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02-17-2014 IRS Issues Final Regulations Regarding Employer Shared Responsibility Payments

On February 12, 2014, the Internal Revenue Service ("IRS") published final regulations implementing the employer shared responsibility provisions of the Patient Protection and Affordable Care Act, as amended ("ACA"). The employer shared responsibility provisions are commonly referred to as the "employer mandate." The full text of the regulations is available here. These regulations, which became effective February 12, 2014, provide additional guidance to employers who may be subject to the employer shared responsibility payments and offer transitional relief delaying the application of the employer mandate to specific categories of employers.

Background

The employer mandate was added to the Internal Revenue Code (the "Code") as part of the ACA in 2010. Under these provisions, employers with fifty (50) or more full-time employees are considered "applicable large employers." Applicable large employers are subject to employer shared responsibility penalties in two situations. First, an applicable large employer that does not offer health insurance coverage to its full-time employees and their dependents that meets the ACA's affordability and minimum value requirements will be subject to a penalty if one of its full-time employees receives a premium tax credit and purchases health insurance coverage from an exchange. Second, an applicable large employer may be subject to shared responsibility payments if the employer fails to offer health insurance coverage complying with the minimum value and affordability requirements to 95% of its full time-employees, and a full-time employee receives a premium tax credit to purchases health insurance coverage on an exchange. In both situations, the amount the employer must pay as a penalty is calculated by multiplying the employer's number of full-time employees, minus 30 such employees, by a set dollar amount.

Guidance Clarifying Which Workers Qualify as Full-Time Employees

The final regulations regarding the employer shared responsibility provisions of the ACA provide guidance clarifying many issues with respect to the employer mandate. Specifically, the final regulations clarify the employees an employer must consider to be full-time employees and the employees to which an employer must offer health insurance coverage.

Under the employer shared responsibility provisions, an applicable large employer must offer coverage to full-time employees and their dependents. Whether an employee is considered a full-time employee is based on the employee's hours of service. According to the final regulations, employees working 30 hours a week or 130 hours a month will be considered full-time employees. The regulations allow a salaried employee's hours of service to be calculated using a daily or weekly equivalency method. The regulations also clarify who is considered a full-time employee's dependent. The child of a full-time employee will be considered a dependent until the child reaches twenty-six (26) years of age. An employee's spouse is not considered a dependent, and employer-provided health insurance coverage is not required to be extended to spouses.

The regulations also address the issue of which employees are considered to be full-time employees. Specifically, the regulations state that seasonal workers will be considered full-time employees only if the workers' customary annual employment is longer than six (6) months. Thus, many employers of seasonal workers will not be required to provide health insurance coverage to employees and will be exempted from the ACA employer shared responsibility provisions. Bona fide volunteers for government entities or tax-exempt organizations will not be considered full-time employees. This will allow such organizations and entities to continue to rely upon volunteers without becoming subject to or violating the ACA. The final regulations also state that educational employees who have long breaks in their employment throughout the calendar year will still be considered full-time employees.

Applicability of Employer Shared Responsibility Provisions to New Businesses

The final regulations address how new businesses should determine if they must comply with the ACA's employer shared responsibility provisions. Employers that were not in existence prior to 2014 should calculate their number of employees based on their reasonable expectations in order to determine if they will qualify as applicable large employers. If a new employer anticipates that it will have fifty (50) or more employees during the year and actually does, the employer will be subject to the employer shared responsibility provisions. For all subsequent years, the employer must rely on the standard regulatory methods to calculate its number of employees and which employees must be offered health insurance coverage.

Affordability Safe Harbor

To comply with the employer shared responsibility provisions and avoid paying a penalty, applicable large employers must offer health insurance coverage that is considered affordable under the ACA. The determination of affordability is made in reference to an employee's household income. However, many employers may not have accurate information regarding an employee's household income. To address this issue, the final regulations provide three safe harbor options applicable large employers may utilize to ensure that their health insurance coverage complies with the affordability standards.

Under the first of these safe harbor provisions, an employer may calculate affordability of health insurance coverage based off the employee's wages earned solely from that particular employer. For the purpose of this calculation, the employee's income does not include any salary reduction elections, such as 401(k) plan contributions. The second safe harbor is entitled the "rate of pay safe harbor." Coverage is treated as affordable if the employee's required health insurance contribution does not exceed 9.5% of the employee's monthly wages calculated from the employee's lowest hourly rate of pay during the calendar month. This method may be utilized for all employees, including those whose compensation is reduced during the year as long as the reduction is for bona fide business reasons. The final safe harbor method deems health insurance coverage to be affordable if the employee's required contribution does not exceed 9.5% of the federal poverty line for a single individual.

Transitional Relief

Earlier this year, the IRS issued guidance stating that applicable large employers would not be subject to employer share responsibility payments in 2014. A full discussion of this guidance is available here. The final regulations extend the delay of the employer mandate's application for specific categories of applicable large employers.

"Small" applicable large employers, which employ between fifty (50) and one hundred (100) employees, will not be subject to the employer shared responsibility payments until 2016. An employer will qualify for this delay in the implementation of the shared responsibility provisions if the employer does not reduce its workforce, without a bona fide business reason, and does not significantly reduce the health insurance coverage offered to its employees. Employers meeting these requirements must provide certification to the IRS.

The final regulations provide all applicable large employers, regardless of the number of employees, a delay in the application of the employer shared responsibility provisions for health insurance plans that have plan years that are not on a calendar year. Applicable large employers with more than one hundred (100) employees must comply with the shared responsibility provisions on the first day of the health insurance coverage's plan year in 2015. Also, applicable large employers will not be subject to employer shared responsibility payments for failing to provide dependent coverage in 2015 if the employer takes steps to offer dependent coverage beginning in 2016.

For 2015 only, all applicable large employers will be exempt from an employer shared responsibility payment if the employer offers health coverage meeting the minimum value and affordability requirements to 70% of their workforce. The final regulations delay the application of the 95% threshold until 2016. Further, employers who are assessed employer responsibility payments in 2015 will be subject to reduced penalties as the IRS will allow for a deduction of 80 instead of 30 full-time employees when calculating the amount of the shared responsibility payment.

Action Items

To comply with the employer mandate, employers should calculate the number of full-time employees and determine whether they are applicable large employers. Applicable large employers should ensure that health insurance coverage is being offered so as to avoid shared responsibility payments. Employers should be aware that while they may be exempt from employer shared responsibility payments in 2015, all applicable large employers are required to comply with the ACA reporting requirements. Further, the IRS has stated that additional guidance addressing specific questions regarding employer shared responsibility payments will be forthcoming. All employers should take steps to ensure that they are fully informed regarding the ACA requirements and are in full compliance with the various health care reform mandates.

Fraser Stryker is a leader in employee benefits and tax law. Attorneys in the Firm's Employee Benefits Practice Group advise businesses, governments, and nonprofit/tax-exempt organizations on a wide variety of tax and employee benefits matters, transactions, and litigation. Fraser Stryker helps employers implement and maintain innovative and cost-effective employee benefit plans that attract and retain top talent. Attorneys on the Firm's Patient Protection and Affordable Care Act & Health Care Reform Response Team advise clients on all aspects of health care reform implementation and compliance. For more information, or if you would like to discuss the ACA, its reporting requirements, or the employer share responsibility provisions please contact Nicole R. Konen, Emily Wischnowski, or Kevin Tracy.

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This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.

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