The Affordable Care Act’s (ACA) employer mandate will take effect on January 1, 2014. The employer mandate requires “large employers” (defined below) to either provide specific health coverage to all “full-time employees,” or pay a penalty. The mandate's operations are extremely complex; this article is designed to help employers understand how they may, or may not, be affected by the new requirements.
Definition of Large Employer
First and foremost, only large employers are subject to the employer mandate of the ACA. In general, an employer qualifies as a large employer if it employed an average of at least 50 full-time and “full-time equivalent employees” on business days during the preceding calendar year. “Full-time” means employed to provide services, on average, at least 30 hours per week.
In addition to counting all full-time employees, the employer must also take into consideration all full-time equivalents, based on hours worked by employees not satisfying the definition of full-time. The Internal Revenue Service (IRS) has proposed a method for determining full-time equivalents, and for using the number of full-time equivalents in calculating the total number of employees to determine if an employer is a large employer.
Specifically, to calculate the monthly full-time equivalent number, the employer divides, by 120, the sum of all the hours of service in a month provided by employees who are not full-time. (The number 120 is derived by multiplying the 30-hour per week requirement for full-time employees by the four weeks typically worked each month.)
After calculating this number, the employer adds the number of full-time employees for a given month to the full-time equivalent number that was calculated for that same month. This calculation must be made for every month in the year. If the average monthly number for the year is 50 or greater, the employer is treated as a large employer, unless the "seasonal employee" exception (explained below) applies.
Possible Exclusion for Seasonal Employees
An employer will not be treated as having 50 full-time employees if: (1) the employer’s workforce exceeds 50 full-time employees for 120 days or less during the calendar year, and (2) the employees in excess of 50 employed during that period were seasonal workers. Seasonal employees are identified as those employees who perform labor or services on a seasonal basis as defined by the Department of Labor. This definition includes, among others, certain agricultural workers and retail workers employed exclusively during the holidays.
Safe-Harbor Alternatives to Monthly Calculations
As noted above, the law requires an employee’s status as full-time to be determined each month. Recognizing that monthly determinations may not be practical, the IRS has issued optional “safe-harbor alternatives” to making month-by-month determinations of full-time status. Employers who want to utilize the safe harbors for 2014 will need to quickly establish and implement processes and procedures that will enable them to do so.
Application of the safe-harbor alternatives depends on whether the employee is an “ongoing employee,” a newly hired employee (“new employee”) who is reasonably expected to work full-time, or a newly hired “variable-hour employee” or seasonal employee. Special rules also apply when an employee transitions from new employee to ongoing employee status. The IRS anticipates issuing guidance in the future with respect to temporary staffing employees and employees hired into high-turnover positions.
Other than for new employees who are reasonably expected to work full-time, the safe harbors allow an employer to determine an employee’s full-time status by looking back at the time worked by the employee during a pre-defined measurement period. This is called a “standard measurement period” for ongoing employees and an “initial measurement period” for new variable-hour employees.
If the employee is determined to have been full-time during the measurement period, then the employer must treat the employee as full-time during a “stability period,” regardless of the number of the hours actually worked by the employee during the stability period. Employers may also use an optional “administrative period” between the measurement and stability periods to notify employees and enroll them in applicable health benefits options.
Definition and Identification of Ongoing Employees
An ongoing employee is an employee who is employed during an entire standard measurement period. The employer must choose a standard measurement period that is no less than three and no more than 12 consecutive calendar months, and must choose the particular months it will use.
If there is a determination that the employee was full-time during the standard measurement period, then the employee must be treated as full-time during the subsequent stability period. The stability period must be at least six months long and can be no shorter than the standard measurement period used by the employer.
If there is a determination that the employee did not work full-time during the standard measurement period, then the employer may treat the employee as not full-time during a stability period that is no longer than the standard measurement period.
