Health Care Refrm s Emplyer Shared Respnsibility Penalties: A Checklist fr Emplyers (Revised February 20, 2014) Nancy K. Campbell Snell & Wilmer L.L.P. Histrically, emplyers have had cmplete discretin in deciding whether t ffer grup health plan cverage t their emplyees. If they ffered cverage, they had t cmply with the requirements f the Emplyee Retirement Incme Security Act ( ERISA ), the Internal Revenue Cde (the Cde ), and ther applicable laws. Hwever, if they did nt ffer cverage, they were nt subject t penalties. It was simply a business decisin whether t ffer cverage. Starting in 2015, this will change-- emplyers emplying at least a certain number f emplyees (generally 50 fulltime emplyees r a cmbinatin f full-time and part-time emplyees that is equivalent t 50 full-time emplyees) will be subject t the emplyer shared respnsibility prvisins under Sectin 4980H f the Cde, smetimes referred t as the large emplyer play r pay penalties. In July 2013, IRS annunced that the penalties wuld nt take effect until 2015. The ne-year delay was welcme news, but it unfrtunately resulted in many emplyers pushing this issue t the back burner. With the IRS just having published final regulatins n February 12, 2014, nw is a great time t refcus n this issue. Under these new rules, large emplyers will be subject t a penalty if they either: (1) fail t ffer minimum essential cverage t substantially all full-time emplyees (and their dependents); r (2) ffer emplyer-spnsred cverage t substantially all full-time emplyees (and their dependents), but the cverage is either nt affrdable r des nt prvide minimum value. The penalties are due nly if at least ne f a large emplyer s full-time emplyees receives a premium tax credit fr purchasing individual cverage n a Health Insurance Marketplace (hereinafter a Marketplace ). Althugh the rules take effect fr mst emplyers n January 1, 2015, what an emplyer s wrkfrce lks like in 2014 is determinative f whether the emplyer may be subject t the penalties in 2015. Als, many emplyers may need t start cunting hurs in 2014 in rder t take advantage f the lk-back measurement safe harbr that permits full-time r part-time status t be lcked in fr sme perid rather than having t track full-time status each mnth. Time is f the essence in understanding these new rules. This checklist is intended t help emplyers: Determine whether an emplyer is a large emplyer (Wrksheet #1); Calculate the ptential penalties (Wrksheet #2); Identify full-time emplyees fr purpses f calculating the penalties (Wrksheet #3); and Design grup health plans t avid/minimize the penalties (Wrksheet #4). Imprtant Nte: This checklist was riginally published n March 20, 2013. It has been updated t reflect the final regulatins published n February 12, 2014. The purpse f this checklist is t prvide general infrmatin abut the large emplyer shared respnsibility penalties under the Patient Prtectin and Affrdable Care Act, as amended by the Health Care and Educatin Recnciliatin Act (the Affrdable Care Act r ACA ) that apply t emplyer-spnsred grup health plans. The Affrdable Care Act and related guidance g int much mre detail and shuld always be cnsulted when cnsidering its applicatin t any particular plan. Mre detailed infrmatin abut these rules may be fund in the final regulatins and the IRS series f questins and answers n the emplyer shared respnsibility prvisins. This summary shuld nt be relied n as legal advice r as a legal pinin n any specific facts r circumstances. Yu are urged t cnsult legal cunsel cncerning yur situatin and any specific legal questins yu may have. Circular 230 Disclaimer: T ensure cmpliance with Treasury Regulatins gverning written tax advice, please be advised that any tax advice included in this cmmunicatin, is nt intended, and cannt be used, fr the purpse f: (i) aviding any federal tax penalty; r (ii) prmting, marketing, r recmmending any transactin r matter t anther persn. 1
Wrksheet #1 WORKSHEET #1 IS THE EMPLOYER A LARGE EMPLOYER? Basic rule T be subject t the large emplyer penalties fr a calendar year, an emplyer must generally emply at least 50 full-time emplyees r a cmbinatin f full-time and part-time emplyees that equals at least 50 during the preceding calendar year. Fr example, if an emplyer has at least 50 full-time emplyees (including full-time equivalents) fr 2014, it will be cnsidered a large emplyer fr 2015. Emplyers will need t repeat this analysis each year. Imprtant Nte: See pages 3 t 4 belw fr a special transitin rule that gives emplyers with 50 t 99 emplyees in 2014 an additinal year, until 2016, t cmply if they meet certain requirements. Example: An emplyer that emplys 40 full-time emplyees (that is, emplyees emplyed 30 r mre hurs per week n average) and 20 emplyees emplyed 15 hurs per week n average has the equivalent f 50 full-time emplyees. Sme imprtant rules t keep in mind when determining whether an emplyer is a large emplyer: The rules apply t all types f emplyers: All emplyers are ptentially subject t the emplyer shared respnsibility prvisins, including fr-prfit, nn-prfit, and gvernment entities, including federal, state, lcal, and Indian tribal gvernment emplyers. Related cmpanies are cmbined: In determining whether an emplyer is large, the emplyer includes all related businesses (each referred t as a cmpany ) under Cde Sectins 414(b), (c), (m), and (). This means emplyers have t cunt all full-time and full-time equivalent emplyees in the grup. Emplyers wh file as qualified separate lines f business ( QSLOBs ) fr ther emplyee benefit purpses cannt rely n the QSLOB rules fr this purpse. If the cmbined ttal meets the threshld