weekly hours of service during an "initial measurement period" and then, following an optional administrative period, apply the resulting determination for an "initial stability period." An employer using this rule may treat the new employee as non-full-time during the initial measurement period and any accompanying administrative period.

A "part-time employee" is an employee whom the employer reasonably expects to work on average less than 30 hours per week. A "variable-hour employee" is an employee who the employer is unable to determine is "reasonably expected" to work an average of 30 hours per week or more. The same factors used to determine whether an employee is reasonably expected to be full-time, described above, are used to determine whether an employee is part-time or variable-hour. Employers are not permitted to consider the likelihood of termination when determining an employee’s status as a variable-hour employee.

A "seasonal employee" is an employee whose customary annual employment is less than six months. However, an employee may still be treated as a seasonal employee if employment is extended in a particular year beyond its customary duration (e.g., ski instructors who are asked to work an additional month due to a heavy snow season).

Initial Measurement Period and Initial Stability Period. The initial measurement period may last for three to 12 months and may begin on any date between the employee’s start date and the later of (i) first day of the next calendar month or (ii) the first day of the next payroll period. Because the initial measurement period is unique to each new employee, administration may be cumbersome for employers. However, employers can partially standardize administration by having a single start date for the initial measurement period of all individuals hired during a particular month.

The length of the stability period for new hires depends on whether the employee is treated as full-time during this period. For an employee who is determined to be full-time during the initial measurement period, the initial stability period must be at least six consecutive calendar months and at least as long as the initial measurement period. For an employee who is determined to be non-full-time during the initial measurement period, the initial stability period may not be more than one month longer than the initial measurement period and may not carry over into a subsequent stability period under which the employee is treated as full-time.

Subject to certain requirements, an employer may elect to have an administrative period of up to 90 days between the initial measurement period and the related stability period.

An employer using this new employee rule will also be treated as complying with the 90-day maximum waiting period rule, as long as (i) the effective date of coverage is not later than 13 months from the employee’s start date plus, if the employee starts on a day other than the first day of the month, the time remaining until the first day of the next calendar month; (ii) in addition to any measurement period, no more than 90 days elapse prior to the employee’s eligibility for coverage; and (iii) the plan specifically includes the new employee rules, including the measurement, administrative, and stability periods chosen by the employer, as a condition of eligibility.

Change in Employment Status During Initial Measurement Period.If a newly hired seasonal, variable-hour, or part-time employee experiences a change in employment status during the initial measurement period, and following the change the employee is reasonably expected to be a full-time employee, then the employee must be offered coverage that meets the Employer Mandate requirements no later than the end of the employee’s third full calendar month of employment in the new position or, if earlier and the employee averages more than 30 hours of service per week during the initial measurement period, the start of the initial stability period. As previously mentioned, these time periods for offering coverage apply to avoiding the Employer Mandate penalty; the separate 90-day maximum waiting period rules must also be met to avoid incurring other penalties.

Different Initial Measurement and Stability Periods for Different Categories of New Hires. An employer may use measurement and stability periods for purposes of the look-back method for new hires that differ in either length or in their starting and ending dates for different categories of employees in the same manner as for ongoing employees, as discussed above.

Transition to Ongoing Employee Status. Once an employee has been employed for at least one full standard measurement period, the employer must test that employee for full-time status at the same time and under the same conditions that apply for other ongoing employees, as described above. An employee who is determined to be full-time during an initial measurement period or a standard measurement period must be treated as full-time during the entire associated stability period. The obligation to treat the employee as full-time applies even if the employee had an average of at least 30 hours of service per week during the initial measurement period, but not during the overlapping, or immediately following, standard measurement period. Similarly, if an employee who did not have an average of 30 hours of service during his initial measurement period meets that requirement during the following standard measurement period, he must be treated as full-time during the entire standard stability period, even if that stability period begins before the initial stability period ends. These rules are illustrated by the following diagram and example for an employee hired on May 10, 2015.

 Click here to view table.

Change from Look-Back Method to Monthly Method. If an employee transfers from a position for which the employer uses the look-back method to a position for which the employer uses the monthly method, special rules apply in determining full-time status for the remainder of the stability period in which the transfer occurs and for the immediately succeeding stability period. Thereafter, only the monthly method need be used. 

