The Internal Revenue Service (IRS) and Department of the Treasury (Treasury) have issued long-awaited final regulations on the employer "pay or play" health care mandate. Although the final employer mandate regulations offer some transitional guidance for certain employers, many employers should take action now to ensure that they comply with the employer mandate when it becomes effective in 2015.
One of the key requirements of the Patient Protection and Affordable Care Act, as amended (the "Affordable Care Act") is the new employer shared responsibility or "pay or play" mandate. The employer mandate requires most large employers (generally those with 50 or more employees) to offer full-time employees and their dependent children qualifying health insurance coverage or pay a monthly penalty to the federal government. The IRS and Treasury issued proposed regulations on the employer mandate in December 2012. Recently, after receiving numerous public comments, the IRS and Treasury issued longawaited final regulations on the employer mandate, as well as a fact sheet and questions and answers on the employer mandate.
Generally, the employer mandate applies to "applicable large employers," which are employers with 50 or more full-time employees (defined as employees who work, on average, at least 30 hours per week), including full-time equivalent employees (FTEs). Applicable large employer status is determined on a controlled group basis. To meet the minimum requirements for qualifying coverage, the coverage must (i) be minimum essential coverage, (ii) be affordable, and (iii) provide minimum value. Coverage will generally be considered affordable if the employee's required contribution for self-only coverage (as opposed to coverage for dependents or family coverage) is not more than 9.5% of the employee's annual household income for that year. Coverage generally provides minimum value when the plan's share of the total costs of benefits provided under the plan is at least 60%.
Transition Relief for Medium-Sized Employers
As discussed in our prior client alerts, the employer mandate was originally scheduled to take effect in 2014 but has been delayed twice. Last summer, the employer mandate was delayed until 2015 for all employers subject to the mandate. The final regulations delay the employer mandate further—until 2016—for certain employers with 50 to 99 employees who satisfy certain requirements. Employers with more than 99 employees, and employers with 50 to 99 employees who fail to meet the requirements for the transition relief for medium-sized employers, generally must comply with the employer mandate for periods after December 31, 2014, and may rely on the final regulations in preparing for such compliance.
Additional Transition Relief
In addition to the transition relief for medium-sized employers, the final regulations provide the following transition relief for 2015:
- Coverage Requirements. To satisfy the employer mandate for 2015, an employer must offer coverage to at least 70% of its full-time employees. This coverage requirement will increase to 95% of full-time employees for 2016 and later years.
- Determining Status as Applicable Large Employer. For purposes of determining whether an employer has the requisite number of full-time employees or FTEs to be subject to the employer mandate in 2015, an employer may use a period of at least six consecutive months (instead of an entire year).
- Measurement Period for Determining Full-Time Employees. Under the look-back measurement method, an employer may determine the status of an employee as a full-time employee during a subsequent period (referred to as the stability period), based upon the employee's hours of service in a prior period (referred to as the measurement period). To determine the number of full-time employees for 2015, on a one-time basis, an employer may use a six-month measurement period, even with respect to a stability period of up to twelve months.
- Non-Calendar Year Plans. An employer that sponsors a non-calendar year plan will not be required to comply with the employer mandate until the beginning of the plan year that starts in 2015 (instead of January 1, 2015), provided that certain conditions were met on February 9, 2014.
- Dependent Children. The employer mandate requires that qualifying coverage must be offered to both employees and their dependent children. However, an employer that (i) does not currently offer dependent coverage, (ii) covers some but not all dependents, or (iii) offers dependent coverage that does not constitute minimum essential coverage, will not be subject to a penalty for 2015 if the employer takes steps during that plan year to offer qualifying dependent coverage beginning in 2016. This transition relief is not available to an employer that offered dependent coverage in 2013 or 2014 and subsequently dropped that coverage.
Various Employee Categories
The final regulations clarify whether certain categories of employees are considered fulltime employees. Specifically, for purposes of the employer mandate:
- Volunteers. Bona-fide volunteers for a government or tax-exempt entity are not considered full-time employees. Educational Employees. Teachers and other educational employees who work fulltime during the school year will not be considered part-time employees simply because their school is closed or operating on a limited schedule during the summer.
- Seasonal Employees. Workers in positions for which the customary annual employment is six months or less generally will not be considered full-time employees.
