Treasury and IRS Issue Final Regulations on Employer Penalties and Provide New Relief
On Feb. 10, 2014, the Treasury Department and Internal Revenue Service (IRS) issued final regulations
on the employer shared responsibility provisions of the Patient Protection and Affordable Care Act of 2010 (PPACA). PPACA's shared responsibility provisions (also known as the "employer mandate," "employer penalties" or "pay-or-play provisions") require large employers to offer minimum essential health coverage to full-time employees or risk paying penalties. Key provisions of the final regulations delay
the penalties for employers with less than 100 full-time equivalent employees until 2016, if certain conditions are met. Employers with 100 or more full-time equivalent employees must still comply in 2015, but they receive additional limited transitional relief. The final regulations answer several open questions and extend prior transition relief into 2015. The IRS posted questions and answers
on its website to help employers understand the new guidance.
The employer shared responsibility provisions under Internal Revenue Code (Code) Section 4980H, as added by PPACA, apply to employers with at least 50 full-time employees (including full-time equivalents). Code Section 4980H provides that these "applicable large employers" will be required to pay penalties if: (1) they do not provide minimum essential health coverage to substantially all of their full-time employees (and their children under age 26); and
(2) at least one of their full-time employees receives a premium tax credit or cost sharing reduction for purchasing individual coverage through a Health Insurance Exchange (or Marketplace). An employer might also face a penalty if a full-time employee receives a premium tax credit or cost sharing reduction on an Exchange if the coverage offered to the employee is not "affordable" or does not provide "minimum value." For these purposes, a full-time employee is one who is employed to perform on average at least 30 hours of service per week. Generally, coverage is "affordable" if the employee's share of single-only coverage does not exceed 9.5 percent of his or her household income, and a group health plan provides "minimum value" if it is designed to pay at least 60 percent of the costs incurred under the plan.
The IRS and Treasury issued proposed regulations
on Dec. 27, 2012, which were originally intended to implement Code Section 4980H, effective beginning in 2014. However, under Notice 2013-45
, the IRS delayed implementation until 2015. The final regulations released on Feb. 10 substantially adopt the approach taken under the proposed regulations, including the availability of a "look-back measurement method" to determine full-time status. In response to comments, the IRS and Treasury amended certain provisions of the proposed regulations and they also expanded transitional relief, most notably for employers with between 50 and 99 full-time employees.
Issues Addressed by the Final Regulations
The final regulations substantially adopt the structure and approach of the proposed regulations, with certain important modifications. Following are those items we believe to be most significant for employers and retirement systems that sponsor group health plans.
Transition Relief for 2015
Additional One-Year Delay for Certain Employers. Applicable large employers with fewer than 100 full-time employees (including full-time equivalent employees) in 2014 are not subject to the employer shared responsibility provisions until the first plan year that begins in 2016, if certain conditions are met. This extension is not automatic. To be eligible for this additional one-year delay, employers must generally maintain their workforce and level of health coverage offered as of Feb. 9, 2014, and certify that they qualify for the transitional relief on a prescribed form provided by the IRS.
Modification to "Substantially All" Standard for 2015. Applicable large employers must provide minimum essential coverage to "substantially all" full-time employees and their dependent children to avoid a penalty under Code Section 4980H(a) (the "A" penalty). The standard for substantially all generally requires an offering of coverage to 95 percent of an employer's full-time workforce. For the 2015 plan year only (including the portion of a non-calendar 2015 plan year that falls in 2016), this standard is reduced to 70 percent. This reduces the likelihood that an applicable large employer will be subject to the "A" penalty. However, those full-time employees who fall within the 30 percent of the workforce who are not be offered coverage could still trigger a smaller penalty for the employer under Code Section 4980H(b) (the "B" penalty) if they obtain subsidized coverage from an Exchange.
Reduction in Calculation of the "A" Penalty for 2015. The "A" penalty is calculated by multiplying the employer's full-time work force (excluding 30 full-time employees) by $2,000 annually. For the 2015 plan year only (including the portion of a non-calendar 2015 plan year that falls in 2016), applicable large employers subject to the "A" penalty may calculate their penalty by taking a reduction of 80 full-time employees, rather than 30 full-time employees. This reduces the maximum "A" penalty by as much as $100,000 for the 2015 plan year.
Prior Transition Relief for 2014 Extended Through 2015. The proposed regulations included transition rules that were originally intended to apply in 2014. Following the delay in implementation until 2015, the final regulations preserve the relief that would have applied in 2014. This relief addresses the following:
An employer may determine whether it is an applicable large employer by determining whether it employed an average of at least 50 full-time employees on business days during any consecutive six-month period in 2014.
An employer that intends to utilize the look-back measurement method for determining full-time status with a 12-month stability period for 2015 may adopt a transition measurement period that is shorter than 12 months but that is no less than six months, and begins no later than July 1, 2014, and ends no earlier than 90 days before the first day of the first plan year beginning in 2015.
