Another Delay in Employer Mandate to Offer Health Coverage to Employees: Relief for Employers with 50-99 Employees Plus New Rules and Definitions
On Monday, February 10, 2014, the Internal Revenue Service issued 238 pages of final regulations for Employer Shared Responsibility under the Affordable Care Act (the “ACA”). These regulations address the many details of (1) the determination of whether an employer is an Applicable Large Employer under the ACA and thus required to offer coverage to its full-time employees and (2) the determination of which employees are considered full-time and must be offered coverage. The regulations also address, among other things, the periods during which penalties may be applied to the employer, the time periods during which full-time employees must be offered coverage, and the transition rules that apply when the regulations first become effective.
The key changes to the proposed regulations that were made by these final regulations include:
1. Transition Relief for Employers with 50-99 Employees. The preamble to the final regulations provides transition relief for employers with fewer than 100 full-time plus full-time equivalent employees. This relief delays the application of penalties for these employers until the end of the employer’s plan year that begins in 2015. Employers must meet the following three requirements to be eligible for this relief:
(a) Limited Employer Size. Employer must employ fewer than 100 full -time plus full-time equivalent employees, which will be determined by calculating the average number of full-time plus full-time equivalent employees during any consecutive six month period in 2014 and by applying rules similar to those used in the Applicable Large Employer determination.
(b) Maintenance of Workforce and Aggregate Hours of Service. The employer cannot reduce its workforce or overall hours of its employees during the period between February 9, 2014 and December 31, 2014, unless the reduction is due to bona fide business reasons, including sale of a division, changes in the economic marketplace, or termination for poor performance.
(c) Maintenance of Previously Offered Coverage. The employer cannot eliminate or materially reduce the health coverage it offered on February 9, 2014. This includes:
(1) Maintaining the employer contribution toward the coverage of at least 95% of the amount it contributed or at least the same percentage that it contributed on February 9, 2014.
(2) If the employer changes the terms of the plan, the coverage provides minimum value after the change.
(3) The employer does not narrow the class of employees who are eligible for coverage.
The employer must comply with all of these requirements through December 31, 2015 if the plan is a calendar year plan or until the last day of the plan year that begins in 2015. In addition, the employer will be required to certify that it complies with these requirements in its transmittal form for reporting under Section 6056 of the Internal Revenue Code.
2. Additional Transition Relief for Requirement to Offer Coverage to Full-Time Employees. During 2015 and any calendar months of an employer’s plan year that begins in 2015, but that fall in 2016, an Applicable Large Employer will be subject to a penalty for failure to offer coverage to its full-time employees if it fails to offers coverage to no more than 30% of its full-time employees. After this period, a penalty will apply if the employer fails to offer coverage to no more than 5% of its full-time employees.
During this transition relief period, any penalty that is assessed against an Applicable Large Employer will be calculated by reducing the Applicable Large Employer’s number of full-time employees by 80 (rather than 30, which will apply in later years). If the Applicable Large Employer is part of a controlled group of employers, the 80 employee reduction will be shared proportionately among the members of the group.
3. 2015 Transition Relief for Employers with Non-Calendar Year Plans. This transition relief applies only to employers that maintained a non-calendar year plan on December 27, 2012 if the plan year was not changed since that date. Employers will not have to pay a penalty (for failure to offer affordable minimum value coverage) during the period from January 1, 2015 until the first day of the non-calendar year plan for employees who, under the eligibility provisions in effect on February 9, 2014, are eligible for and are offered affordable minimum value coverage on the first day of the plan year that begins in 2015. This transition rule gives the employer until the first day of the plan year that begins in 2015 to change the contributions or benefits to ensure that the plan is affordable and provides minimum value.
This transition relief can be extended to all employees of the employer who are offered affordable minimum value coverage on the first day of the 2015 non-calendar plan year (even those not eligible for coverage because the employer’s eligibility rules required more than 30 hours per week) if:
(a) as of any date in the 12 months prior to February 9, 2014 at least 1/4 of all employees were covered by the plan; or
(b) during the most recent open enrollment period prior to February 9, 2014, the employer offered coverage to at least 1/3 of its employees.
