Employers Must Decide Whether to Pay or Play By 2015 (or is it 2016?)

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For important terms and concepts discussed in this article, please click here.
The employer “shared responsibility” provision of the Affordable Care Act, is commonly referred to as an “employer mandate.” But it is more aptly called the “pay or play” rule, because employers will still not technically be required to offer or provide health care coverage to their employees at any time.  But if an employer subject to the rules chooses not to play by offering coverage, the employer will be required to pay a penalty.
What is the Basic Rule?
What the rule says, essentially, is that an “applicable large employer” will have to pay a penalty if it either: (1) does not offer “ minimal essential coverage” to “substantially all” of its full-time employees and their dependents, OR (2) does offer minimal essential coverage, but that coverage does not meet both minimum affordability and minimum value standards.
Who is Subject to the Rule?
A “large employer” (called an “applicable large employer” in the regulations) for purposes of the pay or play penalty will be one that had an average of at least 50 full-time employees (including full-time equivalents/FTEs) during the preceding calendar year. Typical aggregation rules apply, meaning all entities in a “controlled group” are counted for determining large employer status.
When Does the Rule Apply?
The regulations implementing the pay or play rule now generally go into effect as of January 1, 2015.  That provision was originally set to go into effect as of January 1, 2014, but a one-year delay was issued in July 2013. The Treasury Department and the IRS, which have responsibility for enforcing the rules, issued final regulations on February 10, 2014.  Those final regulations provided key “transition” assistance, including:
  • Employers with 99 or fewer employers will not be subject to a pay or play penalty in 2015, so long as certain conditions are met (see below).
  • Employers with 100 or more employees will be subject to the rule in 2015, but will only be required to offer minimum essential coverage to 70% of their full-time employees (rather than the 95% rule discussed below, which will phase in effective for 2016).
Transition Rule Gives Employers With 50-99 Employees Until 2016 to Comply.
For 2015 only, employers with fewer than 100 full-time employees will not be subject to the pay or play penalty, if the following conditions are satisfied:
  • The employer does not reduce its workforce or overall hours (other than normal business operations such as terminations for poor performance) in order to take advantage of the guidance.
  • The employer retains any health coverage that it already-offered as of February 9, 2014 (the day before the final regulations were issued).
  • The employer will have to certify its compliance with these requirements (in place of its standard pay or play reporting requirements).
When Will a Large Employer Be Subject to a Pay or Play Penalty?
There are two scenarios in which an applicable large employer will be subject to a penalty: (a) the large employer DOES NOT offer coverage to at least “ substantially all” full-time employees and their dependents, or (b) the large employer DOES offer coverage, but that coverage does not meet the criteria for being “affordable,” and providing “ minimal value.”
(A) Failing To Provide Minimum Essential Coverage to Substantially All Full-Time Employees ($2,000 Penalty x All Full-Time Employees)
The pay or play penalty, for large employers who do not offer minimum essential coverage to “substantially all” full-time employees, will be $2,000 per full-time employee, excluding the first 30 full time employees.  
Because of the transition assistance provided as part of the final rule, large employers subject to the rule in 2015 (those with 100 or more full-time employees) will be required to provide coverage to 70% or more of their full-time employees to meet the “substantially all” test.  (That 70% number returns to 95% in 2016.)
An example of how the rule will work in practice: An employer with 500 full-time employees would be required in 2015 to offer coverage to at least 70% of those employees, or at least 350 employees.  If it does not, it will be subject to a penalty equal to $2,000 x 470 employees.
The penalty will apply if one or more full-time employees qualifies (and enrolls for) coverage and a premium tax credit and cost reductions through an exchange.  Put another way, it only takes ONE employee to qualify for and receive exchange subsidies to trigger a penalty of $2,000 multiplied by the employer’s total number of full time employees (minus the first 30 employees).  If no full-time employees obtain coverage through the exchange and qualify for premium tax credits, then no penalty will apply.
(B) Failing to Provide Coverage to Substantially All Full-Time Employees That Provides Minimal Value and is Affordable  ($3,000 Penalty x Number of Full-Time Employees Obtaining Exchange Coverage)
If an employer avoids the $2,000 penalty by providing minimal essential coverage to “substantially all” of its employees, it could still be subject to a penalty of $3,000 for those employees: (i) to whom it has not offered the coverage, (ii) who were offered a plan that does not provide minimal value, or (iii) for whom the plan is not affordable.  This means that even if a large employer offers coverage, if that coverage is either not affordable or does not provide minimum value, a $3,000 penalty will apply for each full-time employee who enrolls in an exchange and receives premium tax credits or other exchange subsidies.  Note that this penalty applies only for each individual employee obtaining tax-subsidized coverage on the exchange, not to every full-time employee (which makes the $3,000 penalty different from the $2,000 penalty that applies if no coverage is offered at all).   The maximum amount of the $3,000 penalty is capped at the amount the employer would have paid under the $2,000 penalty, had it applied.
Determining “Affordability”
The general rule for determining whether the employer’s plan is “affordable” is if the employee’s share of employee-only coverage for the lowest cost option is more than 9.5% of the employee’s annual household income (i.e., including the spouse’s income).  Because the employer will not typically know the employee’s household income (making planning infeasible) the IRS has provided three voluntary safe harbors based solely on the employee’s wages and cost, which are:
  • W-2 Safe Harbor: Coverage will be deemed affordable if a full-time employee’s required contribution for employee-only coverage under the lowest-cost option for the calendar year does not exceed 9.5% of W-2 wages as determined at the end of the year.  The required employee contribution amount must remain consistent throughout the year in order to qualify.  For partial coverage years, the W-2 wages are adjusted to reflect the period of coverage.
  • Rate of Pay Safe Harbor: Coverage will be deemed affordable if a full-time employee’s required contribution for a month for employee-only coverage under the lowest-cost option does not exceed 9.5% of the minimum amount a full-time employee at his rate of pay would earn (130 hours x hourly pay as of the first day of the coverage period).  For salaried workers, that monthly salary is used instead of the 130 x hourly pay amount.
