On February 10, 2014 the US Treasury announced new Shared Responsibility, or “Play-or-Pay,” Legislation for those with 50 or more employees, along with a fact-sheet explaining the law, but many business owners and managers affected by this legislation remain confused.
Sleeper Sewell Insurance Services, Inc., a division of ANBTX Insurance Services had the opportunity to discuss the Employer Mandate regulations with Peter Marathas, a partner at the nationally prominent law firm Proskauer Rose and the head of its Health Care Reform Task Force. Mr. Marathas and Proskauer provide compliance support to Sleeper Sewell on all benefits matters, including the ACA.
The play-or-pay rules were originally supposed to go into effect on January 1, 2014, but the White House and the Internal Revenue Service (IRS) (Notice 2013-45) delayed enforcement of play-or-pay until January 1, 2015. When play-or-pay enforcement was delayed, the impact on certain transition relief that applied for 2014 was unclear. The Regulations establish a further delay and clarify aspects of the previously released proposed regulations and guidance, including the impact on certain transition relief.
Sleeper Sewell: Before we discuss the Regulations, can you give us an overview of who is and who is not generally subject to the play-or-pay requirements?
Marathas: In general, only employers who employ 50 or more full-time employees (including full-time equivalents) (FTE) in the prior calendar year are considered “applicable large employers” (ALEs) subject to the play-or-pay requirements. An employer is an ALE for a calendar year if it employed an average of at least 50 FTE on the employer's business days during the preceding calendar year. Solely for purposes of determining ALE status (but not for ACA penalty purposes), the hours of service of full-time equivalent employees (e.g., part-time employees) are included in the calculation.
Example: During each month of 2015, an employer has 20 full-time employees, each of whom averages 35 hours of service per week, and 40 part-time employees, each of whom averages 90 hours of service per month. In this example, each of the 20 employees who average 35 hours of service per week count as one full-time employee for each month. To determine the average number of full-time equivalent employees for each month, take the total hours of service of the part-time employees (up to 120 hours of service per employee) and divide by 120. The result is that the employer has 30 full-time equivalent employees each month (40 × 90 ÷ 120 = 30). By adding the two categories of employees together, the employer would have 50 FTE. Therefore, the employer is an applicable large employer for 2016.
Sleeper Sewell: We heard that there was a delay for certain small employers included in the Final Regulations. Is that true?
Marathas: Among the big news in the Regulations, is that for employers with between 50 and 99 FTE, the implementation date of the play-or-pay rules has been delayed until 2016. To be eligible for the delay, those employers with between 50 and 99 FTE cannot reduce headcount to qualify for the delay and they must generally maintain the same benefits that were in place on February 9, 2014.
These employers will have until the start of their 2016 plan year to comply as long as they haven’t changed their plan year after February 9, 2014 to begin at a later date. This is welcome relief for smaller employers.
Sleeper Sewell: When the play-or-pay rules were effective for 2014, the IRS permitted small employers to count FTE over a shorter period of time. Is that relief included in the Regulations?
Marathas: Yes, it is. To determine whether an employer is an ALE for 2015, an employer can choose any period of at least six consecutive months during 2014 to determine its average number of FTE.
Sleeper Sewell: What about non-calendar year plans? When do they have to comply?
Marathas: The Regulations permit employers with non-calendar year plans to use the first day of the plan year starting on or after January 1, 2015 as their start date for compliance with the play-or-pay rules, as long as certain conditions are met. To qualify, one or more of the following three conditions must be met (the first item below provides relief only to a subset of employees, whereas the other two provide relief to all employees of a qualifying employer):
- The play-or-pay penalty will not apply from January 1, 2015 to the first day of the 2015 plan years with respect to employees (i) who are eligible for coverage on the first day of the 2015 plan year under the eligibility terms of the plan in place as of February 9, 2014 (whether or not they take the coverage), and (ii) who are offered “affordable coverage” that reimburses at a minimum value of at least 60% (Bronze coverage) on the first day of the 2015 plan year.
- If 25% of all employees were covered under the plan as of any date in the 12 months ending February 9, 2014, or 33% of all employees were offered coverage during the last open enrollment period before February 9, 2014, no penalty will be assessed from January 1, 2015 to the first day of the 2015 plan year.
