April 1, 2013 Emplyer Shared Respnsibility (ESR) Prvisins under the ACA Part II Treasury and the IRS released prpsed regulatins n the new Emplyer Shared Respnsibility (ESR) prvisins (a/k/a Play r Pay, Emplyer Mandate r IRC Sectin 4980H) under the ACA n December 28, 2012. 1 On January 2, 2013 we published a Quick Start Overview intended t prvide a high level summary f the prpsed guidance t help yu hit the grund running in 2013 as yu prepare fr 2014. This Part II n ESR fcuses n: Identifying Full-Time Emplyees fr ESR Purpses Applying the Safe Harbr Measurement, Stability, and Administratin Perids QUICK SUMMARY OF CODE SECTION 4980H Starting in 2014, emplyers emplying at least a certain number f emplyees will be subject t the Emplyer Shared Respnsibility prvisins under sectin 4980H f the Internal Revenue Cde (added t the Cde by the Affrdable Care Act, r ACA). Under these prvisins, if such emplyers d nt ffer affrdable health cverage that prvides a minimum level f cverage t substantially all full-time emplyees, they may be subject t an Emplyer Shared Respnsibility (ESR) payment/assessment if at least ne f their full-time emplyees receives a premium tax credit fr purchasing individual cverage in an insurance Exchange. With emplyer shared respnsibility penalties cming int play in 2014, effective planning fr many emplyers will require use f IRS safe harbrs fr identifying full-time emplyees. Furthermre, fr mst emplyers, advance identificatin f full-time emplyees will begin this year 2013. T be subject t the Emplyer Shared Respnsibility prvisins, an emplyer must have at least 50 full-time emplyees r a cmbinatin f full-time and part-time emplyees that is equivalent t at least 50 full-time emplyees. 1 26 USC 4980H. The Treasury Department and the IRS have published fur ntices prir t this prpsed rule addressing issues under sectin 4980H. Each ntice utlined ptential appraches t future guidance, and each requested public cmments. See Ntice 2011-36 (2011-21 IRB 792), Ntice 2011-73 (2011-40 IRB 474), Ntice 2012-17 (2012-9 IRB 430), and Ntice 2012-58 (2012-41 IRB 436). 100 Fxbrugh Blvd., Suite 160 Fxbrugh, MA 02035 vice 617 350 7701 fax 617 350 7744 www.parkerbrwn.cm
P a g e 2 IDENTIFYING FULL-TIME EMPLOYEES Full-Time Emplyee Defined Fr Emplyer Shared Respnsibility purpses: Full-time (FT) emplyee means an emplyee wh averages at least 30 hurs f service per week fr a calendar mnth 130 hurs f service in a calendar mnth is the equivalent f at least 30 hurs f service per week (1560 hurs f service annually) Full-time (FT) emplyee is nt the same as a full-time equivalent (FTE) emplyee used t determine emplyer size and whether the emplyer meets the ESR threshld Therefre, nn-ft emplyees used t calculate FTE emplyees are nt cunted fr cverage r penalty purpses under ESR Hurs f Service An emplyee s hurs f service include time paid fr: vacatin, hliday, illness, incapacity (including disability), layff, jury duty, military duty r leave f absence Hurs wrked utside the US are disregarded Fr hurly emplyees: the actual hurs f service must be tracked Fr nn-hurly emplyees (i.e., exempt r salaried emplyees) an emplyer may use ne f three methds t measure hurs f service: Track actual hurs f service 8 hurs f service/day is credited if at least ne hur wrked that day 40 hurs f service/week is credited if at least ne hur wrked that week If an 8 hur r 40 hur equivalency methd is used, then it must generally reflect actual hurs wrked APPLYING OPTIONAL IRS SAFE HARBOR DETERMINATION PERIODS Determining full-time emplyee status n a mnthly basis may cause practical difficulties fr emplyers, emplyees, and Health Insurance Marketplaces. Fr emplyers, these difficulties include uncertainty and inability t predictably identify which emplyees are full-time emplyees t whm cverage must be prvided t avid a ptential liability. This prblem is particularly acute if emplyees have varying hurs r emplyment schedules (fr example, emplyees