then each separate cmpany is subject t the emplyer shared respnsibility prvisins, even thse cmpanies that individually d nt emply enugh emplyees t meet the threshld. Cmmn law emplyees are cunted: The emplyer must cunt each f its cmmn law emplyees. As a result, careful cnsideratin shuld be given t independent cntractrs and temprary emplyees 1 because such individuals are ften misclassified. Failing t cunt all cmmn law emplyees culd cause an emplyer t cnclude it is nt large when, in fact, it is. Emplyers shuld assess the true relatinship f all individuals wh perfrm services fr them. Sme individuals are nt cunted: Sle prprietrs, partners in a partnership, 2% S Crp sharehlders, leased emplyees (as defined in Cde Sectin 414(n)(2)), and wrkers described in Cde Sectin 3508 2 are nt emplyees fr this purpse, s they are nt cunted. Mst emplyees wh wrk utside the United States are als excluded. 3 Number f full-time emplyees: A full-time emplyee fr any mnth is an emplyee (including seasnal wrkers) wh is emplyed fr an average f at least 30 hurs f service per week, r 120 hurs f service in a calendar mnth. Each such emplyee cunts as ne emplyee fr the calendar mnth. Seasnal wrkers: A seasnal wrker, fr purpses f determining whether an emplyer is large, is a wrker wh perfrms services n a seasnal basis where, rdinarily, the emplyment pertains t r is f the kind exclusively perfrmed at certain seasns r perids f the year and which, frm its nature, may nt be cntinuus r carried n thrughut the year (e.g., agricultural 2
Wrksheet #1 and retail wrkers emplyed exclusively during hliday seasns). Fr this purpse, emplyers may apply a reasnable, gd faith interpretatin f the term seasnal wrker. Number f full-time equivalents: Emplyers must als include full-time equivalents fr each calendar mnth. All emplyees (including seasnal wrkers) wh are nt emplyed n a full-time basis fr a calendar mnth are included in calculating the number f full-time equivalents fr that mnth. Cnverting such emplyees t a full-time equivalent invlves tw steps. Step 1 calculate the aggregate hurs f service in a mnth fr the emplyees wh are nt full-time emplyees fr the mnth. D nt include mre than 120 hurs f service fr any emplyee. Step 2 - divide the ttal aggregate hurs frm Step 1 by 120. The result is the number f full-time equivalents fr the mnth. Hurs f service: Hurs f service are used in determining whether an emplyee is a full-time emplyee and in calculating full-time equivalents. The hur f service rules are described in the final regulatins. New emplyers must use current year: An emplyer that was nt in existence n any business day in the prir calendar year is cnsidered a large emplyer in the current year if the emplyer is reasnably expected t emply an average f at least 50 full-time emplyees (including full-time equivalents) n business days during the current calendar year and it actually emplys an average f at least 50 full-time emplyees (including full-time equivalents) n business days during the calendar year. In cntrast, fr the next year (the year after the first year the emplyer was in existence), the emplyer will determine its status as a large emplyer using the rules that generally apply (that is, based n the number f full-time emplyees and full-time equivalents that the emplyer emplyed in the preceding calendar year). Transitin relief fr emplyers with 50 t 99 full-time emplyees in 2014: Fr emplyers with 50 t 99 full-time emplyees (including full-time equivalents) in 2014, that meet the three cnditins described belw, n emplyer shared respnsibility payment will apply fr any calendar mnth during 2015. 4 Fr emplyers with nn-calendar-year health plans, this applies t any calendar mnth during the 2015 plan year, including mnths during the 2015 plan year that fall in 2016. In rder t be eligible fr the relief, an emplyer must certify that it meets the fllwing cnditins: Limited wrkfrce size. The emplyer must emply n average at least 50 full-time emplyees (including full-time equivalents), but fewer than 100 full-time emplyees (including full-time equivalents) n business days during 2014. Maintenance f wrkfrce and aggregate hurs f service. During the perid beginning n February 9, 2014 and ending n December 31, 2014, the emplyer may nt reduce the size f its wrkfrce, r the verall hurs f service f its emplyees, in rder t qualify fr the transitin relief. Hwever, an emplyer that reduces wrkfrce size r verall hurs f service fr bna fide business reasns is still eligible fr the relief. Maintenance f previusly ffered health cverage. During the perid beginning n February 9, 2014 and ending n December 31, 2015 (r, fr emplyers with nncalendar-year plans, ending n the last day f the 2015 plan year) the emplyer des nt eliminate r materially reduce the health cverage, if any, it ffered as f February 9, 2014. An emplyer will nt be treated as eliminating r materially reducing health cverage if (i) it cntinues t ffer each emplyee wh is eligible fr cverage an 3
