The U.S. Treasury Department recently released new guidance to assist employers (generally those with 50 or more full-time or full-time equivalent employees) in preparing and planning for the 2014 requirement to offer affordable minimum essential health coverage to their employees, and to help employers who have close to 50 employees determine whether the requirement to provide affordable minimum essential health coverage applies to them. The guidance has been provided in the form of proposed regulations and appeared in the Federal Register on January 2, 2013. A series of Questions and Answers, written in more everyday language and published on the IRS web page, provides an effective summary of the guidance.
The proposed regulations and Questions and Answers contain some surprises for those who have closely followed the Patient Protection and Affordable Care Act (the "Affordable Care Act"). This Executive Alert provides an overview of the guidance; however, the BakerHostetler Healthcare Reform Team intends to publish future alerts that focus on specific aspects discussed in the proposed regulations. Most employers will find that the new guidance will help them determine and understand:
- whether the employer mandate - known as the "employer shared responsibility mandate" - applies to them (that is, whether the employer is considered a "large" employer);
- how they should classify their employees and count their hours; and
- what penalties they might face and how large those penalties might be if they are considered a "large" employer and they either fail to offer coverage, they offer coverage that is considered unaffordable, or the coverage they offer does not provide a sufficient amount of value.
For those not already well-acquainted with the Affordable Care Act's "employer mandate" rules, beginning in 2014 employers with at least 50 full-time and full-time equivalent employees generally will be required to offer comprehensive, and affordable, health care coverage to their full-time employees and their dependents. If such a "large" employer:
- fails to offer such health care coverage to all of its full-time employees (and their dependents) and at least one of those employees is certified as receiving a premium tax credit or cost-sharing reduction toward the coverage they purchase on an exchange, the employer is subject to an assessable payment (penalty) equal to $167 per month ($2,000 per year) times each full-time employee (disregarding the first 30 full-time employees) of the employer; or
- offers such health care coverage to all of its full-time employees, but the coverage being offered either (a) is not affordable (as defined by law), or (b) fails to provide sufficient value, and one or more of those employees is certified as receiving a premium tax credit or cost-sharing reduction towards the coverage they purchase on an exchange, the employer is subject to a different assessable payment (penalty); this penalty is equal to $250 per month ($3,000 per year) for each full-time employee who is certified as having received the tax credit or reduction. However, this penalty is subject to a cap: it cannot exceed the penalty the employer would have been assessed had the employer failed to make the coverage offer in the first place (i.e., the $2,000-times-all-full-time-employees penalty described above).
The Treasury Department and the IRS previously issued four separate notices, to provide guidance (Notice 2011-36; Notice 2011-73; Notice 2012-17; and Notice 2012-58) regarding the employer shared responsibility mandate. Comments received in response to those Notices were considered and reviewed by the Treasury Department and the IRS when drafting the proposed regulations.
The proposed regulations expand considerably on what could be discerned from the statutory language used to describe the employer mandate. They provide substantially more detail about how to count the hours of service being rendered by hourly and non-hourly employees when determining the number of full-time and full-time equivalent employees an employer has and how to determine if and when an employer is subject to an assessable payment for having failed to satisfy the new mandate. For instance, additional clarity and detail was provided in the following areas:
- All employees of an employer's controlled group are to be counted as employees of a single employer when determining whether the employer shared responsibility mandate applies to the entire group and to each of the companies that are members of that group.
- Subject only to a handful of special exceptions, whether an individual is considered an "employee" will be based on the common law definition of "employee," and that common law standard will be applied for all purposes of the "employer mandate" rules. Thus, partners in a partnership will not be considered "employees," either for purposes of determining whether an employer is a "large" employer or for purposes of determining whether an employer has offered coverage to all of its full-time employees and their dependents. (One of the exceptions pertains to 2 percent owners who are employed by an electing small business corporation; they are considered non-employee/partners under the employer mandate proposed regulations even though considered employees under relevant state law for most other federal law purposes.)
- Employees are considered full-time employees if and when they have, on average, 30 or more "hours of service" per week. For this purpose an "hour of service" includes not only hours for which an employee is paid or entitled to be paid for performing services, but also the hours for which the employee is paid or entitled to be paid for periods of time for which no duties are performed (such as paid vacation, paid time off (PTO), short-term disability, paid holidays, jury duty (when compensated), military duty (when compensated) or other paid leaves of absence).
- When calculating "hours of service" for a non-hourly worker, an employer can choose between (a) counting actual hours of service, (b) using a days-equivalency method, or (c) using a weeks-worked equivalency method, unless either (b) or (c) would substantially understate the hours worked and cause an employee otherwise considered full-time to not be classified as a full-time employee.
- The hours-counting convention which appeared in some of the earlier Treasury Department guidance, such as in Notice 2011-36 and Notice 2012-58, has been formally adopted in the proposed regulations. As such, employers will now be able to establish testing periods ranging from three months to a full 12 months to measure whether an employee whose schedule causes him or her to be a "variable hours" employee qualifies as a full-time employee for purposes of the employer mandate rules.
- Other rules are now available to enable employers to determine whether a given employee should be treated as an ongoing employee, a new full-time employee, a new variable hours employee or a seasonal employee.
As noted above, though, with the additional detail - and the additional clarity - came a number of surprises. Among the more prominent surprises were the following:
- While the proposed regulations use a "controlled group" standard to determine if the employer mandate rules apply, the coverage tests and the penalty assessments are to be calculated and imposed separately on each company within the group. As such, each company within a given controlled group is considered separately responsible for complying with the employer mandate and only with respect to its own full-time employees and their dependents. This same entity-by-entity approach carries through to the calculation and imposition of the assessable payment.
- A company that is considered a "large" employer only needs to offer coverage to 95 percent of its full-time employees (that is, all but the greater of 5 percent of the company's full-time employees, or five full-time employees total) and their dependents, each month, in order to fulfill the employer mandate. Of particular interest is the fact that the proposed regulations apply this new 95 percent rule separately to each company which is a "member" of a controlled group.
- Coverage does not need to be offered to a spouse of a full-time employee. The proposed regulations define a "dependent" for purposes of the employer mandate as a child of the employee who has not attained age 26. The term "dependent" does not include the employee's spouse.
- An employer may use one of three different safe harbors (based on the employee's IRS Form W-2, the employee's rate of pay, or Federal poverty line) to test whether the employer's offer of coverage satisfies the statute's affordability requirement, and it can apply these safe harbors to all of its employees or to a specific category of its employees.
- Group health plans which have been operating on a fiscal year basis since December 27, 2012, and cover a reasonable percentage of an employer's workforce, will be treated as complying with the new employer mandate under special transitional rules, at least until the plan's fiscal year ends in 2014.
- Employers may use a transitional rule in 2013, which permits them to apply a look-back period of less than 12 full months when determining whether they have 50 full-time/full-time equivalent employees.
Before the IRS issues final regulations on this topic, the proposed regulations may be relied upon as guidance now as employers plan toward 2014, pending any other additional guidance or final regulations.
We will continue to monitor health care reform developments and issue additional Executive Alerts on targeted topics covered in these comprehensive proposed regulations and additional developments as such arise.
If you have any questions regarding this Executive Alert, please contact your BakerHostetler attorney, or: John J. McGowan at email@example.com or 216.861.7475, Jennifer A. Mills at firstname.lastname@example.org or 216.861.7874, or Deborah Bracy at email@example.com or 216.861.7354.
—John J. McGowan, Jennifer A. Mills, and Deborah Bracy
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