• Another Delay in the Employer Mandate to Offer Coverage
  • Relief for Employers with 50-99 Employees
  • Changes to Rules for Shared Responsibility

On Monday, February 10, 2014, the Internal Revenue Service issued 238 pages of final regulations for Employer Shared Responsibility under the Affordable Care Act (the “ACA”). The general media has stated that the new regs provide companies with 50 – 99 employees more time to comply with the requirement that they offer healthcare to employees. But there’s much more to the regulations. The summary below should help you to understand how the new regulations may or may not affect your business. Each section of the summary is followed by a series of Frequently Asked Questions we’ve been hearing about the regs. Leave a comment to let us know if you’d like us to address one or more of these issues in more detail.

The regulations address the many details of:

  • whether an employer is an Applicable Large Employer under the ACA and required to offer coverage to its full-time employees and
  • which employees are considered full-time and must be offered coverage.

The regulations also address, among other things, the periods during which penalties may be applied to the employer, the time periods during which full-time employees must be offered coverage, and the transition rules that apply when the regulations first become effective.

Transition Relief for Employers with 50-99 Employees

The final regulations provide transition relief for employers with fewer than 100 full-time plus full-time equivalent employees, allowing those employers to delay offering coverage to employees without penalty until the end of the employer’s plan year that begins in 2015. Employers must meet the following three requirements to be eligible for this relief:

  • Limited Employer Size.   Employer must employ fewer than 100 full-time plus full-time equivalent employees (determined by calculating the average number of full-time plus full-time equivalent employees during any consecutive six month period in 2014 and by applying rules similar to those used in the Applicable Large Employer determination).
  • Maintenance of Workforce and Aggregate Hours of Service.   The employer cannot reduce its workforce or overall hours of its employees during the period between February 9, 2014 and December 31, 2014, unless the reduction is due to bona fide business reasons, including sale of a division, changes in the economic marketplace, or termination for poor performance.
  • Maintenance of Previously Offered Coverage. The employer cannot eliminate or materially reduce the health coverage it offered on February 9, 2014.  This includes:
    • Maintaining the employer contribution toward the coverage of at least 95% of the amount it contributed or at least the same percentage that it contributed on February 9, 2014.
    • If the employer changes the terms of the plan, the coverage provides minimum value after the change.
    • The employer does not narrow the class of employees who are eligible for coverage.

The employer must comply with all of these requirements through December 31, 2015 if the plan is a calendar year plan or until the last day of the plan year that begins in 2015.  In addition, the employer will be required to certify that it complies with these requirements in its transmittal form for reporting under Section 6056 of the Internal Revenue Code.

Frequently Asked Questions

1.  Do employers with 50-99 employees have to do anything in 2015?

Yes.  The reporting requirements will still apply to these employers so they are going to need to track the hours worked by their employees and be prepared to report on the benefits that are offered to employees during 2015.  In addition, all other mandated benefits will continue to apply.

2.  How will the employer know if it falls into the 50-99 employee range?

The employer will need to calculate the number of employees that it employs (including full-time, part-time and seasonal) over a six-month period in 2014 to determine whether the delay applies.  This calculation should be documented and retained because of the certification requirement that is part of the Section 6056 reporting.

Transition Relief from Requirement to Offer Coverage to Full-Time Employees

During 2015 and any calendar months of an employer’s plan year that begins in 2015, but that fall in 2016, a large employer (with 100 or more employees) will be subject to a penalty for failure to offer coverage to its full-time employees if it fails to offer coverage to more than 30% of its full-time employees.  After this period, a penalty will apply if the employer fails to offer coverage to more than 5% of its full-time employees.

During this transition relief period, any penalty that is assessed against an employer will be calculated by reducing the employer’s number of full-time employees by 80 (rather than 30, which will apply in later years).  If the employer is part of a controlled group of employers, the 80-employee reduction will be shared proportionately among the members of the group.

Frequently Asked Questions

1.  How will an employer know whether it fails to offer coverage to more than 30% of its full-time employees?

Once the employer confirms that it employed 100 or more full-time and full-time equivalent employees during a six-month period in 2014, it will need to determine which of its employees are considered full-time under the regulations. Any employee who is reasonably expected to work 30 or more hours per week is considered to be full-time, along with any part-time, variable hour or seasonal employee who is determined to work an average of 30 or more hours per week based on the employer’s designated Measurement Period.  See below for more information about setting the Measurement Period for the 2015 plan year.

2.  How can an employer determine the potential penalty it will have to pay when there are a number of employers with similar or the same owners?

If the employer is related to one or more other companies, the penalties are applied on each member of the group on a combined basis.  However, in order to determine the amount of the potential penalties, the employer will first need to determine if the relationship among the companies is sufficient for the employers to be considered a combined group under the Internal Revenue Code.  If they are a combined group, each employer is permitted its proportionate share of the 80-employee deduction based on the number of full-time employees in each company.

