March 19, 2014 Top 10 Categories of Changes in the Final ACA Employer Share Responsibility Regulations
KEEPING YOU INFORMED…
As we advised in our February 11, 2014 client memorandum, the United States Treasury Department issued final regulations regarding the Affordable Care Act’s (“the ACA”) employer shared responsibility provisions. This memorandum identifies the top 10 categories of changes most likely to affect you.
1. Transition Relief: The employer shared responsibility provisions have been delayed again. In addition, other transition relief rules have been announced. The latest transition rules are as follows:
a. Employers with at Least 100 Full-Time and Full-Time Equivalent Employees: For the 2015 calendar year (and, for employers with non-calendar year plans, any calendar months of the 2015 plan year that fall in 2016), an employer that offers coverage to at least 70% of its full-time employees will not be subject to the Section 4980H(a) penalty. Effective in 2016, an employer must offer coverage to all but 5% (or, if greater, all but five) of its full-time employees to avoid the penalty.
b. Employers with 50 to 99 Full-Time and Full-Time Equivalent Employees: The employer shared responsibility provisions will not apply for the 2015 calendar year and, for employers with non-calendar plan years (i.e., a plan year that does not begin on January 1), also for the portion of the 2015 plan year that falls in 2016. There are four conditions that must be satisfied in order to be eligible for this transition relief:
i. Workforce Size: The employer employs on average 50 to 99 employees during the 2014 calendar year.
ii. Maintenance of Workforce Size and Hours of Service: During the period February 9, 2014 through December 31, 2014, the employer does not reduce the size of its workforce or its employees’ hours of service so that it has 50 to 99 employees and is then eligible for the transition relief. A reduction in workforce or hours of service for a bona fide business reason will not render an employer ineligible for the relief.
iii. Maintenance of Previously Offered Health Coverage: During the period February 9, 2014 through December 31, 2015 (or, for an employer with a non-calendar year plan, the period February 9, 2014 through the last day of the plan year beginning in 2015), the employer does not eliminate or materially reduce the coverage that it offered as of February 9, 2014. An employer satisfies this condition if: (1) it continues to offer coverage with an employer contribution that is at least 95% of the dollar amount that the employer was contributing as of February 9, 2014, or the employer’s contribution rate remains the same or higher than it was as of February 9, 2014; (2) if there is a change in benefits, the coverage still provides minimum value; and (3) the employer does not alter the plan’s terms to narrow or reduce the categories of employees (or their dependents) to whom coverage was offered as of February 9, 2014.
iv. Certification: The employer certifies to the Internal Revenue Service on a prescribed form that it has met the three eligibility conditions set forth above.
Employers that satisfy these criteria will not be subject to the Section 4980H penalties for the 2015 calendar year (and, for employers with non-calendar plan years, for the portion of the plan year that falls in 2016). These employers still must comply with the reporting requirements in 2015. We will issue a separate client memorandum describing these requirements.
c. Reduction in the Section 4980H(a) Penalty: An employer is subject to the Section 4980H(a) penalty if it fails to offer coverage to the requisite percentage of its full-time employees. The penalty is $2,000 multiplied by the total number of full-time employees (the first 30 are excluded) and then divided by 12. For 2015 only, the penalty will be $2,000 multiplied by the total number of full-time employees (the first 80 are excluded) and then divided by 12. For any year, the Section 4980H(a) penalty will also exclude any full-time employee in one of the limited non-assessment periods (see ¶ 7 below). The Section 4980H(b) penalty remains capped at the Section 4980H(a) amount.
d. Employer’s First Year Covered by Section 4980H: The final regulations contain several permanent transition rules for the first year that an employer is subject to Section 4980H; i.e., the year in which the employer first has at least 50 full-time and full-time equivalent employees. For this first year, an employer avoids the Section 4980H(a) penalty if it offers coverage to all but 5% (or, if greater, all but five) of its full-time employees by no later than April 1. It avoids the Section 4980H(b) penalty if the coverage offered provides minimum value. After the first year, to avoid the Section 4980H(b) penalty, the coverage must also be affordable. If the employer does not offer coverage that provides minimum value by April 1 of its first year as an applicable large employer, it may be liable for a Section 4980H penalty retroactive to January 1 of that year. This transition rule only applies to the first year in which an employer is subject to Section 4980H. It does not apply to any subsequent year following one in which the employer’s workforce drops below the 50-employee minimum and later meets or exceeds that minimum.
e. Employers with Non-Calendar Plan Years: These transition relief rules apply to employers that maintained a non-calendar plan year as of December 27, 2012 and that have not modified the plan year to begin on a later calendar date. An employer must meet one of the following criteria to avoid a Section 4980H penalty for the period January 1, 2015 through the first day of the plan year beginning in 2015:
i. Coverage was offered by no later than the first day of the 2015 plan year; or
ii. As of any date (selected by the employer) in the 12 months ending on February 9, 2014, 25% of all employees were covered or at least 1/3 of all employees were offered coverage during the open enrollment period that ended most recently before February 9, 2014; or
iii. As of any date (selected by the employer) in the 12 months ending on February 9, 2014, 1/3 of full-time employees were covered or at least 50% of full-time employees were offered coverage during the open enrollment period that ended most recently before February 9, 2014.