Example 1: Employee A is hired on May 10, 2015 to work a schedule that varies from week to week. Because Employee A is a new variable-hour employee and the employer is applying the new employee rules under the look-back method, Employee A will be treated as a non-full-time employee during the initial measurement period and administrative period from May 10, 2015 through June 30, 2016. Employee A averages 30 hours of service per week during the initial measurement period that begins on May 10, 2015 and ends May 9, 2016. Employee A will be treated as a full-time employee during the corresponding initial stability period (July 1, 2016 through June 30, 2017). To avoid an Employer Mandate penalty, the employer must offer coverage to Employee A that meets the Employer Mandate requirements during this initial stability period. Because the effective date of coverage is not later than 13 months from Employee A’s start date plus the time remaining until the first day of the next calendar month, the 90-day maximum waiting period rule is also met.

Employee A then averages less than 30 hours of service per week during the standard measurement period that begins October 15, 2015 and ends October 14, 2016. To avoid a penalty, the employer must offer Employee A health coverage that meets the Employer Mandate requirements all the way through the end of his initial stability period (until June 30, 2017), even though it overlaps with a standard stability period during which he otherwise would not be treated as full-time.

Example 2: Employee A is hired on May 10, 2015 to work a schedule that varies from week to week. Because Employee A is a new variable-hour employee and the employer is applying the new employee rules under the look-back method, Employee A will be treated as a non-full-time employee during the initial measurement period and administrative period from May 10, 2015 through June 30, 2016. Employee A averagesless than 30 hours of service per week during the initial measurement period that begins on May 10, 2015 and ends May 9, 2016. Employee A then averages more than 30 hours of service per week during the standard measurement period that begins October 15, 2015 and ends October 14, 2016. Although Employee A may be treated as non-full-time from May 10, 2016 through December 31, 2016, Employee A must be treated as a full-time employee for the standard stability period beginning on January 1, 2017, even though that period overlaps with the prior initial stability period during which he was not treated as full-time. To avoid a penalty, the employer must offer Employee A coverage that meets the Employer Mandate requirements during this standard stability period.

Rehires and Breaks in Service. An employee who resumes active employment after at least 13 consecutive weeks (26 consecutive weeks if the employer is an educational organization) during which he or she is not credited with any hours of service may be treated as a new hire for purposes of determining the employee’s full-time status. An employer also may treat an employee as a new hire if he or she has no hours of service for a period that continues for at least four consecutive weeks and is greater than the number of weeks of the employee’s prior employment (known as the "rule of parity"). Special rules apply for employees on international assignments.

Impact on Stability Period. If an employee is treated as an ongoing employee after a break in service, the employee retains, upon resumption of service, his status (full-time or non-full-time) for the remainder of the stability period in which the employee resumes service. In other words, the employee’s status will be based on the employee’s average weekly hours of service during the previous measurement period. An ongoing employee is treated as being offered coverage upon resumption of services if the employee is offered coverage by no later than the first day of the calendar month following resumption of services.

Impact on Measurement PeriodFor employers other than educational organizations, even if an employee is treated as an ongoing employee, breaks in service other than periods of "special unpaid leave" generally will reduce the employee’s average hours of service for the measurement period in which he resumes service (and therefore may impact his status in the related stability period). "Special unpaid leave" is defined as leave under the Family and Medical Leave Act of 1993 or the Uniformed Services Employment and Reemployment Rights Act of 1994, and unpaid leave for jury duty. The employer may determine the employee’s average hours of service for a measurement period after excluding any special unpaid leave during that measurement period and by using that average as the average for the entire measuring period. Alternatively, the employer may determine the employee’s average weekly hours of service during the measurement period by crediting the employee with the hours of service for any special unpaid leave taken during that time at a rate equal to the average weekly rate for which the employee was credited during the remainder of the measurement period. There is no limit on the number of hours of service that are required to be excluded or credited to an employee on special unpaid leave. Employers that are educational organizations must follow special rules requiring them to take into account employment break periods in addition to special unpaid leave.

Changes Between the Monthly Method and Look-Back Method

As noted earlier in this Q&A, the final regulations allow each employer in a controlled group to use a different method (i.e., the monthly method or the look-back method) to determine who is a full-time employee. Further, an employer may use a different method for different categories of employees as long as these different categories are based on the parameters discussed above. Consequently, if an employee transfers to a different position for an employer or to a different employer within the same controlled group, this may result in a change in the method that is used to determine his or her full-time status. 

Stability Period During Which the Transfer OccursIf the employee is in a stability period under which the employee is treated as full-time at the time of the transfer, the employer must continue to treat the employee as full-time through the end of that stability period. However, if the employee is in a stability period under which he or she is treated as non-full-time, the employer may continue to treat the employee as non-full-time through the end of the stability period; alternately, the employer may begin applying the monthly method to determine the employee’s status. 

Immediately Succeeding Stability PeriodThe employer must continue to track the hours for the measurement period in which the transfer occurred and treat the employee as full-time during the related stability period if the employee’s hours for that measurement period are sufficient. If the employee’s hours are insufficient to be treated as full-time during the related stability period, the employer must use the monthly method to determine when the employee is full-time for that stability period and thereafter.

Special Rule. A special rule may be applied if an employer has offered an employee coverage that satisfies the minimum value requirements by the end of the employee’s third full calendar month of employment and through the month of the transfer. This rule allows the employer to use the monthly method on the first day of the fourth calendar month following the month in which the transfer occurs, in the same manner as if the employee is a new hire who is reasonably expected to be non-full-time. This special rule applies even if the employer uses the look-back method to other employees in the same category, despite the general rule that the same method must be used for all employees in a category.

Example: Employee A is in a position for which the employer uses the look-back method to determine his full-time status. Under the look-back method, Employee A is treated as a full-time employee for the stability period of the 2017 calendar year. On July 1, 2017, Employee A transfers to a position for which the employer uses the monthly method. Employee A must be treated as a full-time employee for the remainder of the stability period in which the transfer occurred (i.e., from July 1, 2017 through December 31, 2017). During the measurement period in which the transfer occurred (October 15, 2016 through October 14, 2017), Employee A is credited with enough hours under the look-back method to be treated as a full-time employee for the 2018 calendar year. Consequently, Employee A must be treated as full-time for the immediately succeeding stability period (the 2018 calendar year). However, the determination of whether Employee A is full-time is made under the monthly method for the 2019 calendar year. If the employer offered minimum value coverage Employee A by the end of Employee A’s third full calendar month of employment and through the month of the transfer, the monthly method could be used exclusively beginning on the first day of the fourth calendar month following the month in which the transfer occurred. 

Change from Monthly Method to Look-Back Method. Likewise, if an employee transfers from a position for which the employer uses the monthly method to a position for which the employer uses the look-back method, special rules apply in determining full-time status for the remainder of the stability period in which the transfer occurs and for the immediately succeeding stability period. Thereafter, only the look-back method need be used.

Stability Period During Which the Transfer OccursUpon the transfer, the employer must determine whether the employee’s hours of service during the measurement period prior to the transfer would have resulted in full-time employee status during the stability period in which the transfer occurred. If they do, the employer must treat the employee as full-time for the remainder of that stability period. If they do not, the employer must continue to use the monthly method to determine full-time status for the transferred employee for the remainder of that stability period.

Immediately Succeeding Stability PeriodFor the stability period immediately following the measurement period during which the transfer occurs, the employer must treat the employee as a full-time employee for any month during which the employee would have been treated as full-time under either the look-back method or the monthly method.

Example: Employee B is in a position for which the employer uses the monthly method to determine her full-time status. On July 1, 2017, Employee B transfers to a position for which the employer uses the look-back method. If the look-back method applied to Employee B for the stability period in which the transfer occurred (the 2017 calendar year), Employee B would be treated as a full-time employee based on her hours from October 15, 2015 through October 14, 2016. Prior to the transfer (January through June 2017), Employee B’s status is determined using the monthly method, while after the transfer (July through December 2017), the employer must treat Employee B as full-time because she would have been treated as full-time during that part of the stability period had the look-back method applied for the entire stability period (i.e., the 2017 calendar year). During the measurement period in which the transfer occurred (October 15, 2016 through October 14, 2017), Employee B is not credited with enough hours under the look-back method to be treated as a full-time employee for the related stability period (the 2018 calendar year). However, while Employee B is not treated as full-time for the related stability period based on the look-back method, she must be treated as full-time for any month of such stability period in which she had sufficient hours of service. The determination of whether Employee A is full-time for the 2019 calendar year is made under the look-back method.

Q&A 7: What Health Coverage Satisfies the Employer Mandate?

