By Hemali Kothari
The Affordable Care Act (ACA) added the employer shared responsibility provision (also known as the "employer mandate" or "play or pay"), to the Internal Revenue Code (IRC) as Section 4980H. This provision is effective for months beginning after December 31, 2013, regardless of the plan year or grandfathered status.
Section 4980H is applicable to any employer considered to be an "applicable large employer" with at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year. The shared responsibility provision subjects the applicable large employer to a penalty tax if:
Employees are eligible to receive premium tax credits or cost-sharing reductions if the health coverage offered by the employer is either not affordable (employee contribution exceeds 9.5% of W-2 wages reported in Box 1) or the employer-sponsored plan does not provide minimum value.
If the employer fails to offer minimum essential coverage, the penalty tax is $2,000 annually per full-time employee (excluding the first 30 employees). If the coverage offered is not affordable or does not meet the minimum value requirement, the penalty is $3,000 annually for each full-time employee that purchases subsidized coverage through the exchange. The penalty is calculated on a monthly basis.
IRC Section 4980H(c)(4) defines a full-time employee as "an employee who is employed, on average, for at least 30 hours of service per week." Proposed regulations provide further guidance that 130 hours of service in a month could be considered equivalent to 30 hours per week.
The IRS previously issued several notices, including 2011-36, 2011-73 and 2012-17, related to full-time status determination and the employer penalty. After considering the comments received on the previous notices, the IRS released Notice 2012-58 on August 31, 2012, which expands and modifies previous guidance and provides safe harbor methods for determining full-time employment status for current employees and new hires, including hourly and seasonal employees. Note: The safe harbor methods provided in this notice are applicable through 2014, at least. While employers are not required to use this methodology to make a determination of full-time status, the benefit of following the safe harbor method is that the employer is deemed compliant.
An ongoing employee is an employee who has been employed by the employer for at least one complete "standard measurement period" (a defined period of not less than three and not more than 12 consecutive calendar months, as chosen by the employer).
An employer may determine full-time status for ongoing employees by using the look-back/stability period safe harbor method. Under this method, the employer looks back to determine whether an employee averaged at least 30 hours of service per week during the standard measurement period. If the employee averaged 30 hours per week during the standard measurement period, the employee is considered full-time during the subsequent "stability period" (a period of at least six consecutive calendar months that is no shorter in duration than the standard measurement period), as long as the employee continues to be employed. If the employee does not average 30 hours of service per week during the standard measurement period, the employer may treat the employee as not meeting the full-time requirement during the stability period and, as a result, the employer is not subject to a penalty tax for the months within the stability period.
The employer must apply the standard measurement period on a uniform and consistent basis for all employees in the same category (e.g., collectively bargained, non-collectively bargained, salaried, hourly, different entities and different states). However, the employer has flexibility to determine the starting and ending dates for the standard measurement and stability periods in order to align them with its plan year or tax year. And, the employer may use a different standard measurement period for different categories of employees.
The employer has the option to use an "administrative period" between the standard measurement period and the stability period to notify and enroll eligible employees in employer-sponsored plan. The administrative period may last up to 90 days, however, it cannot be used to shorten or lengthen the standard measurement period and/or the stability period. Coverage must be continued through the administrative period for those employees that were determined to be full-time during the previous standard measurement period. As such, the administrative period will overlap with the prior stability period to ensure there are no gaps in coverage.
For new employees that are reasonably expected to work full-time (average 30 hours of service per week or 130 hours per month) as of their start dates, the employer will not be subject to a penalty tax as long as it offers coverage within 90 days of employment as required by Section 2708 of the Public Health Service Act.
For a new employee that is considered a "variable hour employee" (on the start date it cannot be determined, based on the facts and circumstances, that the employee is reasonably expected to work on average at least 30 hours per week) or a seasonal employee, the employer can determine whether the employee is considered full-time by using an "initial measurement period" (a period of between three and 12 months that is defined by the employer). The subsequent stability period must be the same as the period for ongoing employees.
ACA addresses the definition of a seasonal employee for the purpose of determining whether an employer is considered an applicable large employer with at least 50 full-time employees subject to the shared responsibility provision, but not as it relates to the calculation of a penalty tax. As such, employers are permitted to use a good faith interpretation of seasonal employee through 2014, at least.
If it is determined that the employee has completed an average of 30 hours of service per week during the initial measurement period, the stability period must be at least six months in duration, but no less than the duration of the initial measurement period. If the employee does not average 30 hours per week during the initial measurement period, the employer may treat the employee as not meeting the full-time requirement during the subsequent stability period.
In addition to the initial measurement period, the employer has the option to use an administrative period of up to 90 days before the start of the stability period. However, the combined length of the initial measurement period and administrative period cannot extend beyond 13 months after the date of hire.
Once a new employee has been employed for an entire standard measurement period, the employee must be tested per the rules outlined for ongoing employees. Notice 2012-58 provides additional details regarding the transition from a new employee to an ongoing employee.
In preparation for compliance with employer shared responsibility effective 2014, an employer should consider the following:
This advisory is intended to provide a basic summary of the regulations as they apply to plan sponsors. It is not intended to address circumstances specifc to a particular plan or plan sponsor. Please contact your Ascende health and welfare team if you have questions about this advisory or would like to further explore the impact of the regulations on your company's health plan.
This Ascende Health Care Reform Update is for informational purposes only and should not be construed as legal advice. Consult your own advisor regarding specific application of the information to your own plan.