2015 Transition Relief for Employers with Non-Calendar Year Plans

This transition relief applies only to employers that maintained a non-calendar year plan on December 27, 2012 if the plan year was not changed since that date.

Employers will not have to pay a penalty (for failure to offer affordable minimum value coverage) during the period from January 1, 2015 until the first day of the non-calendar year plan for employees who, under the eligibility provisions in effect on February 9, 2014, are eligible for and are offered affordable minimum value coverage on the first day of the plan year that begins in 2015.    This transition rule gives the employer until the first day of the plan year that begins in 2015 to change the contributions or benefits to ensure that the plan is affordable and provides minimum value.

This transition relief can be extended to all employees who are offered affordable minimum value coverage on the first day of the plan year (even those not eligible for coverage because the employer’s eligibility rules required more than 30 hours per week) if:

  • at least 1/4 of all employees were covered by the plan as of any date in the 12 months prior to February 9, 2014; or
  • the employer offered coverage to at least 1/3 of its employees during the most recent open enrollment period prior to February 9, 2014.

Alternatively, the transition relief can be extended only to full-time employees who are offered affordable minimum value coverage on the first day of the 2015 non-calendar plan year  if:

  • at least 1/3 of all full-time employees were covered by the plan as of any date in the 12 months prior to February 9, 2014; or
  • the employer offered coverage to at least 1/2 of its full-time employees during the most recent open enrollment period prior to February 9, 2014.

These transition rules do not apply if the employer also maintained a calendar year plan for which these employees would have been eligible.

Frequently Asked Questions

1.  If the employer is not able to satisfy any of the transition relief options, what does that mean?

If the employer cannot satisfy the transition relief, it will potentially be subject to penalties on January 1, 2015 if it does not offer affordable minimum value coverage to at least 70% of its employees on that date.  An employer in this situation should review its coverage and full-time employees prior to the beginning of its 2014 plan year to make sure that the coverage it is offering and the employees who are offered coverage will allow it to avoid paying a penalty beginning on January 1, 2015.

2.  If the employer had a non-calendar year plan on December 27, 2012, but changed its plan year after that date to another non-calendar plan year, can it take advantage of these transition rules?

No.  The preamble to the regulations allows these transition rules to be used only if there has been no change in plan year since December 27, 2012, even if the change is to another non-calendar year plan year.

Measurement Period for 2015 Stability Period

Similar to the rules applied for 2014 prior to the Shared Responsibility delay that was announced on July 2, 2013, employers may adopt a first Measurement Period that is shorter than 12 months, as long as the period:

  • is at least 6 months,
  • begins no later than July 1, 2014 and
  • ends no earlier than 90 days before the first day of the plan year that begins in 2015.

Frequently Asked Questions

1.  Can an employer adopt a first Measurement Period that is 12 months?

Yes. This rule only applies if it adopts a shorter Measurement Period.

2.  Can an employer use a 3-month Measurement Period if it has a calendar year plan?

No.  The only time an employer can use a Measurement Period that is shorter than 6 months is for its 2016 and later plan years.

Transition Relief for determining Applicable Large Employer Status  

For 2015, an employer can determine whether it is an Applicable Large Employer (an employer that employed an average of at least 100 full-time plus full-time equivalent employees) based on a period of at least six consecutive months during 2014.

For 2015 only, an employer that offers coverage as of the first payroll period in 2015 will be considered to have offered coverage for the month of January 2015.

The final regulations indicate that an employer (who was not an Applicable Large Employer during any prior calendar year) will not be subject to penalties for failing to offer coverage to an employee under the following circumstances:

  • The employee was not offered coverage during the prior calendar and is offered coverage by April 1st of the current calendar year.
  • The coverage offered by April 1st provides a minimum actuarial value of 60%.  If the coverage offered does not provide minimum value, the employer may be subject to a $3,000 per year penalty for failure to offer affordable minimum value coverage to its full-time employees.  This penalty will be applied from the January 1st deadline, for each employee who purchases coverage from a Health Insurance Marketplace and receives a premium tax credit or cost-sharing subsidy.
  • If the employer fails to offer coverage by April 1st, it will be subject to penalties for failing to offer coverage from the first day of the calendar year.  This penalty is equal to $2,000 times the number of full-time employees (after subtracting the employers share of 80 employees for the plan year that begins in 2015 or 30 employees thereafter).

This transition relief was intended to give an employer three months after the end of a calendar year to determine whether it is an Applicable Large Employer, to secure coverage and then to offer that coverage to its full-time employees.

Frequently Asked Questions

1. Can an employer that determines that it is subject to the Shared Responsibility provisions for the first time adopt a calendar year plan?

