As previously reported [http://www.erisapracticecenter.com/2014/02/11/theyre-back-final-regulations-on-employer-pay-or-play-mandate-released-irs-provides-transition-relief-to-employers-with-50-100-employees/], on Monday, February 10, 2014, the IRS released final regulations on the Affordable Care Act’s (ACA) employer “shared responsibility” provisions, also known as the “pay-or-play” mandate. The final regulations include a number of important transition rules that are intended to phase in the pay-or-play penalties during 2015 and 2016. A number of questions have arisen as to how the penalty provisions work during the 2015 transition period for applicable large employers.

By way of background, the pay-or-play penalties consist of two parts: the “(a)” penalty, which generally is equal to the number of full-time employees the employer employed for the year (minus up to 30) multiplied by $2,000; and the “(b)” penalty, which is $3,000 per year times the number of full-time employees who obtain a premium tax credit on the exchanges, but not more than the “(a)” penalty amount. The “(a)” penalty could apply if an applicable large employer fails to offer coverage at all to a sufficient number of its full-time employees and dependents. The “(b)” penalty could apply if the employer does offer coverage, but that coverage is either unaffordable or does not provide “minimum value” as defined by regulation. Also, these penalties are only triggered if a full-time employee otherwise purchases coverage on a public insurance exchange and obtains a premium tax credit or subsidy for that coverage.

Under one of the new regulatory transition rules for 2015, an employer in the 50-99 full-time employee range will not face any pay-or-play penalties at all (neither the “(a)” nor the “(b)” penalty) as long as the employer can demonstrate that it has not reduced its workforce to qualify for transition relief and it maintains any previously-offered coverage.

Under a separate 2015 transition rule for employers of 100 or more full-time employees, an employer can avoid the “(a)” penalty for 2015 as long as it offers coverage to at least 70% of its full-time employees. After 2015, all large employers of 50 or more full-time employees can avoid the “(a)” penalty as long as they offer coverage to at least 95% of their full-time employees.

But what about the “(b)” penalty? Could an employer that offers coverage to at least 70% of its full-time employees in 2015 still be subject to the “(b)” penalty for 2015? If so, would that penalty apply only to the employees who are actually offered coverage that is either unaffordable or fails to provide minimum value? Or, does that “(b)” penalty also potentially apply to the group of employees who had no offer of coverage at all, i.e., those in the up to 30% group to whom coverage does not have to be offered under the transition rule?

Some have questioned whether large employers of 100 or more full-time employees subject to the new 2015 transition relief would be exposed to any penalties at all for 2015 with respect to those full-time employees to whom coverage is not offered as long as coverage is offered to at least 70% of the full-time employees.

As explained below, the preamble to the IRS final regulations, as well as the recently issued IRS FAQs on the shared responsibility payment rules, appear to answer this question by indicating that a “(b)” penalty could still apply.

After describing the new 2015 transition relief, the regulatory preamble states: “Applicable large employer members qualifying for the transition relief set forth in this section XV.D.7.a continue to be subject to a potential assessable payment under section 4980H(b).” The preamble does not say whether this potential application of the “(b)” penalty is only for the 70% or more full-time employees to whom coverage is offered or also to the group of employees to whom no coverage is offered.

However, the separate IRS FAQs [http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act] issued at the same time as the final regulations (in particular FAQ 37) answer this question by stating that an employer offering health coverage to at least 70% of its full-time employees and dependents of those employees could still be exposed to a “(b)” penalty if a full-time employee obtains a premium tax credit “because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable… to the employee or did not provide minimum value….” (Emphasis added.)

Similarly, once 2016 arrives and all applicable large employers are subject to the pay-or-play requirements, employers need to be mindful of the fact that as long as they offer coverage to 95% or more of their full-time employees (and dependents), they should not be subject to the “(a)” penalty. However, they could be subject to the “(b)” penalty if the coverage offered is not affordable or does not provide minimum value or the full-time employee triggering the penalty was in the up to 5% of full-time employees to whom coverage was not offered.

It remains to be seen whether the government will try to clarify these rules further in any future guidance.