The U.S. Treasury Department and the IRS have jointly released highly anticipated final regulations implementing the “Employer Shared Responsibility” obligation -- commonly known as the employer mandate. These final rules set forth effective date rules, a delay for employers with 50-99 employees, guidance on the status of specific employees, some refinements of hours tracking rules and a variety of other important topical clarifications.

Executive Summary

As originally enacted, health care reform directed employers with 50 or more full-time employees to offer health coverage starting in 2014. Specifically, the employer mandate requires “large employers” to offer minimum essential coverage that is affordable, minimum value health coverage to full-time employees, (those that work on average 30 hours per week), or pay a penalty. The penalty can be triggered when at least one full-time employee receives a subsidy (premium tax credit) for coverage purchased on the Exchange. Health reform defines a large employer as one who employed on average at least 50 full-time or full-time equivalent employees on business days during the preceding calendar year.

Key regulatory provisions include:

  • Large employer (2015): The employer coverage mandate will apply to larger firms with 100 or more full-time employees starting in 2015.
  • Delay for Employers of 50 to 99 Full-Time Employees: Last summer, the employer mandate was delayed to 2015. These final rules push the delay into 2016 for an employer with 50 to 99 full-time employees if the employer takes required certification steps (explained below). Employers must use hours of service during 2014 to determine full-time status at 30 hours and whether they have enough employees to be considered an applicable large employer in 2015, or to determine if they qualify for the delay until 2016.
  • Percentage lowered for satisfactory health coverage “offer”: Employers only need to offer minimum essential coverage to 70% percent of their full-time employees in 2015 in order to avoid a $2,000 per full-time employee penalty. (The minimum percentage for 2016 and beyond will be 95%.) Note: This transitional phase-in does not let an employer avoid the $3,000 penalty if coverage offered is not minimum value or is unaffordable.
  • Specialized employment categories: Clarification has been provided for various employee categories, including volunteers, educational, seasonal, student work study, and adjunct faculty.
  • Affordability safe harbors: Safe harbor provisions for employers to determine whether their offered coverage is affordable to employees (Box 1 of W-2, rate of pay or federal poverty benchmark) are generally unchanged.
  • Plan year, calendar or non-calendar: Generally, employers with non-calendar plan years may be able to comply as of the first day of the 2015 plan year, versus January 1, 2015. Specific conditions must be met to qualify for the non-calendar plan year compliance date.
  • Dependent coverage: Health coverage is not required for children in 2015, as long as the employer is “taking steps” to arrange for that coverage in 2016. The definition of “child” is also narrowed. (Spouse coverage is not required.)
  • Six-month measurement period: In 2014, a plan may use a six-month measurement period even with respect to a stability period of up to 12 months, but only for 2015 eligibility determinations.

What is the mandate?

Beginning in 2015, employers subject to the health coverage mandate must offer full-time employees “compliant” health coverage (meaning one of at least minimum value and at an “affordable” cost as defined by law). The final regulations implementing the employer mandate set forth the framework for which employers may become financially liable under the law’s penalty triggers, but also still permit many planning opportunities to mitigate the impact of the mandate.

Large employer definition for 2015. An employer can determine if it has 100 or more full-time employees or full-time equivalent employees (and therefore understand whether it is subject to the mandate obligation in 2015), by using a period of at least six consecutive months, rather than a full year. The employer is allowed to use the most favorable consecutive six-month period in 2014 to show whether the threshold number was achieved or not. (This is a resurrection of a familiar rule that was introduced when the mandate was scheduled for a 2014 effective date.)

The first year an employer is a large employer subject to the mandate, the regulations indicate no penalty will apply so long as coverage is offered by April 1 of that year. However, if the coverage that it offers by April 1 is not minimum value or affordable, the employer may be subject to the $3,000 penalty for the first three months of that year. There is no similar rule for non-calendar year plans. This April 1 rule is a bit odd, so keep in mind, compliance with the employer mandate as to the offer of coverage by April 1 does not necessarily mean compliance with the new waiting period rule, or with written plan terms that would require an offer of coverage by a 2015 date prior to April 1.

What is the three-month rule?

The regulations provide clarification regarding three months and a fraction of a month when coverage is not offered to a new hire and the possibility of avoiding the $2,000 penalty during that time period. This clarification should not be interpreted as a workaround of the prohibition on excessive waiting periods. A plan still must satisfy a maximum 90-day waiting period, which for most plans will be the 1st of the month following 60 days, or a shorter time frame if state law is more generous. Violation of the new waiting period rule carries its own separate penalty, which is significant.

