Employer Responsibility Provisions: Pay or Play
The Internal Revenue Services (IRS) has published final rules governing Affordable Care Act (ACA) Employer Responsibility provisions (commonly referred to as "pay or play"). The final rules clarify several issues.
These rules will take effect on January 1, 2015 for most Alliance members, although the final guidance provides some transition relief for non-calendar year plans and businesses with less than 100 employees. If you think you might be eligible for transition relief under one of these scenarios, proceed carefully as there are stipulations that come along with a later effective date.
Once effective, an employer that does not offer health benefits to a certain percentage of workers and their dependents will face a significant nonrefundable, excise tax penalty that is based on the size of its full-time workforce. An employer that offers benefits that do not meet "affordability" or "actuarial value" tests may also face a penalty if any full-time workers are able to access premium tax credits through the purchase of an exchange plan. Employers that offer a health plan to substantially all full-time workers that pays at least 60 percent of costs for a standard population, and where premiums do not exceed 9.5% of any employee's W-2 wages, will not be subject to a penalty.
This page summarizes changes included in the final regulations that were not included in earlier, proposed guidance. When the brief refers to "offer coverage," it refers to an offer of "minimum essential coverage" which includes any employer-sponsored plan that qualifies as group health coverage (even if it doesn't offer coverage for essential health benefits, is of low actuarial value or is otherwise unaffordable to workers). The IRS has posted a FAQ on this issue, accessed here.
- Transition Relief for Penalty Calculations: For 2015 only, the new rules say that employers have to offer coverage to at least 70 percent of full time employees and dependents in order to avoid the "A" penalty of $2,000 per full-time worker minus 80 (another new number for 2015 only). While these rules may help employers avoid large tax hits for misclassifying employees, it will not protect an employer against the "B" penalty of $3,000 for any full-time employee that becomes eligible for premium tax credits on the exchange because they were not offered coverage. In 2016, the threshold for offering coverage will increase to 95%, and the "A" penalty will again be calculated by subtracting 30 from the full-time workforce.
- Transition Relief for ALE Status: An "Applicable Large Employer" is one that has 100 or more full-time equivalents in 2015, and 50 or more in 2016. In 2015 only, employers can use any six month consecutive period in 2014 to determine ALE status. After that, an employer will determine ALE status on a yearly basis. Employers that newly become ALEs from one year to the next may enjoy a one time "grace period" where they will not be subject to "A" penalties for the first three months of the year if the employer offers coverage by April 1. The employer will not be subject to "B" penalties for the first three months of the year if the coverage is both affordable and meets minimum value standards. As before, "seasonal workers" may be exempted from the calculation if the employer becomes an ALE for less than four months out of the year due to a seasonal workforce. Employers may apply a reasonable good faith interpretation of the term seasonal worker based on guidance from the Department of Labor.
- Dependent Coverage: The proposed regulations had clarified that dependents do not include spouses. The new regulations retain that exclusion and also exclude foster children, step children and children that are not considered US citizens. Dependent now means a child up to age 26 including adopted children. Employers that did not provide dependent coverage in 2013 and 2014 can wait one year before providing this coverage as long as they "take affirmative steps" toward providing the coverage in 2016.
- Definition of Seasonal Employee: Employers are allowed to use a look back period for variable hour and seasonal employees, although the term "seasonal employee" was not defined in previous regulations. The new rules define seasonal employee as one "hired into a position for which the customary annual employment is no more than six months" and that generally begins around the same time of year.
- Transition Relief for Initial Measurement Period: For 2015 only, employers may use a measurement period of six months followed by a stability period of 12 months as long as the measurement period begins by July 1, 2014 and ends no earlier than 90 days before the start of the 2015 plan year. This applies only to employees that began their employment before the start of the measurement period. After this initial transition period, employers that want a 12 month stability period must use a 12 month measurement period.
- New Measurement Method: The final rules allow employers
- Break in Service Rules: The break in service rule has been shortened to 13 weeks under the final rules (except for educational organizations that remain at 26 weeks). After a break in service of that length, an employee should be considered a new employee for the purposes of applying Employer Responsibility rules.
- Other Clarifications: There is no relief offered for short term hires, high turnover positions or paid interns. If these individuals are hired and expected to work full-time, they must be offered coverage by the first day of the fourth month following hire. Bona fide volunteers are not full-time employees.
The regulations governing pay or play are lengthy and complex. We will continually update this page with resources we believe are comprehensive and helpful to employers. For now, we refer our members to the following resources: