Readers of our February 10, 2014 Alert know that the employer “play-or-pay” mandate, which last year was postponed until January 1, 2015, was further postponed for some employers. Those readers also know that the Internal Revenue Service’s final regulations contained a number of other important modifications, many of which will be helpful to “applicable large employers” subject to the play-or-pay mandate.
On February 20, 2014, the IRS and the Departments of Labor and Health & Human Services jointly issued both proposed and final regulations regarding the 90-day cap on medical plan waiting periods. These, too, contained some generally helpful rules. This Alert will outline some of the modifications in the new regulations. The items covered in this Alert fall into these six categories (each of which is discussed below):
- Rules that may postpone the January 1, 2015 effective date of the play-or-pay
mandate for certain applicable large employers;
- Rules that relax the play-or-pay mandate during the first year the mandate applies to
an applicable large employer;
- Rules for identifying “full-time” employees, who might trigger a penalty for applicable
large employers who do not offer “affordable, minimum essential” coverage;
- Rules defining an offer of coverage that may prevent imposition of a penalty;
- Rules that determine whether coverage is affordable; and
- Rules that implement the 90-day cap on waiting periods.
The Play-or-Pay Mandate – A Brief Review
Applicable large employers (those with at least 50 full-time-equivalent employees (FTE)
during the prior calendar year) may be subject to either of the following two penalties:
- An “inadequate-offer” penalty of $166.67 per month for each full-time employee
(after the first 30) if the employer fails to offer minimum essential health coverage to
at least 95% of its full-time employees and their dependents and at least one such
employee buys insurance from a state health insurance exchange and qualifies for a
federal subsidy for the purchase.
- An “unaffordable-coverage” penalty of $250 per month for each full-time employee
who buys insurance from a state health insurance exchange and qualifies for a
federal subsidy if the employer did not offer the employee coverage that is affordable
and provides “minimum value.”
The inadequate-offer penalty will be greater in most cases, because it is based on all of the employer’s full-time employees (minus 30), regardless of how many employees are offered or receive health coverage from the employer. The unaffordable-coverage penalty, by contrast, applies only to the specific full-time employees who buy federally-subsidized coverage from a state health insurance exchange.
Possible Postponement of Play-or-Pay Mandate
As noted in our February 10 Alert, for applicable large employers with fewer than 100 FTEs,
the play-or-pay mandate was postponed until January 1, 2016. The following rules also
apply to these relatively smaller “large” employers:
- To determine whether they have fewer than 100 FTEs for 2015 (or whether they are applicable large employers at all), employers may count their employers during a six-consecutive-month period in 2014, rather than the full year.
- If the health plan of such a smaller “large” employer operates on a fiscal year, rather than the calendar year, the employer may not be subject to a penalty due to lack of affordable coverage before the first day of the plan year beginning in 2016, rather than January 1, 2016, depending upon what coverage the employer offered as of February 9, 2014 and whether it expands its coverage by the first day of the 2016 plan year. There is a new transition rule for employers who covered a “significant percentage” of their full-time employees as of February 9, 2014.
In fact, the transition rule for fiscal-year plans noted above applies to all applicable large employers. So, even an employer subject to the play-or-pay mandate in 2015 may not be subject to a penalty before the first day of the plan year beginning in 2015, rather than January 1, 2015, depending upon the coverage the employer offered as of February 9, 2014 and whether it expands its coverage by the first day of the 2015 plan year.
Relaxation of Play-or-Pay Mandate for First Year It Applies to an Employer
The final regulations contain provisions that may make it easier for applicable large employers to satisfy the play-or-pay mandate for the first year the mandate applies.
- Employers with 100+ FTEs may avoid the inadequate-offer penalty for 2015 if they offer minimum essential coverage to at least 70% (not 95%) of their full-time employees. But the unaffordable-coverage penalty still may apply for 2015 with respect to non-covered full-time employees.
- Employers with 100+ FTEs also may not be subject to the inadequate-offer penalty for 2015 just for failing to offer minimum essential coverage to employees’ dependents, if they did not offer such coverage to those dependents during the 2013 or 2014 plan years.
- If an employer with 100+ FTEs is liable for an inadequate-offer penalty for its 2015 plan year, that penalty is based on all of the employer’s full-time employees minus the first 80 (not 30) such employees (but the maximum unaffordable-coverage penalty equals the inadequate-offer penalty with no subtraction of any of the employer’s full-time employees).
