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Agencies Issue Proposed Regulations on Employer Mandate

On December 28, 2012 the IRS and the Treasury released much-anticipated proposed regulations implementing the Patient Protection and Affordable Care Act's ("PPACA") employer mandate. The proposed regulations appear in the January 2, 2013 Federal Register. Comments on the proposed regulations will be accepted until March 18, 2013. The agencies will also hold a public hearing on the proposed regulations on April 23, 2013. Final regulations will be issued at some point following the hearing.

The employer mandate provides that as of 2014, employers of fifty or more full-time equivalent employees must offer affordable health coverage providing minimum value to all full-time employees and their dependents, or pay a penalty. Full-time employees are those employees averaging 30 or more hours of service per week or 130 hours per month.

The proposed regulations generally incorporate the rules and safe harbors set forth in previously-issued guidance. They also define most pertinent terms and provide some examples and guidance for determining how the employer mandate applies. Importantly, the proposed regulations fail to fully address some important issues, instead soliciting additional comments. These issues include the definition of "seasonal" employees, the applicability of the mandate to multi-employer plans (i.e., plans implemented pursuant to a collective bargaining agreement), determining whether temporary agency employees are full time, and whether or not special rules should apply for churches and some government entities.

Wimberly Lawson will publish additional guidance and analysis of the proposed regulations in the near future. For now, highlights of the proposed regulations include the following:

A. Effective date:

Like PPACA's other primary provisions, the mandate takes effect on January 1, 2014. However, the proposed regulations include transitional relief for employers maintaining fiscal-year plans. If an employer maintained a fiscal-year plan as of December 27, 2012, then the employer may maintain that fiscal-year plan into 2014, and no penalties will be assessed prior to the commencement of the 2014 plan year. For example, if the employer's plan year begins March 1, then the employer mandate would not apply until the beginning of the March 1, 2014 plan year. The employer must maintain the same plan year. In other words, an employer whose plan year began on March 1, 2012, may not move the start of the plan year to October 1.

B. Determining whether an employer has fifty or more full-time employees:

An "applicable large employer" covered by the mandate is an employer who employed an average of at least fifty full time employees on business days during the preceding calendar year. For 2014 only, employers may determine whether they employ 50 or more full-time equivalent employees by choosing any consecutive six-month period in 2013 (rather than considering the entire calendar year), and averaging the FTEs during that six-month period. Additionally, if the employer employed in excess of fifty employees for 120 days out of the year or less, and if the workers in excess of fifty were seasonal workers, then the employer is not an applicable large employer. For a discussion of whether an individual is a "seasonal" employee, see part C below.

Employer/employee status is determined via the same common-law standard (generally, the control test) used with respect to other tax issues. Note that a "leased employee" as defined in the tax regulations is not an employee for purposes of the employer mandate.

Whether different entities are part of the same "employer" is also determined by applying the control-group test set forth in existing tax regulations. The proposed regulations refer to entities comprising a single employer under this test as "employer members." For example, a parent company with two subsidiaries would all be considered together as the "employer," with each entity being an "employer member." Liability for the penalty is considered on a member-by-member basis. Thus, if the parent offered health insurance complying with the mandate but one or more subsidiaries did not, the penalty would only be assessed as to the subsidiaries. Additionally, the 30-employee reduction that applies when calculating the penalty is allocated ratably among member employers. (Recall that the first 30 full-time employees are disregarded when calculating the employer penalty.) If an employer has more than 30 employer members, such that the pro-rata share of the 30-employee reduction would be more than zero but less than one for some employer members, the number is rounded up to one.

Importantly for many employers, work performed outside the United States is not counted in determining whether the employer has fifty or more full-time equivalent employees. If an employee works inside as well as outside the United States, only work performed inside the U.S. is counted. This rule applies regardless of citizenship or residency status.

Finally, note that the look-back rules for determining whether an individual employee is full time do not apply to determining whether employer is large employer within the meaning of the statute. Instead, the statute prescribes that the determination be based strictly upon actual hours of service of employees (as defined using the common-law standard) in the previous calendar year.

C. Determining whether an employee is full-time:

The proposed regulations incorporate the look-back and stability measurement period scheme for determining whether variable-hour employees are full-time, as set forth in previous guidance (IRS Notice 2012-58). The safe-harbor rules apply where, in part, it is not clear whether a new employee is "reasonably expected" to work full-time as of the time of hire. The preamble to the proposed regulations notes that the agencies received suggestions for rules to determine whether an employee is "reasonably expected" to work full-time at the time of hire. Factors suggested include whether the new employee is replacing a full-time employee and whether the employee is working in the same job or job category as other employees who are full-time. Neither suggestion was adopted however; rather, the preamble to the proposed regulations notes that the agencies are continuing to consider this issue and welcome additional comments.

Other notable rules applying to a worker's full-time status as set forth in the proposed regulations include the following:

"Hours of service": The proposed regulations use the term hours of "service" instead of hours "worked" to determine an employee's hours. Thus, employers must count any hours when employees were paid or were entitled to be paid (e.g., vacation hours or jury duty hours), not just hours when the employee actually worked, when determining whether the employee is full-time.

Seasonal employees: The proposed regulations make a distinction between "seasonal workers" for the purposes of determining whether an employer is a large employer (with seasonal workers who work fewer than 120 days being excluded from the calculation of number of workers) and "seasonal employees," who do not have to be offered health insurance even if they are full time. PPACA defines a "seasonal worker" as to the 50-employee threshold with reference to Department of Labor agricultural regulations and retail workers, but does not define "seasonal employee." The proposed regulations reserve the definition of a "seasonal employee," and permit employers to use a reasonable, good faith interpretation of that term through 2014. It appears that employees could work more than 120 days and still qualify as "seasonal employees," rather than full-time employees.

New short-term employees: Where an employee does not meet the definition of seasonal, the regulations do not provide any relief for full-time employees hired into short-term positions. The regulations note that if the employee is employed for fewer than three months, there is no penalty. But where an employee is employed for more than three months, there may be the obligation to offer coverage. The agencies invited additional comments on how to clarify the status of short-term employees.

Temporary agencies: The proposed regulations recognize the logistical challenges in determining whether employees of temporary agencies are full-time employees or reasonably expected to work full time. The regulations declined to create a broad exemption for employees employed by temporary agencies. However, the agencies invited comments on rules and methods for determining full-time status that would also guard against abuse.

Education: There are special rules for educational organizations, which operate on a schedule different than a typical calendar-year schedule. The proposed regulations invite comments on whether similar rules should apply to all employers, not just educational employers. The proposed regulations specifically note that it is not a reasonable good-faith interpretation of "seasonal" to classify educational workers who work during the academic year as "seasonal."

Unpaid leave: Employees who are on "special unpaid leave" during a measurement period, defined as job-protected FMLA, USERRA, or jury duty leave, cannot be penalized. Employers must either disregard the protected leave time in calculating the average hours worked or must credit the employee with hours during the leave period equivalent to the average hours worked during the remainder of the measurement period.

Breaks in service: If the employee has a break in service of less than 26 weeks, the prior period of employment must be credited. Employers may choose to use a shorter period.

Change in employment status: A new variable-hour or seasonal employee who has a material change in employment position such that he or she becomes full-time is treated as a full-time employee as of the first day of the fourth month following the change in employment status.

D. Determining who must be offered health insurance:

Dependents: PPACA requires employers to offer health insurance to full-time employees "and their dependents." The proposed regulations define "dependents" to include children up to age 26 but not spouses. The proposed regulations also include substantial transitional relief for employers that do not currently offer dependent coverage: for 2014 only, an employer will not be subject to a penalty for failing to offer dependent coverage if the employer "takes steps" during 2014 to implement dependent coverage. Note also that an employer is only assessed the penalty if an employee receives a tax credit to purchase insurance for himself, not if he receives a tax credit to purchase health insurance for a dependent.

95% Rule: The regulations also include a 95% "grace level" for coverage. If an employer fails to offer health insurance only to the greater of either 5% of its full-time employees or five individual full-time employees for any given month, then the employer is not subject to a penalty for that month.

Applicability to employees working outside the United States: As noted above, hours of service do not include services performed outside the United States. Employees who do not work full-time inside the United States do not have to be offered health insurance.

E. Determining whether health insurance is affordable:

The penalty is imposed if an employer fails to offer affordable coverage to an eligible full-time employee during any calendar month. If the employee's contribution to self-only coverage exceeds 9.5% of household income, then the coverage is unaffordable. The proposed regulations specify that if the employer offers multiple levels of coverage, then the 9.5% is based upon the lowest-cost option. The proposed regulations also retain the previously-published safe harbor of W-2 income. That is, if the employee's required contribution does not exceed 9.5% of W-2 income, then it is deemed to be affordable. Note that "W-2 income" is the income reported in Box 1, which excludes some elective deferrals such as 401(k) contributions and contributions to a cafeteria plan. The agencies were asked to use a different measurement, but declined. There is no provision for employers to obtain information regarding the employee's total household income at this point

The proposed regulations do add two more safe harbors, however. First is the wage-based safe harbor, which permits the employer to calculate affordability based on the wage rate for employees working at least 130 hours per month. The second is the federal poverty level calculator. If the employee's contribution to the lowest level of self-only coverage does not exceed 9.5% of the most recently-published federal poverty level for a single individual, then the coverage is deemed affordable. For example, the most recently published federal poverty level for a single person household is $11,170. 9.5% of that is $1,061.15. Thus, if the employee's contribution to the least expensive health plan providing minimum essential coverage is $1,061.15 per year, then the plan would be affordable.

Other Issues:

The proposed regulations include temporary relief from the section 125 rules to allow employers to permit coverage elections, including revocation or commencement of coverage, outside the regular open enrollment period for employees desiring to change elections due to purchase of an Exchange plan.

As noted above, the proposed regulations request additional comments on application of the mandate to multi-employer plans (plans implemented pursuant to CBAs). For now, an employer who participates in a multi-employer plan will not be subject to a penalty if the employer contributes to a plan pursuant to a CBA; coverage under the plan is offered to full-time employees and their dependents; and the coverage is affordable and provides minimum value.

This is a summary of the proposed regulations only. For specific information about how the rules set forth in the proposed regulations will affect your organization, please contact your Wimberly Lawson attorney.


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