Although it is only January 2013, now is the time for employers and other entities that sponsor group health plans to get serious about 2014. In January 2014, major provisions of the Patient Protection and Affordable Care Act (“Affordable Care Act”) will take effect, including the individual mandate that was upheld by the Supreme Court, and the employer shared responsibility provisions. On December 28, 2012, the Internal Revenue Service (“IRS”) issued proposed regulations under Internal Revenue Code (“Code”) section 4980H, which set forth the employer shared responsibility provisions under the Affordable Care Act. In addition to these proposed regulations, FAQs were issued. They can be found at http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act . Employers may rely on the proposed regulations during 2013 in order to prepare for 2014. The proposed regulations provide that if the final regulations are more restrictive than the proposed regulations, the final regulations will be applied prospectively and employers will be provided sufficient time to comply with the final regulation.

Background

The Affordable Care Act provides that, effective beginning January 1, 2014, an applicable large employer that does not offer its full-time employees (and their dependents) minimum essential coverage that is both affordable and provides minimum value will potentially be liable for assessable payments under Code section 4980H. The proposed regulations state that an employee means an individual who is an employee under the common-law standard. The term employee does not include leased employees, sole proprietors, partners in a partnership or a two percent S corporation shareholder. The Affordable Care Act did not define who is a dependent but, for purposes of the employer shared responsibility provisions, the proposed regulations define dependent to mean a child, as defined in Code section 152(f) (1), of an employee who has not attained age 26. The Code section 152(f) (1) definition of “child” includes a son, daughter, adopted child, stepson, stepdaughter or an eligible foster child of the taxpayer. Based on the foregoing, an employer will need to offer coverage to all of those categories of children, including an eligible foster child, or potentially be subject to an assessable payment under Code section 4980H. It is worth noting that, for purposes of the employer shared responsibility provisions, a dependent does not include a spouse.

For plan years that begin in 2014, the preamble to the proposed regulations provides transition relief for applicable large employer members who do not currently offer dependent coverage. An employer that, during its 2014 plan year, takes steps to offer coverage to full-time employees’ dependents will not be liable for any assessable payment under Code section 4980H solely on account of a failure to offer dependent coverage for that plan year.

The proposed regulations provide that the 4980H assessable payments will be assessed against an applicable large employer member, which is defined as “a person that, together with one or more other persons, is treated as a single employer that is an applicable large employer.” This is welcome news for employers because the liability for, and the amount of, the assessable payment is computed and assessed separately for each applicable large employer member, not the entire controlled group.

Employers have been very concerned that they could be subject to the 4980H (a) assessable payment with respect to all of their full-time employees (less the first 30 employees, per the rules) if a few people were inadvertently missed due to payroll coding or other inadvertent errors. The proposed regulations adopt a “substantially all” standard of 95%. They provide that an applicable large employer member who for any calendar month offers minimum essential coverage to all but 5% (or, if greater, five) of its full-time employees and their dependents will not be subject to the Code section 4980H (a) assessable payment for failing to offer coverage.

An applicable large employer member who for any calendar month does not offer minimum essential coverage that both provides minimum value and is affordable to all but 5% (or, if greater, five) of its full-time employees and their dependents may be subject to an assessable payment under Code section 4980H (b).

Who is an Applicable Large Employer?

Whether an employer is an applicable large employer is determined on a controlled group basis. An applicable large employer is an employer that employed an average of at least 50 full-time employees (taking into account fulltime employee equivalents) on business days during the preceding calendar year. Whether an employer employs at least 50 full-time employees is determined by adding the total number of full-time employees (including any seasonal workers) and the total number of full-time employee equivalents (including any seasonal workers) for each calendar month in the preceding calendar year, and dividing the total for the year by 12. If the result is not a whole number it is rounded down to the next lowest whole number. For purposes of making this determination, seasonal workers are taken into account subject to the exception discussed below.

