The Internal Revenue Service (IRS) recently issued
much-anticipated guidance regarding the application of the
employer-sponsored health coverage mandate (often called the
"play or pay rules" under health care reform). If a
nonprofit employer has 50 or more full-time equivalent employees,
the employer needs to carefully consider its approach to the new
mandate. Planning for these rules should begin as soon as
possible. While the employer coverage mandate itself does not
apply until 2014, it may be necessary to begin tracking the hours
of employees as soon as October 2012 in order to facilitate
compliance.
The Play or Pay Rules Generally
The employer-sponsored health coverage mandate is designed to
require "applicable large employers"1 either
to provide employees with adequate and affordable health coverage
or to require those employers to pay certain penalties for their
failure to do so. Specifically, penalties are triggered
if:
- A nonprofit employer fails to offer all of its "full-time employees" the opportunity to enroll in an employer-sponsored health plan; or (2) the employer-sponsored health plan offered to full-time employees is "unaffordable" or fails to provide "minimum value;" AND
- Any employee impacted by such failure purchases individual health insurance coverage through a State-based or Federally-facilitated Exchange and qualifies for a subsidy.2
Failure to Provide Coverage
Nonprofit employers who fail to provide coverage to their
full-time employees are subject to a penalty of $2,000 per year
(assessed on a monthly basis) multiplied by their total full-time
employee count.3 For nonprofit employers that
provide health coverage, the challenge with respect to this rule is
identifying all of their full-time employees - and making sure all
such employees are offered coverage. In the event that even
one full-time employee is not offered coverage and subsequently
attains subsidized coverage through an exchange, the penalty is
applied to all full-time employees. Thus, with respect to any
employees who do receive employer-sponsored coverage, the nonprofit
employer could end up "playing" and
"paying."
Generally, health care reform defines a full-time employee as any
employee working on average at least 30 hours a week. The new
IRS guidance clarifies that this definition not only includes those
individuals who can be reasonably expected to work on average at
least 30 hours a week, but may also encompass certain
"variable-hour employees."
The guidance provides a safe harbor for determining if an employee
is full-time that allows nonprofit employers some relief from the
need to monitor employee status on a monthly basis. This is
especially useful for those nonprofit employers with high turnover
and a significant number of variable-hour employees.
Specifically, the guidance allows a nonprofit employer to monitor
the hours of a variable-hour employee over a three- to twelve-month
"measurement" or "look-back" period to
determine if the employee averaged 30 or more hours per week during
that period. The nonprofit employer can then rely on those
results for purposes of determining whether coverage should be
offered to that employee during a subsequent six-to twelve-month
"stability period" to avoid the no-coverage
penalty.
The new guidance also introduces the concept of an administrative
period between a measurement period and its corresponding stability
period to allow nonprofit employers to enroll employees determined
to be full-time based on the prior measurement period.
Depending upon the length of the measurement, stability, and
administrative periods elected, the first measurement period for
some nonprofit employers may begin as early as October 1,
2012.
Failure to Provide Affordable/Adequate
Coverage
The second penalty under the play or pay rules applies to nonprofit
employers who offer all of their full-time employees coverage, but
such coverage is too expensive or deemed inadequate. The penalty,
$3,000 per year (assessed on a monthly basis), applies only with
respect to those full-time employees who actually receive
subsidized health coverage through an exchange.
For purposes of this rule, coverage is deemed to be
"unaffordable" if the employee premium for the
lowest-priced "employee only" plan option available
through an employer exceeds 9.5% of that employee's household
income. The new guidance issued last week confirms that
nonprofit employers do not have to actually determine an
employee's household income for purposes of administering this
rule. Instead, a nonprofit employer can assume that an
employee's household income is equal to the W-2 income provided
to that employee by the nonprofit employer for purposes of
determining if the coverage it offers is affordable.
This penalty is also triggered if the coverage provided through an
employer-sponsored plan does not provide "minimum
value." A plan fails to provide minimum value if the
plan's share of the total allowed cost of benefits provided
under the plan is less than 60% of such cost. Definitive
guidance on how to make this determination has not yet been issued;
however, preliminary indications from the government suggest that a
calculator will be made available for purposes of making these
determinations.4 In addition, the government has
suggested that certain safe-harbor checklists will be issued to
allow employer-sponsored plans to confirm they offer minimum value
without performing any calculations.
Additional Guidance Regarding the Limitation of Waiting
Periods
Health care reform prohibits employer-sponsored health plans from
imposing waiting periods of greater than 90 days. The U.S.
Departments of the Treasury, Labor, and Health and Human Services
issued joint guidance on August 31, 2012 on the prohibition of
extended waiting periods for participation in employer-sponsored
plans. Among other things, the new guidance describes the
interaction of this rule with the no-coverage penalty discussed
above. It clarifies that the use of properly designed
measurement periods will not be deemed to be a violation of the
90-day waiting period limitation. It also provides additional
information about how this rule should be applied in practice,
including with respect to part-time employees.
Preparing for 2014 - Avoiding Penalties Is Not as Simple as
Merely Providing Coverage
To avoid this result, it is necessary for nonprofit employers to
evaluate which employees are eligible for coverage under existing
plans, track the hours of any excluded employees, monitor the
income of low-paid full-time employees in relationship to plan
premiums, and, once further guidance is issued, confirm their plan
offers adequate coverage. This is no small task, but with
thorough planning, nonprofit employers can implement the required
plan changes and tracking systems necessary to avoid
penalties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.