Mandate starting date. When must a large employer begin mandate compliance? Is it on January 1, 2015 or the plan anniversary date in 2015?

The regulations provide three pieces of transition guidance for non-calendar plan years beginning in 2015. A new rule excuses an employer from penalties as to full-time employees, while two sets of rules allow an employer to comply on its plan year (usually its renewal) rather than January 1, 2015, depending on coverage offers or elections. These two sets of rules consider past facts, so they are not open to either manipulation or business planning.

Penalty Delay for Certain Employees: An employer will not be liable for a penalty for any employees who are eligible for coverage on the first day of the 2015 plan year based on the eligibility terms of the plan as of February 9, 2014. The employees must be offered affordable coverage that provides minimum value effective no later than the first day of the 2015 plan year, regardless of whether they elected coverage when previously offered. This rule does not really delay compliance; it just excuses the employer from penalties as to these employees for the time between January 1, 2015 and the group’s plan year in 2015. Terminated employees are disregarded, of course. Also, please note that the plan must offer minimum value, affordable coverage as of the first day of the plan year. So, if only offering minimum essential coverage (often referred to as a “skinny plan”), the penalty would not be excused. A strategy in this instance may be for the employer to offer at least one affordable bronze level option on the plan year while offering only a skinny plan starting January 1, 2015. (In fact, that approach is not all bad -- a skinny plan offer on that date may draw elections away from the more expensive core plan options later in 2015.)

Be aware that the 70% rule still applies, and the penalty is not excused as to full-time employees if the plan fails the 70% test in 2015.

Review of All Employees -- Offers and Coverage Percentages: An employer that maintained a non-calendar year plan as of December 27, 2012 may take advantage of a delay until its 2015 plan year by reviewing its treatment of all employees, but only if the plan year was not changed after December 27, 2012 to a later date. The test is met if:


(1) As of any date in the 12 months ending on February 9, 2014, at least one quarter of its total employees (25%) actually were covered under those non-calendar year plan, or
(2) The employer offered coverage under the plan to one-third (33%) or more of its total employees during the open enrollment period that ended most recently before February 9, 2014, and
(3) The employer did not offer a calendar year health plan as of February 9, 2014.

This calculation takes into account all employees, even part-time employees, when doing the evaluation. Offers of coverage and penalties for noncompliance only apply to full-time employees in 2015. This test is a variation on the delay rule in the prior regulations, but with a reference to more recent coverage and election periods.

As noted in (3) above, the employees must have not been eligible for coverage under any group health plan with a calendar year plan just prior to the February 9, 2014 date. (In other words, this rule does not allow an employer to switch employees from a January 1 eligibility date to a different plan with a later plan year.) Whether a health FSA or a Health Reimbursement Arrangement (HRA) with a calendar plan year date, as group health plans, affect this transition relief needs further regulatory clarification.

Also, please note that the plan must offer minimum value affordable coverage as of the first day of the 2015 plan year. As discussed above, offering a skinny plan option will not be consistent with a plan year compliance date, unless the employer also offers at least one affordable bronze level option. The alternative approach for an employer offering only a skinny plan would be to make that option available starting January 1, 2015.

As with the prior rule excusing penalties, be aware that the 70% rule still applies, and the delay is lost if the plan fails the 70% test in 2015.

Review of Full-Time Employees -- Offers and Coverage Percentages: This test may be more favorable to employers with seasonal or part-time employees than the prior rules. The employer is permitted to take into account only its full-time employees – not all employees. Full-time status is determined using 30 hours.

An employer that maintained a non-calendar year plan as of December 27, 2012 may take advantage of a delay until its 2015 plan year by reviewing its treatment of only full-time employees, but only if the plan year was not changed after December 27, 2012 to a later date. The delay is available if either:

(1) The employer had (as of any date during the 12 months ending February 9, 2014) at least one-third (33%) of its full-time employees covered under non-calendar year plans, or
(2) The employer had offered coverage under those plans to one-half (50%) or more of its full-time employees during the open enrollment period that ended most recently prior to February 9, 2014.

The employees must have not been eligible for coverage under any group health plan with a calendar year plan just prior to the February 9, 2014 date. (In other words, this rule does not allow an employer to switch employees from a January 1 eligibility date to a different plan with a later plan year.) Whether a health FSA or an HRA with a calendar plan year date, as group health plans, affect this transition relief needs further regulatory clarification.

