Health Reform Update: Proposed Regulations on Employer Shared Responsibility

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1 May 24, 2013 Action Required Health Reform Update: Proposed Regulations on Employer Shared Responsibility In January, the Internal Revenue Service (IRS) issued proposed regulations and a Frequently Asked Questions page on the Affordable Care Act's (Act) Employer Shared responsibility provisions. Beginning in 2014, the Act requires applicable large employers to either offer health coverage to their full-time employees and dependents, or pay a penalty, called Shared Responsibility Payments. The penalty will apply if at least one full-time employee receives a premium tax credit to purchase coverage through an Exchange Marketplace. The regulations build upon prior guidance (referenced in prior MHBT health reform updates in 2011 and 2012) and may be relied upon by employers until final regulation is issued. The regulations also include new guidance for employers. Applicable Large Employer Status Applicable large employers are those who average 50 or more full-time equivalent employees on business days in the prior calendar year. Solely for purposes of this determination, part-time employees are to be included in the calculation and their fulltime equivalency will be determined based upon average hours worked. A full-time employee is one who averages 30 hours or more of service per week or 130 hours of service per month. Employees who work less than 30 hours will have their hours of service aggregated and divided by 120 hours to determine the number of full-time equivalent employees the employer has for that month. This number is to be added to the number of full-time employees to determine the total number of full-time equivalent employees for that month. The employer should perform this calculation for each month of the calendar year and average the total. Fractional results are to be rounded down to the nearest whole number. If the average is 50 or greater, the employer is an applicable large employer for the following calendar year. If the average is less than 50, the employer is not an applicable large employer for the following calendar year. v2 Dallas Fort Worth Austin Lubbock 1

2 An hour of service is one for which an employee is paid or entitled to payment for duties performed for the employer. Paid vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military leave or leaves of absence qualify as hours of service. All hours of service must be taken into account per the regulations. Employers who do not track employee s hours may calculate hours of service by other means: Beginning to count the actual hours of service; Credit an employee with eight hours of service for every day the employee works at least one hour (days worked method); or Credit an employee with forty hours of service for every week the employee works at least one hour (weeks worked method). The proposed regulations employ the common law standard to define employee and employer. This standard indicates an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services with respect to the result to be accomplished, along with the details and means by which it is done. Employers should not include employees receiving foreign source income (generally, employees working outside the United States), sole proprietors, partners in a partnership and 2 percent or greater shareholders of an S-corporation in this calculation. In addition, leased employees are not considered employees of the service recipient (generally, the employer who is leasing the employee). Seasonal employees are to be included in the calculation, but if the employer is deemed an applicable large employer solely because of its seasonal employees, the employer is not an applicable large employer. For purposes of this calculation only, a seasonal employee is one who works no more than four calendar months or 120 days per calendar year. The work need not be performed on consecutive months or days. Companies under common ownership or affiliated service groups must aggregate their employees to determine applicable large employer status. All employees of controlled group businesses or affiliated service groups, whether they are separate lines of business or have separate tax identification numbers, must be aggregated to determine if the combined total averages 50 or more full-time equivalent employees. If yes, each member employer of the group is an applicable large employer even though that member employer may actually have less than 50 full-time equivalent employees. If no, each member employer of the group is not an applicable large employer. A special one-time transitional rule is proposed for employers who may be close to the applicable large employer threshold. These employers may use any six consecutive months of 2013 to determine applicable large employer status. ACTION ITEM: Each employer must determine applicable large employer status as of 2014 using employee hours of service in Employers with more than 50 full-time employees are automatically an applicable large employer and may skip this process. v2 Dallas Fort Worth Austin Lubbock 2

3 Optional Safe Harbor for Determining Full-Time Employee Status Employers may use an optional safe harbor measurement look-back period of up to twelve months, beginning in 2012 or 2013 to determine an employee s status for purposes of knowing which employees will be eligible for health insurance in Employees who are certain to work at least 30 hours per week, as well as those who are reasonably expected to average at least 30 hours per week, are not measured to determine employee status as they are already deemed full-time employees. An employer may use an alternate full-time standard for employees of 130 hours per month. Variable hour employees (employees whose work hours cannot reasonably be determined to average at least 30 hours per week) are the only classification of employees for which an employer may use the optional safe harbor. The optional safe harbor is detailed in the MHBT Health Reform Update dated September 18, The proposed regulations add guidance for employers to determine how to treat employees who are rehired or return from leave. Employees who return to work after at least 26 weeks of no hours of service may be treated as new employees for purposes of determining full-time status. Employers may use the rule of parity for employees with less than a 26 week absence. The rule of parity states an employee is treated as a new employee if the period of time during which the employee is credited with no hours of service is at least four weeks and is longer than the period of time over which the employee was employed immediately prior to the period of no service. Rehired employees or those returning from a leave of absence must be treated as continuing employees and the measurement and stability periods must continue as if the employee did not have a break in employment status. The proposed regulations include rules for special unpaid leave for variable hour employees due to the Family and Medical Leave Act (FMLA), the Uniformed Services Employment and Reemployment Rights Act (USERRA) or jury duty leave. An employer may exclude the period of time the variable hour employee is out for this special unpaid leave as long as the employee is treated as a continuing employee and is not terminated and rehired. The employer must either average the hours of service during the measurement period excluding the special unpaid leave time or credit the number of hours per week during the special unpaid leave equal to the average number of hours per week when the employee was working. Employees who experience a change in employment status are also addressed in the proposed regulation. New or seasonal variable hour employees (those who have not been employed for at least one standard measurement period) that are changed to fulltime status during the initial measurement period (that starts on date of hire or 1 st of the month following date of hire) must be offered health insurance coverage as of the earlier of: the 1 st day of the fourth month following the change to full-time status, or the 1 st day of the month following the end of the initial measurement period (if the employee averaged 30 or more hours of service per week). v2 Dallas Fort Worth Austin Lubbock 3

4 The proposed regulations offer transitional relief for the 2014 stability period that allows employers to use a one-time short measurement period in 2013 due to time constraints with the issuance of the regulation. The short measurement period must be at least 6 months but less than 12 months; begin no later than July 1, 2013; and end no earlier than 90 days before the 1 st day of the plan year beginning on or after January 1, ACTION ITEM: Review the MHBT Health Reform Update, September 18, Determine if the employer has variable hour employees. Begin measuring employees in a timely manner to know who is a full-time employee for Applicable Large Employer Penalties Applicable large employers may be subject to penalties, called Employer Shared Responsibility Payments, as of January 1, 2014 if not offering health insurance to fulltime employees and their dependents. The proposed regulations offer transitional relief from the employer penalty for noncalendar year plans (February December) that were in effect as of December 27, Plans that qualify for the transitional relief must have offered coverage to at least 1/3 of their total employees at the most recent open enrollment (or any date between October 31, 2012 December 31, 2012) or cover at least 1/4 of their total employees. The employer must also offer minimum value, affordable coverage as of the 1 st day of the 2014 plan year to qualify for the transitional relief. Full-time employees are those who average at least 30 hours per week or 130 hours per month. Full-time equivalent employees, also known as part-time employees, will not cause an employer a federal penalty if they are not offered health insurance. The Act imposes two possible penalties on applicable large employers. Employers who are not deemed applicable large employers are not subject to the Employer Shared Responsibility Payments. Members of a controlled group or affiliated service group may be subject to the penalties. The aggregation rules to determine applicable large employer status do not apply for penalty purposes. Each member employer should only concern itself with their own offering of health insurance to their employees. Member employers in compliance with the provisions below will not be subject to the penalty, even if another member employer of the group is subject to a penalty. Member employers not in compliance with the provisions below will only pay the penalty based on the full-time employees of that member employer, not the aggregated group of full-time employees in the controlled group or affiliated service group. The proposed rules state the 30 employee reduction (in the $2000 penalty) is divided among all the member employers and that each member employer may not subtract 30 employees on their own. The employer shared responsibility payments are considered excise taxes. v2 Dallas Fort Worth Austin Lubbock 4

5 $2000 annual penalty: The penalty is determined on a monthly basis, $ for each month the employer does not annually offer minimum essential coverage health insurance to at least 95% of its full-time employees and dependent children to age 26. If the employer violates this provision of not offering coverage and at least 1 full-time employee qualifies for a premium tax credit in the Exchange Marketplace, the penalty is paid on every full-time employee, less 30. Minimum essential coverage applies to all employer-sponsored fully insured coverage and most employer-sponsored partially self-funded and self-funded coverage. Further guidance is pending to determine minimum essential coverage for some employersponsored partially self-funded and self-funded coverage. Dependent children are proposed to include an employee s children, including natural children, stepchildren, adopted children or foster children under the age of 26. It is proposed that a dependent does not include a spouse. The proposed regulations allow a plan that does not currently offer dependent coverage to take steps in 2014 to offer dependent coverage. No further guidance was issued to define take steps. $3000 annual penalty: The penalty is determined on a monthly basis, $250 for each month the employer does not annually offer minimum value, affordable health insurance coverage to full-time employees. If the employer offers coverage but violates the minimum value or affordability provisions, the penalty is paid solely on the number of full-time employees that qualify for a premium tax credit in the Exchange Marketplace. Minimum Value is defined by the generosity of the plan s benefits. Minimum value is based on the plan deductible, coinsurance, copayments and out of pocket maximum and must be at least 60%. It is not based on the monthly premium, cost of coverage or employee payroll deduction. The IRS released a minimum value calculator in late February to help employers comply with this provision. Additional tools will be released in the future to help plans that may have special plan designs that do not conform to the calculator. Affordability is based on the employee only payroll deduction for the lowest cost minimum value plan offered by the employer. The total monthly premium, cost of coverage or payroll deductions for dependent contributions are not relevant for this provision. In May 2013, the IRS released proposed regulations regarding affordability of employer sponsored plans that also have a wellness plan. The regulations propose an employer may use the non-tobacco or nondiscriminatory tobacco cessation program rate (the lower rate) when determining affordability. While a wellness plan (not a nondiscriminatory tobacco cessation plan) rate may not be considered for employer affordably purposes, there is limited affordability relief for employers with wellness plans (not tobacco cessation programs) in place as of May 3, Such employers may use the wellness plan rate (the lower rate) when determining affordability for plan years beginning before January 1, 2015 as long as the v2 Dallas Fort Worth Austin Lubbock 5

