On August 31, 2012, the Departments of Labor, Treasury, and Health and Human Services jointly issued temporary guidance on two related health care reform issues:
- determining full-time status of employees for purposes of the employer "play or pay" penalty and
- implementation of the 90-day maximum waiting period requirement.
The two pieces of guidance refer to one another, so it is important to understand them both. In addition, while neither piece of guidance takes effect until 2014, sponsors of health plans should begin planning now to address these pieces of guidance.
Guidance on Play or Pay
Overview of the Pay or Play Rules
For those unfamiliar, beginning in 2014, the Patient Protection and Affordable Care Act requires any employer with more than 50 full-time equivalent employees to offer coverage that is "affordable" and provides "minimum value" or pay a penalty. Coverage is "affordable" if the premium cost to an employee is no more than 9.5% of the employee’s household income. The IRS has stated previously, and reaffirmed in the recent guidance, that employers may use the employee’s wages reported on Form W-2 instead of actual household income for this purpose. A plan provides minimum value if it covers at least 60% of the total allowed cost of benefits under the plan.
If an employer with more than 50 full-time equivalent employees offers no coverage for a year and at least one employee of the employer receives a premium tax credit or cost-sharing reduction for health insurance purchased through a health insurance exchange the employer is subject to a penalty for the year equal to $2,000 per year multiplied by the number of the employer’s full-time employees in excess of 30.
If an employer with more than 50 full-time equivalent employees offers coverage that either is not affordable or fails to provide minimum value, the employer is subject to a penalty equal to $3,000 per year multiplied by the number of full-time employees who receive a premium tax credit or cost-sharing reduction from a health insurance exchange during the year, or if less, the penalty for failure to provide coverage described. (Click here to see our blog post on the controversy over which exchanges will allow individuals to qualify for tax credits.)
Generally, any employee who works an average of at least 30 hours per week is full-time. The status of employees on variable or seasonal schedules is addressed in IRS Notice 2012-58.
Overview and Considerations. In broad terms, the Notice provides a safe harbor under which an employer establishes periods for measuring employee hours. Then, if an employee is determined to average at least 30 hours per week during the measurement period, the employee must be treated as full-time for a specified period after the conclusion of the applicable measurement period (called the "Stability Period"). This avoids employees being considered full-time one week and not full-time the next, which would create significant administrative headaches.
The Notice does not address plan documentation. However, plan sponsors wishing to take advantage of the measurement and Stability Periods will need to incorporate such periods into the eligibility provisions of their plan documents in order to avoid PPACA’s penalties. This approach will allow employees who become, or cease to become, eligible for coverage by reason of a change in full-time, part-time or seasonal status to change their coverage and contribution elections.
Employers can rely on the guidance in the Notice at least through the end of 2014. Any guidance that is more restrictive will not apply until January 1, 2015, at the earliest. However, because the penalty first applies in 2014, an employer looking to have a 12-month Stability Period needs to start getting systems in place soon to measure hours for part-time employees to have the evidence to back up its determinations in 2014.
Important Definitions. With that overall construct in mind, the Notice creates some terminology that’s important to understand:
- "Standard Measurement Period" is the period over which an existing employee’s average hours per week are measured. This period can be as short as 3 months or as long as 12 months.
- "Initial Measurement Period" is the period for which a new employee’s average hours per week are measured. This can also be as short as 3 months or as long as 12 months. This applies to employees who are not employed at the beginning of a Standard Measurement Period. The length of the Initial Measurement Period can be different than the length of the Standard Measurement Period.
- "Stability Period" is the period following a Standard Measurement Period or Initial Measurement Period during which an employee has to be treated as either full-time or not full-time, depending on his/her average hours during the measurement period. This period must be the same for both new and existing employees. The Stability Period also cannot be more than 1 month longer than the Initial Measurement Period.
Rules For Existing Employees. If an employee is employed on the first day of a Standard Measurement Period, the employee’s hours are measured over that period. If the employee has an average of 30 hours per week over that period, the employee is treated as a full-time employee for the following Stability Period.
- If the employee is determined to be full-time, the Stability Period must be at least 6 months long and cannot be shorter than the Standard Measurement Period.
- If the employee is determined not to be full-time, the Stability Period cannot be longer than the Standard Measurement Period.
As a practical matter, the fact that the length of the Stability Period can vary based on whether or not the employee is full-time means that most employers are likely to pick a 12-month Standard Measurement Period and a 12-month Stability Period for all employees. This will ease the compliance burden for many employers by providing a single, uniform Stability Period.
Administrative Period. The rules allow the Standard Measurement Period and the Stability Period to be separated by up to 90 days for ease of administration (such as notifying employees of eligibility and having open enrollment). For example, an employer can have a Standard Measurement Period that runs from October 15 to the following October 14 and a Stability Period that coincides with a calendar plan year of January 1 to December 31.
