United States: Final Regulations Issued Regarding Employer Shared Responsibility Under The ACA

Recently issued final regulations on the employer pay-or-play rules under the Affordable Care Act (ACA) clarify the requirement that employers provide health coverage to full-time employees and their dependents, or pay a penalty and provide additional transition relief for 2015.

The U.S. Treasury Department (Treasury) issued final regulations on February 10, 2014, regarding the "pay-or-play" or "employer shared responsibility" requirements under Section 4980H of the Internal Revenue Code of 1986 (Code) (hereafter, the Pay-or-Play Rules). Treasury also released a fact sheet, and questions and answers clarifying key provisions of the Pay-or-Play Rules. The employer Pay-or-Play rules originally were intended to take effect on January 1, 2014, but employers received relief this past year when Internal Revenue Service (IRS) Notice 2013-45 delayed enforcement until January 1, 2015. The final regulations further delay and modify enforcement for certain employers in 2015 as described below.

Employer Pay-or-Play Requirements

Generally, Section 4980H of the Code requires a large employer to offer health coverage to its full-time employees that both is affordable and provides minimum value, or risk being subject to tax penalties. A "large employer" is an employer that employed an average of at least 50 full-time equivalent employees during the prior year. Large employer status is determined on a controlled group basis. However, whether an employer is subject to any tax penalties under Code Section 4980H is determined separately for each member of the controlled group. For an employer that was not in existence in the prior calendar year, the determination of whether that new employer is a large employer during its first calendar year is based on the employer's reasonable expectations at the time the business comes into existence; the preamble clarifies that a new employer will not be recharacterized as a large employer if subsequent events cause the actual number of full-time equivalent employees to exceed that reasonable expectation. The final regulations clarify that an employer is treated as not having been in existence in the prior calendar year only if the employer was not in existence on any business day in the prior calendar year.

A large employer may be subject to penalties under the Pay-or-Play Rules under Section 4980H(a) of the Code if the employer does not offer minimum essential coverage to at least 95 percent of its full-time employees (and their dependent children), and at least one employee receives a cost-sharing reduction or premium tax credit (collectively, an exchange subsidy) for coverage purchased under a state or federally facilitated Marketplace Exchange created by the Affordable Care Act (ACA). For each month that a large employer does not offer coverage or offers coverage to less than 95 percent of its full-time employees (and their dependent children), the employer will owe a Section 4980H(a) penalty equal to the number of full-time employees the employer employed for that month (minus 30), multiplied by one-twelfth of $2,000.

A large employer may be subject to Pay-or-Play penalties under Section 4980H(b) of the Code if the employer offers minimum essential coverage to at least 95 percent of its full-time employees (and their dependent children), but the coverage is either unaffordable or does not provide minimum value, and at least one full-time employee receives an exchange subsidy. If the employer offers minimum essential coverage to at least 95 percent but less than 100 percent of its full-time employees (and their dependent children), the Section 4980H(b) penalty also applies to any full-time employee who is not offered coverage and receives an exchange subsidy. The Section 4980H(b) penalty is equal to the number of full-time employees who receive an exchange subsidy for that month, multiplied by 1/12 of $3,000.

Transition Relief

The final Pay-or-Play Rules provide the following transition relief for 2015:

  • Reduced Coverage Requirement for 2015. A large employer that offers coverage to at least 70 percent of its full-time employees for the 2015 plan year will not be subject to penalties under Section 4980H(a) of the Code for 2015. However, even if a large employer meets the 70 percent threshold, it still faces the potential for the $3,000 Section 4980H(b) penalty for every full-time employee who isn't offered affordable, minimum value coverage and receives an exchange subsidy for insurance through the Marketplace Exchange. Starting with the 2016 plan year, a large employer must offer coverage to at least 95 percent of its full-time employees in order to avoid the $2,000 Section 4980H(a) penalty.
  • Non-Calendar Year Plans. Employers with non-calendar year plans that were in effect as of December 27, 2012, and that have not since modified the plan year to begin at a later calendar date will generally not have to comply with the Pay-or-Play Rules until the first day of the plan year that begins after January 1, 2015.
  • Relief Until 2016 for Employers with Fewer Than 100 Employees. Compliance with the Pay-or-Play Rules is generally not required until the 2016 plan year for employers with at least 50 but fewer than 100 full-time equivalent employees in the controlled group that provide appropriate certification (as part of the informational filing that the employer will be required to make with the IRS under Section 6056).
  • Transition Rule for Determining Large Employer Status. For the 2015 calendar year, an employer may determine its status as a large employer by determining whether it employed an average of at least 50 full-time employees during any consecutive period of at least six calendar months during the 2014 calendar year (rather than the entire 2014 calendar year). Starting in 2016, an employer must determine its status for the calendar year by averaging the total number of full-time equivalent employees for each of the 12 months in the preceding calendar year.
  • Revised Section 4980H(a) Penalty Calculation for 2015. For the 2015 plan year, an employer may exclude the first 80 full-time employees from penalty calculations under Section 4980H(a) of the Code. This amount will decrease to 30 employees in 2016.
  • Dependents. Solely for purposes of the penalties under Code Section 4980H, employers are not required to offer dependent coverage to foster children and stepchildren; employers must offer coverage only for employees' biological and adopted children. Additionally, for purposes of Section 4980H penalties, a child must be offered coverage for the entire calendar month during which he or she attains age 26. Penalties will not apply for the 2015 plan year for certain employers that have taken steps towards satisfying the Pay-or-Play Rule requirement to offer dependent coverage. The guidance confirms that employers are not required to offer spousal coverage.

