IRS, DOL, HHS Issue Guidance On ACA Shared Responsibility For Employers, Waiting Periods

from Spencer’s Benefits Reports: The Internal Revenue Service, and the Departments of the Treasury, Labor (DOL), and Health and Human Services (HHS) (the Departments), simultaneously, but separately, have issued two notices, Notice 2012-58 and Notice 2012-59, respectively, providing guidance on two provisions of the Patient Protection and Affordable Care Act (ACA).

IRS Notice 2012-58 describes safe harbor methods that employers may use (but are not required to use) to determine which employees are treated as full-time employees for purposes of the ACA-added shared employer responsibility provisions of IRC Sec. 4980H. Specifically, the administrative guidance in this Notice modifies and expands on previous guidance and includes a safe harbor method that employers may apply to specified newly-hired employees.

Beginning Jan. 1, 2014, IRC Sec. 4980H provides that an applicable large employer (generally, an employer who employed at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year) is subject to an assessable payment if either of the following situations exists:

    (1) the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and any full-time employee is certified to receive a premium tax credit or cost-sharing reduction; or
    (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage and one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction (generally because the employer’s coverage either is not affordable or does not provide minimum value).

Coverage under an employer-sponsored plan is considered affordable to a particular employee if the employee’s required contribution (within the meaning of IRC Sec. 5000A(e)(1)(B)) to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. IRC Sec. 4980H(c)(4) provides that a full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

The safe harbor method described in a previous notice provides employers the option to use a look-back measurement period of up to 12 months to determine whether new variable hour employees or seasonal employees are full-time employees, without being subject to a payment under IRC Sec. 4980H for this period with respect to those employees. An employee is a variable hour employee if, based on the facts and circumstances at 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.

In addition, the safe harbor provides the following:

A. Gives employers the option to use specified administrative periods (in conjunction with specified measurement periods) for ongoing employees (generally an employee who has been employed by the employer for at least one complete standard measurement period, a defined time period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer) and certain newly hired employees;

B. Facilitates a transition for new employees from the determination method the employer chooses to use for them to the determination method the employer chooses to use for ongoing employees; and

C. Provides employers reliance, at least through the end of 2014, on the guidance contained in this notice and on the following approaches described in prior notices, as follows:

(1) for ongoing employees, an employer will be permitted to use measurement and stability periods of up to 12 months;

(2) for new employees who are reasonably expected to work full-time, an employer that maintains a group health plan that meets certain requirements will not be subject to an assessable payment under IRC Sec. 4980H for failing to offer coverage to the employee for the initial three months of employment; and

(3) for all employees, an employer will not be subject to an assessable payment under IRC Sec. 4980H(b) for an employee if the coverage offered to that employee was affordable based on the employee’s Form W-2 wages reported in Box 1 (referred to as the affordability safe harbor).

IRC Sec. 4980H(c)(2)(B) generally provides that if an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal employees, the employer would not be an applicable large employer, the IRS noted. A seasonal worker is a worker who performs labor or services on a seasonal basis, such as during the summer or the winter holiday season.

This guidance is intended to encourage employers to continue providing and potentially to expand group health plan coverage for their employees by permitting employers to adopt reasonable procedures to determine which employees are full-time employees without becoming liable for a payment under IRC Sec. 4980H; to protect employees from unnecessary cost, confusion, and disruption of coverage; and to minimize administrative burdens on the Affordable Insurance Exchanges.

Limited Waiting Period

Simultaneously with the issuance of this IRS Notice 2012-58, the Departments issued Notice 2012-59 providing administrative guidance under Public Health Service Act (PHSA) Sec. 2708. PHSA Sec. 2708 provides that, for plan years beginning on or after Jan. 1, 2014, a group health plan or group health insurance issuer shall not apply any waiting period that exceeds 90 days. Other conditions for eligibility under the terms of a group health plan are generally permissible under PHSA Sec. 2708, unless the condition is designed to avoid compliance with the 90-day waiting period limitation.

A “waiting period” is defined as the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective. For this purpose, being eligible for coverage means having met the plan’s substantive eligibility conditions (such as being in an eligible job classification or achieving job-related licensure requirements specified in the plan’s terms).

If, under the terms of a plan, an employee may elect coverage that would begin on a date that does not exceed the 90-day waiting period limitation, the 90-day waiting period limitation is considered satisfied. Accordingly, a plan or issuer will not be considered to have violated PHSA Sec. 2708 merely because employees take additional time to elect coverage.