If an employer does not meet one of these criteria, it may be liable for a penalty for the period January 1, 2015 through the first day of the plan year beginning in 2015 (and possibly beyond that date).
f. Shorter Measurement Periods for Stability Period Starting in 2015: For purposes of a stability period beginning in 2015, an employer using the look-back measurement method may designate a transition measurement period that is between six and 12 consecutive months in duration. That period can begin no later than July 1, 2014 and end no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015.
g. Shorter Period for Determining Applicable Large Employer Status: An employer will determine whether it is subject to the employer shared responsibility provisions by calculating the number of full-time and full-time equivalent employees it employed during the preceding calendar year. For the 2015 calendar year, an employer may determine its status using a period in the 2014 calendar year that is at least six consecutive months long. Whether an employer meets the seasonal worked exception continues to be based on the full calendar year.
h. Offer of Coverage for January 2015: For January 2015, an employer will be deemed to have offered coverage for that month if it offers by no later than the first day of the first payroll period that begins in January 2015. Subject to the rules for calculating full-time status, for any subsequent month, the employer must offer coverage by the first day of the month.
i. Dependent Coverage: Some employers do not offer coverage to some or all of their employees’ dependents, or offer dependent coverage that does not meet the new minimum standards. For these employers, the Section 4980H penalties can be avoided if steps are taken in the plan years that begin in 2014 or 2015 to expand coverage to dependents who were not offered coverage that met the minimum standards in the 2013 or 2014 plan year.
a. The term “dependent” continues to be defined as a child under 26 years old, but now includes the month in which the child turns 26. Stepsons, stepdaughters, foster children and children who are not citizens are now excluded from the definition. Children who are nationals United States are included if the child is a resident of a country that is contiguous to the United States, or the child has “the same principal place of abode” as the employee, is a member of the employee’s household, and the employee is a citizen or national of the United States.
b. The term “employee” excludes real estate agents and direct sellers.
c. The term “hours of service” now excludes any hour of service performed as a bona fide volunteer or as part of a federal work-study program or a substantially similar program of a state or its political subdivisions.
i. A “bona fide volunteer” is an employee of a government entity or tax-exempt company whose only compensation is for reimbursement of reasonable expenses, or reasonable benefits and nominal fees customarily paid to volunteers in the industry. Examples of bona fide volunteers include volunteer firefighters and emergency medical technicians (EMTs).
ii. Adjunct Faculty: The final regulations adopt the rule that educational organizations may use a “reasonable” method for calculating an adjunct faculty member’s hours of service. The preamble to the final regulations provides that, until further guidance is issued, a reasonable method would be to credit a member with 2 ¼ hours of service per week for each hour of teaching or classroom time plus an hour of service per week for each additional hour spent outside of the classroom performing other required duties, such as office hours or attending faculty meetings.
iii. On-Call Hours: The final regulations provide that, until further guidance is issued, employers must use a reasonable method for crediting on-call hours. While no example of a reasonable method is provided, the preamble to the final regulations notes that it would be unreasonable not to credit time during which the employee receives compensation for remaining on-call at the employer’s premises or when the employee’s activities while on-call are subject to “substantial restrictions that prevent the employee from using the time effectively for the employee’s own purposes.”
d. The term “seasonal employee” is now defined as an employee who works in a position where the customary annual employment is no more than six months. In certain circumstances, this period can be extended. For example, a ski instructor who customarily works a six-month winter season, but who is asked to work an additional month due to higher than normal snow accumulations would still be deemed to be a seasonal employee.
e. For purposes of the look-back measurement method, the final regulations now include factors for determining which employees are properly deemed to be “variable hour employees.” The factors are: (1) whether the last employee who held the position was a full-time or variable hour employee; (2) the extent to which employees in the same or similar positions have worked hours that vary above or below an average of 30 per week; and (3) whether the position was advertised, documented or communicated to the employee as requiring less, at least or more than 30 hours per week or that the hours would vary.
3. Calculating Full-Time Equivalent Employees: Fractions are taken into account when calculating the total number of full-time equivalent; i.e., part-time, employees. The final regulations clarify that employers may round the total to the nearest one-hundredth. For example, an employer with 54.332 full-time equivalent employees may round to 54.33.
