Final Regulations on the Employer “Play or Pay” Mandate
As the year 2014 comes to a close, the Affordable Care Act (“ACA”) is just around the corner. This E-Alert details the “must know” facts rolled out throughout 2014 that affect employers and their employees as the ACA becomes the guide for healthcare coverage for everyone in the U.S.
Final Regulations Issued
On February 10, 2014, the Internal Revenue Service (“IRS”) released its final regulations on the Employer Shared Responsibility provisions of the Affordable Care Act (“ACA”), 26 U.S.C. § 4980H, also known as the “play or pay” mandate. These regulations generally establish when large employers are subject to excise tax penalties for failing to offer ACA qualifying health care coverage to their full-time employees (i.e. those working 30 hours or more per week, on average) and their dependent children up to age 26.
Generally speaking, employers with an average of 50 or more full-time equivalent employees (“FTEs”) in the prior calendar year are “large employers” under the ACA and are subject to penalties under § 4980H if they either: (1) fail to offer coverage to their full-time employees and dependent children up to age 26, or (2) offer coverage to full-time employees that is unaffordable or fails to provide minimum value. These penalties are triggered when one or more full-time employees receive a premium tax credit in connection with coverage purchased through the Health Insurance Marketplace.
On July 2, 2013, the IRS delayed enforcement of all employer penalties under § 4980H until 2015. In the recently published final regulations, the IRS has provided additional “transition relief” that benefits employers. Among other things, transition relief:
- further delays enforcement of employer penalties for mid-size employers (i.e. those with less than 100 FTEs in 2014) until 2016;
- provides a relaxed method for determining an employer’s size for penalty purposes in 2015;
- provides a relaxed offer of coverage penalties for employers with 100 or more FTEs in 2015; and
- extends penalty relief for employers that do not offer dependent coverage in 2015, but are working to do so in 2016.
Employer Size Determinations: Calculating Full-Time Equivalent Employees
Because only large employers are subject to penalties under § 4980H, the first task of any employer is to determine whether or not it is a “large employer” that is subject to § 4980H. To do this, employers must first determine whether they employed 50 or more FTEs in the prior calendar year. To take advantage of the 2015 mid-size employer transition relief, employers must also determine whether they employed between 50 and 99 FTEs in 2014.
If an employer had 50 or more full-time employees in the prior calendar year (without regard to part-time employees), then it is a large employer under § 4980H and is subject to the § 4980H penalty provisions when they are implemented. If an employer had fewer than 50 full-time employees in the prior year, but also employed part-time workers, then the employer must determine whether it had 50 or more FTEs.
FTEs are calculated by adding up the total number of hours worked each month by employees who are not full-time (but not more than 120 hours of service per employee) and then dividing by 120. Each monthly calculation is then added to the number of full-time employees for that month. The totals for each month are then added together and divided by 12 (months). If the number is 50 or more, the employer will generally be considered a large employer that is subject to the play or pay mandate. For example, if an employer has 20 part-time employees that work 96 hours per month (approximately 24 hours per week) and 35 full-time employees, then the employer would have 51 FTEs and would be a “large employer” subject to the penalty provisions of the ACA (20 x 96 hours = 1920; 1920/120 = 16; 16 + 35 = 51 FTEs).
It should also be noted, however, that if an employer exceeds 50 FTEs for 120 days (four months) or less in a calendar year and seasonal employees caused that employer to meet or exceed the 50 FTE threshold, those seasonal workers will be excluded, and the employer will not be considered a large employer.
When determining an employers’ status as a large employer, related companies are treated as a single employer if they satisfy the IRS’s “control group” test. See 29 U.S.C. § 414(b), (c), (m) and (o).
“No Offer” Penalties
Generally under the ACA, if a large employer fails to offer coverage to at least 95% of its full-time employees and their dependent children up to age 26, the employer can face an annual penalty in the amount of $2,000.00 times the number of full-time employees, but the first 30 full-time employees are excluded from the penalty calculation. The typical “no offer” penalty formula is as follows: $2,000.00 x (# full-time employees – 30). For example, if an employer has 130 full-time employees and fails to offer health care coverage or offers coverage to less than 95% of its full-time employees and dependent children, then the annual “no offer” penalty would be $200,000.00 ($2,000.00 x (130 – 30) = $200,000.00). The penalties are only triggered when a full-time employee receives a premium tax credit through the Marketplace.
