On February 10, 2014, the IRS issued final regulations on the employer-shared responsibility requirements, often known as “play or pay.” This is the requirement that large employers offer adequate coverage to their full-time employees or pay penalties. The final regulations follow the proposed regulations (which were issued in January 2013) in many respects, but also contain some surprises.
For many employers, the most important part of these regulations is the transition rule while employers with 100 or more full-time or full-time equivalent employees will still need to meet the play or pay requirements in 2015, those with 50 to 99 full-time or full-time equivalent employees generally do not have to comply until 2016. Note that for an employer with 50 to 99 employees to be eligible for the delay, the employer will have to certify that, during the period beginning on February 9, 2014, and ending on the last day of the plan year that begins in 2015, the employer:
• Has not reduced the size of its workforce or the overall hours of service of its employees so that it could qualify for this delay, and
• Has not eliminated or materially reduced any coverage it had in effect on February 9, 2014. A material reduction means that:
- The employer’s contribution is less than 95% of the dollar amount of its contribution for single-only coverage on February 9, 2014, or is a smaller percentage than the employer was paying on February 9, 2014.
- A change was made to the benefits in place on February 9, 2014, that caused the plan to fall below minimum value, or
- The class of employees or dependents eligible for coverage on February 9, 2014, has been reduced.
It is expected that this certification will be part of the reporting form.
This delay does not affect the effective date of the insurance market rules – employers still must implement the changes required for 2014, including the 90-day maximum for waiting periods, discontinuance of pre-existing condition limitations, removal of annual dollar maximums, and cost-sharing maximums (out-of-pocket and sometimes deductible) limits. Small insured groups still need to offer the 10
essential health benefits at the metal levels (i.e., platinum, gold, silver, and bronze) and use community rating starting in 2014.
Determining if the Employer is Large Enough for Employer-Shared Responsibility Requirements to Apply
In 2015, employers that had 100 or more full-time or full-time equivalent employees in 2014 must offer coverage or pay penalties. In 2016, employers that had 50 or more full-time or full-time equivalent employees in 2015 must offer coverage or pay penalties. Employers with fewer than 50 full-time or full-time equivalent employees will not be required to offer coverage to avoid penalties. Counting is done on a calendar year basis, even for employers that do not operate on a calendar year. In 2014 only, an employer may determine how many full-time and full-time equivalent employees it has over a period of six or more consecutive months, rather than all of 2014. When counting workers:
- Only “common law employees” are counted. This means that sole proprietors, partners, 2% shareholders and leased employees will not be counted. All other employees are counted, including those who are eligible for Medicare and Medicaid and those who are exempt from the individual mandate.
- An employee who averages 30 or more hours per week is considered a full-time employee. An employee who averages fewer than 30 hours per week is counted as a partial employee; these partial employees are then combined to get “full-time equivalent” employees.
- When counting an employee’s hours, all hours for which an employee is paid are included. This means that vacation, holiday, sick pay, jury duty pay and paid leave count, as well as pay for hours actually worked. An employer does not need to count the hours of “bona fide” volunteers, which includes many volunteer firemen and volunteers for a non-profit organization. A person is a bona fide volunteer if the person volunteers for a government entity or a 501(c) organization and is not paid, or is only paid a nominal amount (for instance) to cover expenses. An employer does not need to count hours worked by a student under a federal work-study program, but all other hours for which a student is paid must be counted. There is an optional safe harbor for adjunct professors under which the employer would credit 2.25 hours of service for each hour taught. The IRS is still considering special rules for employees who are solely paid commissions. In the meantime, employers are to adapt an existing method in a “reasonable” way – presumably the weekly or daily equivalency method will fit best.
- Employers must count an hourly employee’s actual hours. For salaried employees, an employer may use actual hours, daily equivalents (a day with at least one paid hour of service is considered eight hours worked) or weekly equivalents (a week with at least one paid hour of service is considered 40 hours worked).
- Hours worked in the U.S. (those that generate U.S. source income) are counted, whether the worker is a U.S. citizen or not. Conversely, work done overseas by a U.S. citizen does not count.
Seasonal employees generally must be counted. When deciding if the employer is large, they may be excluded only if:
- The employer exceeds 100 full-time or full-time equivalent employees for less than 120 days during 2014, and
- Only seasonal employees (who work less than 120 days per year – whether consecutive or non-consecutive) pushed the employer over the 100-employee threshold.
Note: The 100-employee measure reduces to 50 starting with calculations for 2016.
When deciding if an employer is “large,” all members in the controlled or affiliated service group (basically, entities that are completely or partly owned by the same people or corporations) are combined.
If you would like the White Paper outlining the recent clarifications, please request one here.
Up next: Large Employer Responsibilities and Potential Penalties