- For the first year that an employer is an applicable large employer, whether that is 2015 or some later year, and regardless of whether the plan year is the calendar year, no penalty will be triggered by previously uncovered full-time employees if the employer provides affordable, minimum essential coverage to those employees by April 1, not January 1, of that first year as an applicable large employer.
Identifying Full-Time Employees and Dependents
Whether an applicable large employer may be subject to a play-or-pay penalty generally depends on whether it offers affordable, minimum essential coverage to its full-time employees (those that earn at least 130 hours of service per month) and their dependents. So, to avoid or calculate a potential penalty, an applicable large employer must identify its full-time employees.
The employer begins by identifying those employees it “reasonably expects” to be full-time based on all the facts and circumstances, and particularly the following factors:
- Whether the employee is replacing a full-time employee;
- Whether employees in comparable positions are full-time; and
- Whether the job was advertised or otherwise communicated to the new hire or documented as full-time.
A newly-hired employee that the employer reasonably expects to be full-time will not trigger a penalty if the employee and his or her dependents are offered affordable, minimum essential coverage starting by the first day of the month immediately following the employee’s first three full calendar months of employment.
For employees that an applicable large employer does not reasonably expect to be full-time, the employer may determine their full-time status using either a monthly or a “look-back” measurement method.
- The monthly measurement method treats an employee as full-time if the employee earned at least 130 hours of service in the current month. Although an employee who does earn 130 hours will not trigger a penalty if the employer first enrolls the employee in affordable, minimum essential coverage by the start of the fourth month after the employee has become eligible, this method still seems impractical, unless the employer has decided that the employee will or will not be entitled to coverage for a month regardless of the employee’s hours in the month. Otherwise, the employer and employee (and insurer) will not know at the start of the month whether the employee will be eligible for coverage for the month.
- The look-back measurement method measures the employee’s hours over a measurement period of 3-12 months, set by the employer. The employee’s status as a full-time employee, or not, based on that measurement period, then is generally fixed for the immediately following “stability period,” which is the longer of six months or the duration of the employer’s measurement period. In general, the same complex rules that were in the proposed regulations regarding measurement periods, “administrative periods” and stability periods are retained in the final regulations.
The final regulations contain some specific rules relating to the full-time status of certain types of employees.
- “Seasonal” employees who customarily work not more than six months per year generally will not be considered full-time for purposes of penalties. (This is different from the four-month rule used to determine whether seasonal employees cause an employer to be an applicable large employer.) Temporary or project employees are not necessarily seasonal employees.
- Hours worked as a “bona fide volunteer” for a governmental or tax-exempt employer are not hours of service, even if some nominal taxable compensation (not well defined) is paid to the volunteer. Similarly, students’ federally-subsidized work-study hours are not hours of service.
- There is a new safe harbor for adjunct faculty, which credits them with at least 2¼ hours of service for every hour of teaching and one additional hour for each other hour of required service (such as required office hours or meeting attendance).
- There is no safe harbor for on-call hours; the final rule requires employers to credit on-call hours reasonably. It would not be reasonable to fail to credit hours that are payable by the employer or for which the employee’s activities while on-call are restricted so as to prevent the employee from using the time for the employee’s own purposes.
The rules become complicated when employees change status (such as from full-time to part-time, or vice versa).
- When an employee who is considered full-time changes to part-time, he or she might need to continue to be considered full-time, if he or she is in a stability period under the look-back measurement method. Alternately, the employer might switch to the monthly measurement method for that employee, which might permit the employer to treat the employee as part-time, starting with the fourth calendar month following the employee’s switch to part-time status.
- When a part-time employee changes to full-time, the employer generally must treat the employee as full-time (either offer coverage or risk a penalty), starting with the fourth calendar month following the employee’s switch to full-time status.
- When an employee’s employment terminates, or the employee otherwise ceases earning hours of service, and the employee is rehired or resumes performing services, the proposed rules permitted the employer to treat the employee as a new hire if the employee was absent at least 26 weeks, or, if shorter, a period of time equal to the employee’s immediately preceding term of employment with the employer (but not less than four weeks). The final regulation shortens this break-in-service period to 13 weeks (except for educational organizations, which remain subject to the 26-week rule), making it easier for the employer to require rehired employees to requalify for health plan coverage without risking a penalty.