Wrksheet #1 emplyer cntributin tward the cst f self-nly cverage that either (A) is at least 95% f the dllar amunt f the cntributin tward such cverage that the emplyer was ffering n February 9, 2014 r (B) is at least the same percentage f the cst f cverage that the emplyer was ffering t cntribute tward cverage n February 9, 2014; (ii) in the event f a change in benefits under the self-nly cverage ffered, that cverage prvides minimum value after the change; and (iii) it des nt alter the terms f its grup health plans t narrw r reduce the class r classes f emplyees (r the emplyees dependents) t whm cverage under thse plans was ffered n February 9, 2014. Check here if emplyer qualifies fr transitin relief. If it des, cmplete the remainder f this checklist, nly fr 2014, by substituting 100 fr 50 belw. The calculatin Average the emplyer s number f emplyees acrss the mnths in the calendar year t see whether they will be a large emplyer fr the next year. T d s, add full-time emplyees and full-time equivalent emplyees (including seasnal wrkers) fr each calendar mnth. This will give a full-time emplyee ttal fr January, February, March, etc. Add the 12 mnthly ttals and divide the sum by 12. Then rund dwn t the next lwest whle number. The result fr calendar year 20 is (enter result here):. Special rule if the result is 50 r greater: There are tw ptential rules that may reduce the ttal belw 50. Cnsider whether t use either rule and check if using (bth cannt be used): Special rule fr seasnal wrkers. If the ttal number f full-time emplyees and full-time equivalents is 50 r greater fr 120 r fewer days, r fur r fewer calendar mnths, in a calendar year, and the emplyees in excess f 50 emplyed in that perid were seasnal wrkers, the emplyer is nt a large emplyer. The 120 days and the fur calendar mnths are nt required t be cnsecutive. Shrter perid fr determining large emplyer status fr 2014. Rather than being required t use the full 12 mnths f 2014 t measure whether it has 50 full-time emplyees (r equivalents), an emplyer may determine its status as a large emplyer by using a perid f at least six cnsecutive calendar mnths (as chsen by the emplyer) during 2014. Fr example, an emplyer culd use a perid f at least six mnths thrugh August 2014 t determine its large emplyer status, leaving it time t analyze the results, t determine whether it needs t ffer a plan, and, if s, t chse and establish a plan. If using this rule, nte the shrt perid being used here:. The result fr calendar year 20 is (check ne bx): Less than 50 - The emplyer is nt a large emplyer fr 20 and shuld nt be subject t the penalties in 20. Stp here, but mnitr in future years. 50 r greater - Prceed t Wrksheet #2. Endntes 1 The agencies have indicated that they intend t issue anti-abuse rules t prevent emplyers frm using temprary staffing agencies (r ther staffing agencies) purprting t be the cmmn law emplyer t evade the large emplyer penalties. 2 The exclusin f wrkers described in Cde Sectin 3805 was added by the final regulatins. A wrker described in Cde Sectin 3805 includes real estate agents and direct sellers. 4
Wrksheet #1 3 Generally, an emplyer will take int accunt nly wrk perfrmed in the United States. Fr example, if a freign emplyer has a large wrkfrce wrldwide, but less than 50 full-time (r full-time equivalent) emplyees in the United States, the freign emplyer generally wuld nt be subject t the penalties. Thus, emplyees wrking nly abrad, whether r nt U.S. citizens, generally will nt be taken int accunt fr purpses f determining whether an emplyer is large. 4 The relief is als available t new emplyers (i.e., emplyers that are nt in existence n any business day in 2014). Fr new emplyers that wuld be large emplyers under the general rules in the final regulatins, the transitin relief applies if the emplyer certifies that it: (i) reasnably expects t emply and actually emplys fewer than 100 full-time emplyees (including full-time equivalents) n business days during 2015; and (ii) reasnably expects t meet and actually meets the standards relating t maintenance f wrkfrce and aggregate hurs f service and f previusly ffered health cverage, as measured frm the date the emplyer is first in existence. 5
Wrksheet #2 WORKSHEET #2 CALCULATING THE PENALTIES Basic rule -- Large emplyers (determined in accrdance with Wrksheet #1) are ptentially subject t tw penalties, the Sectin 4980H(a) penalty, which is ptentially the larger f the tw, and the Sectin 4980H(b) penalty. The penalties are assessed with respect t full-time emplyees (determined in accrdance with Wrksheet #3) n a mnthly basis. Ptential subsectin (a) penalty: The emplyer will have t pay a subsectin (a) penalty fr any mnth if it des nt ffer minimum essential cverage 5 t substantially all (i.e., 70% fr 2015 and 95% fr future years) f its full-time emplyees and their dependents if ne r mre full-time emplyees receive a premium tax credit t help pay fr cverage n a Marketplace. 6 Imprtant nte: If the subsectin (a) penalty is triggered, it applies t all full-time emplyees, nt just thse wh receive premium tax credits r thse wh were nt ffered cverage. Subsectin (a) calculatin: Generally, fr any calendar mnth, the penalty is equal t the number f fulltime emplyees the emplyer emplyed fr the mnth (minus 30) multiplied by 1/12 f $2,000. Imprtant nte: Fr 2015 and any calendar mnths f 2016 that fall within the emplyer s 2015 plan year, if a large emplyer has 100 r mre full-time emplyees (including full-time equivalents) n business days during 2014, the calculatin is perfrmed by substituting 80 fr 30. $166.67 x (# full-time emplyees 30) = $ Ptential subsectin (b) penalty: The emplyer will have t pay a subsectin (b) penalty fr any mnth if it ffers minimum essential cverage t substantially all (i.e., 70% fr 2015 and 95% fr future years) f its full-time emplyees and their dependents if ne r mre full-time emplyees receive a premium tax credit t help pay fr cverage n a Marketplace. 