New guidance is available to help employers prepare for the significant new rules that become effective in 2014, including the employer shared responsibility mandate (i.e., the penalties that may be imposed on an employer that doesn't offer certain health care coverage) and the prohibition on waiting periods in excess of 90 days, under the Patient Protection and Affordable Care Act of 2010 (health care reform).
Employers may rely on the new guidance through the end of 2014. Employers will not be required to comply with any subsequent guidance that is more restrictive until January 1, 2015 at the earliest. This is good news because it provides employers a measure of certainty about how to prepare for the 2014 employer shared responsibility mandate - particularly those employers concerned about what must be done to avoid significant penalties for failing to provide coverage, or for providing unaffordable coverage.
Following is a summary of the current rules to help determine who is a full-time employee for purposes of the employer shared responsibility mandate and the 90- day waiting period limitation, as well as suggested steps employers should take now to prepare for 2014.
What you Need to Know for 2014
Beginning in 2014, applicable large employers (i.e., those with 50 or more full-time employees) will pay penalties if they fail to offer health coverage to "full-time employees," or offer coverage that is either unaffordable or does not provide minimum value.
- These penalties can be significant. If an employer fails to offer coverage to just one full-time employee, the employer will have to pay an annual penalty of $2,000, multiplied by total number of full-time employees reduced by 30.
- "Full-time employee" for this purpose is defined as an employee who works an average of 30 or more hours per week (the IRS intends to issue regulations providing that 130 hours per month is equivalent to 30 hours per week).
- In order to determine which employees are considered full-time employees, there are two safe harbors that allow an employer to have different measurement periods and stability periods depending on whether the employee is considered an ongoing employee or a newly hired, variable hour or seasonal employee.
- Beginning in 2014, a group health plan or group health plan issuer cannot apply any waiting period for coverage that exceeds 90 days.
- These 2014 rules apply to both grandfathered and non-grandfathered plans.
Employer Shared Responsibility Mandate
What is the employer shared responsibility mandate?
Under health care reform, beginning in January 2014, employers with 50 or more full-time or full-time equivalent employees may be subject to a penalty if the employer either fails to offer its full-time employees (and their dependents) minimum essential coverage or offers coverage that is considered unaffordable or as not providing the required minimum value. Coverage is affordable for a particular employee if that person's required contribution does not exceed 9.5% of the employee's household income for that taxable year. Because an employer likely will not know an employee's household income, the Internal Revenue Service (IRS) has created a safe harbor providing that an employer will not be subject to a penalty if the coverage offered was affordable based on the employee's Form W-2 wages as reported in Box 1. These penalties are called an "assessable payment" under Section 4980H of the Internal Revenue Code (Code) and may be referred to as the employer shared responsibility mandate, the employer "pay or play" tax, or sometimes, simply the "employer mandate" or "employer penalty."
Drinker Biddle Note: "Minimum essential coverage" for this purpose includes any group health plan or group health insurance coverage offered by an employer to an employee that is either a governmental plan or any other plan or coverage offered in a state's small or large group market. It does not include certain HIPAA excepted benefits. Although additional guidance would be helpful to clarify, it is likely that most employer-sponsored group health (major medical) coverage will meet this broad definition.
Drinker Biddle Note: The IRS has suggested three possible methods for determining whether a plan provides the required minimum value: a "minimum value calculator" that is to be developed by the IRS in collaboration with the Department of Health and Human Services (HHS); design-based safe harbor checklists; and actuarial certification. The IRS has requested public comments on these possible approaches.
How much are the penalties?
Two types of penalties will be imposed under Code §4980H starting in 2014: the "no coverage" penalty and the "unaffordable coverage" penalty.
- No Coverage Penalty: Applies if an applicable large employer fails to offer each of its full-time employees (and their dependents) group health coverage and at least one full-time employee receives premium assistance to purchase health coverage through a health insurance exchange.
- No Coverage Penalty Amount: $166.67 per month for each full-time employee ($2,000 per year), excluding the first 30 such employees from the calculation.
Drinker Biddle Note: Clarification is needed about whether the reference to dependents means that employers are required to provide family coverage in order to avoid a penalty.
- Unaffordable Coverage Penalty: Applies if the health coverage offered by an applicable large employer is unaffordable or does not provide minimum value and at least one full-time employee receives premium assistance to purchase health coverage through a health insurance exchange.
- Unaffordable Coverage Penalty Amount: $250 per month for each full-time employee receiving premium assistance ($3,000 per year), but not to exceed the amount of the "no coverage penalty" calculated for that month.
Drinker Biddle Note: Whether a full-time employee is eligible to receive premium assistance to purchase health coverage through a health insurance exchange will be determined by the exchanges in accordance with IRS and HHS rules. Generally, premium assistance will only be available to taxpayers with income between 100% and 400% of the federal poverty line (FPL) for the taxpayer's family size (currently, FPL is $23,050 for a family of four). In addition, an employee who is eligible for an employer-sponsored plan that is considered affordable and provides the required minimum value will not be eligible for premium assistance to obtain coverage on the exchange.
Who is a full-time employee?
This is the key question and the reason for the government's guidance and our client alert. For purposes of the penalties under the employer shared responsibility mandate, a fulltime employee is generally defined as an employee that works an average of 30 hours or more a week (or 130 hours per month). To help employers determine who is a full-time employee, the IRS has adopted safe harbor approaches that employers may use to make the determination and thus avoid paying a penalty under the employer mandate.
Drinker Biddle Note: Employers are not required to use these safe harbors. For many employees, it will be quite clear whether the individual regularly works 30 hours per week and therefore should be considered a full-time employee for purposes of the employer mandate. However, there will be situations where the determination is not straightforward, such as when employees do not work a set schedule. These safe harbors are intended to provide employers with a measure of comfort that penalties will not be imposed when employers do not provide coverage following a determination that an individual is not a full-time employee under these safe harbors.
Guidance on Full-Time Employee Status for Purposes of the Employer Shared Responsibility Mandate
Enrollment Rule for Newly Hired Employees Reasonably Expected to Work Full-Time
If a newly hired employee is reasonably expected to work full-time (i.e., an average of at least 30 hours per week), the employer is required to provide coverage. However, the employer may require the employee to first complete a 90-day waiting period. For this type of employee, the employer will not be subject to penalties for such employee during that employee's initial three calendar months of employment.
Drinker Biddle Note: Enrollment on the first day of the month following 90 days of employment appears to be permitted under this guidance.
Safe Harbor for Ongoing Employees (i.e., an employee who is already employed by the employer)
Under the safe harbor method for ongoing employees, an employer looks back at the hours an employee worked over a specified period of time (the "standard measurement period") as the basis for determining whether that employee is a full-time employee for a prospective period of time (the "stability period"). The standard measurement period must be a defined time period of 3 - 12 consecutive calendar months, as chosen by the employer. An ongoing employee is generally an employee who has been employed by the employer for at least one complete standard measurement period. Employees that averaged at least 30 hours per week during the standard measurement period are automatically treated as full-time employees for the prospective "stability period" - regardless of the employee's number of hours of service during the stability period - as long as the employee remains an employee. The stability period for these full-time employees must be at least as long as the greater of (1) six months and (2) the standard measurement period.
If an employer determines an employee does not average at least 30 hours per week during the standard measurement period, that employee's status as a nonfull- time employee continues for the related stability period, which may not exceed the length of the standard measurement period.
Because employers may need time between the standard measurement period and the associated stability period to determine which ongoing employees are eligible for coverage and to notify and enroll employees, an employer may make time for these administrative steps by having its standard measurement period end before the associated stability period begins.
This administrative period following the standard measurement period may last up to 90 days, but may not reduce and may not lengthen the measurement period or the stability period. Employers will need to coordinate the administrative period so that it overlaps with the prior stability period to ensure that an employee who is determined to be a full-time employee during the prior measurement period will continue to be offered coverage through the end of the related stability period, even if that employee is determined not to be a full-time employee in the following measurement period.
Drinker Biddle Note: Employers looking for a simplified means to administer the standard measurement period, stability period, and administrative period may wish to implement a one-year measurement period that ends 90 days before a one-year stability period begins. For example, a measurement period that runs from October 3, 2012 to October 2, 2013, with an administrative period of October 3, 2013 to December 31, 2013, and a stability period of January 1, 2014 to December 31, 2014. This will ensure that the same periods may be used for both full-time and non-full-time employees, the administrative period includes the annual open enrollment period, and the stability period coincides with the plan year for the coverage offered by the employer.
Key Rules to Satisfy the Ongoing Employee Safe Harbor
- The standard measurement period (i.e., the look back period) must be at least 3 and no more than 12 consecutive months.
- The permitted length of the stability period (i.e., the prospective period) will depend on whether or not the employee is considered a full-time employee:
- For an individual who is determined to be a full-time employee, the stability period must be at least 6 months and may not be shorter than its related standard measurement period.
- For an individual who is determined not to be a full-time employee, the stability period may not be longer than the standard measurement period.
- The administrative period may not be longer than 90 days.
How the Ongoing Employee Safe Harbor Works
As illustrated by the example below, for ongoing employees, an employer would determine which employees worked full-time (i.e., an average of 30 or more hours per week) during the standard measurement period. Whoever is determined to be full-time must be offered coverage for the entire associated stability period (including the following year's administrative period from October 15, 2014 to December 31, 2014). If coverage is not offered, the employer is subject to the penalties under the employer shared responsibility mandate.
Safe Harbor for New Variable Hour and Seasonal Employees
Under the safe harbor method for newly hired variable and seasonal employees, employers may use an "initial measurement period" to determine whether a particular variable or seasonal employee is a fulltime employee for a prospective stability period. These rules are similar to the safe harbor for ongoing employees, but take into account that there is no historical point of reference for a particular employee. A new employee for purposes of this safe harbor is an employee who has not yet been employed for at least one complete standard measurement period. A variable hour employee is generally an employee for whom the employer cannot determine, based on the facts and circumstances, whether he or she is reasonably expected to work on average at least 30 hours per week. Pending further guidance, employers are permitted to use a reasonable, good faith interpretation of "seasonal employee."
The employer may use both a measurement period of 3 - 12 months and an administrative period of up to 90 days for variable hour and seasonal employees. However, the measurement period and the administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee's start date (totaling, at most, 13 months and a fraction of a month). The stability period for such variable hour or seasonal employees must be the same length as the stability period for ongoing employees. For an employee determined to be a full-time employee, the stability period must be no shorter than the initial measurement period, and must last at least six consecutive calendar months. If an employee is determined not to be a full-time employee, the stability period must not be more than one month longer than the initial measurement period (see the explanation in the following paragraph for additional rules about coordinating with the first full standard measurement period).
Once a newly hired variable hour or seasonal employee who has been employed for an initial measurement period has also remained employed for an entire standard measurement period (i.e., the period applied to ongoing employees), the employer must re-test the employee for full-time status, beginning with that standard measurement period (and using the same rules as applied to ongoing employees). As with the above safe harbor, when an employee is determined to be a full-time employee, that employee must be treated as a full-time employee for the entire associated stability period. In contrast, if the employee is determined not to be a full-time employee initially, but is determined to be a full-time employee for the overlapping or immediately following standard measurement period, then the employee must be treated as a full-time employee for the stability period that corresponds to that standard measurement period (even if that stability period begins before the end of the stability period associated with the employee's initial measurement period).
Drinker Biddle Note: The safe harbor for variable hour and seasonal employees provides some helpful transition rules for new hire situations, but there are several complexities in this process. Because of the maximum initial measurement period (totaling, at most, 13 months and a fraction of a month when combined with an administrative period), employers will probably need to make full-time employee assessments for new hires on a rolling basis (e.g., monthly) and will need to facilitate mid-year enrollment for any employee determined to be a full-time employee.
Key Rules to Satisfy the Variable Hour and Seasonal Employee Safe Harbor
- The initial measurement period (i.e., the look back period) must be at least 3 and no more than 12 consecutive months.
- The administrative period may not be longer than 90 days.
- The total initial period (initial measurement period plus administrative period) before a stability period begins may not exceed 13 months and a fraction of a month.
- The permitted length of the associated stability period (i.e., the prospective period) will depend on whether or not the employee is considered a fulltime employee:
- For an individual who is determined to be a full-time employee, the stability period must be at least 6 months and may not be shorter than its related initial measurement period.
- For an individual who is determined not to be a full-time employee, the stability period may not be longer than the initial measurement period plus one month.
- The employer must re-test the employee when that employee completes a standard measurement period (i.e., the individual has been employed long enough to be considered an ongoing employee).
Note: if an employee is determined not to be a fulltime employee during an initial measurement period, but is determined to be a full-time employee during the overlapping (or immediately following) standard measurement period, the employee must be treated as a full-time employee beginning with the stability period that corresponds to that standard measurement period, even if that period begins before the stability period corresponding to the initial measurement period ends.
How the Variable Hour or Seasonal Employee Safe Harbor Works
In this example (below), for newly hired variable hour and seasonal employees, the employer determines whether each employee worked full-time during the initial measurement period, which is the period that starts at the date of hire. Here, if the employee is determined to be a full-time employee, he or she must be offered coverage for the entire stability period of July 1, 2014 through June 30, 2015. If coverage is not offered, the employer is subject to penalties under the employer shared responsibility mandate. The employer must then test the employee's status again based on the normal standard measurement period that begins after the newly hired variable employee's start date (e.g., October 15, 2013 - October 14, 2014).
Can the employer use measurement periods and stability periods that differ in either length or in their starting and ending dates?
Yes, the new guidance allows employers to use measurement periods and stability periods that differ either in length or in their starting and ending dates for the following categories of employees:
- Collectively bargained employees and non collectively bargained employees;
- Salaried and hourly employees;
- Employees of different entities; and
- Employees located in different States.
How is an hour of service determined?
In prior guidance, the IRS proposed that an hour of service include each hour for which the employee is paid or entitled to payment for the performance of duties or due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence (up to 160 continuous hours). For salaried employees, the prior guidance proposed counting actual hours or using a per day or per week equivalency (e.g., 8 hours per day or 40 hours per week).