Variable Hour Employees

If under a group health plan an employee’s eligibility is based on the employee regularly working a specified number of hours per period (or working full-time), and it cannot be determined that a newly hired employee is reasonably expected to regularly work that number of hours per period (or work full-time), the plan may take a reasonable period of time to determine whether the employee meets the plan’s eligibility condition. The eligibility condition may include a measurement period that is consistent with the timeframe permitted for such determinations under IRC Sec. 4980H, whether or not the employer is an “applicable large employer” subject to IRC Sec. 4980H.

Unless a waiting period that exceeds 90 days is imposed after a measurement period, the time period for determining whether such an employee meets the plan’s eligibility condition will not be considered to be designed to avoid compliance with the 90-day waiting period limitation if coverage is made effective no later than 13 months from the employee’s start date, plus, if the employee’s start date is not the first day of a calendar month, the time remaining until the first day of the next calendar month.

Notice 2012-59 includes the following examples, renumbered.

Example IFacts:

    Employer X’s group health plan limits eligibility for coverage to full-time employees. Coverage becomes effective on the first day of the calendar month following the date the employee becomes eligible. Employee B begins working full-time for Employer X on April 11. Prior to this date, B worked part-time for X. B enrolls in the plan and coverage is effective May 1.

Conclusion:

    In this Example I, the period from April 11 through April 30 is a waiting period. The period while B was working part-time is not part of the waiting period because B was not in a class of employees eligible for coverage under the terms of the plan while working part-time, and full-time versus part-time status is a bona fide employment-based condition that is not considered to be designed to avoid compliance with the 90-day waiting period limitation.

Example IIFacts:

    Under Employer Y’s group health plan, only employees who work full-time (defined under the plan as regularly working 30 hours per week) are eligible for coverage. Employee C begins work for Employer Y on November 26 of Year 1. C’s hours are reasonably expected to vary, with an opportunity to work between 20 and 45 hours per week, depending on shift availability and C’s availability.
    Therefore, it cannot be determined at C’s start date that C is reasonably expected to work full-time. Under the terms of the plan, variable hour employees, such as C, are eligible to enroll in the plan if they are determined to be full-time after a measurement period of 12 months. Coverage is made effective no later than the first day of the first calendar month after the applicable enrollment forms are received. C’s 12-month measurement period ends November 25 of Year 2. C is determined to be full-time and is notified of C’s plan eligibility. If C then elects coverage, C’s first day of coverage will be January 1 of Year 3.

Conclusion:

    In this Example II, the measurement period is not considered to be designed to avoid compliance with the 90-day waiting period limitation (and is, therefore, permissible) because the plan may use a reasonable period of time to determine whether a variable hour employee is full-time under PHSA Sec. 2708 if the period of time is consistent with the timeframe permitted for such determinations under IRC Sec. 4980H. In such circumstances, the time period for determining whether an employee is full-time will not be considered to avoid the 90-day waiting period limitation if coverage can become effective no later than 13 months from C’s start date, plus the time remaining until the first day of the next calendar month.

Example IIIFacts.

    Employee D begins working 25 hours per week for Employer Z on January 3 and is considered a part-time employee for purposes of Z’s group health plans. Z sponsors a group health plan that provides coverage to part-time employees after they have completed a cumulative 1,200 hours of service. D satisfies the plan’s cumulative hours of service condition on December 15.

Conclusion.

    In this Example III, the cumulative hours of service condition with respect to part-time employees is not considered to be designed to avoid compliance with the 90-day waiting period limitation. Accordingly, coverage for D under the plan must begin no later than the 91st day after D works 1,200 hours. (If the plan’s cumulative hours of service requirement were more than 1,200 hours, the Departments would consider the requirement to be designed to avoid compliance with the 90-day waiting period limitation.)

Employers, plans and issuers may rely on the compliance guidance in this Notice 2012-59 at least through the end of 2014.

All employees, whether full-time, part-time, or variable hour, who are not offered the opportunity to enroll in health insurance by their employer will be eligible to receive premium tax credits and cost-sharing reductions for Exchange coverage if they meet other conditions for receipt of these credits, the Departments asserted.

Comments on either Notice may be submitted by September 30 to the specified addresses, referring to the applicable Notice. For Notice 2012-58, send comments electronically to Notice.comments@irscounsel.treas.gov, or via regular mail to CC:PA:LPD:PR (Notice 2012-58), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. For Notice 2012-59, send comments electronically to e-ohpsca-er.ebsa@dol.gov; or via regular mail to Office of Health Plan Standards and Compliance Assistance, Employee Benefits Security Administration, Room N-5653, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.

For more information, contact the following:

  • For Notice 2012-58, Mireille Khoury of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), at (202) 622-6080;
  • For Notice 2012-59, the IRS at (202) 622-6080; the DOL’s Office of Health Plan Standards and Compliance Assistance at (202) 693-8335; or the HHS at (410) 786-1565 or phig@cms.hhs.gov.

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