IRS Issues Proposed Regulations Applicable to Employer Shared Responsibility Regarding Health Coverage
A Human Resources Bulletin
The Department of Treasury published proposed regulations on the employer shared responsibility provisions of the Affordable Care Act (ACA) on January 2, 2013. Under the Internal Revenue Code (Code), an assessable payment may be imposed on an employer if it does not offer group health plan coverage or does not offer affordable group health plan coverage.
Specifically, Code §4980H provides that, beginning January 1, 2014, a large employer is subject to an assessable payment if any full-time employee is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction and either:
- the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan; or
- the employer offers its full-time employees (and their dependents) the opportunity to enroll in MEC coverage under an eligible employer-sponsored plan and such coverage is either unaffordable or does not provide minimum value.
The proposed regulations are effective January 1, 2014, and explain how to determine who is a large employer and how to calculate the assessable payments. Though in proposed form, employers can rely on the proposed regulations until final regulations are issued.
Employers cannot, however, wait until 2014 to take action. Employers, specifically large employers, must use information gathered about their employees during 2013 to determine whether they may be subject to these assessable payments. Such employers should consider whether there is any planning they can do now to avoid the assessable payments later, and whether they need to implement administrative schemes to identify full-time employees.
Determination of Large Employer for Purposes of the Assessable Payments
Only "large employers" are subject to the assessable payments. Therefore, the first step in determining whether an employer may be subject to an assessable payment is to decide whether the employer is a large employer. A large employer for purposes of Code §4980H is any employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year. The total number of full-time employees is determined by taking the sum of the total number of full-time employees and the total number of full-time equivalent employees (FTEs) for each calendar month in the preceding calendar year and dividing by 12. If this calculation results in a number that is 50 or more, the employer is a large employer subject to the assessable payments. For 2014, an employer is permitted to determine its large employer status by using a shorter period of time in 2013 that is at least equal to 6 consecutive calendar months.
An employee is considered a "full-time employee" for purposes of this calculation if the employee performed on average at least 30 hours of service per week for a calendar month in the preceding calendar year (or an equivalent of 130 hours for the month). Any employee who was not employed on a full-time basis must be taken into account in determining the number of FTEs of an employer. The number of FTEs is determined for each calendar month by aggregating the number of hours of service for each FTE (up to a maximum of 120 hours for any employee) and dividing that number by 120.
Hours of Service
An employer must count actual hours of service for hourly employees. For non-hourly employees, an employer must use one of three methods: (a) actual hours, (b) days-worked equivalency, or (c) weeks-worked equivalency. If the days-worked or weeks-worked equivalencies are used, the hours calculated using those methods must generally reflect the hours of service actually worked.
An employee’s hours of service include: (a) each hour for which an employee is paid or entitled to payment for the performance of duties for the employer, and (b) each hour for which an employee is paid or entitled to payment by the employer for time during which no duties are performed due to vacation, illness, injury, incapacity, disability, jury duty, military duty or leave of absence (without regard to the length of the unpaid service).
An employee's hours of service do not include hours of service worked outside of the United States.
The proposed regulations apply to common law employees and include special rules addressing controlled groups, affiliated service groups, successor and new employers, seasonal workers and new employees.
The following example illustrates how to determine large employer status: During each calendar month of 2015, Employer L has 20 full-time employees (each of whom averages 35 hours of service per week) and 40 employees (each of whom averages 90 hours of service per month). Each of the 20 employees who average 35 hours of service per week count as one full-time employee for each month. To determine the number of FTEs for each month, the total hours of service of the employees who are not full-time employees (but not more than 120 hours of service per employee) are aggregated and divided by 120. The result is that the employer has 30 FTEs for each month (40 x 90 = 3,600 and 3,600 ÷ 120 = 30). Because Employer L has 50 full-time employees (the sum of 20 full-time employees and 30 FTEs) during each month in 2015, Employer L is an applicable large employer for 2016.
Calculation of Assessable Payment on the Failure to Offer Minimum Essential Coverage (MEC)
If any full-time employee of an applicable large employer receives a premium tax credit or cost-sharing reduction and the employer fails to offer its full-time employees (and their dependents) minimum essential coverage, the applicable large employer must pay an assessable payment on a monthly basis. The payment is equal to 1/12 of $2,000 for each full-time employee in excess of 30 for each month.
Substantial Compliance Provision
Recognizing that some flexibility or margin of error is necessary so that employers are not penalized for inadvertent errors, the proposed regulations contain a substantial compliance provision. This provision essentially provides that an applicable large employer will be treated as offering its full-time employees (and their dependents) minimum essential coverage if it offers such coverage to all but 5 percent of its full-time employees (or, if greater, 5 full–time employees). This safe harbor is applicable regardless of whether the omission of coverage to the 5 percent of full-time employees is intentional or inadvertent.
Determination of Full-Time Employee for Purposes of the Assessable Payment on Failure to Provide Minimum Essential Coverage
Since the assessable payment on the failure to provide minimum essential coverage is calculated based on all full-time employees of an employer for a given calendar month, the determination of whether an employee is full-time or part-time during a particular month is critical.
