On February 10, 2014 the IRS issued final regulations on the employer shared responsibility provisions under Section 4980H of the Internal Revenue Code. Here is a "Q&A" statement provided by the IRS that answers various questions raised by these new regulations. Most noteworthy is the delay associated with employers who have between 50 and 100 employees, as they will be given an additional year in which to comply with the employer mandate in the Affordable Care Act ("ACA"). Similarly, employers who have more than 100 employees will also be given leeway insofar as the percentage of employees who must be covered by insurance will be reduced from 95% to 70% for 2015 only. The following areas were also covered in these new regulations:
New employers not in existence on any business day in the prior calendar year are considered applicable large employers if in the current year the employer "expects" to employ an average of at least 50 full-time employees. In the following year, however, the employer must determine its status as an applicable large employer using the ACA’s measurement rules concerning the number of full-time employees and full-time equivalents employed in the preceding year.
What Is An Hour Of Service?
The IRS responded that an hour of service means each hour of that an employee is paid or is entitled to payment for: (1) the performance of duties for the employer; and (2) each hour for which an employee is paid or entitled to payment for a period of time during which no duties are performed for: vacation, holidays, illnesses, (including disability) layoffs, jury duty and military duty or leave of absence. Hours of service that do not count include service performed as a bonafide volunteer or to the extent income for services constitutes income from sources outside of the United States.
Rejection of Coverage
The regulations further indicate that an employee who rejects coverage that is both affordable and that provides minimum value will not be eligible for a premium tax credit (thus preventing any penalty from being imposed upon the employer if the employee obtains coverage at an Exchange).
Extent of Penalties
Question 24 is particularly troubling in that it seems to suggest that if an employer offers less than 95% coverage that it will owe an employer shared responsibility payment equal to the number of full-time employees the employer employed for the year minus 30 multiplied by $2,000 (assuming at least one full-time employee receives a premium tax credit). The question that has often been raised (but not fully answered) is if an employer offers say 90% coverage would that still subject an employer to the same penalty as an employer who offers no coverage at all? Intuitively, it would seem this would not be the case; however, the answer to question 25 suggests otherwise.
Penalties Will Increase During Safe Harbor Period
It is clear that the "inflation mechanism" with respect to employer penalties, will not be affected by the transition relief discussed above and will increase during 2014-2016.
Non-Calendar Year Plans; Employers "Close" To Being Large Employers
Also clarified is the fact that employers who are on a non-calendar year basis for coverage will have transition relief to the first calendar day of the plan year for 2015. There is also transition relief available for employers that are "close" to the 50 full-time employee threshold, as such employers may use a consecutive six (6) month period chosen by the employer during 2014 to determine if they are an applicable large employer in 2015.
The transition relief rules (which are really the heart of the recent regulations), do not resolve the issue of when employers will be determined to be an employer with more (or less) than 100 full-time employees. (Accordingly, the number of full-time employees, including full-time equivalents, should be determined in accordance or with applicable rules for determining the status of an applicable large employer. It is important then to start measuring full-time employees this year.) Also, employers intending to fit within the 50-99 employee safe harbor will have to be very careful in instituting procedures to make sure that they are both within this workforce size and do not take steps to negate such relief for 2015 as explained below.
For example, transition relief for "sub-100" employers is only available in connection with employers that do not reduce the size of their workforce (or hours) in order to qualify for this transition relief. The obvious concern here is to prevent employers from laying off employees or reducing work hours in order to fit within this safe harbor. However, employers do have a defense if the reduction of the workforce (or hours) was for a "valid business reason." The sub-100 safe harbor also requires employees to maintain previously offered health coverage between the period February 9, 2014 until December 31, 2015. In this regard, employers will not be treated as eliminating or (materially reducing healthcare coverage) if they continue to offer each employee who is eligible for coverage an employer contribution towards the cost of employee only coverage that is at least 95% of the dollar amount of the contribution towards said coverage that the employer was offering on February 9, 2014, and the employer may not alter the terms of the group health plan to narrow or reduce the class or the classes of the employees to whom coverage was offered on February 9, 2014. As can be seen, therefore, there are limitations for those employers seeking to fit within this safe harbor with respect to changing healthcare coverage or reducing employees.
Interestingly, in providing such transition relief in 2015 for employers with less than 100 full-time employees, even if they do not qualify for this safe harbor, they still will only be liable for an employer shared responsibility payment if the employer offers healthcare coverage to fewer than 70% of its full-time employees. Thus, even if a sub-100 employer fails to meet the safe harbor it may still avoid a penalty by offering coverage of at least 70% of its full-time employees.
Beginning in 2016, the required percentage of coverage for all covered employees will increase to 95%. In general, the continuing delay in implementing the ACA’s employer mandate, while making the overall implementation environment more complex, still provides valuable time to comply with the employer mandate issues. But employers will still need to track employees for 2014 for several reasons, including determining what category they fall into in terms of employer size.
Scope of Coverage; Discrimination
Additionally, the suggestion by the IRS of insuring only 70% of the workforce in 2015 would indicate that there may be "parts" of workforces that may not be provided coverage. It is still unclear if discrimination claims apply to "selective" coverage arrangements under the ACA and whether employees can be treated differently for coverage purposes.1 Presumably, the IRS will allow employers to have regional differences with workforces regarding healthcare coverage, but as of yet guidance has not been provided.
1 The "highly compensated" discrimination section of the ACA is still on "hold" as no guidance has been provided.