For purposes of determining who is an applicable large employer, there is an exception for seasonal workers. If the number of employees employed by the employer exceeds 50 for 120 or fewer days during the preceding calendar year, and the full-time employees in excess of 50 during those 120 or fewer days were seasonal workers, then the employer is not an applicable large employer for the current calendar year. The proposed regulations provide that four calendar months may be treated as the equivalent of 120 days for this purpose. Also, the four calendar months or 120 days or do not need to be consecutive.

If, in 2013, an employer is close to the 50 full-time employee threshold, transition relief is available to determine if the employer will be an applicable large employer for 2014. The employer may use any period of at least six consecutive months (instead of 12 months) during 2013 to determine whether it employed an average of at least 50 full-time employees in 2013. For example, an employer could measure from January 1, 2013, through June 30, 2013, to make a determination as to whether it is an applicable large employer and, if so, whether it will establish a plan for 2014.

For purposes of determining applicable large employer status, an employer includes a predecessor employer and a successor employer. The proposed regulations do not provide rules on predecessor and successor employers but instead state that taxpayers may rely upon a reasonable good faith interpretation of the statutory provision on predecessor (and successor) employers for this purpose until further guidance is issued.

What if an Employer Was Not in Existence in the Preceding Calendar Year?

An employer who was not in existence in the preceding calendar year will be an applicable large employer for the current year if the employer is reasonably expected to, and actually does, employ an average of at least 50 fulltime employees (taking into account full-time employee equivalents) on business days during the current calendar year.

Who is a Full-time Employee?

The Affordable Care Act provides that an individual is a full-time employee if he or she works an average of at least 30 hours of service per week with an employer. For purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as full-time. Guidance on how an employer might calculate hours of service to determine who is a full-time employee was previously provided by the IRS in Notices 2011-36, 2012-17 and 2012-58 (“the Notices”). The Notices provided for the concept of a look-back measurement method. Notice 2012-58 stated that employers could rely on the methods provided in the Notices through at least the end of 2014. Notice 2012-58 also introduced the concept of an optional administrative period that is retained in the proposed regulations. (For a more detailed analysis of the Notices, see our October 2012 issue.)

Hours of Service to be Counted

The proposed regulations provide that, with respect to an hourly employee, the employer must calculate the actual hours of service from the records of hours worked and hours for which payment is made or due to the employee. This includes hours for which an employee is paid or entitled to payment for the performance of duties for the employer and hours for which an employee is paid or entitled to payment for time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. If an employee is not paid on an hourly basis then the employer must use one of the following three methods:

  • Actual hours of service
  • A days worked equivalency of eight hours of service for each day the employee would be required to be credited with at least one hour of service
  • A weeks worked equivalency that credits the employee with 40 hours of service for each week the employee is to be credited with at least one hour of service

Although an employer must use one of these three methods to calculate hours for non-hourly employees, the employer is not required to use the same method for all non-hourly employees. Different methods may be applied to different classifications of non-hourly employees “provided the classifications are reasonable and consistently applied.”

An employer may not use one of the equivalency methods if it would result in the employee’s hours of service being substantially understated. The proposed regulations contain the following example: “[a]n employer may not use a days-worked equivalency in the case of an employee who generally works three 10-hour days per week, because the equivalency would substantially understate the employee’s hours of service as 24 hours of service per week, which would result in the employee being treated as not a full-time employee.”

Hours of service do not include service worked outside of the United States if the compensation for those hours of service constitutes foreign source income. This rule applies without regard to the residency or citizenship status of the individual.

Application of the Look-Back Measurement and Stability Periods

Note that the proposed regulations specify that the lookback measurement rules discussed below are to be applied solely for purposes of determining who is a full-time employee. These rules for determining who is a full-time employee are not to be used for purposes of determining whether an employer is an applicable large employer.

There are different rules for new employees, ongoing employees and new variable hour and seasonal employees as discussed below. Employers who are going to use the look-back measurement method to determine who will be a full-time employee on January 1, 2014, need to begin measuring employees’ time in 2013. It may be administratively difficult for an employer who generally wants to use a 12-month measurement period and a 12-month stability period to make that determination in advance of January 2014. The proposed regulations provide that, solely for purposes of stability periods beginning in 2014, an employer may adopt a transition measurement period that is shorter than 12 months but not less than 6 months. The transition measurement period must begin no later than July 1, 2013, and end no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014. The 90 day rule is intended to correspond with the maximum optional administrative period.

The proposed regulations also include a new rule providing that if each of an employer’s payroll periods is one week, two weeks, or semi-monthly in duration, an employer is permitted to begin and end its measurement periods with the beginning and end of the regular payroll periods. The proposed regulations contain the following example: “an employer using the calendar year as a measurement period could exclude the entire payroll period that included January 1 (the beginning of the year) if it included the entire payroll period that included December 31 (the end of that same calendar year), or, alternatively, could exclude the entire payroll period that included December 31 if it included the entire payroll period that included January 1 at the beginning of that same calendar year.”

Look-Back Measurement Period for Ongoing Employees

An ongoing employee is an employee who has been employed by the employer for at least one complete standard measurement period. An employer must determine an ongoing employee’s full-time status by looking back at the standard measurement period. The standard measurement period can be no less than three, but no more than 12 consecutive months, as chosen by the employer. If the employee was employed on average at least 30 hours per week during a standard measurement period then that employee must be treated as a full-time employee for the subsequent stability period. The stability period must be at least six consecutive months but no shorter than the standard measurement period. For example, if an employer uses a 12 month standard measurement period then the stability period must be at least 12 months.

If the employee was not employed on average at least 30 hours per week during a standard measurement period then the employer may treat that employee as not a fulltime employee during the immediately following stability period, which may be no longer than the associated standard measurement period.

New Employees Who ARE NOT Variable Hour or Seasonal Employees

A new employee is an employee who has been employed for less than one complete standard measurement period. If an employer sponsors a group health plan, then a new employee who is reasonably expected to be a full-time employee must be offered health coverage at or before the time when the employee completes his or her initial three full calendar months of employment. An employer who timely offers coverage will not be subject to the Code section 4980H assessment during this initial three calendar month period. However, if an employer does not offer coverage to such an employee by the end of the employee’s initial three full calendar months of employment, the employer may be subject to the Code section 4980H assessable payment for the employee’s initial three full calendar months of employment and for any subsequent months for which coverage was not offered.

New Employees Who ARE Variable Hour or Seasonal Employees

A new employee is a variable hour employee if, based on facts and circumstances at the start date, the employer cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours per week. For purposes of the employer shared responsibility provisions, the term seasonal employee has not yet been defined. Seasonal worker is defined with reference to existing regulations issued by the Secretary of Labor and includes, but is not limited to, workers covered by 29 CFR 500.20(s)(1) and retail workers employed exclusively during holiday seasons.

As discussed under the prior IRS guidance, with respect to a new variable hour or seasonal employee, an applicable large employer may use an initial measurement period of between three and 12 consecutive months. The measurement period may begin on the employee’s start date or any date from that date to the first day of the first calendar month following the employee’s start date. The hours worked during this initial measurement period will determine whether the employee was employed on average at least 30 hours of service per week. The initial measurement period will be followed by a stability period which must be the same length as the stability period for ongoing employees.

The administrative period can be no longer than 90 days, must begin immediately following the end of a measurement period and must end immediately before the start of a stability period. A special rule applies with respect to the administrative period for a new variable hour or seasonal employee. For these employees, the initial measurement period and the 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 (i.e., a maximum of 13 months plus a partial month).

If during the initial measurement period the new variable hour or seasonal employee did work on average at least 30 hours of service per week then the employee must be treated as a full-time employee during the subsequent stability period. The stability period must be a period of at least six consecutive calendar months that is no shorter than the initial measurement period. The stability period begins after the initial measurement period and any administrative period. If such an employee is determined to be full-time, then the employee must be treated as fulltime for the entire associated stability period, even if the employee is not employed on average at least 30 hours of service per week during an overlapping or immediately following standard measurement period.

If, during the initial measurement period the new variable hour or seasonal employee did not work on average at least 30 hours of service per week, then that employee will not be treated as a full-time employee during the stability period that follows the initial measurement period. Note that, in this situation, the stability period must not be more than one month longer than the initial measurement period and must not exceed the standard measurement plus any associated administrative period.

Rules for Change in Position or Employment Status

If an ongoing employee experiences a change in position or other change in employment status during a stability period, the change does not affect the classification of the employee as a full-time employee (or not a full-time employee) during that stability period. If a new variable hour or seasonal employee experiences a material change in their employment status before the end of the initial measurement period, such that if the employee had been hired into the new position or status they would have reasonably have been expected to be employed on average at least 30 hours of service per week, then the employer is not required to treat the employee as full-time until the first day of the fourth month following the change in employment status. However, if the initial measurement period ends earlier, and during the initial measurement period the employee worked on average at least 30 hours of service per week, then the employee must be treated as full-time as of the first day of the month following the end of the initial measurement period plus any associated administrative period.

Transition from New Employee to Ongoing Employee

With respect to a new variable hour or seasonal employee who has been employed for an entire standard measurement period, the applicable large employer member must then test that employee beginning with the standard measurement period that applies to ongoing employees. This concept for health plans is similar to the concept that is in place for 401(k) or other qualified plans that use a 1,000 hour requirement, and will result in an overlap of the time periods being counted. For example, if an employer uses a 12-month measurement period that begins on an employee’s start date and an employee is hired on May 15 2013, then the employee’s initial measurement period will run from May 15, 2013, through May 14, 2014. If the employer’s standard measurement period is the calendar year then this employee’s hours must also be measured from January 1, 2014, through December 31, 2014.

Categories of Employees for Which Different Look-Back Measurement and Stability Periods May be Used

Subject to the general rules on look-back measurement and stability periods, an applicable large employer member may use different look-back measurement and stability periods for the following categories of employees. These look-back measurement and stability periods may differ in length or starting and ending dates.

  • Collectively bargained and non-collectively bargained employees
  • Each group of collectively bargained employees covered by a separate collective bargaining agreement
  • Salaried employees and hourly employees
  • Employees whose primary places of employment are in different states

Rules for Rehired Employees and Employees Returning From a Leave of Absence

The proposed regulations include guidance with respect to rehired employees and employees returning after other unpaid leaves of absence. An employee who resumes service with an applicable large employer may be treated as a new employee if the employee was not credited with any hours of service for a period of at least 26 consecutive weeks immediately preceding the resumption of service. Alternatively, the proposed regulations provide for a rule of parity. An applicable large employer may select a shorter period of at least four consecutive weeks that is longer than the employee’s period of employment that immediately preceded the period in which the employee had no credited hours of service with the applicable large employer.

An employee who resumes service without having experienced a break in service (as described above) is treated as a continuing employee, and retains the status (full-time or not full-time) and the measurement and stability periods that applied prior to the employee’s termination or unpaid leave of absence. When a continuing employee resumes employment with an applicable large employer, that employee must be offered coverage as of the first day the employee is credited with an hour of service, or as soon as administratively practicable thereafter.

The proposed regulations also contain averaging methods for periods when the employee was on special unpaid leave or, with respect to an educational organization, an employment break period. Special unpaid leave means unpaid leaves subject to the Family and Medical Leave Act of 1993 or the Uniformed Services Employment and Reemployment Rights Act of 1994 or unpaid leave for jury duty. An “employment break period” for this purpose is defined as a period of at least four consecutive weeks (disregarding special unpaid leave) during which an employee of an educational organization is not credited with any hours of service. The proposed regulations also contain an anti-abuse rule whereby any hour of service will be disregarded if the purpose of granting it is to avoid or undermine the application of the employee rehire rules.

