Employers that are large enough to have to extend health coverage to their full-time employees under the so-called “shared responsibility” or “employer mandate” provisions of the Affordable Care Act (ACA) should consider beginning to count the hours that their variable-hour employees work by April 2, 2013, in order to determine whether those employees will be considered full-time when the requirement goes into effect January 1, 2014.
The “shared responsibility” requirement in the ACA
Beginning January 1, 2014, a large employer will be subject to a nondeductible penalty tax under the “shared responsibility” or “employment mandate” provisions of the ACA, which added section 4980H to the Code, if one or more of its full-time employees opt to purchase coverage on an Exchange and qualify for government subsidies when they do so.
Specifically, if a large employer does not offer health coverage to all of its full-time employees and their dependents for a month, and if even one full-time employee obtains a premium tax credit (under section 36B of the Code) or a cost sharing reduction (under section 1402 of the ACA) for coverage purchased on an Exchange for the month, the employer is subject to a penalty tax for the month of about US$167 (1/12 of US$2,000) multiplied by the number of all of its full-time employees, whether they are offered coverage or not. Up to 30 employees may be excluded in calculating this penalty. For example, if an employer has 500 full-time employees, does not provide health coverage to any of them during 2014, and one or more of them purchases coverage on an Exchange and receives a tax credit, the penalty would be US$940,000 (US$2,000 × 470).
Also, even if a large employer offers coverage to all of its full-time employees for a month, if one or more of those employees opt out and obtain premium tax credits or cost sharing reductions for coverage purchased on an Exchange for the month, the employer is subject to a penalty tax for the month of US$250 (1/12 of US$3,000) per full-time employee who opts out (subject to an aggregate cap equal to the tax that would have been due if it hadn’t provided the coverage at all).
An employee generally will be able to obtain a premium tax credit or cost sharing reduction for coverage purchased on an Exchange for the month if he or she is not eligible to participate in any employer-sponsored health plan for the month, or is eligible to participate in such a plan for the month but either (1) the plan does not pass a minimum actuarial value test (generally equivalent to “bronze” level coverage on an Exchange) or (2) the plan is not “affordable” (generally meaning the employee’s premium for self-only coverage exceeds 9.5% of his or her household income). The employee also generally must have household income between 100% and 400% of the federal poverty line. Thus, an employer subject to the “shared responsibility” requirement can avoid penalty taxes by ensuring that the coverage it provides to its lower-paid full-time employees satisfies the minimum actuarial value test and is affordable. (Alternatively, of course, it could choose to pay the taxes.)
The statute defines a “large employer” for a calendar year as one that employed, on average, at least 50 full-time employees during the previous calendar year. For this purpose, the number of full-time equivalent employees is added to the number of actual full-time employees, and all such employees in the employer’s controlled group are taken into account. The statute defines a “full-time employee” as one who works at least an average of 30 hours per week.
Whether a worker is an employee of the employer is determined using the common-law standard, meaning that workers might be treated as employees even if they are not on the employer’s payroll. (These determinations are made on a world-wide basis, meaning that an employer with small operations in the U.S. but large operations overseas could be swept in. However, the proposed regulations allow service performed outside the U.S. to be ignored, meaning that this should not happen often.)
The dollar amounts of the penalties are indexed for inflation after 2014, meaning that if the ACA results in significant increases in premiums these penalties will increase as well.
Identifying “full-time employees” under the proposed regulations – the look-back rules
Proposed regulations on the “shared responsibility” requirement were published early this year.1 They provide important additional guidance for determining which employees are full-time employees for purposes of the requirement.
Most importantly, they allow full-time employee status to be determined on a look-back basis for purposes of determining the penalty amounts and which employees must be offered coverage (although not for purposes of determining whether an employer is a large employer). This aspect of the regulations is unlikely to be changed when the regulations ultimately are issued in final form.
Under the proposed regulations:
- Ongoing employees. An employee who is not a new employee is deemed not to be a full-time employee during a “stability period” if he or she worked on average less than 30 hours per week during the most recent “standard measurement period.”
