On Feb. 10, the U.S. Treasury Department released final regulations on the Affordable Care Act employer mandate, including some additional delays to the employer mandate for some employers. In our piece predating the new rules, Dont Be Sidelined by the ACA Delay: Measure Now to Avoid a Flag on the Play or Pay', you read about the employer shared responsibility provisions of the ACA. As a quick recap, the A penalty is levied when an employer doesnt offer minimum essential coverage to a minimum number of employees, while the B penalty may apply to employers whose offer of coverage fails to meet minimum value or affordability standards.
Most of the proposed rules remain unchanged, including many relating to which employers are subject to the employer mandate penalties, how employees are classified as full-time or eligible under the plan and how the A and B penalties will be applied. While the final rules do give temporary relief to some groups, its not the time for large employers to sit back and relax. To avoid all penalties, theyre still required to offer adequate and affordable group coverage to their full-time and eligible employees and this means knowing the precise numbers on staff. Employer penalty amounts (calculated at $2,000 or $3,000 per head on some full-time employees) remain as originally proposed, which reinforces the importance of strategic and compliance efforts to avoid the fines.
Transitional rules: Temporary relief for some employers
The final rules offer temporary delays and certain flexible guidelines for helping employers ease into the full implementation of the employer mandate, or employer shared responsibility provisions of the ACA:
- Larger businesses those with 100 employees or more still have to comply in 2015, but can now avoid the A penalty by offering coverage to at least 70% of their full-time employees. (This is in contrast to 95%, a threshold that will be enforced in 2016.) Also, the formula for calculating the A penalty initially allows for an exemption for the first 30 full-time employees; this exemption is temporarily extended to the first 80 employees for the 2015 plan year.
- Coverage of full-time employees dependent children will not be mandated until 2016 as long as the employer is working toward offering dependent child coverage effective that year.
- Businesses with 50 to 99 full-time employees have an extra year to provide health insurance. They dont have to comply with the mandate until 2016 as long as they meet certain criteria described more fully below.
- Employers offering non-calendar year plans that begin later than Jan. 1, 2015, may be off the hook for penalties in the early part of the year before their plan years begin, subject to several caveats described below. Also, to accommodate payroll practices, employers are allowed to begin coverage in January 2015 on a day other than the first of the month without facing penalties for that month.
- Rather than averaging the number of employees for the entire year, the employer may count its employees for any six consecutive months during 2014 to determine large-employer status and therefore possible liability under the mandate in 2015. For future years, the employee number must be calculated for the entire preceding year.
- To determine which variable hour employees are full-time, the employer may use a measurement period as short as six months for any stability period that begins in 2015, and still apply a 12-month stability period. This relief is for the first year only; in subsequent years, the measurement period must be at least six months long, and as long as the stability period.
Permanent rules clarified in the final rules
As noted, most of the final rules related to the employer shared responsibility provisions of the ACA are the same as those initially proposed, but here are a few highlights of changes or clarifications:
- The following points affect identifying employees who must be considered eligible, to avoid penalties:
- The employer may use a monthly method for determining who is full-time, rather than the look back method, which involves the measurement, administrative and stability period concept. If the monthly method is used, the employer must be prepared to add people year-round, as they may float in and out of eligibility.
- If using the look back method rather than the monthly method, the initial measurement period (following hiring) is acceptable for part-time, seasonal and variable hour employees; the ongoing measurement period (which follows the initial measurement period cycle) should be used for full-time employees as well as the part-time, seasonal and variable hour employees.
- Seasonal employees are those for which employment normally lasts for six months or less. These employees can be subject to an initial measurement period each year, effectively causing them to not be eligible for health coverage.
- If a person is terminated and later hired back, the person may be considered a new hire rather than a rehire if more than 13 weeks elapse between the termination and the subsequent hiring. This is a change from the proposed rules, where the threshold had been set at 26 weeks. If a person is deemed a new hire rather than a rehire, the counting clock resets to zero in terms of any applicable measurement period.
- The proposed regulations left many open questions around how to count hours for those employees who dont work regular hours, such as adjunct faculty, airline employees, on-call staff, commissioned sales people and volunteer workers. The final rules offer some guidelines, although some uncertainty remains. For adjunct faculty, hours can be credited based on 2 ¼ hours of service per week for each hour of teaching or classroom time and one hour of service per week for each additional hour spent on required duties away from the classroom. On-call employees get credited an hour of service for each on-call hour that theyve been paid for or are entitled to be paid for. No hours are required to be credited for bona fide volunteers, including certain student employees (subject to limitations), or for religious workers under a vow of poverty (also subject to limitations). Outside these published guidelines, employers are encouraged to apply reasonable judgment, which will be subject to federal oversight.
- When looking at the affordability standards that apply to possible B penalties, the same three safe harbor methods introduced in the proposed rules will carry forward. The final rules clarify that when using the rate of pay method for an hourly employee, if the rate of pay changes mid-year, the calculation should look at the lower wage rate which is the old rate if the pay rate goes up or the new rate if the pay rate goes down. (The rate of pay method is unavailable with respect to a salaried employee if his or her monthly salary decreases during the year.) Also, employers using the federal poverty limit (FPL) method may rely on the FPL limits that were in effect six months prior to the start of the plan year.
- When dependent coverage becomes required to avoid penalties, the spouse may be excluded as originally proposed. And only natural or adopted children must be considered eligible, while step children and foster children are not required to be covered.
- Temporary staffing agencies (including employee leasing or professional employer organizations or PEOs) might not be considered the employer for purposes of the ACA employer mandate. The liable employer will be determined by common law, which looks at what organization has the right to direct and control the activities of the employee. Since in most cases, the client employer retains daily control to direct employee activity, the client employer may remain on the hook for any penalties. The rules do allow the client employer to satisfy the A penalty as long as the employee can elect coverage under a plan with the staffing agency, assuming that the client employer is required to pay extra fees in the event that the employee elects coverage. But if an employee qualifies for tax credits when buying a public exchange plan, the common law employer remains subject to any B penalty.
Details on transition rules
Heres some of the fine print on two of the transition rules mentioned above:
- Smaller large employers (size 50-99) are exempt from the employer mandate in 2015 if:
- The employer does not reduce the size of the workforce or reduce employee hours after Feb. 9, 2014 in order to qualify for this size exemption. Reductions in workforce or employee hours are still permissible if done for bona fide business reasons other than avoiding the mandate.
- The employer does not reduce coverage during 2014 or 2015 after Feb. 9, 2014.
- The employer contribution toward employee-only coverage must remain the same percentage of the premium, or at least 95% of the dollar amount available on Feb. 9, 2014.
- If benefits change under the employee-only coverage tier after Feb. 9, 2014, the plan must offer minimum value after the change, and the plan must not narrow or reduce the classes of individual to whom coverage was offered on Feb. 9, 2014.
- The relief applies to all months in 2015, as well as months in 2016 that are part of the 2015 plan year.
- The employer submits a form to the IRS certifying that they meet the criteria for the exemption. The form has not yet been published by the IRS.
- For non-calendar year plans to be exempt from the employer mandate during the initial months of 2015 (prior to the start of the plan year), the employer must observe these rules:
- The plan must have been in existence on Dec. 27, 2012, and the employer must not have moved the plan year start date to any date later in the year than it had been previously.
- For employees who are eligible or enrolled on the first day of the 2015 plan year:
- Eligibility terms remain the same as existed on Feb. 9, 2014.
- Coverage for the employee must be affordable and provide minimum value as of the first day of the 2015 plan year.
- For employees who were ineligible for the plan prior to the 2015 plan year, one of the following must be true for the entire period after Dec. 27, 2012:
- The employer offered coverage to 33% of all employees or covered 25% of all employees.
- The employer offered coverage to 50% of full-time employees or covered 33% of full-time employees.
- As a technical matter, these criteria rely on the plan year as defined under ERISA documents, which may vary from the contract year, so be sure to compare to review your plan documents.
With the issuance of the final regulations by the Treasury Department, its clear that employers have their work cut out for them. Even with the newly announced extension, nows the time to start carefully measuring and analyzing eligible employee hours to avoid having to pay shared responsibility penalties as steep as $3,000 per employee under the ACA. As we discussed in the Play or Pay post, by implementing identification and reporting systems to handle this complex work, employers will be well positioned when the ACA provisions become effective in 2015 and 2016.
Garlitz is executive director, bswift Exchange Solutions. This post originally appeared on the bswift blog.
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