6 The penalty culd be triggered because the emplyer did nt ffer cverage t sme full-time emplyees r because the cverage the emplyer ffered did nt prvide minimum value r was nt affrdable. Subsectin (b) calculatin: Generally, fr any calendar mnth, the penalty is equal t the number f fulltime emplyees wh receive a premium tax credit fr that mnth multiplied by 1/12 f $3,000, nt t exceed the subsectin (a) penalty. $250 x (# full-time emplyees wh receive a premium tax credit) = $ (nt t exceed the subsectin (a) penalty). Sme imprtant rules t keep in mind when calculating the penalties: Penalties are adjusted fr inflatin: Bth penalties are adjusted fr inflatin. The $2,000 and $3,000 penalties shwn abve are the penalties that wuld have applied fr 2014 had the emplyer shared respnsibility prvisins nt been delayed t 2015. These amunts will be adjusted fr inflatin fr 2015 and later years. Delayed effective date fr sme nn-calendar year plans: The preamble t the final regulatins prvides three pieces f transitin relief addressing nn-calendar year plans: (1) pre- 2015 eligibility transitin relief; (2) significant percentage transitin relief (all emplyees); and (3) significant percentage transitin relief (full-time emplyees). The first piece f relief generally addresses emplyees wh are already eligible t participate in the nn-calendar year plan. Specifically the pre-2015 eligibility transitin relief prvides that fr any emplyees (whenever hired) wh are eligible fr cverage n the first day f the 2015 plan year under the eligibility terms f the plan as f February 9, 2014, (whether r nt they take the cverage) and wh are ffered affrdable cverage that prvides minimum value effective n later than the first day f the 2015 plan year, the emplyer will nt be subject t a ptential emplyer shared respnsibility penalty 6
Wrksheet #2 until the first day f the 2015 plan year. The remaining tw pieces f relief generally address emplyees wh have nt been eligible t participate in the nn-calendar year plan. They prvide that if the emplyer meets certain requirements generally related t the percentage f the emplyer s emplyees already eligible fr, r participating in, the nn-calendar year plan, the relief may be extended t thse emplyees that have nt been eligible t participate. Sectin XV.D.1 f the preamble t the final regulatins prvides detailed infrmatin n the rules fr determining whether an emplyer is eligible fr this nn-calendar year relief. All f this transitin relief applies fr the perid befre the first day f the first nn-calendar year plan year beginning in 2015 (the 2015 plan year), but nly fr emplyers that maintained nn-calendar year plans as f December 27, 2012, and nly if the plan year was nt mdified after December 27, 2012, t begin at a later calendar date. Nn-calendar year plans relying n this delayed effective date must ffer full-time emplyees affrdable cverage that prvides minimum value n later than the first day f the 2015 plan year. Otherwise, penalties may apply January 1, 2015. Related cmpanies are nt cmbined fr this purpse: Althugh the related business rules apply fr determining whether an emplyer is large, the determinatin f whether a penalty applies is determined n a cmpany-by-cmpany basis, based n that cmpany s ffer f cverage (r lack theref) and that cmpany s number f full-time emplyees. Each cmpany within the grup shuld cmplete its wn Wrksheet #2. The 30 (r 80 fr 2015) emplyee reductin is allcated amng related cmpanies: If the emplyer has related cmpanies, the 30 (r 80) emplyee reductin (which is part f the subsectin (a) calculatin) must be allcated ratably amng related cmpanies based n each cmpany s number f full-time emplyees. If a cmpany s allcatin is a fractinal number that is less than ne, it is runded up t ne. This runding rule may result in the aggregate reductin fr the entire grup f related cmpanies exceeding 30 (r 80). The cmpanies cannt agree t allcate the 30 (r 80) emplyee reductin in any ther way. If a related cmpany, nte ratable allcatin f 30 (r 80) emplyee reductin here:. Dependent: Means a natural child r an adpted child until the end f the mnth in which the child attains age 26. Spuses, stepchildren, and fster children are nt dependents and d nt have t be ffered cverage. Transitin relief fr dependents: Under transitinal relief, there is n penalty fr failure t cver dependents during the 2015 plan year if the emplyer takes steps during 2015 tward satisfying the requirement in the subsequent plan year. This transitin relief applies t emplyers fr the 2015 plan year fr plans under which: (1) dependent cverage is nt ffered; (2) dependent cverage that des nt cnstitute minimum essential cverage is ffered; r (3) dependent cverage is ffered fr sme, but nt all, dependents. The transitin relief is nt available t the extent the emplyer had ffered dependent cverage during either the plan year that begins in 2013 (the 2013 plan year), r the 2014 plan year and subsequently drpped that ffer f cverage. The transitin relief applies nly fr dependents wh were withut an ffer f cverage frm the emplyer in bth the 2013 and 2014 plan years and if the emplyer takes steps during the 2014 r 2015 plan year (r bth) t extend cverage under the plan t dependents nt ffered cverage during the 2013 r 2014 plan year (r bth). 7