Also, please note that the plan must offer minimum value affordable coverage as of the first day of the plan year. As discussed above, offering a skinny plan option will not be consistent with a plan year compliance date, unless the employer also offers at least one affordable bronze level option. The alternative approach for an employer offering only a skinny plan would be to make that option available starting January 1, 2015.

As with the prior rule excusing penalties, be aware that the 70% rule still applies, and the delay is lost if the plan fails the 70% test in 2015.

One-Year Delay for “Smaller Large Employers”

Employers with 50 to 99 employees. Although the mandate applies to employers with 50 or more full-time employees, a special rule delays the mandate until 2016 for smaller “big” employers with between 50 and 99 full-time employees. (As a result, for 2015, an employer subject to the mandate is one that employs at least 100 full-time employees.)

In order to qualify for the one-year delay, an employer must have an average of 50 – 99 full-time employees on business days during 2014, cannot modify its plan year after February 9, 2014, and must certify the following three criteria has been met:

  • Cutting workers or hours: Employers cannot reduce headcount or cut the overall hours of service of their employees through December 31, 2014, except for “bona fide” business reasons. Acceptable business reasons might include business downturns that force reductions of workforce size or overall hours, the sale of a division, changes in the economic marketplace, terminations of employment for poor performance, or other similar changes. Employers reducing in size should document specific local circumstances.
  • Cutting benefits: Employers cannot eliminate or materially reduce the health coverage they offer to employees between February 9, 2014 and 2016. An employer will meet this requirement if:
  • Timely certification: Employers must provide the IRS an official certification that they have met these requirements.

Reduced Percentage of Employees Offered Coverage: The proposed mandate originally required employers to offer coverage to 95% of their full-time employees. The final regulations now temporarily reduce the threshold to 70% for the first year (2015). This reduction should ease the burden of employers with large segments of workers who were carved out of plan eligibility due to classifications, hours worked, or other reasons. The 70% rule allows avoidance of the $2,000 “offer” penalty only. An employer remains subject to the $3,000 “defective coverage” penalty if its coverage is unaffordable or does not provide minimum value, and one or more of its employees receive a premium tax credit or cost sharing reduction through an exchange. As a practical matter, many experts believe the $3,000 penalty is less likely triggered.

In 2016 and later, affected employers will need to expand coverage up to the 95% level originally required in the regulations.

Carrier Participation and Premium Payment Requirements

Insurance carriers have traditionally required a certain percentage of all eligible employees to actually enroll in coverage. If not met, the carrier reserved the right to terminate the policy, and not provide health insurance to the group. The federal agencies address that concern in a single sentence indicating carriers cannot do so in 2015 due to guarantee issue rules. Carrier reactions may be to increase rates due to a greater risk of adverse selection; HUB International is monitoring that possible reaction.

Keep in mind that carriers also require an employer to contribute a high percentage or even all of the cost of employee-only coverage. Health reform law does not affect their ability to require that, which shifts the affordability paradigm beyond the 9.5% rule as employers may need to pay much more than required by federal law under affordability.

Identifying Full-Time Employees

The number of full-time employees affects an employer in two ways: (1) whether the employer is subject to the mandate; and (2) if subject to the mandate provision, the size of possible penalty depends on the number of full time workers.

An employer identifies its full-time employees based on each employee’s hours of service. An individual is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week. In determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week.

The final regulations provide two measurement methods for determining whether an employee has sufficient hours of service to be a full-time employee. HUB International will address the details of the measurement rules, many of which remain unchanged, in its upcoming webinar.

The first is a monthly measurement method under which an employer determines each employee’s status as a full-time employee by counting the employee’s hours of service for each month. FMLA, military, jury duty and employment break rules (discussed below) are not applicable. Month-by-month determinations might be made for employees in a phased retirement situation, usually starting with the first day of the 4th month after the relationship changes.

The second option is the look-back measurement method, which generally adopts the employee hour tracking rules in the same form as the proposed regulations. Although tracking is required for all employees, most employers associate this second option with variable hour employment. Thus, this look-back measurement period can be used for ongoing and variable hour employees.

A new, more favorable rule for employers generally will allow an employer to disregard prior hours of service if the employee has had a 13-week break in service. (In the past, the break in service was 26 weeks, which meant 6 months.) However, for educational institutions, the break in service period remains at 26 weeks (6 months).