Yes.  Although the employer will have difficulty making the determination that it is an Applicable Large Employer and secure coverage by the first day of the calendar year, it can adopt a plan by April 1st and have the first plan year be a short plan year.  This first plan year will end on December 31st of that year.

Newly Formed Employers

The rules for employers that were not in existence throughout the prior calendar year were clarified to indicate that the employer must not have been in existence during any day of the prior calendar year in order to determine its Applicable Large Employer status based on the average number of employees that it reasonably expects to employ during the current calendar year.

In addition, employers that were not in existence during the prior calendar year are permitted to use a seasonal worker exception when determining whether it is an Applicable Large Employer during the year in which it was formed.  If the employer expects to employ 50 or more employees for 120 days or fewer during the year, it does not have to consider itself an Applicable Large Employer.

Frequently Asked Questions

1. If a company is formed in December 2016 and expects to have 30 employees for the first year or more and then 100 or more employees after that point, how does it determine when it must offer coverage?

During the first year, the employer is not required to offer coverage because it was not in existence throughout 2015 and does not expect to employ 50 or more full-time employees during 2016.  For 2017, because the employer was in existence for only a month of 2016, the employer cannot determine an average for the entire year, so it can decide not to offer coverage because it does not expect to employ an average of 50 or more full-time employees during 2017.

2. What happens if the employer in the above example actually does employ an average of 50 or more full-time plus full-time equivalents in 2017?

The employer could be subject to penalties for 2017 if at least one full-time employee purchases coverage from a Health Insurance Marketplace and receives a premium credit or cost-sharing subsidy.  For this reason, a new employer needs to be careful when making the determination of the number of people it expects to employ.

Monthly Method for Determining Full-time Employees

In addition to the look-back measurement period method of determining whether an individual is considered a full-time employee and must be offered coverage, the final regulations describe the “Monthly Measurement Method.”    The Monthly Measurement Method allows the employer to count an employee’s hours of service for each calendar month, rather than using a look-back method, to determine if an employee is a full-time employee during that month.  There is also a weekly rule that allows the employer to measure the monthly hours on a weekly basis.  If an employee is determined to be full-time under this method, the employer must offer coverage to the employee no later than the first day of the month following three months after the employee is determined to work full-time.

Frequently Asked Questions

1. What is the point of the Monthly Measurement Method?

The Monthly Measurement Method, as first identified in the proposed regulations, was intended to allow employers to offer coverage to only those employees who are full-time during any particular month. However, the Department of the Treasury did not initially specify how the rule would work and instead came up with the Look-Back Measurement period.  In the final regulations, the Treasury Department clarified the Monthly Measurement Method to allow certain employers to determine full-time employees on a monthly basis, at the end of each month.  This method may be a preferred method for an employer if the number of hours worked by employees is more consistent or increases over time.

2. Can an employer use the look-back measurement method for some employees and the monthly measurement method for other employees?

Yes. The final regulations allow the employer to apply different methods to different categories of employees. The categories include salaried employees and hourly employees, employees

whose primary places of employment are in different states, collectively bargained employees and non-collectively bargained employees, and each group of collectively bargained employees covered by a separate collective bargaining arrangement.

Counting Hours

Volunteers.  Hours worked by bona fide volunteers are not counted as hours of service in determining whether an individual is a full-time employee.   A bona fide volunteer is defined as an employee of a government entity or a tax exempt organization under Section 501(a) of the Internal Revenue Code whose only compensation from that employer is either:

  • reimbursement for reasonable expenses; or
  • nominal fees, such as stipends, service awards or other amounts customarily paid in connection with the performance of services by volunteers.

Student Employees.  Hours worked by students as part of the federal work study program (or a similar state program) are not counted as hours of service in determining whether an individual is a full-time employee.  All other hours worked by students are required to be counted.

Other difficult situations.  The final regulations indicate that more guidance will be provided through an Internal Revenue Bulletin to help employers count hours for the following types of employees:  adjunct faculty, airline industry employees with layover hours, employees with on-call hours, and commissioned salespeople.  The regulations require employers to use a reasonable method for crediting hours of service until more guidance is available.

Frequently Asked Questions

1. Do hours worked by students as part of an internship or externship need to be counted?

Yes.  All student hours other than work-study hours must be counted.

2. Is there any guidance for adjunct faculty?

Yes.  Although the preamble to the final regulations indicates that further guidance is expected, they have laid out a potential approach that will be considered a reasonable method for crediting hours for adjunct faculty.  Under this method an adjunct faculty member would be credited with 2.25 hours of service per week for each hour of teaching or classroom time (1 hour of classroom time +1.25 hours of additional grading and preparation time = 2.25 hours) plus each additional hour per week required of the faculty member (for meetings or office hours).  Further guidance will be issued, but employers are allowed to use this rule until at least the end of 2015.