Wrksheet #2 Substantially all nrmally means 95%, but means 70% fr 2015: The final regulatins prvide that a large emplyer will be treated as ffering cverage t substantially all f its full-time emplyees and their dependents fr each calendar mnth in 2015 (and any calendar mnths during the 2015 plan year that fall in 2016) if, fr that mnth, it ffers cverage t 70% r mre f its full-time emplyees. Fr later years, the final regulatins prvide that a large emplyer will be treated as ffering cverage t substantially all f its full-time emplyees and their dependents fr a calendar mnth if, fr that mnth, it ffers cverage t all but 5%, r if greater, five f its full-time emplyees. Fr this purpse, an emplyee is treated as having been ffered cverage nly if the emplyer has als ffered cverage t the emplyee s dependents. The purpse f the substantially all rule is t prvide emplyers with a margin f errr in the event they fail t prvide cverage t a small grup f full-time emplyees. Hwever, the rule applies regardless f whether the failure was inadvertent. Fr related cmpanies, the substantially all rule is applied n a cmpany-by-cmpany basis. Emplyers shuld cnsider hw t use the rule. Sme might save it fr inadvertent failures, while thers use it t exclude a small grup f full-time emplyees. It is imprtant t nte that full-time emplyees excluded under the rule may trigger a subsectin (b) penalty. Minimum value: A plan prvides minimum value if it cvers at least 60% f the ttal allwed cst f benefits that are expected t be incurred under the plan. The Department f Health and Human Services ( HHS ) and the IRS have prduced a minimum value calculatr. By entering certain infrmatin abut the plan, such as deductibles and c-pays, int the calculatr, emplyers can get a determinatin as t whether the plan prvides minimum value. Additinally, n May 3, 2013, Treasury and the IRS issued prpsed regulatins regarding the ther methds available t determine minimum value. Affrdable cverage: If an emplyee s share f the premium fr emplyer-prvided cverage csts the emplyee mre than 9.5% f that emplyee s annual husehld incme, the cverage is nt cnsidered affrdable fr that emplyee. Because husehld incme is nearly impssible fr an emplyer t determine, the final regulatins include three safe harbrs that will make it easier fr an emplyer t determine whether cverage is affrdable. Use f the safe harbrs is ptinal and an emplyer may chse t apply the safe harbrs fr any reasnable categry f emplyees, prvided it des s n a unifrm and cnsistent basis fr all emplyees in the categry. 7 Generally, health cverage is affrdable if the emplyee s required cntributin fr the emplyer s lwest cst self-nly cverage that prvides minimum value meets ne f the fllwing affrdability safe harbrs: W-2 safe harbr: The annual cst f health cverage des nt exceed 9.5% f the emplyee s W-2 wages (shwn in Bx 1) frm the emplyer (including related cmpanies). This rule des nt allw Sectin 401(k), 403(b), r 125 deferrals t be added back int the Bx 1 amunt fr safe harbr purpses. Additinally, the emplyee s cntributin must remain a cnsistent amunt r percentage during the plan year s that an emplyer is nt permitted t make discretinary adjustments t the required emplyee cntributin fr a pay perid. Nte that this methd may result in fluctuatins in emplyee cntributins due t changes in Sectin 401(k) deferrals, unpaid leaves f absence, etc. Rate f pay safe harbr: Fr hurly emplyees, the mnthly cst f health cverage des nt exceed 9.5% f an amunt equal t 130 hurs multiplied by the lwer f the emplyee s hurly rate f pay as f the first day f the cverage perid (generally, the first day f the plan year) r the emplyee s lwest hurly rate f pay during the calendar mnth (i.e., mid-year adjustments are permitted fr an hurly emplyee if the rate f pay is decreased, but nt if the rate f pay is increased.) Fr salaried emplyees, the mnthly 8
Wrksheet #2 cst f health cverage des nt exceed 9.5% f that emplyee s mnthly salary as f the first day f the cverage perid, prvided that if the mnthly salary is reduced, including due t a reductin in wrk hurs, this safe harbr is nt available. Nte that Sectin 401(k), 403(b), and 125 deferrals d nt reduce the emplyee s rate f pay. This may be a mre stable methd f calculating affrdable cverage than the W-2 safe harbr. Federal pverty line (FPL) safe harbr: The mnthly cst f health cverage des nt exceed 9.5% f a mnthly amunt determined as the FPL fr a single individual fr the state in which the emplyee is emplyed, divided by 12. 8 Generally, emplyers will use the mst recently published FPL as f the first day f the plan year, but the final regulatins als allw emplyers t use the FPL in effect six mnths prir t the beginning f the plan year. The FPL is regularly published in late January, s fr 2015, calendar year plans wuld use the FPL published in January 2014, which is $11,670 fr the 48 cntiguus states. This wuld result in an allwable premium f $92.38 fr the 48 cntiguus states. This may be the easiest methd fr calculating affrdable cverage. Offer f cverage: Emplyees must be prvided an effective pprtunity t accept r decline cverage in rder t be treated as having been ffered cverage. An ffer f cverage must be made at least nce each plan year. Emplyees d nt have t be allwed t decline cverage that prvides minimum value and is ffered either at n cst t the emplyee r at a cst, fr any calendar mnth, f n mre than 9.5% f a mnthly amunt determined as the FPL fr a single individual fr the applicable calendar year, divided by 12. The regulatins d nt prvide any specific rules fr demnstrating that an ffer f cverage was made. Offers f cverage may be made electrnically. Offer f cverage by ne cmpany n behalf f a related cmpany: An ffer f cverage by ne cmpany t an emplyee fr a calendar mnth is treated as an ffer f cverage by all related cmpanies fr that calendar mnth. Offer f cverage by staffing firm n behalf f client emplyer: Fr an ffer f cverage t an emplyee perfrming services fr an emplyer that is a client f a staffing firm, in cases in which the staffing firm is nt the cmmn law emplyer f the individual and the staffing firm makes an ffer f cverage t the emplyee n behalf f the client emplyer under a plan established r maintained by the staffing firm, the ffer is treated as made by the client emplyer, but nly if the fee the client emplyer pays t the staffing firm fr an emplyee enrlled in health cverage under the plan is higher than the fee the client emplyer wuld pay the staffing firm fr the same emplyee if that emplyee did nt enrll in health cverage under the plan. Offer f cverage by multiemplyer r single emplyer Taft Hartley plan r MEWA: In additin, an ffer f cverage made t an emplyee n behalf f a cntributing emplyer under a multiemplyer r single emplyer Taft Hartley plan r multiple emplyer welfare arrangement ( MEWA ) is treated as made by the emplyer. See Sectin XV.E f the preamble t the final regulatins fr interim guidance n the applicatin f Sectin 4980H t multiemplyer plans. Prceed t Wrksheet #3 9