The regulations cite several factors the agencies may use in determining if an employee is “variable hour”: whether the employee replaces a full-time employee, whether employees in the same or comparable positions are full-time, how the job was advertised, and how the job is described in a job description or otherwise communicated to a new hire.

Crediting service hours: Under the final regulations, an hour of service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer. The definition also includes every hour for which an employee is paid, or entitled to payment due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence under FMLA.

The regulations do not clarify whether a voluntary disability policy benefit purchased by the employee at the worksite will be treated as paid time off.

Specific Employee Categories – Hours and Similar Issues

Short-term Employees: No special rules were adopted to exclude these employees or to disregard their status if they are actually working full-time.

Employees in High Turnover Positions: No special rule is adopted; any employee who is not variable hour would need to be offered coverage once the waiting period is met, pursuant to plan terms and in accordance with the ERISA or governing plan document.

Temporary/Staffing Firm Employees: These employees may be variable hour or full-time. Factors include the right to reject temporary assignments, gaps in placements, differing periods of time for placements, whether placements are usually less than 13 weeks and the reasonable expectations at the time the relationship begins. A staffing firm is permitted to determine the point at which the individual later separates from service. The regulators remain concerned about the potential for abuse.

Volunteer work: An hour of service does not include any hour of service performed as a bona fide (unpaid) volunteer for a government entity or tax-exempt organization. Reimbursement of expenses is allowed, as are customary reasonable benefits for those positions. This clarification was provided due to the concern that volunteer services (like volunteer firefighters) would be discouraged if required to be counted as full-time employees.

Layover Hours for Airline Employees and Others: Layover hours are counted if they are paid or are required in order for the employee to earn his regular pay. (The regulations leave that crediting issue to the employer, so if layover hours are counted toward a required 40-hour work week for a full-time salary, then the layover hours would count.) For employees in the airline industry, it would be reasonable for the employer to credit the employee with at least 8 hours of service for each day on which the employee is required to stay away from overnight on business, so, 8 hours a day or 16 hours for the two days encompassing the overnight stay. If actual hours are higher, the 8-hour rule is not used.

On-Call Hours: On-call time is counted if it is paid, if the employee is required to remain on the employer’s premises, or if the employee’s activities during on-call time are substantially restricted so the employee cannot use the time for his own purposes.

Members of a Religious Order: Time worked by a member of a religious order subject to a vow of poverty is not counted.

Home Care Employees: These workers will generally be treated as employees of the person using their services (service recipient), rather than the agency or firm providing placement. The determination will be based on who is considered the common law employer. Factors in determining the status of a common law employer include but are not limited to: who has the right to direct and control the employee, how services are performed or who sets the work hours.

Academic Institutions: Educational institutions encounter special issues. The final regulations build on the concept that teachers and other direct employees of educational institutions will not fall into the part-time category just because their school is closed or operates on a limited schedule during the summer. Teachers and other employees of these institutions have to be properly credited up to 501 hours of service based on prior typical work hours for time periods where the institution is not operating under its main school year.

Adjunct Professors: Adjunct faculty is singled out for special consideration. Specifically, a formula for crediting hours to adjunct faculty members means each hour of class time will actually count as 2 ¼ hours of service for health reform purposes. The faculty member is also credited with an hour of service per week for every additional hour that might be spent outside the classroom for required duties such as attending faculty meetings or office hours.

Student Employees: Work performed by students under a federal work-study program (or similar state program) will not be counted in measuring whether the student is a full-time employee. Otherwise, there is no general exception for student employees.

Unpaid Internship or Externship: Hours in these positions would not count as hours of service for a student. However, if the position is paid or the student has the right to receive pay, the hours would be counted, but generally by the outside employer who directs the student’s activities (and not the school placing the student in that role).

Real Estate Agents and Direct Sellers: These workers are not identified or treated as employees for any purpose of the Internal Revenue Code. Thus, they do not count in determining the number of full-time or full-time equivalent employees or for the penalty under the employer mandate.

Seasonal employees versus seasonal workers: The regulations, by definition, clearly differentiate between a seasonal employee and a seasonal worker. As with measuring full-time workers, counting seasonal individuals affects an employer in two key ways. Specifically, when it comes to calculating mandate applicability, seasonal workers can be omitted from the count if their presence pushes an organization over the mandate trigger point for 120 or fewer calendar year days.

Seasonal work generally means work that by its very nature can only be performed during certain times of the year. Increased employee numbers at a pizza delivery service during March Madness does not indicate seasonal employment. By contrast, ski instructors would be seasonal.

