1 Volume 36 | Issue 11 | January 30, 2013 Guidance issued on employer shared responsibility requirements The shared responsibility requirements are one of the most significant provisions that employers need to address under the Affordable Care Act (ACA). Failure to satisfy these requirements could subject employers to significant penalties starting in 2014. The IRS has issued guidance describing the shared responsibility requirements and defined significant terms, like full-time employee. Pending the issuance of final regulations or other guidance, employers can rely on these proposed regulations now to strategize and prepare for compliance with the shared responsibility mandate. In this article: Background | Concept of full-time employee | Hours of Service | Determining large employer status | Identifying full-time employees | Transition relief | Shared responsibility in controlled groups | “Play or pay” shared responsibility requirement | “Play and pay” shared responsibility requirement | Non-calendar year plans — transition rules | Multi-employer plans | Conclusion Background Beginning in 2014, large employers (e.g., employers that employed on average at least 50 full-time employees on business days during the preceding calendar year) may be subject to one of two "shared responsibility" penalties: An employer that fails to offer minimum essential coverage (MEC) to its full-time employees and their dependents may be subject to a nondeductible "play or pay" penalty if any full-time employee enrolls in Exchange coverage and receives a premium tax credit or cost-sharing reduction. The maximum annual “play or pay” penalty is $2,000 for each full-time employee of the employer, disregarding the first 30 full- time employees. Employers that offer MEC to their full-time employees and their dependents may be subject to a nondeductible "play and pay” penalty of $3,000 for each full -time employee who enrolls in Exchange coverage and receives a premium tax credit or cost-sharing reduction because the employer coverage fails to provide minimum value or is unaffordable. Over the past two years, the IRS has issued four notices addressing the shared responsibility requirements. Using concepts expressed in this past guidance, on January 2, 2013, the IRS published proposed regulations on the employer shared responsibility requirements under ACA. The IRS issued additional guidance in Questions and
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Volume 36 | Issue 11 | January 30, 2013
Guidance issued on employer shared responsibility requirements
The shared responsibility requirements are one of the most significant provisions that employers
need to address under the Affordable Care Act (ACA). Failure to satisfy these requirements
could subject employers to significant penalties starting in 2014. The IRS has issued guidance
describing the shared responsibility requirements and defined significant terms, like full-time
employee. Pending the issuance of final regulations or other guidance, employers can rely on
these proposed regulations now to strategize and prepare for compliance with the shared
responsibility mandate.
In this article: Background | Concept of full-time employee | Hours of Service | Determining large employer status | Identifying full-time
employees | Transition relief | Shared responsibility in controlled groups | “Play or pay” shared responsibility requirement | “Play and pay”
proposed regulations permit employers to use the beginning and end of payroll periods as the beginning and end of
the measurement period provided the payroll periods are one week, two weeks, or semi-monthly in duration.
If the employer determines that an employee averaged at least 30 hours of service over the standard measurement
period, the employee must be treated as a full-time employee over a subsequent “stability period.” The employer
has the option of including an “administrative period” of up to 90 days between the standard measurement period
and the stability period. This administrative period would be used by the employer to determine the employee’s full-
time status and to offer health coverage to those determined to be full-time. These periods are illustrated below:
Look-back method for ongoing employees
Administrative Period
Up to 90 Days
Period used to determine employee
eligibility and enroll employees.
Standard Measurement Period
3 to 12 Calendar Month Period
Period used to determine employee status
as full-time employee. Employee considered
full-time if averaged at least 30 hours per
week during this period.
Stability Period
Period during which employee status
determined in the standard measurement
period is fixed regardless of hours worked
during the stability period.
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Volume 36 | Issue 11 | January 30, 2013
Determined to be a full-time employee. An employee who is determined to be a full-time employee during a
standard measurement period must be treated as a full-time employee during the subsequent stability period,
regardless of the employee’s actual hours of service during the stability period. In this case, the duration of the
stability period must be the greater of six months or the length of the standard measurement period.