This proposed IRS approach is similar to Department of Labor (DOL) rules for counting hours of service for retirement plan purposes. While the IRS affirmatively states that the most recent guidance may be relied upon, it has not explicitly made this statement about how to count hours of service. Additional clarification would be helpful.
Guidance on the 90-Day Waiting Period Limitation
What is the 90-day waiting period limitation?
Under health care reform, for plan years beginning on or after January 1, 2014, group health plans or health insurance issuers offering group health insurance coverage are prohibited from applying a waiting period that exceeds 90 days.
How is "waiting period" defined?
A waiting period is the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective. For this purpose, being eligible for coverage means having met the plan's substantive eligibility conditions (e.g., being in an eligible job classification or achieving job-related licensure requirements specified in the plan's terms).
Can the employer still impose other types of eligibility requirements that are not based on a lapse of a time period?
Yes, the new guidance has clarified that an employer is not required to offer coverage to any particular class of employees and may impose eligibility conditions that are not based solely on the lapse of a time period, so long as the conditions are not designed to avoid compliance with the 90-day waiting period limitation. The new guidance has also clarified that if permissible eligibility requirements are used, an employee must be able to enter the plan by the 91st day after the satisfying that eligibility requirement. Under the new guidance, it is permissible to provide an election period that extends beyond the 91st day, provided coverage is first made available no later than the 91st day. In other words, if the employee has the opportunity to enroll on the 91st day, that is enough, even if the employee doesn't actually enroll until later.
Drinker Biddle Note: Keep in mind that if a class of employees is excluded from plan eligibility, the employer may be subject to penalties under the employer shared responsibility mandate if any excluded employees are considered full-time employees.
How is the 90-day waiting period limitation applied to variable hour employees where a specified number of hours of service per period is a plan eligibility condition?
If a group health plan conditions eligibility on an employee regularly working a specified number of hours per period (or working full-time), and it cannot be determined that a newly-hired employee is reasonably expected to regularly work that number of hours per period (or work full-time), the plan may take a reasonable period of time to determine whether the employee meets the plan's eligibility condition. This reasonable period of time may include a measurement period that is consistent with the timeframe permitted for such determinations under Code §4980H (see the "Who is a Full-Time Employee" section above for an explanation of the measurement period), regardless of whether the employer is an applicable large employer subject to the employer shared responsibility mandate. However, coverage generally must be made effective (for employees determined to be full-time) no later than 13 months from the employee's start date, plus, if the start date is not the first day of a calendar month, the period of time remaining until the first day of the next calendar month, and should not include a waiting period that is more than 90 days after any measurement period.
Is Automatic Enrollment Required for 2014?
The DOL has publicly stated that it does not expect to issue guidance on automatic enrollment in time for 2014 implementation, and employers are not expected to comply with the automatic enrollment requirements until additional guidance is issued.
Will There Be Additional Guidance Issued on the Employer Shared Responsibility Mandate?
Yes, it is likely additional guidance will be issued, but it is uncertain whether this additional guidance will be issued in time for application to 2014. Topics that the IRS is considering addressing in future guidance include:
- Application of the rules to temporary employees (e.g., employees who work more than 30 hours per week, but for a period of just over three months), employers with high-turnover rates, and similar special situations;
- How to determine whether a new hire is reasonably expected to work an average of 30 hours per week (e.g., should there be a safe harbor, if so, what factors should be applied);
- How the rules should apply for employees who transfer between different jobs for the same employer (e.g., from a part-time position to a full-time position);
- What types of transition rules should apply to merger and acquisition situations; and
- How "seasonal worker" should be defined.
What Should Employers Do Now to Prepare for 2014?
- Identify whether employees are full-time employees under the 2014 rules (i.e., 30 hours per week or 130 hours per month). In particular, look at any worker who is currently excluded from health plan coverage. If full-time status cannot be readily determined, the employer will need to determine whether the safe harbors are viable for the organization.
- Engage in an analysis of costs based on different variables (e.g., cost of providing coverage to employees newly identified as full-time; evaluate potential penalty amounts for no coverage and unaffordable coverage). Be sure to consider tax implications, employee relations, need for coverage due to the individual shared responsibility mandate (i.e., the requirement that all individuals purchase health care coverage or pay a penalty), recruiting/ retention issues.
- Eliminate waiting periods that are in excess of 90 days.
- Evaluate current employment classifications and assess whether business needs can be met by reclassifying some employees and assess the business implications of providing or not providing coverage to such employees.
How Can I Get a Copy of the New Guidance?
The new guidance has been issued by the IRS and DOL, in collaboration with HHS, in the form of IRS Notice 2012-58, IRS Notice 2012-59, and DOL Technical Release 2012-02.
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.