|December 14, 2012|
Previously published on December 10, 2012
For many "large" employers, determining whether to "pay or play" may not be an easy process. The ACA's employer shared responsibility provision goes into effect in 2014, making advance preparation even more important if you have part-time, seasonal or "variable hour" employees. Since you are only required to either potentially pay (a penalty for) or play (offer coverage to) those individuals who are considered your full-time employees, your ability to substantiate whether an employee is or is not "full-time" will be critical to successfully navigating the "pay or play" provisions of the ACA. While you may have your own rules for determining whether an employee is classified as "full-time," it is the ACA definition of "full-time employee" that controls the "pay or play" requirements. For this purpose, a full-time employee is any employee who is reasonably expected to work an average of at least 30 hours a week.
What are the Pay or Play Rules?
The Pay or Play rules are a complex web of laws, regulations and government sub-regulatory guidance. Here's how they work. Only those employers with 50 or more "full-time"  and "full-time equivalent" employees (called "large employers") will be subject to non-deductible tax penalties (formally known as assessable payments) if either (1) or (2) below apply.
(1) The large employer doesn't offer full-time employees (and dependents) the opportunity to enroll in minimum essential health coverage and at least one full-time employee enrolls in government subsidized coverage through a health insurance exchange; or
(2) The large employer offers minimum essential health coverage but the coverage is either; (1) unaffordable or doesn't provide minimum value, and (2) at least one full-time employee enrolls in government subsidized coverage through a health insurance exchange.
Coverage is unaffordable if the "Cost" is more than 9.5% (adjusted for years after 2014) of the employee's family income. Government guidance allows employers to use an employee's Form W-2 wages (as reported in Box 1) instead of household income in determining whether coverage offered is affordable ("affordability safe harbor"), at least through the end of 2014. "Cost" for this purpose means the cost for employee-only coverage under the lowest cost minimum value plan offered to the employee. Coverage is considered to provide minimum value only if the plan's share of the total allowed costs of benefits under the plan is at least 60 percent. Methodologies proposed by the IRS for determining minimum value include actuarial value/minimum value calculators and actuarial certifications of plans.
When is an Employer a "Large" Employer?"
In general, an employer is a large employer if it employed an average of at least 50 "full-time" and "full time equivalent" employees on business days during the preceding calendar year. "Full-time" means employed, on average, at least 30 hours of service per week. For purposes of determining whether an employee is a large employer, in addition to counting all full-time employees, the employer must also take into consideration all full time equivalents based on hours worked by employees not satisfying the definition of full-time. 
IRS Notice 2011-36 provides a proposed method for determining full-time equivalents and calculating the total number of employees for purposes of the "large employer" threshold.  To make the determination of full-time equivalents for a month, the employer divides the sum of all the hours of service in a month for employees who are not full-time by 120. Fractions are taken into account. To arrive at how many total employees the employer has for purposes of the Large Employer threshold, the employer adds the number of full-time employees for a month to the number of full time equivalents for the month. If the average for the year is 50 or greater, the employer is treated as a large employer.  If the average is 50 or more, the employer then determines whether the seasonal employee exception applies.
What is the Exclusion for Seasonal Employees?
An employer will not be treated as having 50 full time employees if: (1) the employer's workforce exceeds 50 full-time employees for 120 days or less during the calendar year, and (2) the employees in excess of 50 employed during that period were seasonal workers. Seasonal workers means a worker who performs labor or services on a seasonal basis as defined by the Department of Labor including certain agricultural workers and retail workers employed exclusively during the holidays.
Be Careful Before You Conclude You are NOT a Large Employer
Controlled Group Rules Apply -- Special rules apply requiring employees of employers that are part of a "controlled group of corporations" or "affiliated service group" to be aggregated for purposes of determining whether the controlled group members are large employers.
Predecessor Rules Apply. Employees of a predecessor employer are counted in determining whether an employer is a large employer.
And, Special Rules Apply to New Employers. For employers not in existence the preceding year, the determination of whether the employer is a large employer is based on the average number of employees the employer reasonably expects to employer on business days in the current year.
What are the Penalties under the Pay or Play Rules?
Remember, nothing in the ACA requires any employer, including any large employer. to provide health care coverage to its employees (full-time or otherwise). However, a large employer may be subject to the following non-deductible assessable payments (penalties), if it doesn't "Play."