  • Federal Poverty Level Safe Harbor: Coverage will be deemed affordable if a full-time employee’s required contribution for a month for employee-only coverage under the lowest-cost option does not exceed 9.5% of the Federal poverty line for individuals (in the state where the employee is employed), divided by 12.
Special Rules For Determining Which Employees Will Be Full-Time Employees
In many, if not most, cases, an employer will know for both its existing and new employees whether or not to treat them as full-time employees.  Given the extended transitional period provided for employers to comply with the pay or play rule, many companies are proactively planning which employee classifications will be scheduled in 2015 and later as 30 or more hour per week employees.  For those employees that the employer reasonably knows will be full-time, a penalty will be applicable if coverage is not offered by an applicable large employer. But the IRS has provided additional guidance for special situations, notably new employees whose hours are variable and unknown when employment begins. 
New, Variable Employees
New employees who are reasonably expected to work at least 30 hours per week on average must be offered the coverage with a waiting period no longer than 90 days.  For new employees whose schedule is unknown or expected to vary, and for whom the employer cannot determine, based on the facts and circumstances it then knows, whether the employees will be full-time or not (i.e., it is not known whether the employee will average 30 hours or more per week), the employer is provided a period of time to make that determination.  The employer is allowed to use a “measurement period” of between 3-12 months (the employer chooses the length of the measurement period from within that range) to monitor the hours that the employee actually works.   
Following the measurement period, if the employee is determined to be a full-time employee for that initial measurement period, the employer is allowed to use an “administrative period” of up to 90 days to enroll the employee into coverage.  Note, however, that the measurement period, combined with the administrative period, cannot total more than 13 months and a fraction of a month.  
Once enrolled, the full-time employee must be allowed to remain in coverage for a “stability period” that is at least 6 months, and that is at least as long as the measurement period.  So, for example, if the measurement period was 9 months, the stability period must be at least 9 months but can of course be longer.
For an employee determined not to be full-time, the “stability period” (during which the employees who did not make the 30-hour threshold and thus is not getting coverage) cannot exceed the measurement period plus 1 month.  The employer must re-test the employee for possible full-time status once the employee has completed the standard measurement period that overlaps with the initial measurement period.
Ongoing Employees
For ongoing employees, an employer is allowed to determine full-time status under a special safe harbor that utilizes a look-back to determine status and then provides the coverage prospectively to employees who meet the full time employee threshold.  The employer looks at the hours an employee has worked during a given “measurement period” of between 3 – 12 months.  For employees who have worked an average of 30 hours or more per week during that measurement period, they are treated as full-time (i.e., they are provided coverage) for the subsequent “stability period,” which must be at least 6 months, but must not be less than the measurement period.  Coverage must continue to be provided during the entire stability period to an employee who has qualified during the applicable measurement period, even if the employee drops back down to an average of below 30 hours per week during the stability period (but coverage stops if that employee terminates employment during the stability period).  So, for example, an employer may offer coverage for a calendar year to those employees who averaged at least 30 hours per week during the prior calendar year.
The employer is allowed to interject an “administrative period” of up to 90 days between the measurement period and the stability period to allow for time to enroll employees.  But the administrative periods must be coordinated in such a way as to not reduce stability periods.
Transition Rule for Non-Calendar Year Plans
Certain fiscal-year health plans (called “non-calendar year plans” in the regulations) that were in existence in 2012 will be able to take advantage of special transition rules, and will not be subject to the pay or play rule until the first day of their first plan year that falls in 2015.  The categories of non-calendar plans eligible for transition relief under the final rules are:
  1. Pre-2015 Eligibility - A plan that:
    a. had a non-calendar plan year in effect as of December 27, 2012,
    b. whose plan year was not modified after December 27, 2012 to begin at a later calendar date, and
    c. the plan provides coverage that is both affordable and minimum value as of the first day of the 2015 non-calendar plan year to “substantially all” full-time employees.
  2. Significant Percentage (All Employees) - A plan with a non-calendar plan year (and all plans that have the same plan year) that had, as of any date within the 12 months ending on February 9, 2014, either:
    a. offered coverage to at least 1/3 of the employees (including full- and part-time) during the most recent open enrollment, OR
    b. covered at least 1/4 of the employees
    No pay or play penalty will be imposed prior to the first month of the plan year that begins in 2015 if the above criteria are met.  But the plan will be required to provide coverage that is both affordable and minimum value as of the first day of the non-calendar plan year that begins in 2015 to “substantially all” full-time employees.
  3. Significant Percentage (Full-Time Employees) - A plan that had a non-calendar plan year in effect as of December 27, 2012, the plan year was not modified after December 27, 2012 to begin at a later calendar date (and all plans that have the same plan year) had, as of any date within the 12 months ending on February 9, 2014, either:
    a. offered coverage to at least 1/3 of the employees (including full- and part-time) during the most recent open enrollment, OR
    b. covered at least 1/4 of the full-time employees.
    No pay or play penalty will be imposed prior to the first month of the plan year that begins in 2015 if the above criteria are met.  But the plan will be required to provide coverage that is both affordable and minimum value as of the first day of the non-calendar plan year that begins in 2015 to “substantially all” full-time employees.

 

Topics:  Affordable Care Act, Employee Benefits, Employer Mandates, Healthcare, Healthcare Reform, Pay or Play

Published In: Health Updates, Labor & Employment Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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