General Rules Regarding Code Section 4980H Assessable Payments

As noted above, the proposed regulations provide that the Code section 4980H assessable payments will be computed and assessed separately for each applicable large employer member and not the entire controlled group.

Full-time employees and their dependents must have an effective opportunity to elect to enroll in minimum essential coverage under an eligible employer-sponsored plan at least once during the plan year. Whether an employee has an effective opportunity will be determined based on all the relevant facts and circumstances.

If a full-time employee and his or her dependents employee would have been offered coverage for an entire month, but the employee terminated employment mid-month, then the employee is treated as having been offered coverage for the entire month.

Also, if a full-time employee and his or her dependents have been offered minimum essential coverage under an eligible employer-sponsored plan, but that coverage is terminated for late payment or non-payment of the employee’s required share of the premiums (based on the payment rules provided for in the COBRA regulations), then the employer will not be treated as having failed to offer that full-time employee and his or her dependents the opportunity to enroll in minimum essential coverage for the remainder of the coverage period.

In order for the IRS to determine whether for any month an applicable large employer member has offered its fulltime employees and their dependents minimum essential coverage that is affordable and provides minimum value, employers will be required to report information about their employer-provided health coverage. This reporting requirement will begin in 2015 for coverage provided in 2014.

Code Section 4980H (a)

If, for any calendar month, an applicable large employer member either does not offer minimum essential coverage at all, or fails to offer minimum essential coverage to at but 5% (or, if greater, 5) of its full-time employees and their dependents, and at least one full-time employee is certified to the employer as having received a premium tax credit or cost-sharing reduction to help pay for coverage on a public exchange, the employer will be subject to an assessable payment equal to the number of the applicable large employer member’s full-time employees (less the member’s allocable share of the 30 employee reduction) times the Code section 4980H(a) applicable payment amount. For 2014, the Code section 4980H(a) applicable payment amount for a calendar month equals 1/12th of $2,000 ($166.66). The applicable payment amount will be adjusted for inflation in subsequent years.

With respect to the Section 4980H (a) penalty, the exclusion for the first 30 employees will be allocated among all the related employers based on the number of full-time employees employed by each applicable large employer member during the calendar year. The proposed regulations provide that if an applicable large employer member’s total allocation is a fractional number that is less than one, it will be rounded up to one. As a result, the aggregate reduction for all of the related employers may be greater than 30.

Code Section 4980H (b)

If, for any calendar month, an applicable large employer member offers all but 5% (or, if greater, 5) of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage, but that coverage is either unaffordable or does not provide minimum value, and at least one full-time employee is certified to the employer as having received a premium tax credit or cost-sharing reduction to help pay for coverage on public exchange, the applicable large employer member will be subject to an assessable payment under the Code section 4980H(b). For 2014, the Code section 4980H (b) applicable payment amount for a calendar month equals 1/12th of $3,000 ($250.00) times the number of full-time employees of the applicable large employer member for whom it has received certification less the number of employees who are new full-time employees in their first three months of employment and less new variable hour and seasonal employees during their initial measurement period and any associated administrative period. The applicable payment amount will be adjusted for inflation in subsequent years.

The maximum assessable payment under Code section 4980H (b) is subject to the maximum amount that would be payable under the provisions of Code section 4980H (a).

What is Affordable Coverage?

The Affordable Care Act provides that coverage under an eligible employer-sponsored plan is affordable if the employee’s required contribution for coverage does not exceed 9.5% of the employee’s household income for a taxable year. As an employee’s household income for a taxable year will not be known until the end of the taxable year, the IRS has previously provided a safe harbor rule based on Form W-2 income. This rule is retained in the proposed regulations and two additional safe harbor rules are also proposed.

