The final shared responsibility regulations under the Affordable Care Act, issued earlier this month, in large part maintain the rules set forth in the proposed regulations. However, there are several ways in which the final regulations modify or clarify these rules. Below is a top ten list (which we’re sure David Letterman would use if he were a benefits lawyer) of things to know about the final regulations.
The rules govern the requirement that employers with at least 50 full-time employees could owe a “shared responsibility” excise tax if they fail to offer group health coverage. One penalty (known as the “A” penalty) applies if an employer fails to offer group health coverage to 95% of its employees on every day of a month and at least one employee purchases coverage through an exchange with a federal subsidy; the “A” penalty each month is an excise tax of 1/12 of $2,000 for each full-time employee in excess of 30. Even if the employer meets the 95% test, a separate penalty (known as the “B” penalty) applies if the employer fails to offer affordable health coverage to an employee, and the employee purchases coverage through an exchange with a federal subsidy; the “B” penalty each month is an excise tax of 1/12 of $3,000 per each such employee who actually purchases coverage through an exchange with a federal subsidy. A “full-time employee” is a common-law employee who works an average of at least 30 hours per week. (You will find a more detailed description of the shared responsibility rules here and here.)
Below are our top 10 highlights of the final regulations:
1. Transition Relief for 2015
- Employers with less than 100 full-time employees are not subject to the new rules until 2016 (unless the employer reduces its workforce in order to fall into this exception or materially reduces its coverage before 2016).
- An employer is not subject to the “A” penalty (failure to offer coverage to 95% of its full-time employees) in 2015 if the employer offers coverage to 70% of its full-time workforce.
- If subject to the “A” penalty for failing to cover 70% of its full-time workforce in 2015, the employer’s penalty for each month is 1/12 of $2,000 times the number of full-time employees minus 80 (which, in years after 2015, will be 30).
2. Controlled Group Rules Clarified
- An employer is considered to offer coverage to an employee if any member of the controlled group offers coverage to the employee.
- However, the “A” penalty for failing to provide coverage to 95% of employees is determined with respect to each member of the controlled group; accordingly, one member may be assessed the penalty if it does not offer coverage to 95% of its employees, even if the controlled group offers coverage to more than 95% of the employees of the controlled group.
- Employees of more than one member of the controlled group are assumed to work for the entity for whom the employee works the most hours, and this determination is made on a month-to-month basis; if an employee works for the same amount of two different controlled group members, the members of the controlled group may choose which entity employs the employee but, if no election is made, the IRS will make this determination.
3. Decision Tree for New Hires–If an employer is using a look-back method for determining whether an employee is a full-time employee for which coverage is required, there are special rules for new hires:
- If the employee is reasonably expected to work 30 or more hours per week, coverage must be provided by the first day of the fourth month after the date of hire, unless the individual is a seasonal employee (an employee who is hired into a position for which the customary annual employment is six months or less).
- If the employee is a seasonal employee, the employer must cover the employee by the beginning of the 14th month after the date of hire, if the employee works, on average, at least 30 hours per week.
- If the employee is either expected to work less than 30 hours per week or the employer does not reasonably know whether the employee will work 30 hours per week, the employer must cover the employee by the beginning of the 14th month after the date of hire, if the employee works, on average, at least 30 hours per week.
If an employee’s break in service is long enough, the employee is considered a new hire. Generally, the break in service must last at least 13 weeks (the proposed regulation would have required it to last 26 weeks, which remains the rule for educational organizations).
4. Difficulty Counting Hours–a reasonable method should be used when it is difficult to count an employee’s hours, and the regulations provide guidance in the following situations:
- Adjunct Faculty: As a safe harbor, an adjunct faculty member may be considered to work the sum of (a) 2.25 hours for each course hour taught plus (b) the work hours required outside of the classroom (such as office hours or faculty meetings); this safe harbor will be in place until at least the end of 2015, and there will be at least six months’ advance notice of a change.
- Employees with Layover Hours (including in the airline industry): As a safe harbor, the employee may be credited with the greater of (a) 8 hours for a day that on which a layover starts or finishes or (b) the actual hours for which employee is compensated (including layover hours for which employee is compensated).
- Employees with On-Call Hours: A reasonable method must be used, and it is not reasonable to ignore on-call hours for which (a) the employee is paid, (b) the employee is required to remain on the employer’s premises, or (c) the employee’s activities are subject to substantial restrictions.
- Commissioned Sales Employees: A reasonable method must be used, and it is not reasonable to ignore travel time.
5. Excluded Employment by Students and Volunteers–when determining whether an employee is full-time, the following work is excluded:
- Student Workers: Hours are excluded for work that is part of a Federal Work-Study Program (or a substantially similar state or local program); all other student employment is counted.
- Volunteers: Hours worked by an employee of a government or tax-exempt organization under 501(c) of the Internal Revenue Code are excluded if the employee’s only compensation is expense reimbursement and certain benefits.
6. Excluded Employment Outside the U.S.–generally, employment outside the U.S. will be treated as if the employee were not working for the employer for purposes of the shared responsibility rules; for this purpose, the U.S. means only the 50 states and the District of Columbia:
- Counting Hours Outside U.S.: When determining whether an employee is full-time, service performed outside of the United States is excluded.
- Transfers Between US and Foreign Positions Within Employer Controlled Group:
- An employee may be treated as having terminated employment (and no coverage is required) if the employee transfers from a position in the U.S. to a position outside the U.S., as long as the position is anticipated to continue for at least 12 months and substantially all compensation after the transfer will be foreign-source income.
- If a full-time employee transfers from a non-U.S. position to a U.S. position:
- if the employee has no prior U.S. hours of service with the employer, the employee may be treated as a new hire
- otherwise, the employee may be treated as new hire only if the period of employment outside the U.S. was sufficient to constitute a break under the rehire rules (generally 13 weeks)
7. Definition of Dependent–The shared responsibility penalties may apply if an employer does not offer coverage to an employee’s dependent children. Dependent children include only a full-time employee’s natural or adopted child but not stepchildren, foster children, or children who are not citizens or nationals of the United States (unless such individual is a resident of the United States or a country contiguous to the United States).
8. Multiemployer Plans–An employer will not be treated as failing to offer coverage to employees who (along with their dependents) are offered coverage under a multiemployer plan on behalf of the employer, if the employer is required to make contributions to the plan and the coverage offered is affordable and provides minimum value. Coverage under a multiemployer plan will be considered affordable under the general safe harbor affordability tests or if the employee’s required contribution (if any) for self-only coverage does not exceed 9.5 percent of the wages reported to the multiemployer plan (determined using actual wages or an hourly wage rate under the collective bargaining agreement). These multiemployer plan rules are temporary, but new rules will not take effect less than six months after the rules are issued.
9. Affordability Safe Harbors–The final regulations clarified the three safe harbor rules for determining whether coverage is affordable:
- W-2 Safe Harbor: Coverage is affordable if the employee’s annual contribution is a uniform amount that does not exceed 9.5 percent of the amount reported in Box 1 of the employee’s Form W-2 (aggregating W-2 amounts from each member of the controlled group).
- Rate of Pay Safe Harbor: Coverage is affordable if the employee’s monthly contribution does not exceed 9.5 percent of the employee’s monthly rate of pay. Employers may use the rate of pay safe harbor for hourly employees even if they reduce the employee’s rate of pay during the year; however, affordability is based on the lowest rate of pay.
- Federal Poverty Line Safe Harbor: Coverage is affordable if the employee’s monthly contribution does not exceed 9.5 percent of the federal poverty line for a single individual for the calendar year, divided by 12. An employer may use any of the poverty guidelines in effect within six months before the first day of the plan year.
10. Offering Coverage that Provides Minimum Value Is (Almost) Required–As a practicable matter, coverage will typically need to provide minimum value for almost all purposes under the shared responsibility rules (even though the statute applies the minimum value requirement only in limited circumstances) because many of the practical compliance alternatives and safe harbors under the rules are available only if the coverage offered provides minimum value. For example:
- Employers with less than 100 full-time employees are not subject to the shared responsibility rules until 2016; provided, among other things, that if the employer changes its coverage after February 9, 2014, the coverage provides minimum value after the change.
- Recognizing that a new employer may not know until the end of the calendar year that it is a large employer, a new employer will not be subject to the penalty for the first three months of the calendar year as long as it offers coverage that provides minimum value by April 1st.
- An employer will not be subject to the penalty for the first three months after an employee first is considered to be a full-time employee, provided that the employee is offered coverage that provides minimum value.
- If an employee’s status changes from full-time to part-time, an employer can stop offering coverage on the first day of the fourth month after the change in status as long as the employee actually works less than 30 hours per week and the employer offered the employee minimum value coverage within three months after the date the employee was hired as a full-time employee.
- An employer is not considered to have offered coverage (i.e., will be subject to the “A” penalty) if it offers coverage that does not provide minimum value and employees are not allowed to decline the coverage.
- None of the affordability safe harbor rules are available to an employer that does not offer coverage that provides minimum value.