- If 33% of all full-time employees were covered under the plan as of any date in the 12 months ending February 9, 2014, or 50% of all full-time employees were offered coverage during the last open enrollment period before February 9, 2014, no penalty will be assessed from January 1, 2015 to the first day of the 2015 plan year.
This transition relief permits employers sponsoring qualifying non-calendar year plans some additional time to get ready for compliance.
Sleeper Sewell: Can you briefly provide an overview of the play-or-pay rules that will apply to ALE’s?
Marathas: There are two potential penalties: the “no insurance” penalty and the “unaffordable insurance” penalty. Here are the general rules for 2015 and after:
An applicable large employer will be liable for the play-or-pay penalty if:
- The no insurance penalty. The employer does not offer health coverage or offers coverage to fewer than 95% (70% for 2015) of its full-time employees and their children, and at least one of the full-time employees receives subsidized coverage on the exchange or marketplace; then the employer will be assessed a penalty equal to $2,000 multiplied by all of its full-time employees, reduced by the first 30 (this number is increased to 80 for 2015—see Q&A 7 below);
- The unaffordable insurance penalty. The employer offers health coverage to all or at least 95% (70% for 2015—see Q&A 6 below) of its full-time employees (and their children), but the coverage offered is not deemed affordable by the federal government or does not reimburse insurance costs at an actuarial value equal to at least 60% (collectively “affordable coverage”) and at least one full-time employee who does not receive affordable coverage obtains subsidized coverage on the exchange or marketplace; the employer will be assessed a penalty of $3,000 per year multiplied by each full-time employee who obtained subsidized coverage on an exchange or marketplace.
The $2,000 or $3,000 penalties are non-deductible and they are assessed on a monthly basis (i.e., 1/12th of $2,000 or $3,000, as applicable, per month). The penalty is assessed on an EIN basis.
Sleeper Sewell: Can you explain how the Regulations relaxed the “95% rule”?
Marathas: To permit ALEs an opportunity to address coverage and other issues, the Regulations reduce the 95% rule to 70% for 2015 only.
This relaxation of the no-insurance percentage provides all employers subject to the play-or-pay rules breathing room in 2014 and 2015 to address coverage and certain employment practices, including independent contractor issues, which we can discuss in the future.
Sleeper Sewell: What do the Regulations say about the reduction in 30 rule?
Marathas: As noted above in question 5, the “reduction factor” for the no-insurance penalty is increased to 80 from 30 for 2015. (It will return to 30 in 2016.) This will mean that more “smaller” employers will avoid the no insurance penalty. This is significant. Consider this example:
Sara’s Crab Shop employs, on average, 133 FTE every month during 2014. Sara’s correctly assumes that because they had, on average, 100 or more FTE in 2014, they are subject to play-or-pay for 2015. But, only 79 of Sara’s employees are actual full-time employees. The remaining 54 FTE are part time employees.
If Sara’s fails to offer insurance and one of its full-time employees receives subsidized coverage on the exchange or marketplace, however, the penalty that will be assessed against Sara’s is ZERO. Why? Because the reduction factor (80 for 2015) exceeds Sara’s total number of full-time employees (79). As long as Sara’s continues to employ less than 80 full-time employees, they will not be subject to any play-or-pay penalties in 2015.
Note that when the reduction factor returns to 30 in 2016, Sara’s would be subjected to a penalty equal to $98,000 ((79 – 30) X $2,000).
Sleeper Sewell: How soon after a smaller employer becomes an ALE does the employer have to comply with the play-or-pay requirements?
Marathas: The Regulations provide a “grace period” for employers who newly determine that they are ALEs. In the first year in which an employer becomes an ALE, with respect to any full-time employee to whom the employer did not offer insurance coverage, the employer will not be assessed either the no-insurance or the no affordable insurance penalty for January, February and March of the first year in which the employer is an applicable large employer, as long as the full-time employee (and his or her children) is offered coverage (or affordable coverage) by April 1. If coverage is not offered by April 1, the appropriate penalty will apply for the first three months of the year.