“Unaffordable/No Minimum Value” Penalties
Even if a large employer offers coverage to at least 95% of its full-time employees and their dependent children up to age 26, the employer may still be subject to penalties if the coverage offered is either unaffordable or fails to provide “minimum value.” The annual penalty for offering unaffordable coverage or coverage that fails to provide minimum value is $3,000.00 (per year) times the number of full-time employees that receive a tax credit or subsidy through the Marketplace (i.e. $250.00 per month, per full-time employee receiving a premium tax credit). This per-employee penalty will apply as long as the full-time employee(s) receive the premium tax credit.
In order to provide “minimum value,” the plan offered must cover at least 60% of the actuarial costs of benefits (i.e. the employee’s actuarial share of the cost of benefits must be less than 40%). This is not a straightforward calculation that can be determined simply by reviewing the plan documents. Employers, therefore, should check with their insurance carriers to see whether the carrier can confirm that the plan offers minimum value. In addition, employers should use the minimum value calculator on the Center for Medicare & Medicaid Services’ website, http://cciio.cms.gov/resources/regulations/index.html, to confirm that the plan they are offering provides minimum value.
To meet the “affordability” standard, each full-time employee’s share of the premium under the employer’s lowest-cost, self-only plan (which also provides minimum value and is offered to the employee) cannot exceed 9.5% of the employee’s household income. While the statute speaks in terms of affordability based on “household income,” employers expressed concern with the statutory language because employers are often unable to determine an employee’s household income (because, for example, the employer would not typically know an employee’s spouse’s income). For this reason, the final regulations provide three safe-harbor methods that employers can use to assess whether the coverage they are offering is affordable for each full-time employee. The safe-harbor methods are:
- Form W-2 Wages Safe Harbor: Under the W-2 Safe Harbor, employers would look at box 1 of the current year’s W-2 for each full-time employee and determine whether the employee’s share of the premium for the employer’s lowest-cost, self-only plan (that also provides minimum value) exceeds 9.5% of the employee’s box 1 wages. If it does not, the plan is affordable. This safe harbor cannot be used if an employee’s contribution rates or percentages are adjusted mid-year. Because the employer can only use the current year’s W-2 (rather than the prior year’s), this safe harbor cannot be used prospectively.
- Rate of Pay Safe Harbor: Under the rate of pay safe harbor, the employer can approximate future monthly earning for each full-time employee to determine whether the employee’s share of the premium for the employer’s lowest-cost, self-only plan (that also provides minimum value) exceeds 9.5% of the employee’s expected monthly earnings.
- For hourly employees, the employer will calculate approximate monthly earnings by multiplying the employee’s lowest hourly rate for the month by 130 (hours). If the hourly employee’s share of the premium does not exceed 9.5% of their approximate monthly earnings, then the coverage is affordable for that month.
- For non-hourly/salary employees, the employer will determine whether the employee’s share of the premium exceeds 9.5% of the employee’s monthly salary. If it does not, then the coverage is affordable. Note, however, that the rate of pay safe harbor cannot be used for salary employees if the employee’s monthly salary is reduced (including due to a reduction in work hours).
- Similarly, this method cannot be used for tipped employees or for employees paid on commission.
- Federal Poverty Line Safe Harbor: Under the federal poverty line safe harbor, coverage is affordable if the full-time employee’s share of the premium for the employer’s lowest-cost, self-only plan (that also provides minimum value) does not exceed 9.5% of the monthly federal poverty line (“FPL”) for a single individual. For example, the 2013 annual FPL for a single individual was $11,490. Thus, the monthly FPL was $957.50, and 9.5% of that amount is $90.96. Using the 2013 numbers as an example, any employee premium at or under $90.96 would be deemed affordable. Under the FPL safe harbor, the employer should use the FPL published and in effect 6 months prior to the start of the plan year.
Qualifying Coverage Must Be Offered—Not Necessarily Accepted
The offer of qualifying coverage is the focus of § 4980H. That is, it does not matter whether the full-time employee accepts the ACA qualifying coverage offered. The employer meets its obligations if it: (1) offers coverage to its full-time employees and dependent children up to age 26, and (2) the coverage offered to full-time employees is affordable and provides minimum value. The offer of qualifying coverage must be made to full-time employees and their dependent children up to age 26 at least once per year.