P a g e 3 whse hurs vary frm mnth t mnth). A mnth-by-mnth determinatin may als result in emplyees mving in and ut f emplyer cverage (and ptentially Health Insurance Marketplace cverage) as frequently as mnthly. This result wuld be undesirable frm bth the emplyee's and the emplyer's perspective, and wuld als create administrative challenges fr the Marketplaces. T address these cncerns, and t give emplyers flexible and wrkable ptins and greater predictability, the prpsed regulatin utlines a ptential ptinal lk-back measurement methd as an alternative t a mnth-by-mnth methd f determining full-time emplyee status. In General Lk back Measurement Perid is a perid chsen by the emplyer fr cunting hurs f service t determine FT emplyee status that is, eligibility fr grup health plan cverage Stability Perid is a perid chsen by the emplyer during which cverage is prvided based n FT status in the Measurement Perid (regardless f actual emplyee status during the Stability Perid) Administrative Perid is a perid chsen by the emplyer t allw time fr enrllment and disenrllment between MP and SP Onging Emplyee Measurement Perids These perids usually relate t the plan year and annual enrllment perid fr the plan. Onging Emplyee is an emplyee that has been emplyed fr at least ne Standard Measurement Perid (SMP) Standard Measurement Perid (SMP): is a lk back perid chsen by the emplyer that is at least 3 mnths but n mre than 12 mnths in length This calendar-based measurement perid can be adjusted fr weekly, bi-weekly r semi-mnthly payrll perids that d nt end exactly n the last day f the applicable measurement perid Standard Stability Perid (SSP): is a perid chsen by the emplyer that is the greater f 6 calendar mnths r the length f the SMP. It fllws the SMP and precedes any SAP. An emplyee maintains the status attained during the SMP thrughut the SSP Standard Administrative Perid (SAP): is an ptinal perid chsen by the emplyer between the SMP and SSP, which cannt exceed 90 days, used t review hurs f service, cmmunicate with emplyees and ffer enrllment t FT emplyees, as applicable
P a g e 4 EXAMPLE 1: Determining Full-Time Onging Emplyees as f Jan. 1, 2014 Facts: Emplyer maintains an April 1 fiscal plan year grup health plan with a 30 hur per week eligibility requirement. It uses a 12-mnth calendar year standard measurement perid t determine full-time nging emplyees as f each January 1 st. The emplyer cunts as fulltime all emplyees wh wrked an average f at least 130 hurs per mnth during the prir calendar year. Result: On Dec. 31, 2013, emplyer lks back and identifies emplyees emplyed n r befre Jan. 1, 2013 wh wrked at least 1560 hurs during calendar year 2013. Assuming the emplyee is still emplyed n Jan. 1, 2014, the emplyer must ffer cverage r pay penalties during the 12-mnth stability perid beginning April 1, 2014 as lng as the emplyee remains emplyed. The emplyer uses a 90 day administrative perid t ffer cverage and enrll the nging emplyee. Transitinal Measurement Perid fr 2013 Only Ordinarily, the IRS safe harbr determinatin rules require emplyers using a 12 mnth Standard Stability Perid t use a Standard Measurement Perid f 12 mnths as well. Hwever, the prpsed IRS guidance prvides a transitin rule fr 2013 t give emplyers time t implement the safe harbr rules. Emplyers that plan t use a 12 mnth Standard Stability Perid (SSP) fr nging emplyees starting in 2014 may use a Transitinal Measurement Perid (TMP) that is nly available in 2013. The TMP: May be shrter than 12 mnths but cannt be less than 6 mnths Must begin n later than July 1, 2013 and Must end n earlier than 90 days befre the first day f the plan year beginning in 2014
P a g e 5 EXAMPLE 2: Determining Full-Time Onging Emplyees as f Jan. 1, 2014 Using 6-Mnth Transitinal Measurement Perid Beginning in 2013 Facts: Emplyer maintains an April 1 fiscal plan year grup health plan with a 30 hur per week eligibility requirement. Emplyer will use a 12-mnth standard stability perid beginning n April 1, 2014. T determine nging emplyees as f Jan. 1, 2014, emplyer elects t use the Transitinal Measurement Perid in 2013 (rather than the full 2013 calendar year) and cunts as full-time all emplyees wh wrked an average f at least 130 hurs per mnth during the perid July 1, 2013 t Dec. 31, 2013. Result: On Dec. 31, 2013, emplyer lks back and identifies emplyees emplyed n r befre July 1, 2013 wh wrked at least 780 hurs during the 6 mnth perid. Assuming the emplyee is still emplyed n Jan. 1, 2014, the emplyer must ffer cverage r pay penalties during the 12-mnth stability perid beginning April 1, 2014 as lng as the emplyee remains emplyed. The emplyer uses a 90 day administrative perid t ffer cverage and enrll the nging emplyee. New Full-time Emplyees The prpsed regulatins prvide that, fr an emplyee wh is reasnably expected at his r her start date t be emplyed n average 30 hurs f service per week (and wh is nt a seasnal emplyee), an emplyer that spnsrs a grup health plan that ffers cverage t the emplyee at r befre the cnclusin f the emplyee s initial three calendar mnths f emplyment will nt be subject t an assessable payment under IRC sectin 4980H by reasn f its failure t ffer cverage t the emplyee fr up t the initial three calendar mnths f emplyment.