3. What about employees with on-call hours?
The final regulations do not give guidance about how the hours must be counted, but they do note that it is not reasonable for an employer to fail to credit an employee with hours of service for any on-call hours for which payment is made or due, for which the employee is required to remain on-call on the employer’s premises, or for which the employee’s activities while remaining on-call are subject to substantial restrictions that prevent the employee from using the time effectively for the employee’s own purposes.

Application of Penalties for New Employees

Applicable Large Employers will not be subject to penalties for failure to offer coverage to a new employee, who is expected to be a full-time employee, until the first day of the month after the employee has been employed for three full calendar months.  However, if the coverage that is offered by that date is not minimum value coverage, the penalty may be applied back to the first full calendar month in which the employee was working full-time.  This delay in the application of penalties does not change the waiting period requirements under Section 2708 of the Public Health Service Act.

Breaks in Service

The final regulations shorten the length of a break in service required before an employer can consider an individual a new employee.  The proposed regulations stated that if an employee did not work at all for the employer during a 26-week period, the employer was permitted to treat the former employee as a new employee.  This allowed the employer to delay offering coverage by applying a new initial measurement period of up to one year, if the employee was not reasonably expected to work an average of 30 hours per week.  The final regulations have reduced the employment break period to 13 weeks.  The break period for an employee of an educational organization to be considered a new employee remains 26 weeks.

Frequently Asked Questions

1. What about employees who have only worked for the employer for a short time before the break in service?

The final regulations, similar to the proposed regulations, include a rule of parity as an option for employers with employees that work for a short period of time before their break in service.  An employee with a break in service of not less than 4 consecutive weeks can be considered a new employees as long as the break period is longer than the period of employment prior to the break.  This rule cannot be used once the employee has worked for the employer for 13 weeks (or 26 weeks for an educational organization employer).

Seasonal Employees

Seasonal employees are defined in the final regulations to include any employee whose annual employment period is 6 months or less.   However, this period can be extended for a particular year due to unusual circumstances as long as the normal period of employment is 6 months or less.  This definition is important because seasonal employees, even if expected to work an average of 30 hours per week during the season, can be treated like variable hour employees, and have their hours tracked over a longer period of up to 12 calendar months before coverage must be offered.

Frequently Asked Questions

1. Does this mean that seasonal workers do not have to be offered coverage?

Yes.  An employer is not required to offer coverage to season employees as long as:

  • the employee is hired into a position that normally lasts for 6 months or less; and
  • the employer sets its initial measurement period to be more than 6 months; and
  • the employee does not return to work within 13 weeks.

Change in Employment Status

If a variable hour, seasonal or part-time employee changes his or her position to one that would have required the employer to offer coverage after a 90-day waiting period (because the employee was reasonably expected to work an average of 30 hours per week), the employer must offer coverage to this employee by the earlier of the following:

  • the first day of the fourth month following the change in position; or
  • the first day of the month following the end of the initial measurement period for that employee (if the employee averaged 30 or more hours per week during that period).

New rule for employees moving from full-time status to part-time status:  the employer can apply the Monthly Measurement Method over a period of three months to determine whether the employee is no longer eligible for coverage.  Typically, an employer can only change the method of determining whether an employee is considered to be full-time once per year, but for purposes of a change to part-time status, the employer can begin to apply the Monthly Measurement Method on the first day of the fourth full calendar month following the change in status.  This rule only applies if the employer offered minimum value coverage to the employee for the first day of the month following the third full month of employment through the month in which the change to part-time occurred.

Frequently Asked Questions

1. Does the full-time to part-time rule only apply if the employee’s job moves to a category for which the employer applies the monthly measurement method?

No.  The employer can use the monthly measurement method for only those employees who move from full-time to part-time but should document this in its employment policies.

Change to Definition of Dependent for Shared Responsibility Provisions

The final regulations remove both foster children and stepchildren from the definition of dependent, but only with regard to mandated coverage of dependents.  Employers are required to offer coverage to dependents (but not spouse’s) of full-time employees in order to avoid a penalty for failure to offer coverage.

Relief from this requirement has been extended to plan years that begin in 2015 if:

  • dependent coverage is not offered,
  • dependent coverage that is not minimum essential coverage is offered, or
  • dependent coverage is offered for some but not all dependents.

If the employer offered dependent coverage during its 2013 or 2014 plan year, this relief is not available.

The rules also require employers to offer coverage to these dependents through the end of the month in which they turn 26.  Finally, a child who is not a U.S. citizen or national is not considered a dependent unless the child is a resident of a country that is contiguous to the United States or is an adopted child that lives with the employee and is a member of the employee’s household.

Frequently Asked Questions

1. Can an employer who recently began offering coverage to children to comply with this requirement remove that coverage based on this delay?

No.  The final regulations indicate that the extension is only available if the employer did not offer dependent coverage during the 2013 or the 2014 plan year.

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