Policy & Advocacy

IRS Issues Final Regulations on ACA Employer Shared Responsibility Provisions

The Internal Revenue Service issued final regulations implementing the Affordable Care Act’s employer shared responsibility provisions (often referred to as the “employer mandate”).

February 11, 2014

The Internal Revenue Service (IRS) issued final regulations implementing the Affordable Care Act’s employer shared responsibility provisions (often referred to as the “employer mandate”). These regulations largely retain the prior proposed rules but do provide some additional flexibility and helpful clarifications for plan sponsors. We summarize below the guidance that will be most relevant to plan sponsors.

The employer shared responsibility provisions will apply to employers with 100 or more full-time employees (including full-time equivalents) beginning in 2015. For employers with 50 - 99 full-time employees, the regulations allow an additional year of relief from employer shared responsibility payments—through the 2015 plan year.

For non-calendar year plans, the employer shared responsibility provisions generally will not apply until the first day of the 2015 plan year, with respect to employees who will be eligible for coverage effective on the first day of the 2015 plan year.

Calculating Employer Shared Responsibility Payments

The regulations incorporate the ACA’s general rule that:

If an employer with 50 or more full-time employees offers health coverage to full-time employees and their dependents but has at least one full-time employee enroll in an Exchange plan and receive the premium tax credit or cost-sharing reduction for Exchange coverage (generally individuals with household incomes between 100% and 400% of the federal poverty line), the employer must pay a an assessment equal to the lesser of $3,000 (annually) per full-time employee receiving a premium tax credit for an Exchange plan or $2,000 (annually) per full-time employee minus the first 30 full-time employees; and
If an employer with 50 or more full-time employees does not offer health coverage to full-time employees and their dependents and has at least one full-time employee enrolled in an Exchange plan and receiving the premium tax credit or cost-sharing reduction, the employer must pay an assessment equal to $2,000 (annually) per full-time employee minus the first 30 full-time employees. For the 2015 plan year, for employers with 100 or more full-time employees, the assessment will be $2,000 (annually) per full-time employee minus the first 80 full-time employees.

Determining Full-Time Status

Determining whether employees are “full-time” will be crucial in determining whether an employer will be subject to employer shared responsibility payments and if so, the amount of the payments. The regulations largely adopt the safe harbor methods for determining full-time status from the proposed regulations. These safe harbors generally provide that an employer can determine full-time status by looking back at a “measurement period” of 3 to 12 months (referred to as the “look-back measurement method”). Once the employer determines the employee’s part-time or full-time status—based on averaging 30+ hours per week during the standard measurement period—the employer treats the employee as maintaining that status during the subsequent “stability period” regardless of the employee’s hours of service during the stability period.

The regulations also provide details of how an employer can, if it chooses, determine full-time status of employees each month (known as the “monthly measurement method”).

Transition Relief for Determining Full-Time Status

An employer that wishes to use a full 12-month measurement and stability period to determine employees’ full-time status may have difficulty implementing a 12-month measurement period in 2014 to have a corresponding stability period for 2015. Therefore, the regulations permit a shorter measurement period solely for purposes of stability periods beginning in 2015. Under this transition rule, an employer may adopt a transition measurement period of 6-12 months that begins no later than July 1, 2014 and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015, followed by a 12-month stability period. This transition rule will likely be helpful to retailers and other employers with large numbers of variable hour employees, as it allows additional time to develop hours tracking procedures and adjust employee schedules, if necessary.

New Full-Time Employees

The regulations confirm that for new employees who are reasonably expected to average 30+ hours of service per week, an employer has up to 3 calendar months from the start date to offer minimum value coverage without becoming subject to employer shared responsibility payments.

New Variable Hour and Seasonal Employees

The regulations define a “variable hour” employee as a new employee for whom, based on the facts and circumstances at the start date, it cannot be determined that he/she is reasonably expected to work on average at least 30 hours per week during the initial measurement period because the employee’s hours are variable or otherwise uncertain. The regulations set forth specific factors to consider in determining whether an employee is reasonably expected to work on average at least 30 hours per week. Also, the employer must assume that the employee will continue to be employed for the entire initial measurement period and therefore cannot take into account the likelihood that the employee’s employment will terminate before the end of the initial measurement period.
The regulations define “seasonal employee” for purposes of determining full-time status as an employee in a position for which the customary annual employment is 6 months or less. Previously, an employer could use a reasonable, good faith interpretation of “seasonal employee” for purposes determining employer shared responsibility payments.
The regulations also address other issues related to variable hour and seasonal employees, such as changes in employment status.