As discussed in Q&A 1, a large employer may be subject to Employer Mandate penalties if it does not provide health coverage that meets certain requirements to all or substantially all of its full-time employees. In all cases, a large employer will be subject to these penalties only if one or more of its full-time employees gets an Exchange subsidy (as described in Q&A 2). To meet the applicable requirements, the employer’s coverage must be "minimum essential coverage," "affordable," and provide "minimum value," all as described below.

"Minimum Essential Coverage" 

In order to avoid a penalty, an employer must offer its full-time employees and their children minimum essential coverage. "Minimum essential coverage" includes an "eligible employer-sponsored plan," which is a group health plan or group health insurance coverage offered by an employer (including a governmental employer) to any employee or former employee, including COBRA and retiree coverage; coverage offered to employees by an organization acting on behalf of an employer (e.g., a multiemployer plan); and coverage offered to an employer’s employees by a third party (e.g., a professional employer organization ("PEO"), staffing agency, or leasing company). In order for coverage offered on an employer’s behalf by a PEO, staffing agency, or leasing company to qualify as minimum essential coverage "offered" by an employer, the employer must pay a higher fee to the PEO, staffing agency, or leasing company for the individuals who actually enroll in health coverage. If an employer relies on its retiree health coverage to provide minimum essential coverage to retirees who have been rehired, the retiree coverage may be subject to the ACA’s various plan design mandates and not treated as a "stand-alone" retiree-only health plan exempt from these requirements.

Minimum essential coverage does not include: (i) accident or disability income insurance; (ii) liability insurance; (iii) automobile insurance that pays medical benefits; (iv) on-site medical clinics; (v) long-term care, nursing home care, home health care, or community-based care; (vi) indemnity insurance; (vii) coverage only for vision or dental; (viii) workers’ compensation; (ix) coverage only for a specific disease or condition; (x) employee assistance plans; or (xi) flexible spending accounts.

Under current guidance, employer-sponsored group health plans meet the definition of "minimum essential coverage" without having to meet any additional requirements. Of course, both the ACA and other state and federal laws already impose a variety of requirements on employer-sponsored group health plans, and penalties other than the Employer Mandate penalty can apply if those requirements are not met.

"Affordable" Health Coverage

In order to avoid a penalty, the employer must offer coverage to its full-time employees that is "affordable." Employer-sponsored coverage is "affordable" to an employee if the annual employee contribution for the lowest-cost self-only coverage providing minimum value does not exceed 9.5 percent of his or her household income for the taxable year. In this context, "household income" means the total of adjusted gross income required to be reported on a federal income tax return by the employee and members of the employee’s household, plus tax-exempt interest, tax-exempt Social Security income, and tax-exempt income earned while living abroad.

Because an employee’s household income is generally unknown to employers, the regulations contain three affordability safe harbors intended to make it possible for employers to determine whether their coverage is affordable. These safe harbors allow affordability to be determined by comparing the employee’s contribution for the lowest-cost self-only coverage providing minimum value against either:

  • 9.5 percent of the employee’s W-2, Box 1 wages;
  • 9.5 percent of the employee’s rate of pay; or
  • 9.5 percent of the federal poverty line, as in effect six months prior to the beginning of a plan year, for a single individual ($11,670 for 2014).


An employer may elect to use a different safe harbor for different categories of employees, as long as the basis for differentiating is uniform and consistent for all employees in a category. Permissible categories of employees include: (i) specified job categories, (ii) salaried and hourly employees, (iii) geographic location, and (iv) similar bona fide business criteria.

For the W-2 safe harbor, the current year’s wages are used. If an employee does not work the entire year for the employer, an adjusted employee contribution and adjusted income amount is used.

For the rate of pay safe harbor, different rules apply for salaried and hourly employees. For salaried employees, the rate of pay is the monthly salary as of the beginning of the coverage period, which is typically the first day of the plan year. The rate of pay safe harbor may not be used for a salaried employee if the employee’s monthly salary is reduced during the year. For hourly employees, the rate of pay is the lower of the employee’s hourly rate of pay as of the first day of the coverage period, which is usually the first day of the plan year multiplied by 130 hours per month; or the employee’s lowest hourly rate of pay during the calendar month multiplied by 130 hours per month. While an employer may continue to use the rate of pay safe harbor for an hourly employee even if the employee’s hourly rate of pay is reduced during the year, the employer must calculate affordability each calendar month, rather than for the entire year.

