Earlier this year, the IRS issued final regulations implementing the employer shared responsibility provisions (the “Pay-or-Play Mandate”) of the Patient Protection and Affordable Care Act (“PPACA”). We issued a Client Advisory describing how the final regulations calculate which employers are subject to the Pay-or-Play Mandate, as well as how penalties under the Pay-or-Play Mandate will be implemented during 2015 and 2016. That advisory can be viewed here.

This second Client Advisory will provide an overview of the methods employers may use to determine which employees must be offered coverage, as well as the reporting requirements for employers imposed under the PPACA. It also summarizes subsequently issued guidance regarding the PPACA reporting requirements. In the next few weeks, we will issue a final installment in this series of Client Advisories identifying critical issues that employers should be aware of regarding PPACA as a whole.

Determining Full-Time Employee Status

For an employer that qualifies as an applicable large employer (see the prior Client Advisory discussed above), that employer is required to offer minimum essential coverage to substantially all (70% in 2015, 95% in 2016 and all subsequent calendar years) of its full-time employees (and their dependents) under an employer-sponsored plan, and such coverage must meet the minimum value and affordability requirements imposed under PPACA. Therefore, once an employer has determined that it qualifies as an applicable large employer, the next step for that employer is to determine which of its employees are considered full-time and so must be provided with coverage (including coverage for their dependents) to avoid potential penalties. This determination will depend on whether the employee is classified as a new employee or an ongoing employee.

New Employees

New employees must be divided into two categories based upon whether, on the new employee’s start date, he or she reasonably is expected to work full-time (an average of at least 30 hours or more per week).

Reasonably Expected to Work Full Time

• If a new employee is reasonably expected to work full-time, such employee must be offered coverage by the end of the employee’s initial three full calendar months of employment (excluding an orientation period of up to one month), or the employer may be subject to a penalty.
• Generally, the three-month waiting period may only be applied to an employee once during his or her period of employment, after which time the employee must be considered an ongoing employee, unless a special break in service rule applies.

Not Reasonably Expected to Work Full-Time

• If it cannot be determined on a new employee’s start date that the employee is reasonably expected to work full-time, the employer may determine such employee’s status using a month-to-month approach. However, the IRS has acknowledged the administrative burden associated with making such determinations (and offering coverage) on a month-to-month basis, and has therefore issued a look-back measurement safe harbor that employers may use to minimize unpredictability in these determinations, by looking back at an employee’s employment history.
• The look-back measurement safe harbor gives employers some discretion as to the months of service they will use to identify their full-time employees going forward (the “measurement period”).
• The initial measurement period for new employees may start on any date between the employee’s start date and the first day of the first calendar month beginning after the start date.
• If a new employee’s position or employment status materially changes before the end of the initial measurement period in such a way that, if the employee had begun employment in the new position or status, the employee reasonably would have been expected to work full-time, the employee must be considered a full-time employee on the earlier of the first day of the fourth month following the change, or the first day of the first month following the end of the initial measurement.

Ongoing Employees

Employers may determine an ongoing employee’s status as a full-time employee using a month-to-month approach, or may apply a standard measurement period (as discussed below) under the look-back measurement safe harbor.

• Standard measurement periods must be uniform for all employees in the same category. The four types of permissible categories are: (i) collectively bargained and non-collectively bargained employees, (ii) employees covered by different collective-bargaining agreements, (iii) salaried or hourly employees, and (iv) employees with primary places of employment in different states.
• Ongoing employees can become new employees again if they have a period of 13 consecutive weeks in which they are not credited with an hour of service (26 weeks in the case of an educational organization), or meet rules of parity selected by the employer.

Implementing the Look-Back Measurement Safe Harbor

• For both new and ongoing employees, employers generally can make their measurement periods at least 3, and no more than 12, consecutive months as long as the corresponding stability periods are the longer of 6 months or the length of the applicable measurement period. However, for 2015, employers may use a transition measurement period between 6 and 12 consecutive months and still have a 12 month stability period, as long as it begins no later than July 1, 2014, and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015.
• After either type of measurement period, employers may use an administrative period which can be up to 90 days to calculate each employee’s hours of service during the measurement period, identify full-time employees eligible for coverage, and provide enrollment materials to all eligible full-time employees.
• The employee’s status as determined during the measurement period (full-time or not) for purposes of the penalty generally will then be locked in for the applicable stability period during which the employee will either be offered coverage or not depending on eligibility under the plan. However, if a new or ongoing employee’s position or employment status changes from full-time to part-time and the employer has been using the look-back measurement safe harbor, the employer may apply the monthly measurement period to that employee beginning on the first day of the fourth month following the employee’s change-of-status where the employee has worked on average less than 30 hours each week for three full calendar months following his or her change of employment status.
• Employers must establish a stability period equal to the longer of six consecutive months or the length of the standard measurement period. The stability period used for new employees must be the same as the one used for ongoing employees and may not be shorter than 6 months.
• Once a variable or non-full-time employee completes an initial measurement period, his or her status will be determined based on hours tracked during the standard measurement period that began during the initial measurement period.
• It may be helpful for employers to have the measurement, administrative, and stability periods correspond with the plan year for the employer’s group health plan.