Sleeper Sewell: Beginning with the first day of the first plan year starting on or after January 1, 2014, all employers must offer insurance coverage to eligible full-time employees within 90 days of their first being eligible. Some employers have “orientation periods” during which they and the employee evaluate whether the position is a good fit. Have the regulators addressed this?
Marathas: Correct, under the ACA coverage must be offered within the first 90 days after a person is hired or becomes eligible for insurance (if later). Of course, some states have shortened this period for insured plans, like California, which establishes a 60 day limit. Although not included in the final regulations, the regulators released proposed regulations after the final regulations in which they proposed a rule that would permit employers to use up to a month (minus a day) of employment as an orientation period. The 90 day waiting period could then start after the end of that orientation period. Note that employers using an orientation period should clearly state this requirement in their summary plan description and plan document.
Sleeper Sewell: We’ve noted the rule requires that coverage be offered to 95% (70% in 2015) to all full-time employees and their children. A couple of questions here: (i) who are considered to be children? and (ii) if an employer doesn’t offer coverage for children now in 2014, will they have to start offering coverage for children in 2015?
Marathas: Generally, under the ACA, employers must offer coverage to children up to age 26, regardless of whether they depend on their parent or parents for support, live with their parents or have another job that offers insurance. For purposes of the play-or-pay mandate, the term “children” includes all biological children, adopted children and children placed for adoption. According to the final regulations, the term does not include either foster children or step-children. Employers that want to exclude coverage for foster children and/or step-children must include that exclusion in their plan document and summary plan description. Since there is no ready definition of what a “step-child” is or is not, care should be taken in drafting a definition for the term.
Federal law does not require that “spouses” be offered coverage, but for insured plans, employers should check state law to see if state law requires that coverage.
Under the final regulations, an employer that takes steps during its 2015 plan year toward offering coverage to children will not be subject to the play-or-pay penalties solely because it fails to offer coverage to children in the 2015 plan year.
This transition relief applies to employers for the 2015 as long as they did not offer coverage to children in either the 2013 or the 2014 plan year.
Sleeper Sewell: How does an employer know if it offers affordable coverage?
Marathas: If an employee’s share of the premium for employer-provided individual only coverage would cost the employee more than 9.5% of his/her annual household income, the coverage is not considered affordable for that employee.
Sleeper Sewell: Household income? How is an employer supposed to know what household income is?
Marathas: Fortunately, they don’t. The final regulations maintain the three safe-harbors that employers may use instead of “household income” to determine whether coverage is affordable. These three affordability safe harbors are:
- the Form W-2 wages safe harbor,
- the rate of pay safe harbor, and
- the federal poverty line safe harbor.
Sleeper Sewell: Are employers required to use these safe harbors? Can they use different safe harbors for different employee? How do they each work?
Marathas: These safe harbors are all optional. An employer can use one or more of the safe harbors for all of its employees or for any reasonable category of employees, as long as it does so on a uniform and consistent basis for all employees in a category.
The Form W-2 Wages Safe Harbor generally is based on the amount of wages paid to the employee that are reported in Box 1 of that employee’s Form W-2. Coverage is affordable under the W-2 Safe Harbor if the employee’s cost for individual coverage does not exceed 9.5% of his Box 1 W-2 wages for the current year. Remember that this is gross income reduced by pre-tax payments for health insurance and pre-tax contributions to retirement plans, cafeteria plans and similar arrangements, so the number might be lower than an employer might anticipate.
The Rate of Pay Safe Harbor generally is based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee, if the rate of pay is decreased (but not if the rate of pay is increased). Using the Rate of Pay Safe Harbor, the employer determines whether the monthly cost of individual coverage for the lowest cost minimum value plan exceeds 9.5% of the employee’s hourly rate multiplied by 130.
The Federal Poverty Line Safe Harbor generally treats coverage as affordable if the employee contribution for individual coverage at the lowest cost plan reimbursing at a 60% minimum value for the year does not exceed 9.5% of the federal poverty line for a single individual for the applicable calendar year.
Sleeper Sewell: How does an employer know if a plan reimburses at a level of at least 60% value?
Marathas: A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan. The Department of Health and Human Services (HHS) and the IRS have produced a minimum value calculator. By entering certain information about the plan, such as deductibles and co-pays, into the calculator employers can get a determination as to whether the plan provides minimum value.