4. Changing the Method for Calculating Non-Hourly Employees’ Hours of Service: As we advised in our February 19, 2013 and April 8, 2013 client memoranda, an employer has three options for calculating a non-hourly employee’s hours of service. These are: (1) counting hours of service; (2) using a days worked equivalency method (crediting the employee with working eight hours for each day worked); and (3) using a weeks worked equivalency method (crediting the employee with working 40 hours for each week worked). The final regulations clarify that an employer may change the method of calculating hours of service for non-hourly employees once each calendar year. An employer continues to be able to use different methods for different categories of employees.
5. Monthly Measurement Method for Determining Full-Time Employee Status: The proposed regulations described in detail the look-back measurement method. They did not include a similar description for the alternative method that is now entitled the “monthly measurement method.” This method (except for the weekly rule discussed in the next paragraph) can also be used to determine whether an employer is covered by the ACA’s employer shared responsibility provisions.
The monthly measurement method essentially requires an employer to determine whether an employee is full-time by counting hours of service in “real time” on a calendar month basis. To avoid the Section 4980H penalties, an employer must offer coverage that provides minimum value by the end of the first three full calendar months after the employee becomes full-time and meets the eligibility requirements of the plan (other than any applicable waiting period). After this three-month period, the employer must also provide affordable coverage to avoid the Section 4980H(b) penalty.
An employer using the monthly measurement method may also adopt an optional weekly rule pursuant to which a “month” is divided into full calendar weeks. This rule is best illustrated by way of the following example:
March 2014 began on a Saturday. The first full week began on March 2. For March 2014, an employer would start counting hours of service on the first Sunday of the month (March 2) and continue counting through the last Saturday of the month (March 29), which is the equivalent of four full calendar weeks. For April 2014, the employer would start counting hours of service on March 30 and continue counting through April 26 (four full calendar weeks).
The monthly equivalent of a full-time employee is generally defined as an employee who performs 130 hours of service in a month. There are, of course, months with four weeks and months with five weeks. For employers using the monthly measurement method, the monthly equivalent of a full-time employee in a month with four weeks is 120 hours of service and 150 hours of service in a month with five weeks.
Because the monthly measurement method requires “real time” calculations, two look-back measurement method concepts are inapplicable. These are “variable hour” employees and the use of the averaging method for special unpaid leave and employment break periods; i.e., summer break for schools.
As with the look-back measurement method, there are certain circumstances pursuant to which an employer can treat a rehired employee as “new.” For educational organizations, an employee may be treated as new if he/she did not have an hour of service for at least 26 consecutive weeks. For all other employers, an employee may be treated as new if he/she did not have an hour of service for at least 13 consecutive weeks. In both cases, an employer may adopt a rule of parity which allows it to select a shorter period of time between the employee’s periods of employment that is at least four consecutive weeks and as long as the number of weeks that the employee was previously employed. In other words, if the employee was previously employed for 10 weeks, then at least 10 weeks must pass following the employee’s last day of work before he/she can be treated as a new employee upon being rehired.
6. Look-Back Measurement Method for Determining Full-Time Employee Status: The final regulations leave largely intact the rules for implementing the look-back measurement method. The rule for when an employer can treat a rehired employee as “new” is the same for the look-back measurement method as it is for the monthly measurement method.
In addition, with regard to the averaging method for special unpaid leave and employment break periods, the final regulations provide that there is no limit on the number of hours that can be excluded/credits for special unpaid leave. The 501-hour cap only applies to an employment break period.
For both the monthly measurement method and look-back measurement method, there are rules regarding how to determine full-time status when an employee has a significant change in employment status during a calendar month or measurement period, resumes service (i.e., is rehired, but cannot be treated as new), or transfers to a position for which the employer uses a different method of calculating hours of service. These rules are fact specific and complicated. We recommend that you contact us to review the steps that must be taken.
7. Limited Non-Assessment Periods for Certain Employees: There are periods of time during which an employer will not be subject to a Section 4980H(a) penalty and, under certain circumstances also the Section 4980H(b) penalty, with regard to certain full-time employees. During these limited non-assessment periods, employees covered by them will be excluded from the employer’s total number of full-time employees for purposes of calculating the Section 4980H(a) penalty.
a. Employee First Eligible for Coverage (Monthly Measurement Method): Only once during an employee’s employment will he/she first become eligible for coverage. When that happens, an employer using the monthly measurement method will not be subject to the Section 4980H(a) penalty for the first three full calendar months in which the employee is otherwise eligible for coverage (beginning with the first full calendar month of eligibility) if the employer offers coverage by no later than the first day of the first calendar month following that three-month period. If the coverage offered within that deadline provides minimum value, the employer will also avoid the Section 4980H(b) penalty for that three-month period. If, by the end of the three-month period, the employer does not offer coverage or offers coverage that does not provide minimum value, the employer may be assessed a penalty that is retroactive to the first day on which the employee was otherwise eligible for coverage.