Wrksheet #2 Endntes 5 Minimum essential cverage is bradly defined t include any grup health plan r grup health insurance that is nt a HIPAA excepted benefit (i.e., stand-alne dental r visin plans). 6 The IRS will adpt prcedures that ensure emplyers receive certificatin that ne r mre emplyees have received a premium tax credit. The IRS will cntact emplyers t infrm them f their ptential liability and prvide them an pprtunity t respnd befre any liability is assessed r ntice and demand fr payment is made. The cntact fr a given calendar year will nt ccur until after the due date fr emplyees t file individual tax returns fr that year claiming premium tax credits and after the due date fr large emplyers t file the infrmatin returns identifying their full-time emplyees and describing the cverage that was ffered (if any). If it is determined that an emplyer is liable fr an emplyer shared respnsibility payment after the emplyer has respnded t the initial IRS cntact, the IRS will send a ntice and demand fr payment. That ntice will instruct the emplyer n hw t make the payment. 7 The final regulatins clarify that that reasnable categries generally include specified jb categries, nature f cmpensatin (fr example salaried r hurly), gegraphic lcatin, and similar bna fide business criteria. Hwever, an enumeratin f emplyees by name, r ther specific criteria having a similar effect, is nt cnsidered a reasnable categry. 8 The FPL fr the 48 cntiguus states and the District f Clumbia is the same. Hawaii and Alaska have higher FPLs. 10
Wrksheet #3 WORKSHEET #3 IDENTIFYING FULL-TIME EMPLOYEES IN 2014 Basic rule Bth penalties hinge n whether the emplyer ffers cverage t full-time emplyees, s being able t identify full-time emplyees is f critical imprtance. Sme imprtant rules t keep in mind when determining whether a cmpany has any full-time emplyees wh might trigger a penalty tax: Related cmpanies are nt cmbined fr this purpse: Althugh the related business rules apply fr determining whether an emplyer is large, the determinatin f whether a penalty applies is determined n a cmpany-by-cmpany basis, based n that cmpany s ffer f cverage (r lack theref) and that cmpany s number f full-time emplyees. Each cmpany within the grup shuld cmplete its wn Wrksheet #3. Cmmn law emplyees are cunted: The rules fr determining wh is an emplyee are generally the same as described in Wrksheet #1 (i.e., cmmn law emplyees, excluding partners, sle prprietrs, partners in a partnership, 2% S Crp sharehlders, leased emplyees (as defined in Cde Sectin 414(n)(2)), mst emplyees wh wrk utside the United States, and wrkers described in Cde Sectin 3805). Again, careful cnsideratin shuld be given t independent cntractrs, temprary emplyees, and ther individuals wh perfrm services fr the emplyer but are nt treated as cmmn law emplyees by the emplyer. Full-time emplyee: The statute defines a full-time emplyee, with respect t any mnth, as an emplyee wh is emplyed n average at least 30 hurs f service per week. The final regulatins permit emplyers t treat 130 hurs f service in a calendar mnth as the mnthly equivalent f 30 hurs f service per week, prvided the emplyer applies this rule n a reasnable and cnsistent basis. Hurs f service: Hurs f service are used in determining whether an emplyee is a full-time emplyee. The hur f service rules are explained in the final regulatins. Part-time emplyees: Penalties d nt apply t part-time emplyees, and there is n need t determine a full-time equivalent (like there is under Wrksheet #1). Because penalties d nt apply t part-time emplyees, sme emplyers might cnsider whether reducing emplyees belw the 30-hur threshld culd minimize ptential penalties. 9 Tw methds fr determining full-time status: The final regulatins prvide tw methds fr determining whether an emplyee has sufficient hurs f service t be a full-time emplyee. The mnthly measurement methd: One methd is the mnthly measurement methd under which a cmpany determines each emplyee s status as a full-time emplyee by cunting the emplyee s hurs f service fr each mnth. This methd can be difficult t administer, especially fr variable hur emplyees because a cmpany will nt typically be able t determine until the end f a mnth, after it is t late t avid penalties, whether such emplyees were full-time fr the mnth. The lk-back measurement methd: 10 The ther methd is the lk-back measurement methd under which a cmpany may determine the status f an emplyee as a full-time emplyee during a future perid (called a stability perid ), based upn the 11