Categories of Employees

The regulations confirm that employers can use different measurement and stability periods for specific categories of employees:

Salaried and hourly employees;
Employees whose primary places of employment are in different states;
Collectively bargained and non-collectively bargained employees; and
Each group of collectively bargained employees covered by a separate collective bargaining agreement.

The regulations also clarify that an employer can apply either the look-back measurement method or the monthly measurement method to these categories of employees (but no other categories).

Rehiring After Termination or Resuming Service After Other Absence

The regulations address the situation where an employee might work for the same employer on and off over time in the following rules:

Rehiring after Termination. If an employee has no hours of service for at least 13 consecutive weeks and the employer then rehires the employee, the employer can treat the employee as having terminated employment and having been rehired as a new employee.
Rule of Parity. If an employee had no hours of service for less than 13 weeks, the employer can still treat the employee as having terminated employment and having been rehired as a new employee, provided the period with no hours of service is at least 4 weeks long and is longer than the immediately preceding period of employment.

Offering Coverage

Under the ACA, whether an employer is subject to employer shared responsibility payments—and the amount of those payments—depends, in part, on whether the employer “offers coverage” to full-time employees and their dependents. The regulations provide the following guidance:

Offer to Full-Time Employees. Previous guidance provided that the IRS will consider an employer to have offered coverage to full-time employees and their dependents if the employer offers coverage to at least 95% of its full-time employees and their dependents. As additional transition relief, for the 2015 plan year, the IRS will consider an employer to have offered coverage to full-time employees and their dependents if the employer offers coverage to at least 70% of its full-time employees and their dependents.
Dependents. The IRS will consider an employer to have offered coverage to employees and their dependents if the employer offers coverage to employees and their children up to age 26. The final regulations provide that foster children and stepchildren are not included in the definition of “dependent” for purposes of employer shared responsibility payments. The IRS also extended its prior transition relief so that for plan years beginning in 2014 and 2015, an employer that takes steps to extend coverage to dependents who were not offered coverage previously will not be liable for employer shared responsibility payments solely on account of a failure to offer coverage to dependents. This transition rule allows employers who do not currently offer dependent child coverage additional time to make necessary changes to plans and procedures without incurring liability for employer shared responsibility payments.

Payment Rules & Procedures to Follow

Consistent with prior guidance, the IRS confirmed that it will adopt procedures to ensure that (1) employers receive certification if employees receive a premium tax credit and (2) the IRS will inform employers of potential liabilities and provide an opportunity to respond before any notice and demand for payment. The IRS anticipates that it will not contact an employer regarding payment until after employees’ individual tax returns are due for a given year and after employers file information returns identifying full-time employees and describing any coverage offered.

Transition Rule for Employers Contributing to Multiemployer Plans

To take into account the special circumstances of multiemployer plans, the IRS provides interim guidance that continues a prior transition rule for employers contributing to such plans. Under this interim guidance, an employer will not be treated as failing to offer the opportunity to enroll in employer-sponsored coverage to a full-time employee (and dependents) and will not be subject to employer shared responsibility payments with respect to a full-time employee if:

The employer is required to make a contribution to a multiemployer plan with respect to the full-time employee pursuant to a collective bargaining agreement or appropriate related participation agreement;
Coverage under the multiemployer plan is offered to the full-time employee and dependents; and
The coverage offered to the full-time employee is affordable and provides minimum value.

Other Guidance

The regulations also include:

Details on the transition relief from employer shared responsibility payments through 2015 for employers with 50-99 full-time employees;
Hours of service rules for specific types of employees such as adjunct faculty, airline employees, on-call employees, volunteers, and student employees;
Hours of service rules for special unpaid leave scenarios;
Rules for determining whether an employer has 50 full-time employees and therefore is subject to the employer shared responsibility provisions;
Rules for new employers;
Additional rules on offering coverage;
Rules related to employees of temporary staffing firms;
Details on periods of time between stability periods;
Affordability safe harbors;
Details on specific categories of employees, such as employees who transfer between employers inside and outside the U.S.; and
Specific guidance on transition rules for non-calendar year plans.