The simplest approach to satisfy the affordability requirement may be to calculate 9.5 percent of the federal poverty line and offer at least one self-only health coverage option that limits employee contributions to that amount. This may not be the most cost-effective approach, however, as the other two safe harbors will likely support much higher employee contributions. Alternatively, employee contributions could be limited to 9.5 percent of the employee’s wages for each pay period that is reported in Form W-2, Box 1. However, this alternative could result in very small (or no) employee contributions during pay periods in which the employee works limited (or no) hours.

While not addressed in the regulations, it seems that an employer could use a "greater of" combination of safe harbors for a category of employees. For example, employee contributions could be limited to the greater of 9.5 percent of the employee’s Form W-2, Box 1 wages or 9.5 percent of the federal poverty line for a single individual. This alternative ensures that the employee contribution is always at least based on the federal poverty line, but it results in employees who can afford to pay more doing so. In using such a combination, employers should take care to structure the formula in a manner that does not inadvertently result in some employees having annual contributions in excess of any safe harbor.

Coverage That Provides "Minimum Value" 

Finally, in order to avoid a penalty under the Employer Mandate, the affordable coverage offered by an employer to its full-time employees must provide "minimum value."

Coverage under an eligible employer-sponsored plan provides "minimum value" if the plan’s share of the total allowed costs of covered services under the plan is at least 60 percent of the actuarially projected average cost of such services. Employers will be required to determine whether the 60 percent threshold has been met. Employers can do this in one of three ways: (i) using an online minimum value calculator developed by HHS and IRS; (ii) covering all of the benefits included in the minimum value calculator and satisfying a plan design safe harbor established by the IRS; or (iii) having an actuary determine and certify that the plan provides minimum value. HHS has released a testing version of the minimum value calculator[1] on its web site. Although the design-based safe harbors have not been finalized, the IRS has indicated that the rules may include limits on a plan’s deductible, cost-sharing requirements, and maximum out-of-pocket expenses for medical and prescription drug expenses.

Under final HHS regulations, minimum value for employer-sponsored group health plans (both fully insured and self-insured) is determined using a standard population based on the population covered by self-insured group health plans. There is no requirement that these plans offer all categories of essential health benefits or conform to the essential health benefit benchmarks. However, in order to use the online minimum value calculator or the design-based safe harbors, a plan may have to follow a standardized structure for coverage and cost-sharing. This would not be the case when using an analysis prepared by an actuary. Thus, employers will have to compare the cost of hiring an actuary with modifying their plan to make use of the other methods of determining "minimum value."

Planning Consideration

The Employer Mandate requires employers to offer health coverage to full-time employees and their children that is both "affordable" and provides "minimum value" or risk a penalty. Affordability is determined for each full-time employee based on the employee contribution for the lowest-cost self-only coverage option that meets minimum value and is offered to that employee. The employee contribution for other coverage tiers, such as employee plus spouse or family, is not subject to any affordability test. Further, the employee contribution for any tier of more expensive coverage options (including the self-only tier) need not meet the affordability test.

Minimum value, unlike affordability, is not determined for each full-time employee, but rather is determined based on the plan as a whole. To meet the minimum value requirement, the plan must pay at least 60 percent of the actuarially projected total allowed costs of covered services under the plan. The actuarial value of most employer-sponsored health coverage is currently higher than this threshold.

To meet both of these requirements and avoid a penalty, an employer must offer to full-time employees at least one health coverage option that has an actuarial value of 60 percent, for which the employee contribution for self-only coverage meets the affordability threshold. If one health coverage option meets these requirements, other available health coverage options need not. In other words, all other health coverage options could (using the definitions above) be unaffordable or not provide minimum value, or both. This creates a planning opportunity for an employer to simultaneously offer coverage that protects it from an Employer Mandate penalty while also offering coverage that is better aligned with the needs of its workforce. For example, if the employer has a low-paid workforce, it could simultaneously offer coverage that has a lower minimum value, and thus a lower monthly premium  cost. Likewise, if the employer has a relatively high-paid workforce, it could simultaneously offer coverage with a higher minimum value and employee contributions greater than the affordability threshold allows.

In considering these options, employers will also want to consider whether the plan design meets applicable nondiscrimination testing requirements.

Q&A 8: What Is the Penalty For Noncompliance and How Is It Collected?

Employers can incur a penalty under the Employer Mandate in one of two ways. First, an employer may be subject to a penalty if it fails to offer minimum essential coverage to substantially all of its full-time employees and their children up to age 26. Second, an employer may be subject to a penalty if it offers coverage, but that coverage is not "affordable," fails to provide "minimum value," or is offered to substantially all (but not all) full-time employees. However, neither penalty will apply unless at least one of the employer’s full-time employees enrolls in coverage through an Exchange for which the employee receives an Exchange subsidy. While "full-time equivalent" employees are counted for purposes of determining if an employer is a "large employer" and subject to the Employer Mandate, they are disregarded in calculating any penalty. The terms used above are discussed in more detail in earlier Q&As.

The employer’s penalty is computed month by month, and the amount of the penalty may vary month by month depending on the total number of full-time employees for the month and possibly also the total number of full-time employees receiving an Exchange subsidy for the month.

As noted in Q&A 4, members of the same controlled group are treated as one employer for purposes of determining whether all of the members will be treated as large employers subject to the Employer Mandate. However, liability for noncompliance and computation of any penalty owed is determined independently for each controlled group member. If an employee provides services to more than one employer in a controlled group, liability for a penalty related to that employee is generally imposed on the employer for whom the employee has the greatest number of hours of service for that month.

Penalty for Not Offering Coverage

If an employer fails to offer minimum essential coverage to substantially all of its full-time employees and their children up to age 26, and at least one of its full-time employees enrolls in coverage through an Exchange and receives an Exchange subsidy, the employer will be obligated to pay, for each month in which this occurs, a nondeductible penalty for each of its full-time employees in excess of 30 for that month (or in excess of 80 for that month for the 2015 plan year). Certain new hires are excluded from this calculation. The penalty amount is $166.67 per month per full-time employee ($2,000 per year) increased for medical inflation after 2014. If an employer is a member of a controlled group, it may not be entitled to the full 30 (80 for the 2015 plan year) employee exemption because the exemption will be allocated among the controlled group members that are employers. If an employer is treated as a "large employer" due to full-time equivalents and it has fewer full-time employees than the applicable exemption (i.e., 30, 80, or the allocated number), it will not be subject to a penalty.

Example: An employer employs 50 full-time employees for every month in the 2016 plan year, fails to offer them health coverage for the entire year, and one of them receives an Exchange subsidy. The employer would owe a penalty for each full-time employee less 30; in other words for 20 employees. The penalty for each employee would equal $2,000, increased for applicable medical inflation between 2014 and 2016. In other words, the penalty would be more than $40,000 (20 full-time employees multiplied by $2,000 (as adjusted upward)).

As noted in Q&A 5, to avoid the "no coverage" penalty, an employer need not offer coverage to every full-time employee. To avoid this penalty, an employer need only offer coverage to "substantially all" full-time employees. This is defined as all but the greater of five full-time employees or five percent of all full-time employees (or all but 30 percent of all full-time employees for the 2015 plan year). The "substantially all" rule applies separately to each employer in a controlled group. For example, one member of the controlled group could offer coverage to 96 percent of its full-time employees and avoid the "no coverage" penalty, while another member of the controlled group could offer coverage to only 50 percent of its full-time employees and be subject to the penalty. Note, that starting in 2016, an offer of coverage is deficient unless it also extends to an employee’s children up to age 26.

Making an Effective Offer of Coverage. In order to "offer" coverage, an employer must give a full-time employee an "effective opportunity" to enroll (or decline to enroll) in health coverage at least once each plan year. Whether an employee has an "effective opportunity" is determined based on the facts and circumstances, including whether the employee is adequately informed of the availability of the offer of coverage, the time period to accept or decline, and any other conditions on the offer. The final regulations clarify that an employee’s election of coverage that rolls over from a prior year unless the employee affirmatively elects to waive coverage constitutes an effective offer of coverage. If an employer requires employees to make significant sacrifices to qualify for coverage, it could be at risk of incurring a penalty. 

In general, an employer will only be treated as offering coverage for a calendar month if coverage is offered for all of the days of the month. Exceptions apply for the month in which an employee commences or terminates employment.