Reporting Requirements

To assist the IRS in enforcing the Individual Mandate, the Pay-or-Play Mandate, and administering premium tax credits, the PPACA imposes two separate reporting requirements. The first applies to all employers that sponsor a group health plan which provides minimum essential coverage, and the second applies to all employers that are considered applicable large employers. Although the IRS has yet to publish the forms which must be used to satisfy both the minimum essential coverage and applicable large employer reporting requirements, at this time reporting requirements need to be completed for the 2015 calendar year by February 28, 2016 (March 31, 2016 if filed electronically). We also know that the reporting requirements will require in depth information from the employer.

Minimum Essential Coverage Reporting

An employer that offers a group health plan which provides minimum essential coverage will be required to report certain information about such coverage on an annual basis. For employers that sponsor fully-insured plans, this reporting requirement will be satisfied by the plan’s insurer; however, employers with self-insured plans will be responsible for complying with the reporting requirements. For this purpose, minimum essential coverage is defined as employer-sponsored coverage (including COBRA and retiree coverage) that does not consist solely of excepted benefits (such as stand-alone vision or dental care).

The minimum essential coverage reporting requirement requires information such as:

• the employer sponsoring the group health plan;
• personal information about the employees and dependents covered under the plan (i.e. the individuals’ names, social security numbers, and addresses); and
• the dates during which such individuals were covered.

Employers (or insurers as applicable) must file a separate return for each individual that is provided minimum essential coverage, and also provide a written statement to such individuals that outlines the information provided on the return.

Applicable Large Employer Reporting Requirement

The second reporting requirement provides that all applicable large employers must report to the IRS information about the coverage offered, if any, to their full-time employees, as well as information about the employees who were offered coverage, and the employees actually covered under the employer’s group health plan. It is important to note that this reporting requirement applies even to medium employers that are not subject to penalties under the Pay-or-Play mandate in 2015 due to the temporary transition relief.

The information required to satisfy this reporting requirement is much more extensive than the information required for the minimum essential coverage reporting requirement. It includes:

• information about which months during the year coverage was available to a full-time employee (and his or her spouse and dependents), and which months the employee was actually covered under the plan;
• information about whether an employee’s coverage was affected by a waiting period during any months of the year;
• information about whether the coverage offered by the employer provided minimum value and was considered affordable with respect to each individual full-time employee;
• the employer’s total number of employees by calendar month; and
• whether the applicable large employer member is a member of an aggregated group and, if applicable, the names and employer identification numbers (EIN) of the members of the aggregated group.

This reporting requirement for applicable large employers also requires the filing of an individual return for each full-time employee and provides that, in addition to the return, applicable large employers must provide a related written statement to their full-time employees. Unlike the minimum essential coverage reporting requirement, applicable large employers remain responsible for this reporting requirement, even if they sponsor a fully-insured plan. However, the IRS will permit such employers to contract with third party administrators and other service providers to delegate the reporting obligation. The IRS is also planning that, for applicable large employers sponsoring self-insured group health plans that otherwise would be subject to both the minimum essential coverage and applicable large employer reporting requirements, a single form may be used to satisfy both of the reporting requirements.

The IRS has provided several alternative methods that an applicable large employer may use to satisfy its applicable large employer reporting requirements.

• Qualifying Offer in 2015
  For coverage provided during 2015 only, an applicable large employer may avoid the applicable large employer reporting form requirement if such employer is able to certify that it offered minimum essential coverage which provided minimum value and was affordable to 95% of its full-time employees, and the employee’s spouse and dependents. Employers taking advantage of this relief for coverage offered in 2015 will still be required to furnish their full-time employees with a written statement.
• Qualifying Offer
  If an applicable large employer offers minimum essential coverage which provides minimum value and was considered affordable to a full-time employee and the employee’s spouse and dependents for all months during the year in which the employee was a full-time employee, the employer may file a simplified return with respect to such full-time employee. If the employer meets these requirements with regards to any given full-time employee, it will not be required to provide all of the information outlined above.
• 98% Offers
  An applicable large employer that certifies it offered minimum essential coverage which provided minimum value and was deemed to be affordable to 98% of its full-time employees and their dependents will not need to individually identify its full-time employees or report the total number of its full-time employees when completing its applicable large employer reporting requirements.