The “standard measurement period” is a period of 3 to 12 consecutive months ending no earlier than 90 days before the beginning of the stability period. (The gap between the standard measurement period and the stability period is called the “administrative period”.) The standard measurement period is chosen by the employer and can differ from company to company within a controlled group as well as between certain groups of employees, e.g., salaried and hourly employees. The “stability period” is a period chosen by the employer that cannot – for employees determined not to be full-time – be longer than the standard measurement period.
For example, if an employer chooses November 1 through October 31 as its standard measurement period, and November 1 through December 31 as its administrative period, an employee who works on average less than 30 hours per week during the period November 1, 2014, through October 31, 2015, would be deemed not to be a full-time employee during the following stability period of January 1, 2016, through December 31, 2016.
Slightly different rules apply if the employee works 30 hours per week or more during the standard measurement period.
- New variable hour employees. A new “variable hour employee” is deemed not to be a full-time employee during a “stability period” if he or she worked on average less than 30 hours per week during his or her “initial measurement period.” An employee is a “variable hour employee” if the employer cannot determine whether the employee is reasonably expected to work on average at least 30 hours per week during his or her initial measurement period because his or her hours are variable or otherwise uncertain.
The “initial measurement period” for a new variable hour employee is a period of 3 to 12 consecutive months beginning no later than the first day of the first calendar month following the employee’s start date and ending no earlier than 90 days before the beginning of the stability period. The combined length of the initial measurement period and the following administrative period may not exceed 13 months. The stability period for a new variable hour employee may not be more than one month longer than the initial measurement period and – for employees determined not to be full-time – may not extend beyond the end of the standard measurement period and administrative period in which the initial measurement period ends.
For example, if the employer in the first example above hires a new variable hour employee on July 15, 2014, and the employee works on average less than 30 hours per week during the initial measurement period of August 1, 2014, through July 31, 2015, the employee generally would be deemed not to be a full-time employee only through December 31, 2015, because that is the last day of the standard measurement period and administrative period in which the initial measurement period ends.
Slightly different rules apply if the new employee works on average 30 hours per week or more during his or her initial measurement period, or if there is a material change in the employee’s position or status.
No penalty is imposed for failing to cover a new variable hour employee under the employer’s health plan during his or her initial measurement period regardless of how much he or she works.
- New employees expected to work full-time. If a new employee is not a variable hour employee, i.e., he or she can reasonably be expected to work on average at least 30 hours per week during the initial measurement period, then the employee is deemed to be a full time employee. However, a 3-month grace period is provided, i.e., no penalty is imposed for failing to cover the employee under the employer’s health plan through the end of his or her first 3 full calendar months of employment.
- Temporary and seasonal employees. Until 2015 a new employee may be treated as a variable hour employee even if he or she is expected to work on average at least 30 hours per week, if the employee is not expected to do so throughout the initial measurement period – as would be the case with a temporary employee. Beginning in 2015, except in the case of seasonal employees, an employer must assume that the employee will continue to be employed for the entire initial measurement period.
Important transition rules for 2013-2014
The above rules would require an employer that wanted to use a 12-month stability period lasting all of 2014 to adopt a standard measurement period of 12 months beginning no later than January 1, 2013 (or October 3, 2012, if the employer wanted to use the maximum permitted 90-day administrative period). They would require an employer with a fiscal-year plan overlapping the January 1, 2014, effective date, that did not want to change coverage in the middle of the plan year, to use an even earlier standard measurement period. That would have been impractical, especially in the absence of regulations. A similar problem would have faced an employer that was not sure whether it would qualify as a large employer in 2014. Therefore, the proposed regulations contain three important transition rules.
- They allow a stability period beginning in 2014 to last for the maximum permitted period of 12 months as long as the associated measurement period is at least 6 months long, begins no later than July 1, 2013, and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014. For example, an employer with a calendar year plan may use a measurement period from April 15, 2013, through October 14, 2013, followed by an administrative period ending on December 31, 2013.
This means that an employer with a calendar year plan that wants to use the maximum permitted administrative period of 90 days must use a measurement period that begins no later than April 2, 2013, and ends no later than October 2, 2014, with an administrative period lasting from October 3, 2014, through the end of the year. Employers that want to use a measurement period keyed off of pay periods (and also use the maximum possible administration period) might need to start even earlier.