The employer, at its option, may use an administrative period of up to 90 days between the end of the standard measurement period and the beginning of the associated stability period. The administrative period must overlap the stability period for the prior year, to ensure that there is no gap in benefits coverage. The purpose of providing this optional administrative period is, again, recognition by the IRS of the administrative difficulties in getting employees enrolled in applicable health benefits programs, and the 90-day maximum waiting period requirement under the ACA that goes into effect in 2014.
Definition of New Employee
Under the ACA, a new employee is any employee who is not employed during an entire standard measurement period.
The Safe Harbor for New Variable Hour and Seasonal Employees
An employee is considered a variable-hour employee if, based on the facts and circumstances on the date the employee begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work, on average, at least 30 hours per week. Under this safe harbor, employers must choose an initial measurement period of not less than three and no more than 12 consecutive months.
If the employer determines that the employee was full-time during the initial measurement period, the employee must be treated as full-time during the next stability period. The stability period must be at least six months long and no shorter than the initial measurement period.
If the employer determines that the employee was not full-time during the initial measurement period, then the employee may be treated as not full-time for the next stability period that does not exceed the shorter of (1) the initial measurement period plus one month, or (2) the remainder of the standard measurement period for ongoing employees (plus any associated administrative period) in which the initial administrative period ends.
As was the case with ongoing employees, the employer can use an administrative period with the new variable-hour employee safe harbor if the administrative period does not exceed 90 days. In this case, the 90-day period is required to include any periods of time between the employee’s start date and the date the employee is first offered coverage under the employee’s group health plan, minus the initial measurement period. For example, if the employer begins the initial measurement period on the first day of the month that follows the employee’s start date, the period of time between the start date and the first day of the next month must be included in determining the 90-day limit.
There is a maximum limit on the combined initial measurement period and any administrative period adopted by the employer. The initial measurement period and administrative period together cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date (the end of the 13th calendar month following the employee’s start date).
Determining When New Variable/Seasonal Employees Transition to Ongoing Status
Once an employee who has been employed for an initial measurement period has also been employed for an entire standard measurement period, the employee is tested for full-time status as an ongoing employee, beginning with that standard measurement period.
An employee who tests as full-time during his initial measurement period, but not as full-time during an overlapping or immediately following standard measurement period, must continue to be treated as full-time until the end of the stability period associated with his initial measurement period.
An employee who is determined not to be full-time during his initial measurement period, but is determined to be a full-time employee during the overlapping or immediately following standard measurement period, must be treated as a full-time employee for the entire stability period that corresponds to the standard measurement period (even if that stability period begins before the end of the stability period associated with the initial measurement period).
Safe Harbor for New Employees Reasonably Expected to Work Full-Time
Under the IRS rules, if, on the employment start date, an employee is reasonably expected to work full-time, the employer will not be subject to any “pay or play” penalty by reason of failing to offer coverage for up to the first three calendar months of employment, if the employee is offered coverage at or before the conclusion of the three months.
Other Considerations and Cautions
Can the employer’s standard measurement period vary by employee groups? Yes, different measurement periods may be used for different categories of employees, including the following examples:
- Collectively bargained and non-collectively bargained employees
- Salaried and hourly employees
- Employees of different entities
Be careful before you conclude you are NOT a large employer. Certain employers may be required to delve more deeply before determining they are not large employers. These include employers that are part of separate entities with mutual control, employers that have taken over operations from a predecessor, or new employers. The following are rules that apply to these groups:
- Controlled groups. Employees of employers that are part of a “controlled group of corporations” or an “affiliated service group” must be aggregated for purposes of determining whether the controlled group members are large employers.
- Predecessor employers. Employees of a predecessor employer are counted in determining whether an employer is a large employer.
- New employers. For employers not in existence the preceding year, the determination of whether the employer is a large employer is based on the average number of employees the employer reasonably expects to employ on business days in the current year.
Pay or Play Decision
Once an employer determines that it is a large employer, it must then decide whether to provide insurance coverage to employees mandated by the ACA (to play), or, instead, to pay a defined penalty (to pay).
For many large employers, a simple cost-benefit analysis can help them determine whether to pay or play. Since the employer mandate goes into effect in 2014, making advance preparation is even more important if an employer has or expects to have part-time, seasonal or variable-hour employees. Employers are only required to either potentially pay or play for full-time employees; therefore, determination of every employee’s status as full-time or part-time will be critical. While employers may have their own rules for determining whether an employee is classified as full-time, the ACA definition of full-time employee will control the pay or play requirements. Under the play or pay provisions of the ACA, a full-time employee is any employee who is reasonably expected to work an average of at least 30 hours a week, mirroring the terms used in the definitions above.
What Are the Pay or Play Rules?
As with the determination of full-time equivalents and the related administrative and other periods, the pay or play rules are also extremely complex. Under these rules, only large employers will be subject to non-deductible tax penalties (formally known as assessable payments) if either of the two conditions described below apply:
(1) The large employer DOES NOT offer full-time employees (and dependents) the opportunity to enroll in “minimum essential health coverage,” and at least one full-time employee enrolls in government-subsidized coverage through a health insurance exchange.
(2) The large employer DOES offer minimum essential health coverage, but the coverage is either a) “unaffordable” or doesn’t provide “minimum value,” and b) at least one full-time employee enrolls in government-subsidized coverage through a health insurance exchange.
Coverage is deemed unaffordable if the “cost” is more than 9.5% (adjusted for years after 2014) of the employee’s family income. At least through the end of 2014, employers can use an employee’s Form W-2 wages (as reported in Box 1) instead of household income in determining whether coverage offered is affordable (the “affordability safe harbor”).
Cost is defined as the cost for employee-only coverage under the lowest-cost minimum value plan offered to the employee. Coverage is considered to provide minimum value only if the plan’s share of the total allowed costs of benefits under the plan is at least 60 percent. The IRS has proposed using actuarial value/minimum value calculators and actuarial certifications of plans for determining minimum value.
Penalties Under the Pay or Play Rules
A large employer can choose not to provide the mandated coverage, deciding instead to pay non-deductible penalties. The penalties are separated into the “no-coverage” penalty and the “non-compliant coverage” penalty. In order to avoid both the no-coverage penalty and the non-compliant coverage penalty, large employers must (1) maintain records sufficient to substantiate those employees who are full-time under the ACA, and (2) offer all full-time employees minimal essential coverage that provides minimum value and is also affordable. One way to ensure that coverage is affordable is to use the affordability safe harbor discussed above.
The No-Coverage Penalty
If a large employer fails to offer full-time employees (and their dependents) the right to enroll in minimum essential coverage for any month, and at least one full-time employee has been certified to the employer as having enrolled for the month in government-subsidized coverage through a health insurance exchange, then the employer will be assessed and must pay as penalty (subject to annual inflationary increases) a monthly amount equal to 1/12th of $2,000 (or $166.67 per month), multiplied by the number of the employer’s full-time employees minus 30.
The Non-Compliant Coverage Penalty
In order to avoid penalties, the employer must offer its full-time employees the right to enroll in minimal essential coverage that is both affordable and provides minimum value. If the employer offers minimum essential coverage, but the coverage is either unaffordable or fails to provide minimum value, and one or more full-time employees enrolls in government-subsidized coverage through a health insurance exchange, then the employer will be assessed and must pay as penalty (subject to annual inflationary increases) either a monthly amount equal to 1/12th of $3,000 (or $250 per month), multiplied by the number of full-time employees enrolled for government subsidized health insurance coverage for the month, or must pay the penalty that would apply if no coverage was offered at all.
Remember, the pay or play penalty does not apply to any employer who does not satisfy the ACA’s definition of large employer, as determined on a controlled-group basis.
Employers should work with counsel and/or its payroll department (or provider) to establish a method for tracking employees’ work history. Depending upon the timelines an employer intends to adopt for substantiating each employee’s full-time status, this process and methodology (or sufficient records for the timelines) should be in place as soon as possible. Simultaneously, employers will need to make certain their plan design and the cost of coverage are consistent with the ACA's pay or play requirements.© 2013 Much Shelist, P.C.