Subject to certain conditions specified in the preamble to the regulations, an employer that sponsors a non-calendar plan year is generally not subject to Code Section 4980H and the final regulations with respect to its employees for the portion of 2015 that precedes the beginning of the 2015 plan year if those employees are offered coverage on the first day of the plan year that begins in 2015. The relief for non-calendar year plans does not apply if the employer modified its plan year to a later calendar date after Dec. 27, 2012.
Counting Hours for Certain Categories of Employees. Similar to the proposed regulations, the IRS acknowledged in the preamble to the final regulations that there are certain categories of employees whose hours of service are particularly challenging to identify or track, such as adjunct faculty, commissioned salespeople and airline employees. The preamble to the final regulations provides some specific guidance to employers of (i) adjunct faculty, (ii) employees with layover hours, including the airline industry, and (iii) employees with on-call hours, regarding how to credit hours in these circumstances. This guidance is not a safe harbor, but it gives employers a sense of what the IRS may consider a reasonable method to credit hours for these categories of employees. The final regulations authorize the promulgation of further rules for these categories through additional guidance.
Rules on Part-Time Employees and Employment Status Changes. The final regulations fill gaps that existed under the proposed regulations with respect to how part-time employees are treated under the look-back measurement method. The final regulations also provide additional guidance on how certain employees may be treated under the look-back measurement method upon a change in employment status.
Definition of Seasonal Employees. Applicable large employers that use the look-back measurement method may apply an initial measurement period to seasonal employees to determine their status as full-time employees. The definition of the term "seasonal employee" was reserved under the proposed regulations. The final regulations define a seasonal employee to mean an employee who is hired into a position for which the customary annual employment is six months or less. The customary annual employment should begin each calendar year in approximately the same part of the year, such as summer or winter.
Definition of Dependent. Applicable large employers must offer coverage to full-time employees and their dependent children to avoid the penalties under Code Section 4980H. The proposed regulations defined "dependent" by reference to the definition of "child" under Code Section 152(f)(1). This definition includes biological children, stepchildren, adopted children and foster children. The final regulations modified the definition of dependent for purposes of Code Section 4980H to exclude foster children and stepchildren. In addition, the final regulations clarify that, for purposes of Code Section 4980H, a child is a dependent for the entire calendar month during which he or she attains age 26.
The final regulations contain several additional modifications to the proposed regulations that could have a material impact on particular employers. For example, the final regulations contain new guidance on allocating employer penalties among different members of the same controlled group that employ the same employee, guidance on the application of the rules to temporary leasing agencies and multiemployer plans, and a modification to the rehire rules that govern when an employer may treat an employee as a new hire under the look-back measurement method.
Action Steps for Applicable Large Employers in 2014
Many employers began reviewing their health plan eligibility policies when the proposed regulations were issued, and they may have also begun the task of working through potential measurement and stability periods that could work with their organization. The delay in implementation until 2015 gave employers an opportunity to wait for final regulations to evaluate their options. Now that final regulations have been released, employers can move forward with greater clarity in preparing for 2015 (or 2016). Employers need to consider what actions to take in the short-term to avoid employer penalties:
1. Determine if you are an applicable large employer subject to the employer shared responsibility provisions by counting full-time employees (taking into account full-time equivalents) employed for at least a six-month period during 2014. Aggregation rules apply to treat employers of the same controlled group and affiliated service group as a single employer for these purposes. Special rules apply with respect to counting seasonal workers.
2. If you are an applicable large employer but you have fewer than 100 full-time employees (taking into account full-time equivalents), determine if you can meet the eligibility criteria for an additional one-year delay. You will need to certify to the IRS that you qualify for this relief.
3. Review your group health plan coverage for potential issues under the employer shared responsibility provisions:
Does your plan offer coverage to all full-time employees (as defined by the 30-hour standard in PPACA) or are certain categories of employees excluded who may be full-time employees under the final regulations (e.g., temporary or contract employees)? How many potential full-time employees are excluded?
Does your plan offer coverage to the biological children and adopted children of full-time employees until the end of the calendar month in which they reach age 26? Stepchildren and foster children are not required to be covered for purposes of avoiding the employer penalties.
Is each employee's share of health coverage less than or equal to 9.5 percent of his or her W-2 wages, computed monthly wages, or the federal poverty line for a single individual?
Is your plan expected to pay for at least 60 percent of the costs incurred under the plan?
4. Determine, if applicable, what the measurement and stability periods will be for the first year of implementation, taking into account the transition relief provided, and ensure that human resources staff have the ability to track an employee's hours of service for the relevant periods.
5. If you have categories of employees in your workforce whose hours of service are particularly challenging to identify or track, such as adjunct faculty, commissioned salespeople or airline employees, develop a policy to demonstrate your company's reasonable method of crediting hours for these employees.
Ice Miller LLP has been tracking the regulations and other guidance issued under PPACA, and you can read about the guidance that has been issued to date on Ice Miller's Health Care Reform Web site
For more information about PPACA employer responsibilities or any employee benefits matter, contact Mary Beth Braitman
, Sarah Funke
, Melissa Proffitt Reese
, Shalina Schaefer
, Tara Sciscoe
, Chris Sears
, Tiffany Sharpley
, or any member of the firms Employee Benefits Group