The "No Coverage" Penalty.
Under the law, if a large employer fails to offer full-time employees (and their dependents) the right to enroll in minimum essential coverage for any month and at least one full-time employee has been certified to the employer as having enrolled for the month in government subsidized coverage through a health insurance exchange, then the employer will be assessed and must pay the following penalty (subject to annual inflationary increases): A monthly amount equal to 1/12th of $2,000 ($166.67) multiplied by the number of the employer's full-time employees minus 30.
The Penalty for Providing Coverage that Either Fails the Minimum Value Requirement or is Unaffordable ("Non-Compliant Coverage Penalty")
In order to avoid penalties, the employer must offer its full-time employees the right to enroll in minimal essential coverage that is both affordable and provides minimum value. If the employer offers minimum essential coverage but the coverage is either unaffordable or doesn't provide minimum value and one or more full time employees enrolls in government subsidized coverage through a health insurance exchange, there is a different monthly penalty. The penalty in this case, subject to annual inflationary increases, is the lesser of: 1/12th of $3,000 (or $250 per month), times the number of full-time employees enrolled for government subsidized health insurance coverage for the month; or the penalty that would apply if no coverage was offered at all.
Accordingly, the Non-Compliant Coverage Penalty can be triggered if minimal essential coverage is offered to a large employer's full-time employees but either: (a) the coverage does not provide "minimum value," and one or more full-time employees enrolls in government subsidized coverage through a health insurance exchange, or (b) the coverage is unaffordable for an employee (exceeds 9.5% of the employee's household income, or the employee's W-2 wages, under the affordability safe harbor) and the employee obtains government subsidized coverage through a health insurance exchange.
So What Will it Mean to "Play" in order to Totally Avoid both the "No Coverage Penalty" and the "Non-Compliant Coverage Penalty?"
In order to avoid both the "No Coverage Penalty" or the "Non-Compliant Coverage Penalty," it will be important for large employers to both : (1) maintain records sufficient to substantiate those employees who are full-time under the ACA; and (2) offer all full-time employees minimal essential coverage that both provides minimum value and is also affordable. One way to ensure that coverage is affordable is to use the "affordability safe harbor" discussed above.
Safe Harbor Alternatives to Month-By-Month Determinations of Full-Time Status
As noted above, the law requires an employee's status as full-time to be determined month-by-month. However, month-by-month determinations will be an administrative burden, especially when an employee's hours vary each month or when an employee is employed for a limited period of time.
In recognition that monthly determinations may not be practical, the IRS issued Notice 2012-58 containing optional "safe harbor" alternatives to making month-by-month determinations of full-time status. Notice 2012-58 does not constitute official regulatory guidance, but employers may rely on the guidance in Notice 2012-58 until the end of 2014. Employers will not be required to comply with any subsequent guidance that is more restrictive until at least January 1, 2015. Employers who want to utilize the Notice 2012-58 safe harbors for 2014 will need to quickly establish and implement processes and procedures that will enable them to do so.
The safe harbor alternatives vary depending on whether the employee is an "ongoing" employee, a newly hired employee who is reasonably expected to work full-time or a newly hired variable hour or seasonal employee. Notice 2012-58 also has rules that apply when an employee transitions from new employee to ongoing employee status. While Notice 2012-58 does not address safe harbor alternatives for short-term-assignment employees, temporary staffing employees, and employees hired into high-turnover positions, the IRS anticipates issuing such guidance in the future.
Background on the Notice 2012-58 Safe Harbors
Other than for new employees who are reasonably expected to work full-time, the safe harbors allow an employer to determine an employee's full-time status by looking back at the time worked by the employee during a pre-defined "measurement period." This is called a "standard measurement period" for "ongoing employees" and an "initial measurement period" for new "variable hours" employees. If the employee is determined to have been full-time during the measurement period, then the employer must treat the employee as full-time during a "stability period," regardless of the number of the hours actually worked by the employee during the stability period. Employers may also use an optional "administrative period" between the measurement and stability periods to notify and enroll employees.
Can the Employer's Standard Measurement Period Vary by Employee Groups?
Yes, different measurement periods may be used for different categories of employees such as
Collectively bargained and non-collectively bargained employees;
Salaried and hourly employees; and
Employees of different entities
Safe Harbor Basics: Testing Ongoing Employees
An ongoing employee is an employee who is employed during an entire standard measurement period. The employer must choose the standard measurement period that can be no less than 3 and no more than 12 consecutive calendar months and must choose the particular months it will use.
What if the Employee is Full-Time During the Standard Measurement Period?
If there is a determination that the employee was full-time during the standard measurement period, then the employee must be treated as full- time during the subsequent stability period that is at least 6 months long and no shorter than the standard measurement period.
What if the Employee is not Full-Time During the Standard Measurement Period?
If there is a determination that the employee did not work full-time during the standard measurement period, then the employer may treat the employee as not full-time during a stability period that is no longer than the standard measurement period.
So even though this part-time employee might enroll in government subsidized coverage through a health insurance exchange, the employee would not be counted for purposes of the No Coverage Penalty or Non-Compliant Coverage penalty.
What is the Optional Administrative Period for Ongoing Employees?
The employer, at its option, may use an administrative period of up to 90 days between the end of the standard measurement period and the beginning of the associated stability period. The administrative period must overlap the stability period for the prior year so there is no gap in coverage. The purpose of providing this optional administrative period is, again, recognition by the IRS of the administrative difficulties in getting employees enrolled as well as the 90-day maximum waiting period requirement under the ACA that goes into effect in 2014. Guidance on this 90-day waiting period is provided in IRS Notice 2012-59, and will be discussed in more detail in a subsequent communiqué.
Safe Harbor Basics - Testing New Employees
For this purpose, a "new employee" is any employee who is not employed during an entire standard measurement period.
What is the Safe Harbor for New Variable Hour and Seasonal Employees
An employee is considered a variable hour employee if, based on the facts and circumstances at the date the employee begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week. Under this safe harbor, employers must choose an "initial measurement period" of not less than 3 and not more than 12 consecutive months. 
What if the Variable Hour/Seasonal Employee is Full-Time During the Initial Measurement Period?
If the employer determines that the employee was full-time during the initial measurement period, the employee has to be treated as full-time during the next stability period. The stability period must be at least 6 months long and no shorter than the initial measurement period. 
What if the Variable Hour/Seasonal Employee is not Full-time During the Initial Measurement Period?
If the employer determines that the employee was not full-time during the initial measurement period, then the employee may be treated as not full-time for the next stability period that does not exceed the shorter of: the initial measurement period plus one month; or the remainder of the standard measurement period for ongoing employees (plus any associated administrative period) in which the initial administrative period ends.
What is the Optional Administrative Period for Variable/Seasonal Employees?
The employer can use an administrative period with the new variable hour employee safe harbor if the administrative period does not exceed 90 days. In this case, the 90-day period is required to include any periods of time between the employee's start date and the date the employee is first offered coverage under the employee's group health plan minus the initial measurement period. For example, if the employer begins the initial measurement period on the first day of the month that follows the employee's start date, the period of time between the start date and the first day of the next month must be included in determining the 90-day limit.
There is a maximum limit on the combined initial measurement period and any administrative period the employer adopts. The initial measurement period and administrative period together cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee's start date (the end of the 13th calendar month following the employee's start date).
What Rules Apply When New Variable/Seasonal Employees Transition to Ongoing Status?
Once an employee who has been employed for an initial measurement period has also been employed for an entire standard measurement period, the employee is tested for full-time status as an ongoing employee, beginning with that standard measurement period.
For example, assume an employer uses January 1 through December 31 as its standard measuring period for ongoing employees, and also a one-year initial measurement period for new employees that begins on the employee's start date. Further assume that new employee, "Newby's, start date is February 12, 2014. In this case, the employer would first test Newby's status as full-time during his initial measurement period (February 12, 2013 - February 12, 2014). Newby would be tested again, as an ongoing employee, for the standard measuring period that being on January 1, 2014 and ends on December 31, 2014, assuming that he continues in employment during that entire standard measurement period.
What if an Employee Tests as Full-Time During the Initial Measurement Period but is Not Full-Time During any Overlapping or Immediately Following Standard Measurement Period?
An employee who tests as full-time during his initial measurement period but not full-time during an overlapping or immediately following standard measurement period, must continue to be treated as full-time until the end of the stability period associated with his initial measurement period.
What if the Employee Tests as Not Full Time During Initial Measurement Period but Full-Time During any Overlapping or Immediately Following Standard Measurement Period?
An employee who is determined not to be full-time during his initial measurement period, but is determined to be a full-time employee during the overlapping or immediately following standard measurement period, must be treated as a full-time employee for the entire stability period that corresponds to the standard measurement period (even if that stability period begins before the end of the stability period associated with the initial measurement period).
Safe Harbor for New Employees Reasonably Expected to Work Full-Time
Under the Notice, if an employee is reasonably expected on the employment start date to work full-time, the employer will not be subject to any pay or play penalty by reason of failing to offer coverage for up to the first three calendar months of employment, if the employee is offered coverage at or before the conclusion of the 3 months. This coordinates with the Affordable Care Act provision prohibiting waiting periods that exceed 90-days that is effective in 2014. 
Remember, the pay or play penalty does not apply to any employer who does not satisfy the ACA's definition of "large" employer, described above, determined on a controlled group basis.
As detailed above, you will need to work with your benefits counsel and payroll department (or provider) to establish a method for tracking your employees' work history. Depending upon the timelines you intend to adopt for substantiating each employee's "full-time" status, this process and methodology (or sufficient records for your timelines) may need to be in place as early as January 1, 2013. Simultaneously, you will need to make certain your plan design and the cost of coverage are consistent with ACA pay or play requirements.
 In general, employees who are employed for an average of at least 30 hours of service per week. IRS Notice 2011-36 states that 130 hours of service in a calendar month would be treated as the monthly equivalent of 30 hours of service per week.
 Presumably, this does not require employers to provide coverage for dependents when a plan otherwise only covers employees but the literal language of the statute raises the question.
 "Minimum essential coverage" includes employer-sponsored health coverage other than coverage for certain "excepted benefits". In order to constitute minimal essential health coverage, employer-sponsored coverage must be both affordable and provide minimum value.
 For purposes of this communiqué, the term "government-subsidized coverage" means either a federally subsidized premium tax credit or cost sharing reduction.
 Beginning in 2014, states are expected to create health insurance exchanges- but the federal government can create them if a state does not. When the federal government sets up an exchange in a state it will be called a "federally-facilitated" exchange.
 See: IRS Notice 2011-73.
 Proposed Regulations were issued on November 29, 2012, addressing minimum essential benefits and the "minimum value" requirement.
 The IRS expects to issue regulations for calculating hours of service for both non-hourly and hourly that are consistent with existing labor regulations and approaches outlined in IRS Notice 2011-36, including a presumption that 130 hours of service in a calendar month would be treated as the monthly equivalent of at least 30 hours of service per week.
 Full-time equivalent employees are only considered for purposes of determining whether an employer is a large employer and not for purposes of determining the penalty.
.The method in Notice 2011-36 is not official guidance but instead is what the IRS expects to eventually issue in regulations, but this could change.
 Fractions are disregarded in arriving at the average. For example an average of 49.9 is rounded down to 49 and, in that case, the employer would not be a Large employer subject to the Pay or Play rules.
 Internal Revenue Code § 4980H(c)(2)(B) defines seasonal employee for purposes of determining who is a large employer but does not define it for purposes of who is a seasonal employee for purposes of the pay or play penalty. However employers are permitted to use a reasonable, good faith interpretation of the term "seasonal employee" for this purpose.
 A measuring period for determining whether an employee meets an hours based eligibility condition (such as whether the employee is considered full-time) will not be considered as designed to avoid compliance with the Affordable Care Act's prohibition of waiting periods of more than 90-days if for those determined to work full-time during the measuring period, coverage is made effective no later than 13 months from the employee's start date, plus, if the employee's start date is not the first day of a calendar month, until the first day of the next calendar month. This assumes that any waiting period after the end of the measuring period does not exceed 90 days.
 Notice 201-58 also says that the stability period for this purpose and the ongoing stability period have to be the same. So it is ambiguous as to whether this is merely intended to mean that the employer has to use the same method for determining the stability period as for ongoing employees (period of not less than 3 and not more than 12 consecutive calendar months) or whether the it means the stability periods for ongoing and new employees must be the identical. We think the former makes interpretation makes more sense.
 However, if the employer otherwise imposes a shorter waiting period, then coverage would need to be provided when the plan otherwise requires (for example, on the first day of the month following the date of hire).