An offer of coverage by an employer is treated as an offer of coverage by all employers in the same controlled group. Also, an offer of coverage made by a multiemployer plan, a Taft-Hartley plan, or a multiple employer welfare arrangement ("MEWA") on behalf of an employer is treated as made by that employer. However, if the offer of coverage is made by a staffing firm, the offer will be treated as made by the employer only if the employer pays a higher fee to the staffing firm for an individual enrolled in health coverage than the employer would pay the firm for the same individual if he or she were not enrolled in the staffing firm’s health coverage.

While the regulations require that employees have an effective opportunity to decline coverage at least once each plan year, this right is limited to offers of coverage that are not minimum value coverage or require an employee contribution of more than 9.5 percent of the federal poverty line for a single individual in the 48 contiguous states. In other words, mandatory coverage is permissible in instances where the coverage is affordable and provides minimum value. In these cases, the offer of coverage by itself would render the employee ineligible for the credit. Thus, an employee cannot be blocked from eligibility for the premium tax credit by being forcibly enrolled in inadequate coverage. An employer’s ability to provide mandatory coverage may be impacted in the future by the automatic enrollment requirement for employers with more than 200 full-time employees. This provision, which is not yet effective, requires that employees be given an opportunity to opt out of any automatic coverage.

As discussed in more detail in Q&A 5, an employer is treated as having offered coverage to an employee for the remainder of a coverage period (generally, a plan year) if coverage is terminated due to the employee’s failure to pay premiums timely. The employer must provide a grace period for making payment and must also provide the opportunity to reenroll for the next coverage period.

Penalty for Not Offering Affordable, Minimum Value Coverage, or Coverage to All Full-Time Employees

The second way in which an employer can incur a penalty is if it offers coverage to its full-time employees, but that coverage either is not "affordable," fails to provide "minimum value," or is offered to substantially all (but not all) full-time employees, and one or more of its full-time employees enrolls in coverage through an Exchange for which the employee receives an Exchange subsidy.

The "insufficient coverage" penalty equals the number of full-time employees who receive an Exchange subsidy during a month multiplied by an amount equal to $250 per month ($3,000 per year) increased for medical inflation after 2014. Unlike the "no coverage" penalty, the "insufficient coverage" penalty applies only with respect to the number of full-time employees who get Exchange subsidies, rather than to all full-time employees. However, this penalty is capped on a monthly basis by the amount that the employer would have been required to pay had it failed to offer coverage at all to its full-time employees. Thus, an employer who offers coverage to its employees can never pay a larger penalty than it would have paid had it offered no coverage at all.

Collection of the Penalty

Penalties under the Employer Mandate will be initially determined by the IRS. The IRS will notify employers of proposed assessments and will provide the employer with a chance to respond before making a final determination and assessing any penalty. An employer will not be obligated to pay any penalty (nor will any interest begin to accrue) until the penalty is formally assessed and the employer receives a notice and demand for payment from the IRS. In other words, there is no self-reporting obligation (other than the information reporting requirements described below) with respect to these penalties. In the final regulations, the IRS indicates that it will not send notice of any proposed assessments until after employees’ individual tax returns are due and after the due date for the employer’s information return that is described below (February 28, or March 31 for electronically filed returns). Employers should expect that the IRS will not send notice of any proposed assessments until the second quarter of 2016 at the earliest. Also, because the information reporting and Exchange subsidies apply on a calendar year basis, the IRS is likely to follow the calendar year, rather than the plan year (if different), in conducting enforcement activity. If employers expect to owe such penalties for 2015, they should budget to pay them in 2016.

Information Reporting Requirements

Beginning in 2016, large employers will be required to report offers of coverage and other information related to compliance with the Employer Mandate by submitting information returns to the IRS for each full-time employee to reflect coverage offered in the 2015 calendar year. In completing the return, the employer will be required to report certain information, including basic identification information for the employer and its full-time employees, certain details about whether the employer offered its full-time employees and their children coverage and for what period, and each full-time employee’s share of the lowest cost monthly premium for self-only coverage. Further, just as the employer must provide a Form W-2 to an employee with wage and tax withholding data that the employer has filed with the IRS, the employer must give a written statement to each full-time employee included in the return, listing the contact information of the employer and the information that the employer provided to the IRS regarding that employee’s health coverage. For more information on the information reporting requirements, see the Jones Day Commentary, "New ACA Information Reporting Starts for Employers in 2015."