Wrksheet #3 hurs f service f the emplyee in a prir perid (called a measurement perid ). Under this methd, a cmpany will knw the emplyee s status as a full-time emplyee at the time the cmpany ffers cverage. The final regulatins describe appraches that can be used fr varius circumstances, such as fr emplyees wh wrk variable hur schedules, seasnal emplyees 11, and emplyees f educatinal rganizatins. Imprtant nte: The final regulatins clarify that related cmpanies may use different measurement methds. The final regulatins d nt permit a cmpany t adpt the lk-back measurement methd fr variable hur and seasnal emplyees while using the mnthly measurement methd fr emplyees with mre predictable hurs f service. The final regulatins als clarify that a cmpany may apply measurement perids and stability perids that differ in length, r in their starting and ending dates, with respect t: (1) cllectively bargained emplyees and nn-cllectively bargained emplyees; (2) each grup f cllectively bargained emplyees cvered by a separate cllective bargaining agreement; (3) salaried emplyees and hurly emplyees; and (4) emplyees whse primary places f emplyment are in different states. The specifics f the tw measurement methds are explained in the final regulatins. The cmpany will use (check ne bx): If using different perids and dates fr different permitted categries f emplyees, cmplete the infrmatin belw fr each categry f emplyees. The mnthly measurement methd. The lk-back measurement methd. Cmplete the infrmatin fr nging and new emplyees belw. Fr nging emplyees nte the standard measurement perid, the standard stability perid, and the standard administrative perid being used belw: Standard measurement perid: t (3 t 12 mnths). Standard stability perid (typically the plan year): t (3 t 12 mnths). 12 Standard administrative perid: t (n lnger than 90 days beginning immediately after the standard measurement perid and ending immediately befre the standard stability perid). Shrt measurement perid fr stability perid starting in 2015. Fr stability perids beginning in 2015, the final regulatins prvide a transitin rule that allws a cmpany t use a measurement perid f less than 12 mnths (even if a 12-mnth measurement perid wuld therwise be required). The shrter measurement perid must be at least six cnsecutive mnths, must begin n later than July 1, 2014, and must end n earlier than 90 days befre the first day f the plan year beginning n r after January 1, 2015. (Cnsider whether t use the special rule, check if using, and nte shrt measurement perid): Shrt measurement perid fr 2015 standard stability perid: t. Fr new emplyees nte the initial measurement perid, the initial stability perid, and the initial administrative perid being used belw: Initial measurement perid: will begin n and will last fr mnths (3 t 12 mnths). 13 12
Wrksheet #3 Initial stability perid will last fr mnths (must generally be the same length as the standard stability perid). 14 Initial administrative perid: days (nt t exceed 90 days). 15 Will the cmpany have any full-time emplyees (check ne bx)? Yes. The cmpany is ptentially subject t a penalty. Prceed t Wrksheet #4. N. The cmpany will nt be subject t the penalties. Stp here but cntinue t mnitr each year. Endntes 9 Emplyers that lwer hurs t prevent emplyees frm being cnsidered full-time shuld cnsult with legal cunsel t ascertain whether such individuals culd bring viable claims under Sectin 510 f ERISA r any ther nndiscriminatin rules such as the Americans with Disabilities Act, the Age Discriminatin in Emplyee Act, r Title VII. 10 The lk-back measurement methd fr identifying full-time emplyees is available nly fr purpses f determining and cmputing liability fr an emplyer shared respnsibility penalty, and nt fr purpses f determining whether an emplyer is a large emplyer. 11 The final regulatins prvide that a seasnal emplyee means an emplyee in a psitin fr which the custmary annual emplyment is six mnths r less. The preamble t the final regulatins indicates that the reference t custmary means that by the nature f the psitin an emplyee in the psitin typically wrks fr a perid f six mnths r less, and that perid shuld begin each calendar year in apprximately the same part f the year, such as summer r winter. In certain unusual instances, the emplyee can still be cnsidered a seasnal emplyee even if the seasnal emplyment is extended in a particular year beynd its custmary duratin (regardless f whether the custmary duratin is six mnths r is less than six mnths). Fr example, if ski instructrs at a resrt have a custmary perid f annual emplyment f six mnths, but are asked in a particular year t wrk an additinal mnth because f an unusually lng r heavy snw seasn, they wuld still be cnsidered seasnal emplyees. 12 Fr emplyees determined t be emplyed n average at least 30 hurs per week during the standard measurement perid, the standard stability perid must be at least 6 cnsecutive calendar mnths, but n shrter in duratin than the standard measurement perid. Fr emplyees determined nt t be emplyed n average at least 30 hurs per week during the standard measurement perid, the standard stability perid cannt be lnger than the standard measurement perid 13
Wrksheet #3 13 The initial measurement perid may begin n any date between the emplyee s start date r any date up t and including the first day f the first calendar mnth fllwing the emplyee s start date (r n the first day f the first payrll perid starting n r after the emplyee s start date, if later, as set frth in Sectin 54.4980H-3(d)(3)(ii) f the final regulatins). 14 See Sectin 54.4980H-3(d)(3) f the final regulatins fr rules impacting the length f the initial stability perid. 15 The initial administrative perid includes all perids between the start date and the date the emplyee is first ffered cverage, ther than the initial measurement perid. In additin, the initial measurement perid and the initial administrative perid tgether cannt extend beynd the last day f the first calendar mnth beginning n r after the first anniversary f the emplyee s start date. 14