For Example: Two employees work for LittleCo. The first one (Employee A) works more than 30 hours/week over the Standard Measurement Period from October 2, 2012 to October 1, 2013. The other (Employee B) does not. During the following Stability Period (January 1, 2014 through December 31, 2014), LittleCo will not be subject to a penalty for failing to offer coverage to Employee B. LittleCo may, however, be subject to a penalty if it fails to offer coverage to Employee A.
Rules For New Employees. New employees have slightly different rules. If an employee is reasonably expected to work full-time on the date of hire, then an employer should treat the employee as such. However, if it cannot be determined whether an employee is reasonably expected to work an average of 30 or more hours per week, then the Notice provides a safe harbor for determining whether the new employee is considered full-time. These rules also apply to seasonal employees who may work more than 30 hours per week for a seasonal period, and less thereafter.
Under the safe harbor, the employer establishes an Initial Measurement Period to determine the average hours an employee works. Employers are also allowed a 90-day administrative period, but there is a limit: the Initial Measurement Period and the up to 90-day administrative period, combined, cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date. For example, if an employee is hired on April 5, 2013, the Initial Measurement Period and the 90-days for administration cannot go beyond May 31, 2014.
For Example: Assume BigCo uses a 12-month Initial Measurement Period that begins on an employee’s start date. BigCo also applies an administrative period from the end of the Initial Measurement Period through the end of the first calendar month beginning on or after the end of the Initial Measurement Period. BigCo hires an employee on May 10, 2014. The employee’s Initial Measurement Period runs from May 10, 2014 through May 9, 2015. Assume the employee works an average of 30 hours per week during this Initial Measurement Period. This employee will be treated as full-time. To avoid "play or pay" penalties, BigCo would need to offer coverage to the employee for a Stability Period that runs from July 1, 2015 through June 30, 2016.
The examples in the Notice state that an employer who does not offer coverage in accordance with these rules could be subject to "play or pay" penalties and be assessed a penalty for failing to comply with the 90-day waiting period limit described below. Therefore, the stakes for failing to offer coverage to these variable hour or seasonal employees are higher than just the "play or pay" penalties.
Additional Help. The Notice provides that employers may use Initial and Standard Measurement Periods and Stability Periods that differ either in length or in their starting and ending dates for the following categories of employees:
- collectively bargained employees and non-collectively bargained employees;
- salaried employees and hourly employees;
- employees of different entities; and
- employees located in different States.
The Notice also makes clear that no penalty will be assessed during 90-day waiting periods for employees who are reasonably expected to be full-time on date of hire. In other words, there is no penalty for failing to offer coverage to full-time employees during the 90-day waiting period. This is a helpful clarification.
Guidance on the 90-Day Waiting Period
The guidance on the 90-day waiting period rules can be found at DOL Technical Release 2012-02 and at IRS Notice 2012-59, which are identical. They address the statutory requirement that an otherwise eligible employee or dependent cannot be required to wait more than 90 days for coverage to become effective. Failure to comply is subject to a penalty tax of $100 per day per person, possible enforcement action from the Department of Labor and possible employee litigation.
"Waiting period" is defined as the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective. Being eligible to enroll means the employee or dependent has met all of the plan’s substantive eligibility conditions, such as being in an eligible job classification.
Eligibility based solely on the lapse of time is permissible so long as the time period does not exceed 90 days. Other conditions are permissible unless they have the effect of undermining the 90-day rule. A plan may be compliant where, under the plan’s terms, an employee may elect coverage that would begin on a date that does not exceed a 90-day waiting period even where employees take additional time to elect coverage.
The guidance also addresses the circumstance where a plan conditions eligibility on working a specified number of hours per week (or working full-time), and it cannot be determined at an employee’s date of hire whether or not the employee will work sufficient hours to be covered. For this purpose, the guidance conforms to the applicable large employer rules under the “play or pay” penalty Internal Revenue Code § 4980H (and the guidance contemporaneously issued on that topic described above). This means a plan may use a measurement period of time up to 12 months to determine it the employee meets the hours eligibility requirement. The time period for determining whether the employee meets the hours condition will not be considered to violate the 90-day rule if coverage is made effective no later than 13 months from the employee’s start date plus, if the start date is mid-month, the time remaining to the first day of the next month. The guidance provides that any employer may use this rule even if it is not subject to § 4980H. The guidance includes a number of helpful examples.
In addition, there is an optional hours of service requirement for part-time employees. They can be required to accumulate up to 1,200 cumulative hours of service to become eligible for coverage and they can be subject to a 90-day waiting period that begins after meeting the 1,200 hours of service requirement. The Notice does not address how hours are to be calculated for this purpose.