On Monday, February 9, 2014, the Agencies issued regulations that provide additional guidance regarding the employer mandate (i.e. the “play or pay” penalty) under Healthcare Reform. But, the most surprising aspect of the guidance was the delay on the implementation of the mandate for certain employers to provide health coverage to their full-time employees.
Under Healthcare Reform, applicable large employers (i.e. businesses that normally employ at least 50 full-time employees or full-time equivalents each year) are required to offer their full-time employees minimum essential coverage that satisfies certain criteria, or face a penalty if a full-time employee receives coverage from the Marketplace and is eligible for a subsidy for such coverage. Initially, this mandate was supposed to go into effect as of the first plan year beginning on or after January 1, 2014. In July, 2013, however, the Agencies issued a notice that delayed the implementation of the employer mandate until the first plan year that begins on or after January 1, 2015. The purpose of that delay was to allow the government more time to finalize its guidance on the reporting requirements for applicable large employers. No similar delay was provided to individuals. As a result, individuals are generally required to have minimum essential coverage as of January 1, 2014 or pay a penalty.
According to the regulations issued yesterday, employers with less than 100 full-time employees and full-time equivalents will now have until the first plan year that begins on or after January 1, 2016 to comply with the employer mandate. The purpose cited for this delay was to allow employers more time to transition to a 30-hour workweek (which is the threshold for an employee to be considered “full-time” for purposes of healthcare reform). Notably, this transition relief is NOT automatic.
An employer that intends to rely on this transition relief will be required to certify to the Internal Revenue Service that it has not reduced the size of its workforce or the overall hours of service of its employees during the period commencing on February 9, 2014 and ending on December 31, 2014, other than for bona fide business purposes (such as a sale of a division or changes in the economy), and, further has not otherwise eliminated or materially reduced its health coverage during such period. An employer that fails to satisfy these conditions will not be entitled to rely on this transition relief and, therefore, will be subject to the employer mandate as of the first plan year beginning on or after January 1, 2015.
In addition, employers with 100 or more full-time employees and full-time equivalents will have a phase-in period for compliance with the mandate. The mandate for this group remains effective as of the first plan year beginning on or after January 1, 2015. However, an employer in this group will be treated as complying with the mandate in the 2015 plan year if the employer covers at least 70% of its full-time employees (which, ironically, is a threshold that currently applies for determining whether a self-insured health plan is discriminatory under Section 105(h) of the Internal Revenue Code) and will be treated as complying with the mandate in the 2016 plan year and thereafter if the employer covers at least 95% of its full-time employees. Recall, the “substantial compliance” threshold of 95% was provided for in regulations issued by the Agencies in early 2013 and is not new.
While the delay may be appreciated by those employers eligible to take advantage of it, it is limited in nature. Employers with less than 100 full-time employees (and full-time equivalents) will need to weigh the advantages of making changes to their employee population and health coverage against the usefulness of the transition relief. Interestingly, an employer in this group that fails to satisfy the conditions for transition relief will be entitled to rely on the reduced compliance standards that are otherwise provided for employers with larger employee populations (i.e. provide coverage to at least 70% of the full-time employee population in the 2015 plan year).