Alternatively, the transition relief can be extended only to full-time employees of the employer who are offered affordable minimum value coverage on the first day of the 2015 non-calendar plan year if:
(a) as of any date in the 12 months prior to February 9, 2014 at least 1/3 of all full-time employees were covered by the plan; or
(b) during the most recent open enrollment period prior to February 9, 2014, the employer offered coverage to at least 1/2 of its full-time employees.
These transition rules do not apply if the employer also maintained a calendar year plan for which these employees would have been eligible.
4. Measurement Period for 2015 Stability Period. Similar to the rules applied for 2014 prior to the Shared Responsibility delay that was announced on July 2, 2013, employers may adopt a first measurement period that is shorter than 12 months, as long as the period is at least 6 months, begins no later than July 1, 2014 and ends no earlier than 90 days before the first day of the plan year that begins in 2015.
5. Transition Relief for Determining Applicable Large Employer Status.
(a) For 2015, an employer can determine whether it is an Applicable Large Employer (an employer that employed an average of at least 100 full-time plus full-time equivalent employees) based on a period of at least six consecutive months during 2014.
(b) For 2015 only, an employer that offers coverage as of the first payroll period in 2015 will be considered to have offered coverage for the month of January 2015.
(c) The final regulations indicate that an employer (who was not an Applicable Large Employer during any prior calendar year) will not be subject to penalties for failing to offer coverage to an employee under the following circumstances:
(1) The employee was not offered coverage during the prior calendar and is offered coverage by April 1st of the current calendar year.
(2) The coverage offered by April 1st provides a minimum actuarial value of 60%. If the coverage offered does not provide minimum value, the employer may be subject to a $3,000 per year penalty for failure to offer affordable minimum value coverage to its full-time employees. This penalty will be applied from the January 1st deadline, for each employee who purchases coverage from a Health Insurance Marketplace and receives a premium tax credit or cost sharing subsidy.
(3) If the Applicable Large Employer fails to offer coverage by April 1st, it will be subject to penalties for failing to offer coverage from the first day of the calendar year. This penalty is equal to $2,000 times the number of full-time employees (after subtracting the employers share of 80 employees for the plan year that begins in 2015 or 30 employees thereafter).
This transition relief was intended to give an Applicable Large Employer three months after the end of a calendar year to determine whether it is an Applicable Large Employer, to secure coverage and then to offer that coverage to its full-time employees.
6. New Employers. The rules for employers that were not in existence during the prior calendar year were clarified to indicate that the employer must not have been in existence during any day of the prior calendar year in order to determine its Applicable Large Employer status based on the average number of employees that it reasonably expects to employ during the current calendar year.
In addition, employers that were not in existence during the prior calendar year are permitted to use a seasonal worker exception when determining whether it is an Applicable Large Employer during the year in which it was formed. If the employer expects to employ 50 or more employees for 120 days or fewer during the year, it does not have to consider itself an Applicable Large Employer.
7. Monthly Method for Determining Full-time Employees. In addition to the look-back measurement period method of determining whether an individual is considered a full-time employee and must be offered coverage by an Applicable Large Employer, the final regulations describe the “Monthly Measurement Method.” The Monthly Measurement Method allows the employer to count the employee’s hours of service for each calendar month, rather than using a look-back method, to determine if the employee is a full-time employee during that month. There is also a weekly rule that allows the employer to measure the monthly hours on a weekly basis. If an employee is determined to be full-time under this method, the employer must offer coverage to the employee no later than the first day of the month following three months after the employee is determined to work full-time.
8. Counting Hours.
(a) Volunteers. Hours worked by bona fide volunteers are not counted as hours of service in determining whether an individual is a full-time employee. A bona fide volunteer is defined as an employee of a government entity or a tax exempt organization under Section 501(a) of the Internal Revenue Code whose only compensation from that employer is either (a) reimbursement for reasonable expenses; or (b) nominal fees, such as stipends, service awards or other amounts customarily paid in connection with the performance of services by volunteers.
(b) Student Employees. Hours worked by students as part of the federal work study program (or a similar state program) are not counted as hours of service in determining whether an individual is a full-time employee. All other hours worked by students are required to be counted.