Transition Relief Under the Final Regulations
2015 Transition Relief for Mid-Size Employers
Employers with fewer than 100 FTEs will not be subject to “play or pay” penalties in 2015 if they meet the following three requirements and certify compliance to the IRS:
(1) Limited Workforce Size: The employer must certify that it employed fewer than 100 FTEs (i.e. between 50 and 99 FTEs) on business days in 2014. As discussed below, the employer is permitted to make this size determination by reference to any consecutive six-month period in 2014. The size calculation otherwise relies on the applicable rules for determining large employer status. That is, employers will use the typical method for calculating FTEs, the IRC “control group” aggregation rules apply, and employers are permitted to exclude seasonal workers if those workers cause the employer to have 100 or more FTEs for 120 days (or four calendar months) or less in 2014.
(2) Maintenance of Workforce Size & Aggregate Hours of Service: The employer must certify that between February 9, 2014 (the day before the final regulations were published) and December 31, 2014 (for calendar year plans) or the last day of a 2014 fiscal year plan in 2015, it did not reduce its workforce size or employees’ hours of service to qualify for this transition relief. The employer may, however, reduce its workforce size or employees’ hours of service for bona fide business reasons (such as a sale of a business division, terminations for poor performance, changes in the economic marketplace unrelated to transition relief, etc.) and still qualify for relief.
(3) Maintenance of Previously Offered Health Coverage: The employer must also certify that between February 9, 2014, and December 31, 2014 (for calendar year plans) or the last day of a 2014 fiscal year plan in 2015, it did not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014.
2015 Transition Relief for Employer Size Determinations
Because employers will be determining their status as a “large employer” for the first time in 2015, the final regulations allow employers to select any consecutive six month period in 2014 (rather than using the full 2014 calendar year) to calculate their FTEs and determine whether or not they are a large employer. The freedom to select a consecutive six month measurement period is particularly advantageous for employers on the cusp of the mid-size employer (100 FTE) threshold and for employers that are on the cusp of the 50 FTE threshold that cannot otherwise satisfy the three criteria for mid-size employer transition relief.
Relaxed Offer of Coverage Penalties in 2015 for Larger Employers
For employers with 100 or more FTEs (and employers with 50 to 99 FTEs that cannot satisfy the three criteria for the mid-size employer transition relief), the final regulations also provide relaxed §4980H(a) “no offer” penalties for 2015.
The final regulations relax these penalties for 2015 by reducing the offer of coverage threshold percentage from 95% to 70% and by excluding 80 full-time employees from the penalty calculation rather than the 30 full-time employees. Thus, the 2015 transition relief formula is as follows: $2,000.00 x (# full-time employees – 80). Using the same example above, if an employer has 130 full-time employees and fails to offer health care coverage or offers coverage to less than 70% of its full-time employees and dependent children, then the annual penalty would be $100,000.00 ($2,000.00 x (130 – 80) = $100,000.00). Again, the penalties are only triggered when a full-time employee receives a premium tax credit through the Marketplace.
The relaxed 2015 “no offer” formula may also reduce the § 4980H(b) “unaffordable/no minimum value” penalties that arise when an employer offers coverage to a sufficient percentage of full-time employees, but the coverage offered is unaffordable or fails to provide minimum value. In that case, the penalty is $3,000.00 per year times the number of full-time employees that receive a premium tax credit through the Marketplace. The “unaffordable/no minimum value” penalties, however, cannot exceed the penalty amount using the “no offer” formula. The transition relief formula provides a lower § 4980H(b) penalty ceiling for 2015. Using the examples above, in 2015 the § 4980H(b) penalties could not exceed $100,000.00, and in 2016, the § 4980H penalties could not exceed $200,000.00 for the employer with 130 full-time employees.
Extended Dependent Coverage Transition Relief
The final regulations extend transition relief further for employers that have not offered coverage to dependent children up to age 26 but are taking steps to do so in 2015. If an employer is taking steps to offer dependent coverage in 2015, the employer will not be subject to a penalty solely on account of its failure to offer dependent coverage.
This transition relief, however, is not available if the employer offered dependent coverage during plan years that began in 2013 or 2014 and subsequently dropped dependent coverage.
Additional summary guidance on the play or pay mandate and other transition relief can be found at https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act.