United States: IRS' Final Employer Shared Responsibility Rules: What Does It Mean To "Offer" Coverage?

Earlier this year, the IRS issued final regulations that provide additional guidance on the employer shared responsibility rules (also called the "pay or play" rules) that will generally apply to employers' group health plans beginning in 2015 under the Patient Protection and Affordable Care Act of 2010 (i.e., the ACA or ObamaCare). Under the ACA, an applicable large employer may be required to pay an employer shared responsibility penalty if it fails to offer affordable, minimum value health coverage to substantially all of its full-time employees and their dependents. Critical to these penalty provisions is the determination of what it means to "offer" coverage. This newsletter describes what it means for an applicable large employer to "offer" compliant coverage to its eligible full-time employees. For more information about other aspects of these final rules, including details about the potential penalties, please refer to our related "Pay or Play Rules" newsletters.

Who Must Be Offered Coverage?

The final employer shared responsibility rules clarify that applicable large employers must "offer" (as described below) coverage to their full-time, common-law employees or potentially face penalties. Because the rules focus on common-law employees, employers need not offer coverage to leased employees, sole proprietors, partners in partnerships, 2 percent S-corporation shareholders, or certain limited categories of employees under Code Section 3508. In addition, the employer must also offer coverage to the dependents, but not the spouses, of its full-time employees.

"Dependents" Defined. The final rules define a "dependent" as an employee's biological or adopted child under age 26. Stepchildren and foster children are specifically excluded. (According to the final rules, this is because those children are likely to receive health coverage either from their biological parents' health plans or from the state foster care system, respectively. Accordingly, the IRS determined that an additional offer of coverage from a step-parent's employer was unnecessary.) The final rules also generally exclude from the definition of "dependent" children who are not citizens or nationals of the United States. (Special rules apply, however, to dependent children who are residents of either Canada or Mexico and to certain adopted children.)

Not surprisingly, the final rules note that a dependent child will reach age 26 on the child's 26th birthday. They also provide, however, that in order to avoid both the penalties, an employer must treat a child as a "dependent" for the entire calendar month in which the child's 26th birthday occurs. As a result, an employer could be subject to a penalty if it immediately drops a dependent's coverage as of his 26th birthday. Unless an employer has knowledge to the contrary, it can rely on an employee's representations about the number and ages of the employee's children. '

Transition Guidance. Many, if not most, applicable large employers probably already offer some sort of health coverage to their employees' dependents. Nevertheless, the final rules contain transition guidance giving any employer that hadn't previously offered compliant coverage to its employee's dependents time to expand its plan to do so. Under that transition guidance, if the employer takes steps during the 2015 plan year to offer coverage to dependents, it will not be subject to the penalty for failing to offer coverage.

What Does It Mean to "Offer" Coverage?

Under the final pay or play rules, an applicable large employer offers coverage to "substantially all" of its full-time employees and their dependents if it offers coverage to at least 95 percent (70 percent for the 2015 plan year) of its full-time employees (or, if greater, 5 of its full-time employees). Coverage must be offered to all full-time employees, even those who already have coverage from other sources (such as Medicare, Medicaid, or a spouse's health plan).
The rules do not appear to require the employer to separately offer compliant coverage to an employee's dependents. Offering that coverage to the employee (who can then elect coverage behalf of his dependents) is sufficient to avoid the penalties.

Effective Opportunity to Enroll or Opt Out. An offer of coverage will be made if, at least once with respect to each plan year, full-time employees have an effective opportunity to elect to enroll in (or opt out of) coverage. Employers should keep this requirement in mind when determining how they'll determine who will qualify as full-time employees. For example, if an employer selects a look-back period (see our related newsletter entitled "Who is a "Full-Time" Employee?" for more detail) that spans two plan years, it will need to provide eligible full-time employees with two opportunities to elect (or opt out of) coverage – once with respect to each of the two plan years.

The pay or play rules treat "evergreen" elections that automatically continue from one plan year to the next unless the employee affirmatively opts out as an offer of coverage. In addition, an employer that auto-enrolls its full-time employees in mandatory health care coverage will be treated as offering coverage to its employees, so long as it provides the employees an effective opportunity to opt out of the coverage at least once with respect to each plan year. The employer will not, however, need to give employees an opportunity to opt out if (i) the coverage provides minimum value (as defined by the ACA), and (ii) the employee's required monthly contribution for the coverage (if any) is no more than 9.5 percent of the federally-determined poverty level for a single individual for the particular calendar year, divided by 12. (Employers must use the poverty line applicable to the 48 continental states and the District of Columbia for this determination.)

Special Timing Rules. Generally, if an employer fails to offer an eligible employee coverage for any day of a calendar month, then the employer will be treated as not having offered the employee coverage for that month. Recognizing that employers may hire (or fire) employees mid-month, the final pay or play regulations contain special rules for offering partial month coverage.

For instance, an employer will not be subject to a penalty for failing to offer coverage for the month in which a new employee begins working if the employee's start date is a day other than the first day of the month. Likewise, the employer will not be subject to the penalty with respect to employees whose employment terminates mid-month, so long as those employees would have been offered coverage for the entire month had they remained employed.

Facts and Circumstances Determination. Whether an employee has been given an effective opportunity to enroll in coverage (or to opt out) is based on all of the relevant facts and circumstances, including (but not limited to): the adequacy of any notice describing the availability of coverage; the period of time during which the employee can accept the offer of coverage; and any other conditions the employer imposes on the employee's ability to accept the offer of coverage. An employer will not be treated as failing to offer coverage, however, if an employee's coverage is terminated because the employee failed to pay his or her portion of any required premium (subject to a 30-day grace period).
An employer can likely impose some conditions on an employee's ability to elect (or opt out of) coverage, provided those conditions are reasonable and don't unduly burden the employee. For instance, an employer could likely require an employee to complete a short, general health survey or undergo limited biometric testing in order to enroll in the employer's health plan. If, however, the employer's requirements were too restrictive (such as requiring the completion of a detailed, 100-page medical survey), employees might not be viewed as receiving an effective opportunity to enroll in coverage.

Offers of Coverage on Behalf of Other Entities

Controlled Groups. An offer of coverage made by one member of an applicable large employer's controlled group is treated as an offer of coverage by all other members of that group. For example, if a parent company maintains the group health plan for its subsidiaries, each subsidiary is treated as offering coverage with respect to the parent's plan.

Other Multiple Employer Arrangements. Offers of coverage to employees participating in multiemployer or single employer Taft-Hartley plans (i.e., union plans) or a multiple employer welfare arrangements (MEWAs) will be treated as though they were made by the employers contributing to those plans on their employees' behalf.

Staffing Firms. Special rules also apply to clients of staffing firms, including both traditional "temp" agencies and professional employer organizations (PEOs). Temp agencies typically provide their clients with temporary workers who perform certain specific tasks, fill vacancies, act as temporary replacements, etc. PEOs, in contrast, may also provide more extensive services to their clients – for instance, they may provide a client with comprehensive HR or IT services, acting, in effect, as the client's HR or IT department. Whether a staffing firm or its client will be treated as a worker's (or set of workers') common-law employer will depend on the extent of the control the client exerts over the worker/workers.

If the staffing firm is treated as a worker's common law employer, it will be responsible for offering the worker compliant coverage in order to avoid penalties. On the other hand, if the client is viewed as the worker's common-law employer (which is more likely with PEO arrangements), and the worker is treated as a "full-time employee" for purposes of the pay or play rules, then the client will be obligated to offer the worker coverage. No doubt the client would prefer to avoid this situation – especially since it likely engaged the staffing firm specifically to avoid hiring its own employees.

To address this, the final pay or play rules will treat a staffing firm's offer of coverage to a worker under the staffing firm's group health plan as an offer of coverage by the client, so long as the fee the client pays to the staffing firm for a worker enrolled in the staffing firm's health plan is higher than the fee the client would pay if the worker were not enrolled in that plan. This rule should provide staffing firm clients with some comfort about their obligation to offer compliant coverage to workers provided by the staffing firm. The employer should, however, enlist the staffing firm's assistance in clearly documenting the difference in worker cost.

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.

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
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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.


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