I’m An Applicable Large Employer – To Whom Must I Offer Health Coverage In Order To Avoid Pay Or Play Penalties?

by Stinson Leonard Street - Employee Benefits & Compensation
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Beginning in 2014, the employer shared responsibility mandate of the Patient Protection and Affordable Care Act requires applicable large employers (those employing on average at least 50 full-time equivalent employees on business days during the preceding calendar year (also see previous blog on determining if you are an applicable large employer) to offer minimum essential, affordable coverage to their full-time employees or be subject to penalties. Penalties will be computed and assessed on a monthly basis, and will be assessed separately for each employer within a controlled group.

The applicable large employer’s health plan must provide minimum essential coverage to at least 95% of its full-time employees and their dependents (children under age 26). If the employer doesn’t offer any coverage, or the coverage offered is not minimum essential coverage and if at least one employee enrolls in an exchange plan and receives a premium tax credit, the employer could be responsible for a penalty of $2,000 x each full-time employee, ignoring the first 30 employees. If the employer offers minimum essential coverage to at least 95% of its full-time employees but the coverage is not affordable or doesn’t offer minimum value, the employer could be responsible for a penalty of $3,000 x each full-time employee who enrolls in an exchange plan and receives a premium tax credit.

A full-time employee is an employee who is employed on average at least 30 hours of service/week. The regulations state that if an employer offers health coverage to all but 5% (or 5, if greater) of its full-time employees, it will be treated as offering coverage to all full-time employees. Hours of service include each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, including vacation, holiday, illness, layoff, jury duty, military duty or leave of absence. For employees not paid on an hourly basis, employers can use 1 of 3 methods to count hours of service: counting actual hours of service, using a days-worked equivalency method, or using a weeks-worked equivalency method. Hours of service generally do not include services performed outside of the United States.

Regulations adopt the look-back measurement method for determination of full-time employee status as an alternative to a month-by-month method of determining full-time employee status. The regulations describe different look-back periods for ongoing and new employees. The regulations also discuss how to address changes in employment status, rehiring employees, short-term employees, and employees hired into high turnover positions.

For ongoing employees (employees who have been employed for at least one complete standard measurement period), an employer may look back at a standard measurement period (a defined period between three and 12 consecutive months chosen by the employer). If an employee was employed on average at least 30 hours/week during this standard measurement period, the employer treats the employee as a full-time employee for the subsequent stability period regardless of the employee’s actual hours of service, so long as he or she remains an employee. The stability period is a period that is the greater of six consecutive calendar months or the length of the standard measurement period. An employer may also choose to add an administrative period of up to 90 days between the measurement and stability periods so it has time to determine which employees are eligible for coverage, and notify and enroll such employees. The standard measurement period and stability period generally must be uniform for all employees. However the regulations allow an employer to choose different lengths for each group of collectively bargained employees covered by a separate collective bargaining agreement; collective and non-collectively bargained employees; salaried and hourly employees; and employees whose primary places of employment are in different states. 

The regulations offer transitional rules for purposes of stability periods beginning in 2014 – employers may adopt a transition measurement period that is shorter than 12 months but that is no less than six months long, and that begins no later than July 1, 2013 and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014. For example, an employer with a calendar year plan could use a measurement period from April 15, 2013 – October 14, 2013, followed by an administrative period ending on December 31, 2013.

Different measurement requirements apply to new employees (those who have not been employed for a complete standard measurement period), depending on whether they are full-time, variable or seasonal. New full-time employees are those reasonably expected to work on average 30 hours/week when they are hired. New variable hour employees are those that employers cannot determine whether they are reasonably expected to work on average at least 30 hours/week. Seasonal employees are not defined. 

New full-time employees must be offered health coverage at or before the conclusion of the employee’s initial three calendar months of employment.  

For new variable hour and seasonal employees, an employer may use an initial measurement period of between three and 12 consecutive calendar months, and an administrative period of up to 90 days. The initial measurement period and administrative period combined cannot extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date. If a variable or seasonal employee works on a full-time basis during the initial measurement period, then the employee must be treated as a full-time employee during the subsequent stability period. The stability period for these employees must be the same length as the stability period for ongoing employees, and must be a period of at least six consecutive calendar months that is no shorter in duration than the initial measurement period. If a variable or seasonal new hire is not considered to work on average 30 hours/week, the employer does not have to offer the employee coverage during the stability period that follows the initial measurement period. This stability period must not be more than one month longer than the initial measurement period and must not exceed the remainder of the standard measurement period and associated administrative period in which the initial measurement period ends. 

Counting new hires hours will be cumbersome for employers, because each new variable hour and seasonal employee will have his/her own initial measurement period.

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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