The Form W-2 safe harbor provides that an applicable large employer member will not be subject to an assessable payment under Code section 4980H(b) if the employee’s required contribution for the lowest cost self-only coverage offered by an applicable large employer member that provides minimum value does not exceed 9.5% of the employee’s Form W-2 wages reported in Box 1 by the employer for the calendar year. If coverage is not offered for the entire year because, for example, the employee is hired or terminates during the year, then the Form W-2 safe harbor is applied by adjusting the Form W-2 wages to reflect the period for which coverage was offered.

The rate of pay safe harbor will be met if the employee’s required contribution for a calendar month for the applicable large employer member’s lowest cost self-only coverage that provides minimum value does not exceed 9.5% of an amount equal to 130 hours times the employee’s hourly rate of pay determined as of the first day of the plan year. If the employee is a salaried employee, the employee’s required contribution for a calendar month for the employer’s lowest cost self-only coverage that provides minimum value cannot exceed 9.5% of the employee’s monthly salary.

There is also a Federal poverty line safe harbor. For this purpose, an applicable large employer member must look at the Federal poverty line for the State in which the employee is employed. To meet this safe-harbor, the employee’s required contribution for the calendar month for the applicable large employer member’s lowest cost selfonly coverage that provides minimum value cannot exceed 9.5% of a monthly amount determined as the Federal poverty line for a single individual for the applicable calendar year, divided by 12.

Transition Rules for Fiscal Year Plans in Effect on December 27, 2012

Transition rules are provided for applicable large employer members who as of December 27, 2012, offered health coverage under a fiscal year plan. The transition relief applies with respect to an employee who would be eligible for coverage under the plan as of the first day of the fiscal year that begins in 2014 under the plan’s eligibility terms in effect on December 27, 2012. If an employee is offered affordable minimum value coverage no later than the first day of the fiscal plan year that begins in 2014, then the applicable large employer member will not be subject to an assessable payment for that employee for the period prior to the first day of the fiscal plan year starting in 2014. This rule applies provided the employee was offered coverage, regardless of whether the employee actually enrolled in coverage.

In addition, transition relief is provided for applicable large employer members that have a significant percentage of employees eligible for, or covered under, one or more fiscal year plans that have the same plan year as of December 27, 2012, and the applicable large employer member wants to offer other employees coverage under those plans. If during the last open enrollment period before December 27, 2012, the plan(s) covered at least onequarter of the applicable large employer member’s employees, or the plan(s) was offered to at least one-third of the applicable large employer member’s employees (including both full-time and part-time employees ), then the applicable large employer member will not be subject to the employer shared responsibility payment under Code section 4980H with respect to its full-time employees for any month prior to the first day of the fiscal plan year starting in 2014 with respect to employees who:

  • are offered affordable, minimum value coverage no later than the first day of the 2014 plan year of the fiscal year plan; and
  • would not have been eligible for coverage under any group health plan maintained by the applicable large employer member as of December 27, 2012, that has a calendar year plan year.

For purposes of determining whether the plan covers at least one quarter of the employer’s employees, an applicable large employer member may look at any day between October 31, 2012, and December 27, 2012, to determine the percentage of employees covered under its plans.

Transition Rules for Cafeteria Plan Years Beginning in 2013

Salary reduction elections under a Code section 125 cafeteria plan are irrevocable unless the change is permitted under Treasury Regulations section 1.125-4, and the employer has incorporated the rules for those permitted election changes in its written cafeteria plan document. The proposed regulations provide transition relief for an employer provided accident and health plan whose fiscal year begins in 2013 to correspond with the fact that the public exchanges will be operational effective January 1, 2014. An employee may want to cancel coverage in order to enroll in a plan offered on the public exchange, or may wish to enroll in coverage under an employer plan, in order to avoid the individual mandate that becomes effective on January 1, 2014. The proposed regulations provide that an applicable large employer whose fiscal year begins in 2013 is permitted to amend its cafeteria plan to permit either or both of the following changes in salary reduction elections:

  • An employee who elected to salary reduce through the cafeteria plan for accident and health plan coverage with a fiscal plan year beginning in 2013 is allowed to prospectively revoke or change his or her election with respect to the accident and health plan once during that plan year, without regard to whether the employee experienced a change in status event described in Treasury Regulations section 1.125-4; and
  • An employee who failed to make a salary reduction election through his or her employer’s cafeteria plan for accident and health plan coverage with a fiscal plan year beginning in 2013 before the deadline in Proposed Treasury Regulations section 1.125-2 for making elections for the cafeteria plan year beginning in 2013 is allowed to make a prospective salary reduction election for accident and health coverage on or after the first day of the 2013 plan year of the cafeteria plan, without regard to whether the employee experienced a change in status event described in Treasury Regulations section 1.125-4.

Although retroactive amendments are generally not permitted for a Section 125 cafeteria plan, in this case, the proposed regulations do permit the plan to be amended retroactively to the first day of the 2013 plan year. The amendment must be made by no later than December 31, 2014.

Transition Rules for Applicable Large Employer Members Participating in Multiemployer Plans

Multiemployer plans are unique in that they are maintained pursuant to collective bargaining agreements and contributions may be based on requirements other than hours worked. In addition covered employees may work for multiple employers, thus no one employer can determine how many hours an individual worked. The IRS is requesting further comments on how Code section 4980H should apply to employers who participate in multiemployer plans. In the meantime, the proposed regulations also contain the following transition rule for multiemployer plans:

An applicable large employer member will not be treated as failing to offer the opportunity to enroll in minimum essential coverage to a full-time employee (and the employee’s dependents) for purposes of section 4980H(a), and will not be subject to a penalty under section 4980H(b) with respect to a full-time employee if (i) the employer is required to make a contribution to a multiemployer plan with respect to the full-time employee pursuant to a collective bargaining agreement or an appropriate related participation agreement, (ii) coverage under the multiemployer plan is offered to the full-time employee (and the employee’s dependents), and (iii) the coverage offered to the full-time employee is affordable and provides minimum value.

This transition rule will apply through 2014.

CONCLUSIONS

Now is the time for employers to determine whether they are an applicable large employer and, if so, decide whether and to what extent they will comply with these employer shared responsibility provisions of the Affordable Care Act. In order to make the decision whether to “pay or play”, employers may want to analyse their potential liability under Code sections 4980H (a) and (b) and determine whether they want to avoid all of the assessable payments, or some of them. There are many pieces to the employer shared responsibility rules and, for many companies, several departments including benefits, human resources, employee relations, payroll, finance and legal, as well as benefits and/or compensation committees, may need to be involved in these decisions.

In order to assess potential liability for purposes of Code section 4980H (a), employers will need to review their entire U.S. workforce to determine who their common law employees are, and then carefully review their plan eligibility provisions to determine whether any of those common law employees (and their dependents) are not currently eligible for minimum essential coverage. For purposes of Code section 4980H (b), employers will need to determine if their coverage provides minimum value and is affordable, as defined by the Affordable Care Act and its implementing regulations.

An employer who will continue to provide coverage, but does not currently cover all but 5% (or, if greater, five) of its full-time employees, will need to determine what additional groups of employees it will cover in order to meet the requirements of Code section 4980H (a). An employer who will continue to provide coverage, but who does not currently cover dependent children (as defined in Code section 152(f)(1)), will need to take steps to add dependent child coverage in order to meet the requirements of Code section 4980H (a). An employer who determines that it will continue to provide coverage (or who decides to implement a group health plan) will need to determine how it will measure service for new and ongoing employees, including variable hour and seasonal employees. If an employer will use the look-back measurement and stability safe harbors, then measurement periods must generally begin in 2013 in order to ensure that the appropriate employees are covered effective January 1, 2014.