A seasonal worker is one who performs labor or services on a seasonal basis, including retail workers employed exclusively during holiday seasons.

Seasonal employees also are addressed when it comes to variable hour measurement calculations. A seasonal employee means someone in the position for which annual employment “customarily” runs six months or less. “Customary” generally means that the job is attached to seasonality where the period of work begins at approximately the same time of each year, such as summer or winter. The regulations do not address seasonal employees who move into various seasonal positions with the same employer, but those likely remain seasonal positions if the jobs would be seasonal if performed by different workers.

Dependent Child Coverage

Health reform requires an offer of health plan coverage to each full-time employee and all eligible children. Spouse coverage is optional. (Also, “affordability” applies only to the worker’s health coverage – dependents can be required to bear the full health coverage cost.)

Now, the definition of dependent is changing again. The original proposed regulations defined a child to include stepchildren, adopted children, and foster children. By contrast, the final regulations now refine the rule to omit foster children and stepchildren. An employer also can exclude a child who is not a citizen or national of the United States unless the child resides here in a contiguous country (like Canada or Mexico). International adoptions raise special coverage rules, especially as to the need to cover a child after the parent is responsible for the child but before transportation to the U.S. is done.

When does a plan have to offer coverage to children? In 2015, an employer need not offer dependent coverage for the first time as long as the employer did not previously offer coverage for children and can show it is taking steps to incorporate such coverage for 2016. The regulations also clarify that a child is eligible for the entire calendar month during which age 26 is attained.

Offering Affordable Coverage

Health reform requires an offer of health plan coverage to each full-time employee and all eligible children. Spouse coverage is optional. (Also, “affordability” applies only to the worker’s health coverage – dependents can be required to bear the full health coverage cost.)

Federal rules do not specify how to demonstrate that an offer of coverage has been made, but recordkeeping and standard practices would be accepted. Evergreen elections and electronic enrollment are specifically allowed. Retaining some proof of an offer and ideally either an election of coverage or proof of a waiver will be crucial.

The employee usually must be given the opportunity to decline coverage unless it is minimum value coverage provided at no cost or it is minimum value coverage that satisfies affordability. (This rule prevents an employer from automatically enrolling an employee in a “skinny” plan and not permitting a waiver.) Eligibility for Medicaid, Medicare or another source does not excuse an offer of coverage.

An offer by any member of a controlled group of employers is considered an offer of coverage (but it needs to be the plan for which the employee is eligible). With dual employment within the same group, the employer where more hours are worked generally must make the offer. If hours are even, the employers can decide. If there is a failure, the IRS determines which entity to penalize.

An offer by an employer to a union does not satisfy the offer of coverage requirement by the employer of a full-time employee. But an offer by a multiple employer plan, a MEWA, or a Taft-Hartley plan to the employee would be accepted as an offer by the employer.

An employee performing services for a client employer of a professional employer organization (PEO) or staffing firm is deemed to have been offered coverage by the client employer, if coverage is offered by the PEO or staffing firm. In order for this offer of coverage to apply, the client employer must pay a higher fee for those employees enrolled in health care. Furthermore, this instance of an offer of coverage only exists in a case where the PEO or staffing company is not the common law employer.

For “affordability,” an employee’s share of the premium for employer-provided coverage can cost no more than 9.5% of that employee’s annual household income. Because employers generally will not know their employees’ household incomes, three affordability safe harbors have been established:

(1) The Form W-2, Box 1;
(2) The rate of pay safe harbor; and
(3) The federal poverty line safe harbor.

An employer may use one or more of the safe harbors only if the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage with minimum value for the self-only coverage offered to the employee. (A “skinny” or “bare bones” plan would not qualify because although it represents minimum essential coverage, it is less than minimum value.)

The agencies modified these rules only slightly by allowing use of the federal poverty level in place within the 6 months prior to the start of the plan year. Another modification permits the rate of pay safe harbor to be used for hourly employees, even if the rate of pay is reduced somewhat during the year.

Conclusion

The final regulations are embodied in over 200 pages of complicated, technically challenging guidance. Employers (and HUB International) now hold the core guidance needed to shape compliance strategies for 2015 and 2016. With these new clarifications, employers should consider developing a comprehensive compliance approach, ideally a 3 – 5 year strategic plan, as soon as possible.

Helpful links


Federal Register: Final Rules

IRS FAQs

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The discussion presented in this document is informational in nature and is not (and should not be construed as) a legal opinion or legal advice. We would be happy to discuss any information above with you or your attorney.