H&W: New IRS Guidance on Employer Shared Responsibility Rules

New IRS Guidance on Employer Shared Responsibility Rules: On Jan. 2, 2013, the Internal Revenue Service (IRS) published a proposed rule, “Shared Responsibility for Employers Regarding Health Coverage,” that contain compliance guidance for the requirement that large employers provide affordable health care coverage to employees under the Affordable Care Act (ACA). The IRS also released a set of questions and answers that provide additional detail on these requirements. The (IRS) said employers could rely on the proposed rule and Q&As in making plans for 2014.

The newly published information closely tracks the requirements outlined in previous notices, many of which were described in previous posts on this blog site: “Play or Pay FTE Safe Harbor” and “IRS Guidance on 90 Day Waiting Period Limit.”

In general, these provisions impose a monetary penalty on large employers who do not provide minimum essential coverage that pays at least 60% of the total allowed cost of benefits to their full-time employees, if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage through an Exchange.

Some of the highlights of the new guidance include the following:

Applicable Large Employer: An applicable large employer subject to the shared responsibility provisions is one that employed at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50 full-time equivalents during the preceding calendar year. Employers average their number of employees across the months in the year to see whether they meet the threshold of 50 full-time employees/equivalents. Employers do not need to count hours of service worked outside the United States if compensation for those services would qualify as foreign source income. If the average results in a fraction, the employer should always round down.

Transition relief is provided for the 2014 calendar year that allows an employer the option to determine its status as an applicable large employer by reference to a period of at least six consecutive calendar months, as chosen by the employer, in the 2013 calendar year (rather than the entire 2013 calendar year). Thus, an employer may determine whether it is an applicable large employer for 2014 by determining whether it employed an average of at least 50 full-time employees on business days during any consecutive six-month period in 2013.

Controlled Group: Members of a controlled group are treated as a single entity for purposes of meeting the definition of an applicable large employer; however, each member is treated as a separate entity for purposes of determining liability for any shared responsibility penalty.

Dependent Coverage: Applicable large employers must offer coverage to “substantially all” full-time employees and their dependent children up to age 26 in order to avoid the shared responsibility penalty. Coverage does not have to be provided to spouses.

Dependent Coverage Transition: Applicable large employers that do not now offer dependent coverage will not be penalized for not offering dependent coverage during the 2014 plan year, provided that the employer takes steps during that plan year to come into compliance and offer dependent coverage beginning in 2015.

Margin of Error Rule:  Previously, the government had determined that the assessable payment should not apply in the case of an employer that intends to offer coverage to substantially all its full-time employees, but fails to offer coverage with respect to a few full-time employees. The “substantially all” standard is defined in the proposed rule as being met for a calendar month if, for that month, the employer offers coverage to all but five percent or, if greater, five of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also offered coverage to that employee’s dependents).

Affordable Coverage:  An employer’s health coverage will be considered unaffordable for purposes of the shared responsibility penalty if the required employee contribution for the lowest cost self-only coverage option exceeds 9.5% of the employee’s Form W-2 wages (amount reported in Box 1 of the employee’s Form W-2). The cost of family or dependent coverage is not considered in determining affordable coverage.

Affordable Coverage Additional Safe Harbors: The proposed regulations set out two additional safe harbor options to meet the affordable coverage test. Under the Rate of Pay safe harbor, affordability is based on monthly wages. Employers will use the monthly salary for salaried employees and the hourly rate of pay times 130 for hourly employees. If the employee’s required monthly contribution for self-only coverage does not exceed 9.5% of the monthly wages, the employer coverage would be affordable. Under the Federal Poverty Level (FPL) safe harbor, affordability is based on the 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 deemed affordable for all employees.

Non-Calendar Year Plans: The shared responsibility provisions generally are effective on January 1, 2014. However, if an employer with a non-calendar year plan in existence on December 27, 2012 offers employees affordable coverage that satisfies the minimum value requirement by the first day of the plan year starting in 2014, it would not be assessed a shared responsibility penalty for any period in 2014 prior to the beginning of the 2014-2015 plan year.

Non-Calendar Year Plans (Cafeteria Plans): An employer may permit participants in a cafeteria plan to make one mid-year election change to drop their employer coverage and enroll in Exchange coverage. In addition, employees may enroll in coverage through the cafeteria plan, even if they previously declined the coverage and they had not experienced a change in status event. The cafeteria plan must be amended to permit these election changes by December 31, 2014.  This transition relief applies only to the revocation, modification, or commencement of salary reductions for accident and health coverage offered through a cafeteria plan of an employer with a cafeteria fiscal year plan beginning in 2013.

Seasonal Worker Exception: If the sum of an employer’s full-time employees and full-time equivalents exceeds 50 for 120 days or less during the preceding calendar year, and the employees in excess of 50 who were employed during that period are seasonal workers, the employer is not considered to be an applicable large employer for the current calendar year. Four calendar months may be treated as the equivalent of 120 days and neither the four calendar months nor the 120 days need be consecutive. While DOL regulations define seasonal workers as agricultural workers, and retail workers employed exclusively during the holiday season, the proposed regulations allow employers to use a “reasonable good faith interpretation” of this standard in addition to this definition.

Paid Leave: Prior guidance had limited paid leave to a maximum of 160 hours when calculating the employee’s full-time status. However, this limit was eliminated because legally protected leaves of absence could exceed this hourly amount.

Pay Periods: Look back “measurement periods” can begin and end with payroll periods that are one week, two weeks, and semi-monthly in duration.

Anti-Abuse Rules:  The proposed regulations include provisions to prevent employer efforts to manipulate the nature or length of the employment relationship so as to avoid application of shared responsibility rules.