IRS issues regs on ACA’s employer play-or-pay provision

February 25, 2013

A key portion of the Affordable Care Act (ACA) health care reform law is the employer play-or-pay provision, also known as the employer mandate.

Employers with 50 or more full-time employees during the prior year must offer affordable health benefits that provide minimum value to full-time employees and their dependents—in other words, play—or else pay a free-rider penalty if even one employee buys individual insurance through an exchange and receives a premium tax credit or other cost-sharing reduction.

Grandfathered plans—those in existence on March 23, 2010—are excluded from the mandate. Regulations, which are proposed to become effective for months after Dec. 31, 2013, implement this provision. You may rely on these regs until final regs are issued. (78 F.R. 217, 1-2-13)

Free-rider review

There are two paths to free-rider liability, which apply if even one full-time employee (but not dependents) obtains coverage on an individual exchange and qualifies for a premium tax credit or other cost-sharing reduction.

Exclusions: part-time employees, full-time em­­ployees hired for up to three months and full-time employees who don’t qualify for tax credits because they earn too much, or they earn so little that they’re eligible for Medicaid. Dependents include employees’ children who haven’t yet turned 26; they exclude spouses.

First, you will pay penalties if you don’t offer minimum essential coverage, regardless of whether the coverage is affordable or provides minimum value, to all full-time employees (and, beginning with the 2015 plan year, to their dependents). 95% rule: Under the regs, penalties won’t apply if you offer coverage to all but 5%, or, if greater, five full-time employees and dependents.

Second, a penalty applies if you offer minimum essential coverage that isn’t affordable or doesn’t provide minimum value. The 95% rule applies here, too. Consistent with previous guidance, coverage is affordable if employees don’t contribute more than 9.5% of their household income for self-only coverage for the lowest cost plan; coverage provides minimum value if employers pay at least 60%.

Counting 50 employees

For purposes of the 50-employee limit, leased employees, partners, sole proprietors and 2% S corp shareholders don’t count as employees. Special rules apply to seasonal em­­ployees.

Existing employers average the number of full-time and full-time equivalent employees (FTEs) per month during the prior year by adding full-time employees and FTEs for each month, dividing by 12 and rounding down. FTEs are employees who didn’t work full time during any month of the prior calendar year.

New employers count the number of full-time employees and FTEs they reasonably expect to hire during the current year.

Counting 30 hours of service

Full-time em­­ployees and FTEs are those who logged 30 hours of service a week or 130 hours a month during the prior year. Hours of service for exempt employees may be calculated as actual hours worked, eight hours a day, or 40 hours a week. FTEs’ service hours are figured by adding their hours (up to 120 hours a month), dividing by 120 and rounding down. Service hours include working and nonworking time, such as vacation or sick days or other paid leave.

Anti-abuse rule: You can’t use a days-worked or weeks-worked equivalent if it substantially understates an employee’s service hours (e.g., counting three days of work if an exempt works three 10-hour days).

Measurement safe harbors

Since existing em­­ployees’ service hours are measured on a look-back basis, you must measure employees’ service hours this year, for play-or-pay compliance next year. The regs incorporate the optional look-back/stability safe harbors and, for new employees, the initial measurement/stability safe harbors, which the IRS announced last year.

Recap: Under these safe harbors, if employees are determined to work full time during the measurement period, they must be offered benefits for the whole stability period. The regs make these clarifications to the safe harbors:

  • For weekly, biweekly or semimonthly pay periods, look-back periods may begin or end at the beginning of a pay period (e.g., for calendar year look-back periods, the entire pay period that includes Jan. 1 can be excluded, if the entire pay period that includes Dec. 31 is included in the measurement period, and vice versa).
  • An employee who goes from full time to part time during a stability period must be offered benefits for the rest of that period. A new variable-hour employ­­­­­ee who becomes a full-time employee during the initial measurement period must be treated as a benefit-eligible full-time employee on the first day of the fourth month after the change or—if earlier, and he or she averages more than 30 hours of work a week during the initial measurement period—the first day of the first month after the end of the initial measurement period.
  • Rehires may be treated as new employees, and subjected to an initial measurement period, if they are completely off the payroll for at least 26 consecutive weeks. Rule of parity: Rehires may also be treated as new hires if they were off the payroll for at least four weeks and that time is longer than their previous stints of employment.
  • For continuing employees with breaks in service, the look-back/stability periods that would have applied had leave not been taken continue to apply when they return to work. Full-time em­­ployees are treated as having been offered benefits as of their first day back at work or, if later, the first day it’s administratively practicable.
  • To determine the average service hours during the look-back period for continuing employees who are unpaid special leave (i.e., jury duty leave, family leave under the FMLA or military leave under the Uniformed Services Employment and Reemployment Rights Act), you may exclude the period of special leave. Alternatively, you may credit employees with hours of service during the leave.

Transition relief

Since the play-or-pay provision kicks in next January, the regs provide several layers of transition relief to health plans that operate on a fiscal-year basis and that have plan years that span 2013 and 2014.

  • You won’t be subject to penalties until the first day of the 2014 plan year if, as of Dec. 27, 2012, you offered benefits to eligible employees, regardless of whether they enrolled in coverage.
  • You won’t be subject to penalties until the first day of the 2014 plan year if, as of Dec. 27, 2012, benefits were offered to at least 33% of all employees during the most recent open en­­roll­­ment period or the plan covered at least 25% of employees, provided full-time employees are offered affordable coverage that provides minimum value by the first day of the 2014 plan year.
  • Employers intending to use a 12-month look-back period may, for 2013 only, use any consecutive six-month period. Shortened look-back periods must begin by July 1, 2013, and end no later than 90 days before the first day of the plan year beginning Jan. 1, 2014. Stability periods must still be 12 months long.
  • Cafeteria plans with a fiscal year beginning in 2013 may be amended to allow employees to make prospective elections to opt into health benefits or opt out of previously elected health benefits. Plans may be amended retroactively, provided the amendment is made by Dec. 31, 2014, and is effective retroactive to the first day of the 2013 plan year.