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A Mixed Bag of Guidance: The IRS Issues Final Regulations on the Employer Pay-or-Play Mandate Under ACA




by:
James R. Napoli
Constangy Brooks Smith LLP - Atlanta Office

 
February 19, 2014

Previously published on February 12, 2014

The IRS released the long awaited final regulations to the employer shared responsibility provisions of the Affordable Care Act ("ACA") (aka the "pay-or-play mandate") along with a set of FAQs on the pay-or-play mandate. On a first read of the 227 pages of guidance, the regulations appear to be a mixed bag for employers and industries with particular needs such as higher education. What is clear is that additional guidance will be needed and the final regulations appear to embrace that notion. With that said, here are some of the highlights of this round of ACA rulemaking:

Application of the Pay-or-Play Mandate

  • For employers with non-calendar year plans, the mandate will generally apply beginning with the first day of the 2015 plan year as opposed to January 1, 2015, for calendar year plans.
  • The requirement to cover dependents will not apply for the 2014 pla year or the 2015 plan year so long the employer meets the following criteria:
    • The employer did not offer dependent coverage during the 2013 or 2014 plan year.
    • The employer is taking steps to arrange for dependent coverage to begin in the 2016 plan year.
  • For purposes of determining whether an employer is subject to the pay-or-play mandate in 2015, an employer can determine whether it had at least 100 full-time or full-time equivalent employees by reference to a period of at least six consecutive months in 2014.
  • An employer that employs more than 50 but less than 100 full-time and full-time equivalent employees during 2014 is given until the 2016 plan year to comply with the pay-or-play mandate so long as the employer meets the following conditions:
    • The employer does not reduce the size of its workforce or the overall hours of its workforce to meet the workforce size condition.
    • The employer does not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014.
    • The employer certifies to the IRS that it meets the above criteria.
  • For the 2015 plan year, an employer's offer of health coverage has to be made to at least 70% of the employer's full-time employees (and their dependents – unless the special exemption for dependent coverage applies – see above) to avoid the no coverage penalty. The employer remains subject to the affordability penalty.
  • For the 2016 plan year, an employer's offer of health coverage has to be made to at least 95% of the employer's full-time employees (and their dependents) to avoid the no coverage penalty. The employer remains subject to the affordability penalty.

Institutions of Higher Education

  • The final regulations give institutions of higher education relief with respect to students who are employed by the institution through the federal work study program, but offer no relief with respect to students otherwise employed by the institution. This generally means that institutions of higher education will not have to treat work-study students as "employees" but will, for example, have to measure the hours of service completed by grad students (e.g., teaching assistants, lab assistants, etc.).
  • The final regulations provide a safe harbor for counting adjunct faculty hours of service pursuant to which an adjunct faculty member is credited with 2.25 hours of service for each hour taught, and is credited with an additional hour of service for each hour worked outside of the classroom (e.g., mandatory faculty meetings). This safe harbor is available until at least the end of 2015. It is anticipated that further guidance will be issued at some point in the future.
  • The final regulations provide that an institution of higher education that does not otherwise use the safe harbor approach must use a "reasonable method" for crediting hours of service of adjunct faculty members.

Determining Employment Status

  • The final regulations adopt the common law approach to determining whether an employee-employer relationship exists. The regulations specifically define an employee to exclude a leased employee (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in IRC section 3508 (e.g., real estate agents and direct sellers).
  • The final regulations do not provide a safe harbor definition for independent contractors nor do the regulations provide relief for industries that employ so-called "high turnover" employees.

Definition of Seasonal Employee Provided

  • The regulations define a "seasonal employee" as an employee who is hired into a position for which the customary annual employment is six months or less. The preamble to the regulations further clarify that "the reference to customary means that by the nature of the position an employee in this position typically works for a period of six months or less, and that period should begin each calendar year in approximately the same part of the year, such as summer or winter."

Volunteer Firefighters and Emergency Medical and Other "Bona Fide Volunteers"

  • The final regulations provide that hours of service performed by "bona fide volunteers" need not be counted to determine whether the volunteer is a full-time employee.
  • The final regulations define a "bona fide volunteer" as any volunteer who is an employee of a government entity or a 501(c) tax-exempt organization whose only compensation from that entity or organization is in the form of (i) reimbursement for (or reasonable allowance for) reasonable expenses incurred in the performance of services by volunteers, or (ii) reasonable benefits (including length of service awards), and nominal fees, customarily paid by similar entities in connection with the performance of services by volunteers. Examples of bona fide volunteers include volunteer firefighters and emergency medical.

Employers need to evaluate the impact the final regulations will have as they continue to implement ACA. As always, employers are encouraged to also look beyond the final regulations in developing their implementation strategy. By way of example, an employer can be 100% ACA-compliant in its implementation strategy, yet violate federal law and, in some cases state law, beyond ACA. Care must be taken to understand the interplay between ACA and other laws when implementing strategies built around the pay-or-play mandate.

The above summary is not meant to be an exhaustive list of the rules contained in the final regulations but, rather, is meant to highlight some of the standout provisions of the new guidance. We will continue to analyze the final regulations and prepare special reports on the impact the regulations will have on employers' ACA implementation efforts.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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