Determined to be a non-full-time employee. An employee who is determined not to be a full-time employee during
the standard measurement period may be treated as a non-full-time employee during the subsequent stability
period, regardless of the employee’s actual hours of service during the stability period. In this case, the duration of
the stability period cannot exceed the length of the standard measurement period.
The standard measurement period and stability period used by an employer must be uniform for all ongoing
employees. However, an employer can use different measurement, stability, and administrative periods for the
following categories of employees:
Each group of collectively bargained employees covered by a separate bargaining agreement
Collectively bargained and non-collectively bargained employees
Salaried and hourly employees
Employees whose primary places of employment are in different states
An employer may change its standard measurement and stability periods each year but cannot make a change for
a given year once the standard measurement period has begun.
Buck Comment. Employers may want to consider coordinating the ongoing employee administrative and
stability periods with the plan year for the health plan. The example below illustrates this approach for a
2015 calendar year plan. The standard measurement period would be the 12-month period from October
15, 2013 through October 14, 2014. The administrative period would be coordinated with the annual open
enrollment period from October 14, 2014, through December 31, 2014. The resulting stability period would
be the 2015 calendar year.
Look-back method example for ongoing employees
Standard Measurement Period
October 15, 2013 to October 14, 2014
Stability Period
January 1, 2015 to December 31, 2015
Administrative Period
October 14, 2014 to December 31, 2014
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Volume 36 | Issue 11 | January 30, 2013
New full-time employees If a new employee is reasonably expected to be employed on average at least 30 hours a week, then coverage
must be offered within three months of his or her start date (the date the employee is first required to be credited
with an hour of service with the employer).
New variable hour or seasonal employees A new employee is considered a “variable hour employee” if, at the start date, it cannot be determined that the
employee is reasonably expected to be employed on average at least 30 hours per week. The proposed
regulations do not define “seasonal employee,” and employers are permitted to use a reasonable good faith
interpretation of the term through 2014. The preamble to the proposed regulations specifies that educational
organizations may not treat employees who work only during the active portions of the academic year as seasonal
employees.
The method of determining the full-time employee status of new variable hour employees and seasonal employees
is similar in concept to that used for ongoing employees, but it is more complicated. An employer may use an “initial
measurement period” of between three and 12 months that begins on any date between the employee’s start date
and the first day of the calendar month following the start date. An administrative period of up to 90 days is also
allowed. But, the combination of the initial measurement period and the administrative period “may not extend
beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s
start date.”
Determined to be a full-time employee. An employer must treat an employee who is determined to be a full-time
employee during the initial measurement period as a full-time employee during the subsequent stability period. In
this case, the duration of the stability period must be the same length as the stability period for ongoing employees.
Determined to be a non-full-time employee. If the employee is determined to be a non-full-time employee during the
initial measurement period, then the employee would be treated as a non-full-time employee during the subsequent
stability period. In this case, the stability period can be no more than one month longer than the initial measurement
period.
New employee — variable hour employees
Administrative Period
Up to 90 Days
Standard
Measurement Period
3 to 12 calendar month
period
Stability
Period
Waiting Period
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Volume 36 | Issue 11 | January 30, 2013
After a new variable hour or seasonal employee has been employed by an employer for a “standard measurement
period,” the employee is considered to be an ongoing employee and must have his or her hours measured on the
same basis as other ongoing employees.
Other employee situations The proposed regulations also address other special situations:
A new variable hour employee or seasonal employee who has a change in employment status, such that
the individual is now reasonably expected to work 30 or more hours of service per week during the initial
measurement period, must be treated as a full-time employee on the first day of the fourth month following
the change in status. However, a change in employment status of an ongoing employee does not change
the employee’s status as a full-time or non-full-time employee. (In both of these situations, an employer is
always allowed to change the employee’s status to full-time.)
Special rules are provided for determining the status of new variable hour employees who are rehired after
a termination of employment or return to service after other absences.
New employees who are expected to be employed on average at 30 hours or more per week for a short
term of employment are subject to the same rules described above. Similarly, there are no special rules for
employees hired into high-turnover positions.
Identifying full-time employees — transition relief for 2014 stability periods
In order to use the look-back measurement method for determining full-time employees for 2014, employers will
need to start their measurement periods in 2013. Employers who want to use a 12-month measurement period with
a corresponding 12-month stabilization period will face time constraints in doing so. Therefore, solely for the
purposes of stability periods beginning in 2014, employers can use a transition measurement period that meets
these conditions:
Is shorter than 12 months, but no less than six months
Begins no later than July 1, 2013
Ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014
Buck Comment. This is significant transition relief of which employers who want to use a 12-month
measurement and stability period will likely want to take advantage for 2014. However, employers still need
to implement procedures quickly for collecting data on employee work hours, if they are not already
tracked.
For example, an employer with a calendar year plan could use a six-month measurement period starting April 15,
2013, with an administrative period starting October 14, 2013, as shown below:
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Volume 36 | Issue 11 | January 30, 2013
2014 transition relief — look-back method example
Separate assessment of shared responsibility penalties within controlled group
While determination of large employer status is made on a controlled group basis, the assessment of the shared
responsibility penalties will be determined on a member-by-member basis within the controlled group. Therefore,
shared responsibility penalties will be “computed and assessed separately for each applicable large employer,
taking into account that member’s offer of coverage and based on that member’s number of full-time employees.”
Buck Comment. The application of the shared responsibility requirements separately to each employer
within a controlled group is welcome news for employers in a controlled group. This guidance will enable
those affected employers to develop compliance strategies separately for each employer in the controlled
group. However, it is important to note that the nondiscrimination requirements under Section 105(h) for
self-funded plans still apply, and ACA also includes similar nondiscrimination requirements for insured
plans. The nondiscrimination rules under 105(h) appear to limit an employer’s ability to offer coverage to
some members of a controlled group, while not offering coverage to other members, unless done on a
nondiscriminatory basis.
The guidance does not permit the application of the shared responsibility requirements independently to
separate lines of business within an employer.
Within a controlled group, only a single 30 full-time employee reduction in determining the penalty is allowed. It
must be prorated among the employers in the controlled group to prevent smaller members of the group from
avoiding the penalty altogether.
Measurement Period
April 15, 2013 to October 14, 2013
Stability Period
January 1, 2014 to December 31, 2014
Administrative Period
October 14, 2013 to December 31, 2013
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Volume 36 | Issue 11 | January 30, 2013
“Play or pay” shared responsibility requirement
A large employer that fails to offer minimum essential coverage (MEC)
to all “full-time employees (and their dependents)” may be subject to the
"play or pay" $2,000 annual penalty beginning in 2014. (The penalty is
indexed in future years.) The guidance confirms that employers must
also offer dependents the opportunity to enroll in MEC or be subject to
this penalty. Dependents include the employee’s children under age 26
as defined under Section 152(f)(1), but importantly does not include the
employee’s spouse. The definition of child includes son, daughter,
stepson, stepdaughter, adopted child, child placed for adoption, and
foster child.
Buck Comment. The definition of child is broader than that used by some employers and may require an
expanded plan definition to avoid the penalty. For employers that do not currently offer dependent
coverage, or do not cover all the required categories of child, such as foster children, the regulations
provide transition relief. If an employer takes steps during 2014 toward offering dependent coverage, the
penalty will not apply for failure to offer coverage to dependents for that plan year.
The proposed regulations alleviate employers’ concerns that they might be subject to a penalty based on their
entire full-time population if they inadvertently failed to offer MEC to some of their full-time employees. If an
employer offers MEC to all but 5% of its full-time employees (or, if greater, five employees) it will be treated as
offering coverage to its full-time employees. However, to be considered offered to an employee, it must also be
offered to the employee’s dependents. Importantly, this relief applies “regardless of whether the failure to offer was
inadvertent.”
Buck Comment. The requirement to offer coverage to 95% of the full-time employees, rather than 100%, is
welcome relief. And since the failure to offer coverage to up to 5% of the full-time employees does not need
to be inadvertent, employers can use this flexibility as part of their compliance strategy. However, it is
important to note that if the employer does not offer dependent coverage to more than 5% of its full-time
population, it may be subject to the “play or pay” penalty on its entire full-time population.
“Play and pay” shared responsibility requirement
A large employer that offers MEC to its full-time employees and their
dependents will potentially be subject to the "play and pay” $3,000
penalty in 2014 if at least one full-time employee enrolls in Exchange
coverage and qualifies for a premium tax credit or cost-sharing
reduction. (The penalty is indexed in future years.) This can occur
because:
The employer coverage is unaffordable, i.e., the required
employee contribution for employee-only coverage exceeds
9.5% of the employee's household income for the taxable year.
“Play or pay” penalty
Equal to the number of full-time
employees employed during the
year, multiplied by $2,000
“Play and pay” penalty
Equal to the number of full-time
employees who enroll in
Exchange coverage and receive
a premium tax credit, multiplied
by $3,000
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Volume 36 | Issue 11 | January 30, 2013
The employer coverage does not provide minimum value (i.e., the plan’s share of the total allowed costs is
less than 60% of the costs).
The employer offers coverage to at least 95%, but less than 100%, of its full-time employees, and one of
the full-time employees not offered coverage enrolls in Exchange coverage.
Buck Comment. Only one employer health option needs to satisfy the affordability and minimum value
requirements to avoid the penalty. The proposed regulations confirm that affordability for purposes of the
employer penalty will be based on the cost of employee-only coverage, and not the cost of family coverage.
Still not addressed in guidance is the treatment of wellness incentives and surcharges in determining
affordability. The guidance notes that the determination of affordability for purposes of the individual
premium tax credit based on the affordability of family coverage will be addressed in future guidance.
While ACA does not require that MEC provide minimum value or be affordable, guidance is required on what
employer-provided coverage will be considered MEC for purposes of the employer penalties. The proposed
regulations state that additional guidance will be provided in the future.
In Notice 2011-73 (see our September 20, 2011 For Your Information), the IRS outlined a proposed safe harbor
approach for determining affordability based on Form W-2 reporting for purposes of the employer “play and pay”
penalty and asked for other potential safe harbor approaches. Based on comments received, the proposed
regulations provide two additional safe harbor approaches that employers can use to determine affordability.
W-2 Safe Harbor – Affordability is based on the amount reported in Box 1 of the Form W-2 for the
employee. If the employee annual contribution for employee-only coverage does not exceed 9.5% of the
Form W-2 amount, the employer coverage would be deemed affordable. This determination would be made
at the end of the year. Adjusted W-2 amounts and employee contributions are used for employees who did
not work the entire year for the employer.
Rate of Pay Safe Harbor – Affordability is based on the rate of pay as of the beginning of the coverage
period (usually the first day of the plan year). For an hourly employee, the monthly wage equals the hourly
rate of pay times 130 hours (for a salaried employee, it is the monthly salary). If the employee’s monthly
contribution for employee-only coverage does not exceed 9.5% of the monthly wages, the employer
coverage would be affordable. Note that this safe harbor is not available if the employer reduces wages for
the applicable group during the year.
Federal Poverty Line Safe Harbor – Affordability is based on the federal poverty line (FPL) for a single
individual. If the employee contribution for self-only coverage does not exceed 9.5% of the FPL, the
employer coverage would be affordable for all employees. For example, the 2012 FPL for a single
individual is $11,170. Assuming this FPL applies in 2014, if the annual employee contribution for self-only
coverage is not greater than $1,061.15 (9.5% of the FPL), the employer coverage would be affordable.
The use of these safe harbors is optional. An employer can also choose to use a different safe harbor for any
reasonable category of employees, as long as the basis is uniform and consistent for all employees in a category. It
is also important to note that the safe harbors are only used for determining affordability for purposes of the
employer penalty and do not affect the employee’s eligibility for Exchange subsidies, which will still be based on the