As noted above, applicable large employers may be subject to a penalty after 2015 if they do not offer minimum essential coverage to full-time employees and their dependents. The final rule confirms that “dependents” for this purpose don’t include the employee’s spouse or the employee’s stepchildren or foster children.
Adequate Offers of Coverage
An applicable large employer is not subject to a play-or-pay penalty if it makes an adequate offer of affordable, minimum essential coverage to its full-time employees. The final rules clarify what constitutes an adequate offer.
- In general, an adequate offer requires that the employee be given an effective opportunity to accept or decline coverage, but coverage may be mandatory if it provides minimum value and costs the employee no more for employee-only coverage than 9.5% of the federal poverty level for an individual. (For 2014, the poverty level for the continental U.S. is $11,670, so the maximum employee contribution for this purpose would be $92.38 per month.)
- An “evergreen” election (which remains in effect from year to year until affirmatively canceled) is permissible.
- An adequate offer may be made on behalf of an employer. An offer made on behalf of an employer by a professional staffing firm under the staffing firm’s medical plan is an adequate offer if the employer pays a fee to the staffing firm that is higher than the fee the employer would have paid absent the coverage provided by the staffing firm’s medical plan.
Affordability Safe Harbors
Technically, coverage is affordable if the employee contribution for employee-only coverage is not more than 9.5% of the employee’s household income. Since employers generally will not know their employees’ household incomes, they may measure affordability using any one of the following safe harbors:
- 9.5% of the employee’s W-2 taxable income;
- 9.5% of the employee’s base rate of pay times 130 hours per month; or
- 9.5% of the federal poverty level for an individual.
The final rules clarified these safe harbors in the following ways.
- An employer may use different safe harbors for different reasonable categories of employees, as long as it treats all employees in each category consistently.
- Employers may use the rate-of-pay safe harbor even if the employee’s rate of pay is reduced midyear, in which case the rate of pay is determined monthly, based on the lowest rate of pay in effect during the month.
- Employers may use the federal poverty level in effect six months before the start of the plan year, to permit advance determinations of the employee contribution.
90-Day Cap on Waiting Periods
All medical plans, and not just applicable large employers’ plans, are prohibited from imposing waiting periods longer than 90 calendar days (which may be less than three calendar months). This prohibition took effect for plan years beginning in 2014, and the penalty for noncompliance may be $100 per person per day of noncompliance.
The cap on waiting periods does not prohibit other eligibility conditions, unrelated to the passage of time, and the 90-day waiting period need not start until such other eligibility conditions are satisfied (though such a provision could subject an applicable large employer to a penalty under the play-or-pay rules.)
- Plans may impose cumulative-hours requirements of up to 1,200 hours of service for eligibility and start a waiting period of up to 90 days upon satisfaction of the cumulative-hours requirement.
- Plans that limit participation to full-time employees may subject variable-hour employees to a measurement period of up to 12 months, and impose a waiting period of up to 90 days upon completion of the measurement period, but a full-time employee must be permitted to enroll in the plan not later than the first day of the second month starting on or after the employee’s one-year anniversary.
The new final and proposed regulations clarify and revise the existing rules as follows:
- As long as coverage could begin by the end of the 90-day waiting period, an employer will be in compliance even if the employee’s actual enrollment is delayed due to the employee’s delay (for example, in returning required forms).
- A rehired employee, or an employee transferred back into a position eligible for medical coverage, may be subject to a new waiting period (subject to the play-or-pay rules, if applicable), as long as the prior termination and rehire or transfers were not a subterfuge to circumvent the 90-day cap on waiting periods.
- The proposed regulations permit employers to impose an orientation period, which an employee must successfully complete before starting a waiting period of up to 90 days. The orientation period cannot be longer than roughly 30 days. (The orientation period must end not later than the corresponding date in the following month, minus one day).
Employers that are or might be applicable large employers will want to go back over their planning for the play-or-pay rules in light of the new final regulations. All employers will want to revisit their options regarding compliance with the 90-day cap on waiting periods.
As with most aspects of health care reform, the rules are complex and detailed, and special rules and limitations apply to certain types of employers and employees. Employers will want to consult their advisors for counsel tailored to their situations. As ever, please feel free to contact us at any time about health care reform or other labor, employment, or benefits issues.