Defining Full-Time Employee and Counting Hours of Service

A full-time employee is defined as an employee who is employed on average at least 30 hours of service per week. This standard has been the subject of much debate, and legislation has been introduced in both the U.S. House of Representatives and Senate to increase the number of hours required to be considered a full-time employee, such as to 40 hours of service per week. However, because the 30-hour standard was written into the ACA legislation, Treasury has no authority to change the hours requirement.

Large employers must track all hours of service worked for which payment is made or due in order to determine an employee's full-time status. As under the proposed regulations, this includes any payment made or due for vacation, holiday, illness, incapacity, layoff, jury duty, military duty or leave of absence. The final regulations provide that hours of service do not include any hours worked by a volunteer who does not receive compensation for his or her services or who is a "bona fide volunteer" of a government entity or 501(c) tax-exempt organization whose only compensation consists of reimbursement of reasonable expenses and certain reasonable benefits and nominal fees. Hours of service also do not include any hours worked for income that is taxed as income from sources outside of the United States. In addition, the final regulations provide that hours of service do not include hours attributable to a student participating under a federal or state-sponsored work-study program. Importantly, this exception does not include other student employees, such as students in a paid internship or externship program. Employers that have employees whose hours of service are difficult to track, such as employees who are on call or who are travelling salespeople compensated on a commission basis, must use a reasonable method of crediting hours of service.

The final regulations provide two measurement methods for an employer to determine whether an employee is a full-time employee: the monthly measurement method and the look-back measurement method. Under the monthly measurement method, an employer determines whether each employee is a full-time employee by counting the employee's hours of service for each month. An employer will not be subject to a Pay-or-Play penalty with respect to an employee as long as the employee is offered affordable, minimum value coverage no later than the day after the end of the three-month period that begins with the first full calendar month in which the employee meets the plan's eligibility requirements for coverage other than a waiting period. The final regulations include rules for counting hours of service under the monthly measurement method.

Under the look-back measurement method, an employer determines an employee's full-time status during a future period known as the "stability period" based upon the employee's hours of service in a prior period referred to as the "measurement period." For ongoing employees, employers determine full-time employee status by reference to hours worked during a "standard measurement period" that is between three and 12 months long. Each ongoing employee who works an average of 30 hours per week during the standard measurement period is treated as a full-time employee during the subsequent stability period.

Employers may use different standard measurement periods and stability periods, as long as the periods selected are consistent for all employees in the same category. Additionally, different employer members of the same large employer may use measurement periods and stability periods that differ either in length or in their starting or ending dates. Employers may choose to use an administrative period of up to 90 days between the standard measurement period and stability period to determine full-time employee eligibility and to enroll employees in health coverage.

Transition Rule for 2015 Stability Period

Employers that wish to use a 12-month stability period for 2015 may use a shorter look-back period for purposes of identifying full-time employees. The short measurement period must be at least six consecutive months; must begin no later than July 1, 2014; and must end no later than 90 days before the first day of the plan year beginning on or after January 1, 2015. Starting with stability periods starting in 2016, employers must use a 12-month look-back period in order to use a 12-month stability period.

The final regulations continue to apply special rules to determine continuing employee hours during periods of special unpaid leave. Special unpaid leave means periods of unpaid leave subject to the Family and Medical Leave Act of 1993 (FMLA) or the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), or on account of jury duty. To compute an employee's average hours for special unpaid leave during the standard measurement period, the employer will need to either ignore periods where no hours were worked or credit hours to the employee based on the average number of hours worked by the employee during the remainder of the measurement period (the result is the same under either method).

An employer may treat a rehired employee or an employee resuming service as a new employee rather than a continuing employee after a break in service in two situations. The first situation is when the employee had no hours of service for at least 13 weeks (previously, 26 weeks under the proposed regulations). Second, under the "rule of parity," an employer may treat a rehired employee who has had a break of at least four weeks as a new employee if the employee's break in service with no credited hours of service is longer than the employee's period of service immediately preceding the break in service.

