Beginning in 2014, the shared responsibility provisions of health care reform require certain employers to offer qualified health coverage to their full time employees or pay a penalty. Because of this pay-or-play mandate, employers must determine this year who will be considered a full time employee for health coverage purposes and if their health plan qualifies as an acceptable plan.
The guidance for determining full-time employee status is extremely complex. Last week, the IRS issued proposed regulations and Q&As on the shared responsibility provisions of the Affordable Care Act providing additional guidance to help employers determine if they will be subject to the pay or play mandate beginning in 2014 and, if so, how to comply.
The proposed regulations generally follow guidance previously released by the IRS in four separate notices. The rules were created by health care reform under section 4980H of the Internal Revenue Code.
Pay or Play Mandate
Generally, a large employer will be subject to a penalty if either (1) the employer does not offer qualified health coverage and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an Exchange, or (2) the employer offers qualified health coverage to at least 95% of its full-time employees, but at least one full-time employee still receives a premium tax credit to help pay for coverage on an Exchange. Coverage must be provided to both employees and their dependents, who are considered children younger than age 26. The "coverage" must meet certain standards that make it minimum essential coverage at a certain "affordable" dollar amount. Click here for our article dated May 3, 2012 on minimum value.
Employer Size
Only "large" employers are subject to the pay-or-play penalty. A large employer is an employer that employs 50 full-time equivalent employees ("FTEs") on average during the prior calendar year. An employee includes a common law employee, but does not include a partner in a partnership, a sole proprietor or a more than 2% corporation shareholder. All employees of all members of a controlled group or affiliated service group must be counted, but there are special rules that may apply to a governmental entity or church (these groups may rely on a reasonable, good faith interpretation of the Code section 414(b), (c), (m), and (o) aggregation rules in determining which groups have to be counted in determining if a person or group of persons is an applicable large employer). Generally, only U.S. workers have to be counted.
A full-time employee for determining if an employer is a "large" employer includes both full-time employees and full-time equivalent employees (part-time employees who work a certain number of hours to make them considered full-time).
A full-time employee for these purposes is generally an employee who has more than 30 hours of service per week. 130 hours of service per month is considered the equivalent of 30 hours of service per week. An hour of service includes (1) each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and (2) each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
Hours of Service Calculation
For employees not paid on an hourly basis, employers may calculate the number of hours of service under any of the following three methods: (1) counting actual hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence; (2) using a days-worked equivalency method whereby the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service under the service crediting rules; or (3) using a weeks-worked equivalency of 40 hours of service per week for each week for which the employee would be required to be credited with at least one hour of service under the service crediting rules. An employer does not have to use the same method for all classes of employees.
Employers must average their number of employees over the calendar months in the prior year. This includes, for each calendar month:
Each employee who works more than 30 hours per week, plus
The total number of hours worked during a month by employees who are not full-time (but not more than 120 for any employee), divided by 120.
Then, the employer must total the FTE count for each calendar month and divide by 12. If the number equals 50 or more (not including any fractions), the employer would be potentially subject to compliance with the pay or play mandate.
Specific transition relief is available for the first year. Employers who are close to meeting the 50 employee mark for the 2013 look-back year may be able to use any 6-consecutive month period during 2013 rather than the whole year.
Seasonal Workers
While there are no special calculation rules to exclude positions with high-turnover, there is a special rule for seasonal workers. An employer can avoid the pay or play mandate if the employer has less than 50 FTEs for 120 days or fewer (or, alternatively four calendar months) during the look-back year due to seasonal workers. A seasonal worker is one who performs labor or service on a seasonal basis, retail workers employed exclusively during the holiday season, and certain other employees determined "seasonal" within a reasonable, good faith interpretation of the rules.
New Employers
New employers who do not have a prior year look-back period may be subject to the pay or play mandate if it is reasonably expected that the employer will employ an average of at least 50 FTEs curing the current calendar year.
Meeting the Coverage Requirements- Calculations
While all full-time equivalent employees are taken into account in determining if an employer is a "large" employer subject to the pay or play mandate, only full-time employees have to be offered coverage under the rules. A full-time employee is an employee who works at least 30 hours per week. Employers may measure an employee's hours over a certain measurement period of 3 to 12 months, and then treat that employee as either full-time or part-time (depending on the measurement period results) for a certain stability period.
The rules for these determinations are complex, and new employees are distinguished from ongoing employees.
A "standard measurement period" is a certain period of time in the prior year during which data will be collected. Each plan must have one or more standard measurement periods, which may be as short as 3 months or as long as 12 months. The year must be filled with standard measurement periods. The standard measurement period must be uniform and consistent for all classes of employees.
A "stability period" is a period of time after the standard measurement period during which time the plan must consider someone full-time if they were a FTE during the standard measurement period.
Ongoing Employees. An ongoing employee is an employee who has been employed for what the employer deems to be a standard measurement period in the prior year. If the ongoing employee averaged working 30 hours per week during the standard measurement period, then that employee must be treated as a FTE for the stability period, regardless of what hours the individual actually works during the stability period. A stability period must be at least 6 months, but may not be shorter than the standard measurement period.
For example, if the plan has a three month standard measurement period in 2013 (Jan-April/April-July, etc.), the stability period for 2014 must run from at least 1/1/2014 through 6/30/2014.
However, if a person is a part-time employee during the standard measurement period, then the person could be treated as not a full-time employee during the stability period that follows, but only for a period of time that is not longer than the standard measurement period. So, if the standard measurement period was 3 months, the person could be treated as a part-time employee for only 3 months in 2014 before the calculations would have to be run again to see if the person should subsequently be considered a FTE.
New/Variable Hour Employees. For new employees who are reasonably expected to be full-time employees, an employer will not be subject to a penalty if the employer does not offer coverage during the first three months of employment. Under the new guidance, employers may use a standard measurement period for new/variable hour employees of up to 12 months to determine if the new/variable hour or seasonal employee is a full-time employee without being subject to a penalty. An employee is a variable hour employee if it cannot be determined at the employee's start date if the employee will be employed 30 hours per week.
Affordability
Coverage offered by a large employer is considered affordable if the employee's contribution for single coverage is not more than 9.5% of the employee's modified adjusted gross household income. Since employers do not have information about household income, the guidance provides three alternative safe harbors for determining affordability:
W-2. The employee's annual contribution does not exceed 9.5% of the employee's wages from Box 1 of the W-2; or
Rate of Pay. The employee's monthly contribution does not exceed 9.5% of the employee's hourly rate of pay multiplied by 130 (or monthly salary for a salaried employee); or
FPL. The employee's annual contribution does not exceed 9.5% of the most recently published federal poverty limit as of the first day of the plan year.
Calculation of Penalty
In 2014, if an employer employs enough employees to be subject to the pay or play rules and does not offer affordable minimum coverage during the calendar year to at least 95% of its FTEs, it must pay a penalty equal to the number of FTEs the employer employed for the year (minus 30) multiplied by $2,000, if one or more of its full-time employees receives a premium tax credit through the Exchange. If an employer does not provide affordable minimum essential coverage, an annual penalty of $3,000 per employee who is certified as having enrolled in subsidized coverage through an Exchange. The payment for the calendar year is the sum of the monthly payments computed for each month for which coverage was not offered. After 2014, these rules apply to employers that do not offer coverage or that offer coverage to less than 95% of their full time employees and for the dependents of those employees.
The pay-or-play rules are complex. Employers should implement procedures this year to calculate their number of FTEs. This article provides general information, only, and employers, especially those close to the 50 FTE threshold, should seek legal guidance on how the FTE calculation rules apply to their specific situation.