(c) Other difficult situations. The final regulations indicate that more guidance will be provided through an Internal Revenue Bulletin to help employers count hours for the following types of employees: adjunct faculty, airline industry employees with layover hours, employees with on call hours, and commissioned salespeople. The regulations require employers to use a reasonable method for crediting hours of service until more guidance is available.
9. Application of Penalties for New Employees. Applicable Large Employers will not be subject to penalties for failure to offer coverage to a new employee, who is expected to be a full-time employee, until the first day of the month after the employee has been employed for three full calendar months. However, if the coverage that is offered by that date is not minimum value coverage, the penalty may be applied back to the first full calendar month in which the employee was working full-time. This delay in the application of penalties does not change the waiting period requirements under Section 2708 of the Public Health Service Act.
10. Breaks in Service. The final regulations shorten the length of a break in service required before an employer can consider an individual a new employee. The proposed regulations provided an optional method which provided that if an employee did not work at all for the employer during a 26-week period the employer was permitted to treat the former employee as a new employee. This method allowed the employer to delay offering coverage by applying a new initial measurement period of up to one year, if the employee was not reasonably expected to work an average of 30 hours per week. The final regulations have reduced the employment break period to 13 weeks. The break period for an employee of an educational organization to be considered a new employee remains 26 weeks.
11. Seasonal Employees. Seasonal employees are defined in the final regulations to include any employee in a position for which the customary annual employment period is 6 months or less. However, this period can be extended for a particular year due to unusual circumstances as long as the normal period of employment is 6 months or less. This definition is important because seasonal employees, even if expected to work an average of 30 hours per week during the season, can be treated like variable hour employees, and have their hours tracked over a longer period of up to 12 calendar months before coverage must be offered.
12. Change in Employment Status. If a variable hour, seasonal or part-time employee changes his or her position to one that would have required the employer to offer coverage after a 90-day waiting period (because the employee was reasonably expected to work an average of 30 hours per week), the employer must offer coverage to this employee by earlier of the following:
(a) the first day of the fourth month following the change in position; or
(b) the first day of the month following the end of the initial measurement period for that employee (if the employee averaged 30 or more hours per week during that period).
New rule for employees moving from full-time status to part-time status: the employer can apply the Monthly Measurement Method over a period of three months to determine whether the employee is no longer eligible for coverage. Typically, an employer can only change the method of determining whether an employee is considered to be full-time once per year, but for purposes of a change to part-time status, the employer can begin to apply the Monthly Measurement Method on the first day of the fourth full calendar month following the change in status. This rule only applies if the employer offered minimum value coverage to the employee for the first day of the month following the third full month through the month in which the change to part-time occurred.
13. Change to Definition of Dependent for Shared Responsibility Provisions. The final regulations remove both foster children and step-children from the definition of dependent, but only with regard to mandated coverage of dependents. Employers are required to offer coverage to dependents (but not spouse’s) of full-time employees in order to avoid a penalty for failure to offer coverage. Relief from this requirement has been extended to plan years that begin in 2015 if (a) dependent coverage is not offered, (b) dependent coverage that is not minimum essential coverage is offered, or (c) dependent coverage is offered for some but not all dependents. If the employer offered dependent coverage during its 2013 or 2014 plan year, this relief is not available.
In addition, employers are required to offer coverage to these dependents through the end of the month in which they turn 26. Finally, a child who is not a U.S. citizen or national is not considered a dependent unless the child is a resident of a country that is contiguous to the United States or is an adopted child that lives with the employee and is a member of the employee’s household.
We hope you find this issue of KKAL’s Labor and Employment Law Watch helpful and informative. Please understand that the Law Watch is designed to provide information about current developments and required actions. If you have any questions regarding any labor and employment law matter, including the issues discussed in this newsletter, please do not hesitate to contact us at 717-392-1100, or email us at the following addresses:
KEGEL KELIN ALMY & LORD LLP
Labor & Employment Practice Group
(717) 392-1100
Denise E. Elliott, Chair elliott@kkallaw.com
Amy G. Macinanti macinanti@kkallaw.com
Paul D. Clouser clouser@kkallaw.com
Jeffrey D. Litts litts@kkallaw.com
Howard L. Kelin kelin@kkallaw.com
Judith A. Griffith griffith@kkallaw.com
Stephen S. Russell russell@kkallaw.com