6 wellness plan terms, including the reward amount, in place as of May 3, 2013 are not altered. Additionally, this relief applies to any employee in a class of employees eligible for the wellness program as of May 3, 2013, even if hired after that date. Affordability is defined as 9.5% of an employee s household income; however, the IRS has issued 3 proposed affordability safe harbors for employers in lieu of requiring employers to ask household income for their employees. W2 Safe Harbor: The IRS has suggested for many months that W2 (box 1) wages be allowed to be used by an employer in lieu of household income for affordability purposes. The proposed regulations confirm the W2 safe harbor. Employers wishing to use this safe harbor must offer minimum value coverage to their full-time employees and set the employee only payroll deduction at no more than 9.5% of any full-time employee s W2 (box 1) wages. The proposed regulations state this safe harbor is to be used at the end of the calendar year for which it applies (i.e., at the end of 2014 for determining affordability in 2014). An employer may use this safe harbor prospectively by setting the employee only payroll deduction at no more than 9.5% of W2 wages and may adjust compensation in a pay period if the payroll deduction exceeds 9.5%. The proposed regulation offers a special prorating rule for employees who have less than 12 months of W2 wages. Rate of Pay Safe Harbor: The rate of pay safe harbor is an additional affordability option for employers based on feedback received by the IRS. Employers who use this safe harbor must offer minimum value coverage and multiply an employee s hourly rate of pay by 130 hours per month (regardless of hours worked) to determine monthly wages. The monthly wage is then multiplied by 9.5% to determine the employee only payroll deduction. Salaried employees will have their monthly salary multiplied by 9.5% to determine the employee only payroll deduction. Employers may only use the rate of pay safe harbor if not reducing employee wages during the year. Federal Poverty Level Safe Harbor: Employers may also rely on an additional affordability safe harbor based on the most recently published federal poverty level guidelines (as of the 1 st day of the plan year). The 2013 federal poverty level guidelines were recently released; $11,490 is the single person federal poverty level. An employer may use this guideline by dividing by the number of payroll deductions per year then multiplied by 9.5% to determine the employee only payroll deduction as long as minimum value coverage is offered. These employer safe harbors do not affect an employee s ability to possibly qualify for a premium tax credit in the Exchange Marketplace. Individuals use different criteria to possibly qualify for Exchange Marketplace premium tax credits and will not cause the employer a penalty, (known as Employer Shared Responsibility Payments), if the employer is offering minimum value, affordable coverage based on one of the above safe harbors. v2 Dallas Fort Worth Austin Lubbock 6

7 ACTION ITEM: Applicable large employers should prepare to offer at least 1 minimum value, affordable plan to all full-time employees and dependents no later than the 1 st day of the 2014 plan year. Plans with nondiscriminatory tobacco cessation programs may use the lower rate to determine affordability. Plans with a wellness program in place as of May 3, 2013 have limited availability to use the lower wellness plan rate and should consult with their MHBT team to determine affordability. Plans that do not qualify for the transitional penalty relief must be ready to offer at least 1 minimum value, affordable plan to all full-time employees and dependents as of January 1, Plans with closed enrollment must prepare to have an annual open enrollment as of Optional Transition Rule for Cafeteria Plan Elections The proposed regulations allow applicable large employer cafeteria plans to allow employees to change elections during the 2013 plan year without a change of status event (marriage, birth, adoption, etc). Employers may allow one or both of the following options but are not required to do either. Employees who elected medical coverage with a pre-tax salary reduction as of the 1 st day of the 2013 plan year may prospectively change or revoke the election during the 2013 plan year without a change in status. Employees who did not elect medical coverage with a pre-tax salary reduction as of the deadline to enroll for the 2013 plan year may prospectively elect medical coverage with a pre-tax salary reduction without a change in status during the 2013 plan year. These changes are allowed only once during the 2013 plan year and only for medical insurance. ACTION ITEM: Consider adopting these changes allowing employees to add, change or drop medical insurance during the 2013 plan year so they may try to purchase health insurance in the Exchange Marketplace. If adopting these changes, communicate them to employees and amend the plan document. The cafeteria plan document must be amended by December 31, 2014, retroactive to the 1 st day of the 2013 plan year. Next Steps Review and consider implementing the action items noted throughout the update. Determine applicable large employer status to prepare for the 2014 requirements. If you have a variable hour employees, begin measuring them no later than 2013 to be ready to offer coverage in Non-calendar year plans should determine if they qualify for the transitional relief from the employer penalty for a few months in Prepare to offer minimum value, affordable coverage to all full-time employees and dependent children to age 26 no later than the 1 st day of the 2014 plan year. Watch for future guidance and final regulations on these and other provisions. This update is based on the known provisions of the Affordable Care Act. Any inclusion of incorrect data or omission of data is unintentional. This is not to be construed as legal or tax advice. v2 Dallas Fort Worth Austin Lubbock 7