Wrksheet #4 WORKSHEET #4 PLAN DESIGNS TO AVOID/MINIMIZE THE PENALTIES Basic rule The penalties nly apply if ne r mre full-time emplyees receive a premium tax credit t help pay fr cverage n a Marketplace. Premium tax credits generally are available t help pay fr cverage fr emplyees wh: (1) have a husehld incme between 100% and 400% f the federal pverty level and enrll in cverage thrugh a Marketplace; (2) are nt eligible fr cverage thrugh a gvernment-spnsred prgram like Medicare, Medicaid, r CHIP; and (3) are nt eligible fr cverage ffered by an emplyer r are eligible nly fr emplyer cverage that is unaffrdable r that des nt prvide minimum value. These factrs are largely beynd the emplyer s cntrl, s the emplyer may be taking a significant risk if it des nt ffer minimum essential cverage. Rather than hping that n full-time emplyee receives a premium tax credit r cst-sharing reductin fr cverage thrugh a Marketplace, emplyers can design their plans t avid/minimize the penalties. Hw t design arund the subsectin (a) penalty: Offer minimum essential cverage t substantially all full-time cmmn law emplyees and their dependents under an emplyer spnsred plan. Make sure t prperly classify all cmmn law emplyees. Give careful cnsideratin t prper treatment f independent cntractrs, temprary emplyees, and leased emplyees. An emplyer may avid the subsectin (a) penalty even if emplyees are required t pay 100% f the cst f cverage, althugh ding s culd subject the emplyer t the subsectin (b) penalty. A large emplyer will be treated as ffering cverage t substantially all full-time emplyees and their dependents fr a calendar mnth if it ffers cverage t at least 70% f such individuals in 2015 and 95% f such individuals in later years. Remember, any full-time emplyees wh are nt ffered cverage may still trigger a subsectin (b) penalty. Amend grup health plans t reflect a 30 hur f service requirement. Sme emplyers might decide t use a lwer hur f service requirement t prvide a margin f errr. Amend plans t prvide cverage fr all full-time emplyees and their children (i.e., natural brn and adpted children) until the end f the mnth the child attains age 26. Recnsider current plan exclusins because they may nt wrk if the emplyees being excluded are full-time emplyees under the new rules. Amend plan as needed. If using the lk-back methd t determine full-time emplyees, cnsider whether plan amendments may be necessary t dcument the measurement perids, the stability perids, and the administrative perids. Hw t design arund the subsectin (b) penalty: Offer at least ne minimum value ptin (determined using ne f the three permissible methds). Set the premium s the emplyee s cntributin tward the emplyer s lwest cst self-nly cverage that prvides minimum value is affrdable t all full-time emplyees. The safest way t d this is t set the premium s it satisfies the W-2, rate f pay, r federal pverty level safe harbr. If self-nly cverage is affrdable fr sme, but nt all emplyees, nly thse emplyees fr whm it is unaffrdable, wh receive a premium tax credit t help pay fr cverage n a Marketplace, will trigger a penalty. 15
Wrksheet #4 Emplyers might cnsider requiring highly cmpensated individuals t pay a higher percentage f cmpensatin t make a plan mre affrdable fr lwer-incme emplyees. Family cverage des nt have t be affrdable. Plan dcuments and/r enrllment materials may need t be amended t reflect the affrdable premium structure. Imprtant rules t keep in mind when designing plans t avid the penalties: Nndiscriminatin rules: Plans remain subject t ther applicable rules. Fr example, self-funded grup health plans are currently subject t the nndiscriminatin requirements f Cde Sectin 105(h), and it is nly a matter f time until nn-grandfathered insured grup health plans are subject t similar nndiscriminatin rules. Furthermre, any grup health plans that allw premiums t be paid n a pretax basis thrugh a Sectin 125 plan must als satisfy the nndiscriminatin requirements f Cde Sectin 125. These nndiscriminatin rules generally prhibit emplyers frm designing their grup health plans t discriminate in favr f highly cmpensated individuals. When designing plans t avid the penalties, emplyers must be careful nt t run aful f nndiscriminatin r ther applicable rules. Tax deductins: Emplyers may nt take a tax deductin fr any penalties they pay. Emplyers may deduct the cst f emplyer-spnsred health cverage fr incme tax purpses. In additin, the value f emplyer-prvided cverage is generally tax free t emplyees and is nt subject t FICA taxes. Cllective bargaining may be required: Emplyers with cllective bargaining agreements might have t mdify thse agreements t make health plan changes needed t avid the penalties. 16
Appendix A APPENDIX A Large Emplyer Play r Pay Penalties Flw Chart Is the emplyer a large emplyer? (Wrksheet #1) A N Yes NO PENALTY B Is minimum essential cverage ffered t substantially all full-time emplyees? (Wrksheets #2 and #3) C Yes Will ne r mre fulltime emplyees wh are eligible fr a premium tax credit pt ut f emplyer cverage t purchase Marketplace cverage? G Yes Was the cverage ffered t the emplyees minimum value? (Wrksheets #2 and #4) H N N Yes Did ne full-time emplyee receive a premium tax credit fr Marketplace cverage? D N NO PENALTY F Yes Was the minimum value cverage affrdable fr each emplyee? Yes (Wrksheets #2 and #4) I Emplyer must pay subsectin (a) penalty fr all full-time emplyees, minus first 30 (80 fr 2015). (Wrksheets #2 and #3) E Emplyer must pay subsectin (b) penalty fr each full-time emplyee wh receives a premium tax credit fr Marketplace cverage, nt t exceed the subsectin (a) penalty. (Wrksheets #2 and #3) N J 17