SUMMARY: Final Rules were released late in the day on February 10, 2014 implementing the employer shared responsibility provisions of the Affordable Care Act (pay or play rules or employer mandate). The Rules, which were published on February 12, 2014 in the Federal Register, contain clarifications to previously proposed regulations, additional informal guidance, and a number of transition rules. One of the transition rules delays the effective date for the imposition of any pay or play penalties to 2016 for certain large employers with a limited workforce size. The relief is only extended to employers that have at least 50 but fewer than 100 full-time and full-time equivalent (FTE) employees in 2014 and meet certain other conditions, discussed below.
Background: Under the employer mandate, large employers (defined as having 50 or more full-time employees, including FTEs1) risk the assessment of penalties, called “assessable payments,” if they fail to offer health coverage to their full-time employees (those working at least 30 hours per week) and their dependents.2 The rules were originally scheduled to take effect in 2014 but enforcement was delayed until 2015. Under the employer mandate, penalties may be assessed if coverage is not offered to at least 95 percent3 of full-time employees (a no offer penalty). In the alternative, penalties may be assessed if the plan offers coverage that either does not provide minimum value (pay at least 60 percent of the anticipated expenses) or offers employee-only coverage under the lowest-value option available under the plan that costs the employee more than 9.5 percent of his or her household income (an insufficient coverage penalty). Neither penalty is assessed unless at least one full-time employee receives premium tax credits or cost-sharing payments (subsidies) in connection with his or her purchase of coverage from the Health Insurance Marketplace.
Under the guidance, limited-size large employers will, essentially, get another year to prepare their game plan for compliance with the pay or play provisions of the ACA. Under this specific transition provision, no penalty will apply for any calendar month in 2015 (or, for employers with non-calendar year group health plans, no penalties will apply for any calendar month during the 2015 plan year, including months during the 2015 plan year that fall in 2016), so long as the large employer meets four conditions, as follows:
1) Limited Workforce Size. During 2014, the employer (on a controlled group basis) employs at least 50 full-time employees (including FTEs) but fewer than 100 full-time employees (including FTEs).4
2) Maintenance of Workforce and Aggregate Hours of Service. The employer does not reduce the size of its workforce or overall hours of service during the period beginning on February. 9, 2014 (the day before the regulations were issued) and ending on December 31, 2014, in order to avoid the employer mandate. If reductions occur, the employer can satisfy this requirement by showing that the reductions were for bona fide business reasons.
3) Maintenance of Previously Offered Health Insurance. During the period beginning on February 9, 2014 through December 31, 2015 (or the end of the 2015 plan year for non-calendar-year plans), the employer does not eliminate or materially reduce the health coverage (if any) it offered as of February 9, 2014.
An employer will not be treated as eliminating or materially reducing health coverage if, for each employee who is eligible for coverage on February 9, 2014:
(a) The employer offers to make a contribution toward the cost of employee-only coverage that is either (i) at least 95 percent of the dollar amount of the contribution the employer was making toward the coverage in effect as of February 9, 2014, or
(ii) at least the same percentage of the cost of coverage that the employer offered to contribute toward coverage in effect as of February 9, 2014.
(b) Benefits offered as of February 9, 2014 at the employee-only coverage level does not change, or, if it does, the coverage after the change provides minimum value; and
(c) Eligibility under the employer’s group health plans is not amended to narrow or reduce the class or classes of employees (or the employees’ dependents) to whom coverage under those plans was offered as of February 9, 2014.
4) Certification of Eligibility for Transition Relief. The employer certifies that the employer is eligible for the relief.5 It is anticipated that the form will be filed as part of the IRS information return that will form the basis for the assessment of penalties under the employer mandate.
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
1. The number of FTEs for any calendar month is determined by adding up all of the hours of service in that calendar month for employees who were not ACA full-time employees (but taking into account not more than 120 hours of service for any one employee) dividing that total by 120, and rounding the result to the nearest one hundredth.
2. The term dependent does not include a spouse. If employers maintain plan options that do not offer dependent coverage, a separate transition provision may apply to delay the imposition of penalties for a failure to offer coverage to dependents until 2016.
3. Additional transitional relief is provided in the Final Rules, that permits 75 percent to be substituted for 95 percent for 2015.
4. Under another transition provision in the Final Rules, employers will be permitted to use any consecutive month period during 2014 of at least six (6) months for the purpose of determining large employer status for 2015., instead of the entire calendar year.
5. In the Fact Sheet issued with the Final Rules, the Treasury Department indicated that the IRS intends to issue final regulations that aim to substantially simplify and streamline the employer information reporting requirements under the ACA.