- They generally also delay, for employers that cover substantial numbers of their employees under fiscal year health plans, the effective date of the “shared responsibility” until the first day of the first plan year beginning in 2014. They also allow an employer with a fiscal year cafeteria plan to allow participants to make mid-year election changes if they currently purchase coverage through the plan but wish to purchase coverage on an Exchange instead or currently do not purchase coverage through the plan but wish to do so in order to avoid a penalty under the “individual mandate” provisions of the ACA.
- They also allow an employer to determine whether it is a large employer in 2014 based on any consecutive 6-month period in 2013.
Other important guidance in the proposed regulations
The proposed regulations provide other significant guidance on the “shared responsibility” requirement. Some of the most noteworthy is described below.
- They allow government entities, churches, and conventions and associations of churches to rely on a reasonable, good faith interpretation of the controlled group rules in determining whether a group of entities forms a “large employer.”
- Once it is determined that a group of entities forms a “large employer,” they apply the penalty provisions separately to each entity in the group. One beneficial result is that if only one entity fails to offer a health plan to all of its full-time employees, the penalty will be computed based on the number of that employer’s full-time employees only, rather than the number of full-time employees in the entire controlled group, which could be much larger.
- They include a successor employer rule borrowed from the FICA tax provisions. A successor employer under those provisions includes any employer that acquires substantially all the property used in a separate unit of a predecessor’s trade or business. This could become important in corporate transactions.
- They do not limit seasonal employees to agricultural or retail workers. However, they prohibit treating a teacher who works during the active portions of the academic year as a seasonal employee.
- They require hours of service for hourly employees to be determined based on actual hours of service, but allow some simpler “equivalencies” to be used to determine hours of service for other employees. The definition of hours of service is based on the definition used for tax-qualified plan purposes.
- They identify several groups of employees – including adjunct faculty members, salespersons and airline pilots – for whom “the look-back method could be misused to treat employees long considered full-time employees as not full-time employees.” For these employees, they require the employer to “use a reasonable method for crediting hours of service that is consistent with the purposes of section 4980H.” They say this means that travel time must be taken into account in the case of a traveling salesperson and that class preparation time and other time necessary to perform the employee’s duties must be taken into account in the case of an adjunct faculty member.
- They provide rules for dealing with breaks in service and re-hire situations.
- They confirm that, while section 4980H requires coverage to be extended to a full-time employee’s dependents and not just the employee, the affordability of dependent coverage is not taken into account in determining whether an employee is eligible for a premium tax credit or cost sharing reduction if he or she decides to purchase coverage on an Exchange. Therefore no penalty can be imposed under section 4980H for failing to subsidize dependent coverage. They also say that an employer won’t be subject to a penalty in the first plan year beginning in 2014 for failing to provide dependent coverage if it “takes steps” towards providing that coverage.
- They confirm that the requirement under section 4980H to extend coverage to a full-time employee’s dependents does not apply to the employee’s spouse. Therefore no penalty can be imposed under section 4980H for failing to offer spousal coverage.
- They treat a large employer as offering coverage to all of its full-time employees (and their dependents) if it offers coverage to all but 5% or, if greater, 5 of its full-time employees. Like the rest of the penalty rules this rule applies on an entity-by-entity basis in the case of a controlled group of entities. Thus, omitting all of the employees of one small subsidiary will not be excused under this rule.
- For section 4980H purposes only, they allow an employer to use an employee’s Form W-2 wages or rate of pay – rather than household income – to determine the affordability of the employer’s health plan.
- They treat an employer that contributes to a multiemployer plan as satisfying the “shared responsibility” requirement with respect to employees covered by the plan as long as the plan itself provides coverage that is affordable and satisfies the minimum actuarial value test.
- They require an employee to have an “effective opportunity” to decline to enroll in coverage at least once a year, in part so that the employee can be eligible for a premium tax credit or cost sharing reduction if the coverage does not provide minimum value or is not affordable and he or she decides to purchase coverage on an Exchange instead.
In view of the guidance described above, employers should decide very soon how they will determine whether they will be large employers subject to the “shared responsibility” provisions in 2014, and identify the full-time employees who will be affected by those provisions. This is likely to involve a review of employment records for all members of the employer’s controlled group, the identification of any common law employees who do not show up in those records, the selection of appropriate look-back measurement periods, and the creation of systems to measure the hours of variable hour employees during those periods.