Recognizing that it would be administratively challenging for an employer to determine who its full-time employees are on a monthly basis, especially for employees who have employment schedules or hours of service that vary month to month, the proposed regulations adopt the look-back method for determining full-time status. The look-back method, which was introduced in prior IRS guidance, allows an employer to determine an employee’s full-time status by looking back at a measurement period.
If an employee is determined to be a full-time employee during the measurement period, then the employer must treat the employee as a full-time employee during the first stability period that ends after the measurement period and any administrative period. An employer is permitted to use an administrative period of up to 90 days between the measurement period and stability period to determine whether any employees are full-time employees.
The following are some additional rules that employers should know in determining full-time employees under the look-back method:
- A stability period must be at least 6 months and no shorter than the measurement period.
- For ongoing employees, an employer may establish a standard measurement period of between 3 and 12 months. The employer must designate the beginning and end of the standard measurement period. An employer may use different measurement periods for certain classifications of employees (i.e., collectively bargained employees, salaried employees and hourly employees, and employees located in different states).
- For new employees, if an employee is reasonably expected to be a full-time employee at his start date, the new employee must be offered coverage within 3 months of employment. For new variable hour and seasonal employees, an employer may establish an initial measurement period of between 3 and 12 months that begins on any date between the employee’s start date and the first day of the first calendar month following the employee's start date. The stability period must be the same length as the stability period for ongoing measurement periods.
- Transition Relief: The IRS recognizes that employers wanting to establish a 12-month measurement period and a 12-month stability period for 2014 are facing time constraints. Accordingly, for stability periods beginning in 2014 only, employers may adopt a transition measurement period that is shorter than 12 months but no less than 6 months long and begins no later than July 1, 2013, and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014.
Calculation of Assessable Payment on the Failure to Provide Affordable Coverage
If any full-time employee of a large employer receives a premium tax credit or cost-sharing reduction and the employer offers coverage that is unaffordable or does not provide minimum value, then the large employer must pay a monthly assessable payment. The payment is the lesser of: (1) 1/12 of $2,000 for each full-time employee (minus 30), or (2) 1/12 of $3,000 for each full-time employee who receives a premium tax credit and who also purchases health coverage through an exchange.
Determination of Affordable Coverage
Coverage under an employer-sponsored plan is affordable to an employee if the employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. Household income for this purpose includes the modified adjusted gross income of the employee and any members of the employee’s family (spouse and dependents) who are required to file a federal income tax return. Since it would be difficult for an employer to ascertain an employee’s household income for a taxable year, the proposed regulations contain three safe harbors. An employer-sponsored plan will be considered "affordable" if:
- Form W-2 Safe Harbor: the employee’s contribution for the calendar year for the employer’s lowest cost of self-only coverage that provides minimum value during the entire calendar year does not exceed 9.5 percent of the employee’s Form W-2 wages for the calendar year. For an employee who was not a full-time employee for the entire calendar year, the employee's Form W-2 wages are permitted to be adjusted to reflect the period when the employee was offered coverage and this adjusted wage amount is compared to the employee share of the premium during that period;
- Rate of Pay Safe Harbor: the employee’s contribution for the month for the employer's lowest cost of self-only coverage that provides minimum value does not exceed 9.5 percent of an amount equal to the employee’s hourly rate of pay as of the first day of the coverage period multiplied by 130 hours; or
- Federal Poverty Line Safe Harbor: the employee’s contribution for the calendar month for the applicable large employer member’s lowest cost of self-only coverage that provides minimum value does not exceed 9.5 percent of the federal poverty line for a single individual for the applicable calendar year. Unlike the previous two safe harbors, which require employers to gather salary information about each employee, this is a design-based safe harbor. What this means is that an employer can set the employee contribution rate in advance and know that the plan will be considered affordable. For 2013, the federal poverty threshold for one person is $11,490. Accordingly, if an employee is required to contribute less than $1,091.55 per year ($11,490 x .095) toward the lowest cost of self-only coverage, the plan falls within this safe harbor and is considered to be "affordable."
Determination of Minimum Value
An employer-sponsored plan provides "minimum value" if the plan pays at least 60 percent of the total allowed costs of benefits provided under the plan. The Treasury Department issued guidance, which is consistent with rules promulgated by the Department of Health and Human Services (HHS), setting out three alternative approaches to determine whether a plan provides minimum value:
- For plans with standard cost-sharing features — Utilize the minimum value calculator made available by HHS and the Treasury Department by entering information about an employer-sponsored plan's benefits, coverage of services, and cost-sharing terms.
- For plans that cover all four core categories of benefits and services1 and have specified cost-sharing amounts — Utilize an array of design-based safe harbors in the form of checklists developed by HHS and the Treasury Department that would provide a simple, straightforward way to ascertain that employer-sponsored plans provide minimum value without the need to perform any calculations or engage an actuary.
- For plans with nonstandard features — Obtain an initial value using the calculator and/or engage a certified actuary to make appropriate adjustments that take into account the nonstandard features.
Next Steps for Employers
With the release of the proposed regulations, employers must take action now to determine if they are a large employer and subject to the assessable payments that are effective beginning January 1, 2014. Steps taken by large employers in 2013, such as implementing administrative schemes to identify full-time employees and developing plans to avoid the assessable payments, will position the employer to best manage employer shared responsibility for group health coverage in 2014.