- Student Work-Study Programs. Service performed by students under federal or statesponsored work study programs will not be counted for determination of full-time employee status. However, the final regulations do not include a general exception for student employees; all hours of service for which a student employee is paid or entitled to payment in a capacity other than through a federal or state-sponsored work study program are required to be counted for determination of full-time employee status.
- Adjunct Faculty. Until further guidance is issued, employers of adjunct faculty must use a method of crediting hours of service that is reasonable under the circumstances and consistent with the employer mandate. For this purpose, the final regulations provide a safe harbor which permits an employer to credit an adjunct faculty member with 2¼ hours of service per week for each hour of teaching or classroom time.
Identification of Full-Time Employees
The Affordable Care Act defines the term "full-time employee" to mean, with respect to any month, an employee who is employed on average at least 30 hours per week. The final regulations provide two measurement periods that an employer may use to determine whether an employee is a full-time employee: the monthly measurement period and the look-back measurement period. The final regulations clarify how to apply the monthly measurement period and the look-back measurement period for determining full-time status. Under the monthly measurement period, employees will be identified as full-time employees using their hours of service for each calendar month. Under the look-back measurement period, an employer may determine the status of an employee as a full-time employee during a subsequent period (referred to as a "stability period"), based upon the employee's hours of service in a prior period (the "measurement period"). Using the look-back measurement period makes it easier to determine whether employees who work varying hours and seasonal employees are full-time employees. An employer generally must use the same measurement method for all employees, but the final regulations allow an employer to apply either the monthly measurement period or the look-back measurement period to different categories of employees (for example, an employer may use the monthly measurement period for salaried employees and the look-back measurement period for hourly employees).
Affordability Safe Harbors
Like the proposed regulations, the final regulations provide safe harbors that make it easy for an employer to determine whether the coverage it offers is affordable to employees. These safe harbors allow an employer to use employees' hourly rates of pay, W-2 wages paid, or the federal poverty level in determining whether employer coverage is affordable under the Affordable Care Act. If an employer meets the requirements of the safe harbor, the offer of coverage is deemed affordable under the Affordable Care Act. Use of a safe harbor is optional, and an employer may choose to use one or more of these safe harbors for all of its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category (for example, using one safe harbor for salaried employees and another safe harbor for hourly employees).
Assessment and Payment of Employer Mandate Penalties
Like the proposed regulations, under the final regulations, a covered employer who fails to satisfy the employer mandate will be subject to a penalty, which will be payable upon notice and demand and will be assessed and collected in the same manner as other tax penalties. An employer will not be required to self-report potential penalty amounts related to the "pay or play" rules. Rather, the IRS will contact the employer to inform it of its potential liability and provide it with an opportunity to respond before any penalty is assessed or notice and demand for payment is made.
Like the proposed regulations, the final regulations define an employee for purposes of the employer mandate as an individual who is an employee under the common law standard, subject to certain exclusions, such as exclusions for leased employees, sole proprietors, and partners in partnerships. Under the common law standard, a worker is generally a common law employee of an entity if that entity has the right to direct and control the worker. An employer is not required to offer health insurance coverage to independent contractors. However, if a worker is misclassified as an independent contractor and is later found by the IRS to be a common law employee, such misclassification is likely to expose the employer to penalties. Commenters had suggested that worker classification relief available for purposes of employment tax provisions of the Internal Revenue Code also be made available for purposes of the employer mandate. However, the IRS declined to adopt this suggestion because it is concerned that providing such relief would increase the potential for worker misclassification by significantly increasing the benefit of having a worker classified as an independent contractor rather than an employee. Employers should carefully review their arrangements with independent contractors to ensure that such workers have been properly classified, and would not meet the definition of a common law employee.
Although the employer mandate has been delayed, employers should take steps now to prepare for compliance. These steps include the following:
- Determine whether the employer is an "applicable large employer" and subject to the employer mandate.
- Determine the employer's current costs for employee health insurance coverage and any alternative options available to it.
- Consult with health insurance providers and brokers, and explore health insurance options and the associated costs.
- If the employer is an "applicable large employer," decide whether to offer qualifying health insurance coverage or be subject to penalties.
- If the employer elects to comply with the employer mandate, it should determine who are its full-time employees that must be offered coverage.
- If the employer elects to comply with the employer mandate, it should ensure that its health insurance coverage meets the Affordable Care Act's minimum requirements to avoid any "pay or play" penalties. The employer should review health insurance plan documents, SPDs, and other plan information, and consult with legal counsel.
- The employer should consider whether any available transition rules are applicable to it.