b. New Non-Variable Hour Full-Time Employees: For an employee who is reasonably expected at his/her start date to be full-time, an employer using the look-back measurement method will not be subject to the Section 4980H(a) penalty for the first three full calendar months (beginning with the first day of the first full calendar month of employment) if the employer offers coverage by no later than the first day of the fourth full calendar month of employment. If the coverage offered within that deadline provides minimum value, the employer will avoid the Section 4980H(b) penalty for the first three full calendar months. If, by the end of the three-month period, the employer does not offer coverage or offers coverage that does not provide minimum value, the employer may be assessed a penalty that is retroactive to the first day on which the employee was otherwise eligible for coverage.
c. New Variable Hour, Seasonal and Part-Time Employees: For an employee who is deemed to be full-time during the initial measurement period, an employer will avoid the Section 4980H(a) penalty if the employer offers coverage by no later than the first day of the stability period. If the coverage offered within that deadline provides minimum value, the employer will also avoid the Section 4980H(b) penalty. If, by the first day of the stability period, the employer does not offer coverage that provides minimum value, the employer may be assessed one of the Section 4980H penalties retroactive to the first day of the initial measurement period.
d. Change in Employment Status during Initial Measurement Period: During the initial measurement period, an employee may experience a change in employment status that results in the employee being part-time or seasonal for a portion of the initial measurement period and full-time for the remainder. If the employee would have been full-time (or would not have been seasonal) had he/she commenced employment in the new position, an employer will avoid the Section 4980H(a) penalty if it offers coverage by no later than the first day of the fourth full calendar month following the change in status or by the first day of the first full month following the end of the initial measurement period and any associated administrative period. The latter deadline applies if it is earlier and the employee was determined to be full-time during the initial measurement period. The employer will also avoid the Section 4980H(b) penalty if the coverage offered provides minimum value. If the employer does not offer coverage that provides minimum value within this deadline, it may be assessed a Section 4980H penalty retroactive to the first day of the initial measurement period.
e. Partial Calendar Month: The general rule is that, if an employer fails to offer coverage on any day of a calendar month, it will be treated as not having offered coverage for the entire calendar month. There are two exceptions to this rule.
i. If an employee’s employment is terminated in the middle of a calendar month and the employee would have been offered coverage for the entire month had he/she remained employed, then the employee will be treated as having been offered coverage for the entire calendar month.
ii. An employer will avoid the Section 4980H penalties with regard to an employee for the calendar month in which the employee commences employment if the employee’s start date is on a date other than the first of the month. In addition, the calendar month that includes the start date will not be included for purposes of calculating any potential Section 4980H penalty.
8. Affordability Safe Harbors: The final regulations clarify that employers may designate different safe harbors for any reasonable category of employees including specified job categories, nature of compensation (hourly or salaried), geographic location or similar bona fide business criteria.
In addition, the preamble to the final regulations provides that employers electing the federal poverty line safe harbor method for determining affordability will be permitted to select any poverty guidelines issued by the Secretary of Health and Human Services and in effect within six months of the first day of the plan year.
9. Offer of Coverage: In the preamble to the final regulations, the Treasury Department notes that commentators on the proposed regulations requested that an offer of coverage made by an employer to a union during the collective bargaining process be treated as an offer of coverage to the employees covered by the collective bargaining agreement. The Treasury Department declined to accept this request noting that, even though an offer has been made and rejected by a union, the affected employees did not have the opportunity to accept that offer. As a result, an employer will not be able to avoid the Section 4980H penalty by offering coverage through a union representative. At the same time, federal and State law prohibit employers from negotiating individually with represented employees, which includes offering health insurance benefits. Thus, the final regulations place employers with unionized employees in the untenable position of choosing between a potentially large monetary penalty and violating a contract/committing an improper or unfair labor practice.
10. Anticipated Timing of the Section 4980H Penalties: The Treasury Department anticipates that employers will not be notified of potential liability until after individual tax returns and ACA-required employer reporting forms are due. Thus, for the 2015 calendar year, the earliest a penalty would be collected is after April 15, 2016.
As was the case with the proposed regulations, the final regulations are complex. We invite you to contact us with any questions about the regulations including the steps that you should be taking to prepare for their implementation.
THIS MEMORANDUM IS MEANT TO ASSIST IN GENERAL UNDERSTANDING OF THE CURRENT LAW. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL.
TAX ADVICE DISCLOSURE: THIS WRITTEN COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER. THIS STATEMENT HAS BEEN PROVIDED PURSUANT TO U.S. TREASURY REGULATIONS GOVERNING TAX PRACTICE.
© Lamb & Barnosky, LLP 2014