P a g e 6 New Variable Hur Emplyee Measurement Perids These perids will relate t the new variable hur emplyee s date f hire. New Variable Hur Emplyee: is a new emplyee that has been emplyed fr less than ne Standard Measurement Perid (SMP) and, as f the start date, the emplyer is unable t determine if the new emplyee is reasnably expected t be emplyed n average 30 r mre hurs f service per week Beginning 1/1/2015, the emplyer must assume the new variable hur emplyee will be emplyed fr the entire measurement perid Initial Measurement Perid (IMP): is a lk back perid chsen by the emplyer that is at least 3 mnths but n mre than 12 mnths in length that starts n later than the first f the mnth fllwing the emplyee s start date Initial Stability Perid (ISP): is a perid chsen by the emplyer that must be the same length as the SSP fr nging emplyees Initial Administrative perid (IAP): is an ptinal perid chsen by the emplyer between the IMP and ISP, which cannt exceed 90 days, used t review hurs f service, cmmunicate with emplyees and ffer enrllment t FT emplyees, as applicable Cmbined IMP and AP cannt exceed 13 mnths plus a fractin f a mnth EXAMPLE 3: Determining New Variable Hur Emplyees Hired in 2014 Facts: Emplyer uses a 12-mnth Initial Measurement Perid fr new variable hur emplyees emplyed n r after Jan. 1, 2014. Variable-hur emplyees are thse whm the emplyer cannt reasnably determine n their start date will average at least 30 hurs f service per week ver the curse f the Initial Measurement Perid.
P a g e 7 Result: Emplyee starts wrk 3/15/2014. On 3/14/15, emplyer lk backs t see if emplyee wrked at least 1560 hurs ver the 12-mnth perid Initial Measurement Perid. If s, emplyer must ffer cverage r pay penalties during the 12-mnth Initial Stability Perid as lng as the emplyee remains emplyed. The emplyer uses an Initial Administrative Perid that, when cmbined with the Initial Measurement Perid, is 13 mnths (and a fractin f a mnth) t ffer cverage and enrll the new variable hur emplyee. Transitin frm New Variable Hur Emplyee t Onging Emplyee Status New variable hur emplyees cannt remain new emplyees frever. Eventually, the new variable hur emplyee will have wrked fr the emplyer lng enugh t be cnsidered an nging emplyee. Therefre, the prpsed guidance related t transitining new variable hur status t nging emplyee status. Once emplyed fr an entire SMP, emplyers must test new variable hur emplyees fr FT status under the SMP fr nging emplyees This creates sme verlap f measurement perids fr the new emplyee. The IMP and the SMP will likely be tested at the same time during sme mnths If as a result f this testing the new emplyee meets FT status under the SMP fr nging emplyees: The emplyer must treat the new emplyee as FT as f the start f the SSP fr nging emplyees Even if the initial stability perid (ISP) that applies t the new emplyee has nt yet expired EXAMPLE 4: Transitin frm New Variable Hur t Onging Emplyee Status Facts: Emplyer maintains a calendar year grup health plan with a 30 hur per week eligibility requirement. Emplyer uses a 12-mnth Initial Measurement Perid fr new variable hur emplyees emplyed n r after Jan. 1, 2014. Emplyer als uses a 12-mnth Standard Measurement Perid beginning each Octber 15 th t measure nging emplyees. T determine nging emplyees as f Jan. 1, 2016, emplyer cunts as full-time all emplyees wh wrked an average f at least 130 hurs per mnth during the perid Oct. 15, 2014 t Oct. 14, 2015.