As with the proposed regulations, the final regulations provide that a new employee who is reasonably expected to be full time (and who is not a seasonal employee) at the time he or she is hired must be provided health coverage by the first day of the month immediately following the employee's initial three months of employment in order to avoid potential tax penalties for that three-month period. Full-time employee status for such an employee is determined based on that employee's hours of service for each calendar month. Employees who are not expected to work an average of 30 hours per week are referred to as variable hour employees. A new employee is a variable hour employee if the employer cannot reasonably determine if the employee will work an average of 30 hours per week using certain factors set forth in the final regulations. An employer cannot take into account the likelihood that an employee will not continue employment through the entire initial measurement period in determining whether an employee is a variable hour employee. The final regulations describe factors an employer should consider in determining whether an employee is reasonably expected to be a variable hour employee (e.g., whether the employee is replacing an employee who was a full-time employee or a variable hour employee, the extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods, and whether the job was advertised or otherwise communicated to the new employee as full time). The same rules that apply to variable hour employees apply to part-time employees, defined as employees who are reasonably expected to average less than 30 hours of service per week. Seasonal employees also can be treated like variable hour employees subject to the look-back rules, even if they are hired to work a full-time schedule. The final regulations clarify that seasonal employees are those employees in a position for which the customary annual employment period is six months or less, and which starts in approximately the same part of the year.

Full-time employee status for a variable hour or seasonal employee is determined using a three-to-12-month look-back period called an "initial measurement period" and is generally consistent with the determination for ongoing employees. The final regulations clarify that the initial measurement period for a new variable hour or seasonal employee may begin at any time from the employee's start date up to and including the first day of the first calendar month following the employee's start date. If the employer determines that the variable hour or seasonal employee is not a full-time employee, then the employer will not need to treat that employee as full-time during the stability period unless the employee is determined to be a full-time employee during the standard measurement period applicable to ongoing employees, and the stability periods overlap. Variable hour or seasonal employees who experience a change in status, such that the employee would have reasonably been expected to be employed on a non-seasonal basis on average at least 30 hours of service per week if initially hired into that position, must be provided health coverage by the first day of the fourth calendar month following the change in employment status (or, if earlier, the first day of the first month following the end of the initial measurement period (plus any applicable administrative period) if the employee averaged 30 hours of service or more per week during the initial measurement period.

Affordable Coverage Safe Harbors

Under the Pay-or-Play Rules, even an employer that offers minimum essential health coverage to 95 percent (70 percent for 2015) or more of its full-time employees may still be subject to a penalty if that coverage is either unaffordable or does not provide minimum value. Health coverage is generally affordable if the employee's portion of the self-only premium for the employer's lowest cost coverage that provides minimum value does not exceed 9.5 percent of the employee's annual household income. Because it may be difficult for an employer to determine an employee's annual household income, the Pay-or-Play Rules provide three safe harbors under which an employer may treat coverage as affordable. Under the Form W-2 safe harbor, an offer of coverage is affordable if the employee's health care premium does not exceed 9.5 percent of that employee's Form W-2 wages, reported in box 1 of the Form W-2, for the calendar year. Under the rate of pay safe harbor, an offer of coverage is affordable if the employee's applicable health care premium does not exceed 9.5 percent of the employee's monthly wages equal to 130 hours multiplied by the lower of the employee's applicable hourly rate of pay on the first day of the coverage period or the lowest hourly rate of pay during the calendar month. The final regulations permit use of the rate of pay safe harbor even if an employee's rate of pay is reduced during the year, contrary to the proposed regulations. Under the federal poverty level safe harbor, coverage is affordable if the employee's applicable health care premium does not exceed 9.5 percent of the monthly equivalent of the federal poverty line. The final regulations permit an employer to use the federal poverty line in effect six months prior to the beginning of the plan year.

Employer Reporting

The IRS, and not the employer, will calculate any penalty due on an annual basis through a combination of employer and individual reporting, and will inform the employer of the assessed tax penalty. Treasury has indicated that final guidance on the employer reporting requirements under the ACA will be issued shortly.

Next Steps

Employers should review plan procedures and payroll practices to ensure that they have an effective strategy in place to prepare and plan for compliance with the Pay-or-Play Rules. Specifically, employers should identify and categorize employees, decide whether to adopt a monthly measurement method or look-back measurement method for identifying full-time employees, identify look-back and stability periods for measuring hours of service, and ensure that appropriate procedures are in place to track employee status and hours. The rules are complex and may require employers to amend plan documents and revise summary plan descriptions and enrollment materials. Employers should not delay in preparing for compliance with the Pay-or-Play Rules.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions