Final Regulations On Employer Mandate Delay Compliance For Medium-Sized Employers

The Internal Revenue Service has issued final regulations implementing the Patient Protection and Affordable Care Act’s (ACA) employer shared responsibility provisions (employer mandate), giving medium-sized employers (50-99 full-time employees) until 2016 to comply with the mandate and providing significant transition relief for both medium-sized and larger employers (100 or more full-time employees). The final regulations apply to periods after December 31, 2014. Employers may rely on them prior to that. The final regulations were published in the February 12 Federal Register.

Major transition relief. Under current rules, employers with 50 or more full-time employees must offer minimum essential coverage to at least 95 percent of their full-time employees in 2015 to avoid assessed shared responsibility payments. Under the transition relief, the shared responsibility rules will generally apply to larger firms with 100 or more full-time employees starting in 2015, and employers with 50 to 99 full-time employees starting in 2016. To avoid a payment for failing to offer health insurance coverage, employers subject to the rules in 2015 must offer coverage to 70 percent of their full-time employees in 2015 and 95 percent in 2016 and beyond.

The final regulations also clarify numerous issues that were addressed in previously issued guidance including, but not limited to, the following:

• determination of status as an applicable large employer;

• hours of service;

• identification of full-time employees;

• affordability safe harbors;

• offers of coverage;

• assessment and payment of Code Sec. 4980H liability; and

• definition of dependent.

Applicable large employer. Interested parties that commented on the proposed regulations requested that the threshold for status as an applicable large employer (ALE) be increased to various numbers of full-time employees greater than 50. The final regulations do not adopt this suggestion because it is inconsistent with the statutory definition of ALE in Code Sec. 4980H(c)(2).

Commenters also suggested that Code Sec. 4980H should not apply to employers for a period of time after the end of the calendar year so that employers that are close to the 50 full-time employee (plus full-time equivalent employees (FTEs)) threshold, whose status may be affected by data from the final calendar months of the calendar year, have time to respond to becoming an ALE. To address this concern, the final regulations provide, with respect to an employee who was not offered coverage at any point in the prior calendar year, that if the ALE offers coverage on or before April 1 of the first year in which the employer is an ALE, the employer will not be subject to an assessable payment (for January through March of the first year the employer is an ALE) due to its failure to offer coverage to the employee for January through March of that year. In addition, the employer will not be subject to a penalty if the coverage offered provides minimum value.

Hours of service. The final regulations provide that until further guidance is issued, with respect to categories of employees whose hours of service are particularly challenging to identify or track or for whom the final regulations’ general rules for determining hours of service may present special difficulties, employers are required to use a reasonable method for crediting hours of service that is consistent with Code Sec. 4980H. Such employees include airline industry employees and employees who have on-call hours.

Full-time employees. The final rules adopt the approach found in the proposed regulations allowing employers to use an optional look-back measurement method to make it easier to determine whether employees with varying hours and seasonal employees are full-time. The final regulations clarify the application of this method and the alternative monthly method of determining full-time status.

Rehire rules. The final regulations also retain the rehire rules contained in the proposed regulations but reduce the length of the break-in-service required before a returning employee may be treated as a new employee from 26 weeks to 13 weeks (except for certain educational organization employees). This break-in-service period applies for both the look-back measurement method and the monthly measurement method.

Unpaid leave rule. For purposes of applying the look-back measurement method to a returning employee not treated as a new employee, the final regulations retain the averaging rules for special unpaid leave and employment break periods as provided in the proposed regulations. Special unpaid leave is unpaid leave subject to the FMLA or USERRA or on account of jury duty. An employment break period, which is applicable to educational organizations that use the look-back measurement method, is a period of at least four consecutive weeks (disregarding special unpaid leave) during which an employee is not credited with hours of service.

Employee categories. The final regulations also clarify whether employees of certain types or in certain occupations are considered full-time. The categories addressed are as follows:

Volunteers. Hours contributed by bona fide volunteers for a government or tax-exempt entity, such as volunteer firefighters and emergency responders, will not cause them to be considered full-time employees.

Educational employees. Teachers and other educational employees will not be treated as part-time for the year simply because their school is closed or operating on a limited schedule during the summer.

Seasonal employees. Those in positions for which the customary annual employment is six months or less generally will not be considered full-time employees.

Student work-study programs. Service performed by students under federal or state-sponsored work-study programs will not be counted in determining whether they are full-time employees.

Adjunct faculty. As a general rule, until further guidance is issued, employers of adjunct faculty are to use a method of crediting hours of service for those employees that is reasonable in the circumstances and consistent with the employer responsibility provisions. Colleges seeking a bright line rule may credit adjunct faculty with 2-1/4 hours of service per week for each hour of teaching or classroom time.

Affordability safe harbors. The final regulations adopt the three safe harbors found in the proposed regulations for determining whether coverage that employers offer is affordable to employees. The safe harbors, which are optional, allow employers to use the wages they pay, their employees’ hourly rates, or the federal poverty level in determining whether employer coverage is affordable. The final regulations, unlike the proposed regulations, permit an employer to use the rate-of-pay safe harbor even if an hourly employee’s hourly rate of pay is reduced during the year. In addition, under the federal-poverty-line safe harbor, employers may use the poverty guidelines in effect six months prior to the beginning of the plan year.

Offers of coverage. The final regulations do not apply any specific rules for demonstrating that an offer of coverage was made. The otherwise generally applicable substantiation and recordkeeping requirements in Code Sec. 6001 apply. In addition, the offer generally can be made electronically.

If an employee has not been offered an effective opportunity to accept or decline coverage, the employee will not be treated as having been offered the coverage.

The final rules also clarify that an employee’s election of coverage from a prior year that continues for every succeeding plan year unless the employee affirmatively elects to opt out of the plan constitutes an offer of coverage.

Assessment and payment of Code Sec. 4980H liability. With respect to a full-time employee who performs services for two or more applicable large employer members during the same calendar month, the final regulations provide that the member for whom the employee has the greatest number of hours of service for that calendar month is the member that treats that employee as a full-time employee for purposes of assessable payment determinations.

Definition of dependent. The definition of dependent in the final regulations excludes spouses, foster children and stepchildren for purposes of Code Sec. 4980H only. The final regulations also clarify that a child is a dependent for the entire calendar month during which he or she attains age 26.

Transition relief. The final regulations extend to 2015 a package of limited transition rules that applied to 2014 under the proposed regulations. This relief includes:

Employers first subject to shared responsibility provision. Employers can determine whether they had at least 100 full-time or full-time equivalent employees in the previous year by reference to a period of at least six consecutive months, instead of a full year.

Non-calendar year plans. Employers with plan years that do not start on January 1 will be able to begin compliance with employer responsibility at the start of their plan years in 2015 rather than on Jan. 1, 2015, and the conditions for this relief are expanded to include more plan sponsors.

Dependent coverage. The policy that employers offer coverage to their full-time employees’ dependents will not apply in 2015 to employers that are taking steps to arrange for such coverage to begin in 2016.

Six-month measurement period. On a one-time basis, in 2014 preparing for 2015, plans may use a measurement period of six months even with respect to a stability period—the time during which an employee with variable hours must be offered coverage—of up to 12 months.

Eligibility conditions for transition relief. The transition relief for ALEs with fewer than 100 full-time employees contains four eligibility conditions. The employer must:

1. employ on average at least 50 full-time employees (including FTEs) but fewer than 100 full-time employees (including FTEs) on business days during 2014 (workforce size condition);

2. not reduce the size of its workforce or the overall hours of service of its employees, during the period beginning on Feb. 9, 2014, and ending on Dec. 31, 2014, in order to satisfy the workforce size condition;

3. not eliminate or materially reduce previously offered health coverage during a coverage maintenance period (for calendar year plans, this period is Feb. 9, 2014, through Dec. 31, 2015; for non-calendar year plans, the period is Feb. 9, 2014, through the last day of the plan year that begins in 2015); and

4. certify on a prescribed form that it meets the first three eligibility requirements.

Reporting. The Treasury and the IRS will issue final regulations shortly that aim to substantially simplify and streamline the employer reporting requirements.

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