P a g e 8 Result: Emplyee starts wrk 3/15/2014. On 3/14/15, the emplyer lks back and determines that the new variable hur emplyee wrked at least 1560 hurs ver the 12-mnth Initial Measurement Perid. The emplyer must ffer cverage r pay penalties during the 12-mnth Initial Stability Perid ending 4/30/16 as lng as the emplyee remains emplyed. The emplyee enrlls during the Initial Administrative Perid fr cverage effective 5/1/15 thrugh 4/30/16. At the same time, emplyer tests the emplyee s hurs f service again at the clse f Standard Measurement Perid ending 10/14/15 and determines the emplyee wrked at least 1560 hurs during the Standard Measurement Perid ended 10/14/15. The emplyee is nw an nging emplyee and the emplyer must ffer cverage frm 5/1/16 thrugh 12/31/16 the balance f the Standard Stability Perid fr nging emplyees. PUTTING IT ALL TOGETHER FOR 2014 As yu can see, fr mst emplyers advance identificatin f full-time emplyees will begin this year 2013. This means that emplyers must start NOW t develp a strategy fr 2013 with regard t ESR cmpliance. The January 2, 2013 Quick Start Summary that yu received frm me previusly in cmbinatin with this April 1, 2013 Part II summary will prvide yu with the infrmatin necessary t assess yur ESR cmpliance needs and t prepare an actin plan. Yur 2013 actin plan shuld include: Determining, based n 2013 payrll numbers cnverted t full-time equivalent (FTE) emplyees, whether yur business will be cnsidered a large emplyer subject t ESR in 2014. If yu have 50 r mre FTE emplyees f which at least 30 are full-time emplyees with 130 hurs f service per mnth, yur business is slidly in the ESR game. Assessing WHEN ESR will apply t yur business grup health plan (GHP) either January 1, 2014 r the first 1st plan year/renewal date in 2014. Remember that nncalendar year plans must als cmply by January 1, 2014 UNLESS the plan meets
P a g e 9 either the 33% ffer r 25% enrllment tests based n dates in 2012 and taking int accunt all emplyees f the business. Reviewing yur GHP eligibility prvisins fr cmpliance with the 30 hurs f service per week / 130 hurs per mnth and the 90 day maximum waiting perid requirements and assessing the impact f these prvisins n yur GHP. Reviewing the structure f yur business wrk frce and its use f full-time, part-time, per diem, temprary, and seasnal emplyees and emplyee turnver rate t assess the need fr variable hur rules fr new hires. Crafting a custmized slutin and respnse specific t yur business, taking int accunt yur GHP s current plan year, plan design, cntributin strategy and the structure and culture f yur business wrk frce. Determining applicable safe harbr measurement, stability and administratin perids t identify full-time emplyees (bth nging emplyees and new variable hur emplyees) and including thse perids as part f any revised eligibility prvisins fr yur GHP. Nte that these perids may include shrt r run-in perids beginning in 2013 as yur GHP transitins t its 2014 plan year. Lcating, reviewing and revising yur GHP s existing ERISA plan dcument and health plan SPD(s). The ESR prvisins WILL require amendments t yur GHP dcuments in 2013. Yur GHP s legal dcumentatin MUST include up t date eligibility prvisins indicating which emplyees are eligible fr GHP cverage, when and fr hw lng, including applicable measurement perids fr nging and variable hur emplyees. If yu d nt have ERISA plan dcuments fr yur GHP, r yu have ancient/inadequate ERISA dcumentatin, NOW is the time t have these dcuments prepared with apprpriate, ESR-cmpliant prvisins. Yur legal plan dcumentatin and yur enrllment/payrll recrds will be yur ONLY defense against IRS penalty assessments. Please cntact me if yu have any questins. Richard A. Szczebak, Esq. 617-399-0441 rszczebak@parkerbrwn.cm The freging has been prepared fr the general infrmatin f clients and friends f the firm. It is nt meant t prvide legal advice with respect t any specific matter and shuld nt be acted upn withut prfessinal cunsel. If yu have any questins r require any further infrmatin regarding these r ther related matters, please cntact yur Parker Brwn Macaulay & Sheerin, PC representative. This material may be cnsidered advertising under certain rules f prfessinal cnduct. 2013. All Rights Reserved. Richard A. Szczebak, Esq.