IRS Issues Final Pay or Play Rules and Quietly Adds (More) Delays
Earlier this week, the IRS published the long-awaited final rules relating to the employer mandate, often referred to as the “pay or play” mandate. Under the mandate, which is set forth in Internal Revenue Code Section 4980H, large employers that fail to offer their full-time employees health coverage that is (i) affordable and (ii) provides minimum value may be subject to penalties. Penalties will be imposed if a full-time employee of the employer enrolls in health coverage through an Exchange and receives a federal subsidy.
For details regarding the mandate and its operation, please visit our earlier blogpost, available here.
The most significant element of the final regulations is the inclusion of additional “transition guidance” which delays and/or alleviates some of the mandate’s provisions for a short period of time.
Large Employers with Fewer than 100 Full-Time Employees. The preamble to the final regulations states that employers with an average of at least 50 full-time employees but fewer than 100 full-time employees on business days during 2014 will not be liable for penalties under the pay or play mandate for any calendar month during 2015. These employers will, however, be required to comply with the mandate for their 2016 plan year. Employers can enjoy this reprieve only if the employer:
– Does not reduce its workforce or overall hours of service of employees between February 9, 2014 and December 31, 2014 in order to avail itself of the extended delay (i.e., to fall within the 50-99 employee range);
– Does not eliminate or materially reduce its health coverage for the period beginning on February 9, 2014 and ending on December 31, 2014 (for calendar year plans); and
– Certifies that it satisfies all of the foregoing requirements on a designated form.
Additional Transition Relief. As further transition relief, the IRS stated that for the 2015 plan year, a large employer (100+ employees) that offers coverage to at least 70% of its full-time employees will not be subject to a “No Offer Penalty” for 2015. Additionally, if an employer with 100+ full-time employees is subject to the “No Offer Penalty” by virtue of covering less than 70% of its full-time employees, the penalty is equal to $2,000/year for each full-time employee (less the first 80 full-time employees). In all other years, employers are treated as having offered coverage to substantially all full-time employees if coverage is offered to 95% of full-time employees. Employers failing this requirement are subject to a penalty of $2,000/year for each full-time employee (less the first 30 full-time employees).
Shorter Measurement Period for 2015. For purposes of stability periods beginning in 2015, employers may adopt a transition measurement period. This period must be shorter than 12 consecutive months but no less than 6 consecutive months. This period must begin no later than July 1, 2014 and end no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015, (90 days being the maximum permissible administration period).
(See prior post for information regarding measurement periods.)
For example, an employer with a calendar year plan may use a measurement period from April 15, 2014 through October 14, 2014 (six months) followed by an administrative period ending on December 31, 2014.
Offers of Coverage for January 2015. In general, where an employer fails to offer coverage to a full-time employee for any day in a calendar month, that employee is treated as not offered coverage during that entire month. In other words, if an employer fails to offer coverage to a full-time employee on January 1, 2015, the employer will be subject to a full penalty for that month. In order to facilitate transitions, the IRS stated that, solely for purposes of January 2015, if a large employer offers coverage to a full-time employee no later than the first day of the first payroll period that begins in January 2015, the employee will be treated as having been offered coverage for the entire month of January 2015 (the employer will not be subject to a penalty). This relief applies only for January 2015.
Coverage for Dependents. In order to avoid penalties, employers must offer minimum essential coverage to substantially all full-time employees and their dependents. The final regulations state that any employer “that takes steps” during its 2014 plan year to satisfy this requirement will generally not be liable for any assessable penalties solely on account of a failure to offer coverage to dependents for the 2015 plan year.
In presenting the final regulations, the IRS addressed various comments and questions from the public relating to the operation of the mandate. The following is a summary of some of these comments as well as the position of the final rules. Most other aspects of the proposed regulations (summarized here) remain unchanged.
Seasonal Workers. Employers with an average of at least 50 full-time employees (and full-time equivalent employees) are subject to the mandate. However, certain employers are exempt from the mandate to the extent most of their employees are seasonal employees. Specifically, an employer is not considered to employ more than 50 full-time employees if (1) the employer’s workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year and (2) the employees in excess of 50 employed during such 120-day period are seasonal workers. For this purpose, a seasonal worker is an employee who performs labor or services on a seasonal basis including, but not limited to, retail workers employed exclusively during holiday seasons.
Under the final regulations, employers may apply a reasonable good faith interpretation of the term seasonal workers. The final regulations decline to add much detail as to which employees constitute seasonal workers. Rather, the IRS will allow employers the flexibility to apply the term in a manner most appropriate to their particular business. For instance, the IRS declined to indicate specific holidays or the length of any holiday season for the purpose of identifying seasonal workers.
Adjunct Faculty. Adjunct faculty members are typically compensated based upon the number of classes they teach rather than based upon actual time spent on non-classroom activities (e.g., class prep, grading papers/exams, meeting with students). The final regulations provide little guidance as to how educational institutions are supposed to measure service hours of adjunct faculty. Specifically, the IRS stated that until further guidance is issued, employers of adjunct faculty are required to use a reasonable method for crediting hours of service.
In response to requests from the industry, the IRS offered one method (“but not the only” permissible method) that would be considered reasonable. This method is as follows:
Educational institutions may credit an adjunct faculty member with:
(a) 2¼ hours of service per week for each hour of teaching or classroom time (i.e., in addition to crediting an hour of service for each hour of teaching, this method would credit an additional 1¼ hours for activities such as classroom prep and grading); and, separately,
(b) an hour of service per week for each additional hour outside of the classroom the faculty member spends performing duties he or she is required to perform (e.g. scheduled office hours, attendance at faculty meetings).
Although further guidance may be issued, this method may be relied upon at least through the end of 2015.
Thirty Hours per Week Threshold. Under the mandate, a full-time employee is an employee who is employed for an average of at least 30 hours per week. This threshold has been the subject to much derision and recently, Congressional hearings. Although commenters requested that the 30 hours per week threshold be increased to 40 hours per week, the IRS has declined to make this change. The IRS deferred to the statute which explicitly states that the threshold for status as a full-time employee is an average of 30 hours of service per week.
New Employees. The look-back measurement period applicable to a new employee depends on the employer’s reasonable expectations as to the status of the new employee at his or her start date. (See prior post for information regarding measurement periods.)
Under the final regulations, if a new employee is reasonably expected to be a full-time employee on his or her start date and is offered coverage by the first day of the month immediately following the conclusion of the employee’s initial three-full calendar months of employment, the employer will not be subject to penalties for those initial three-full calendar months of employment.
Under the final regulations, employers must make a reasonable determination as to whether new hires will be full-time employees. In making this determination, the final regulations offer some factors that may be taken into account. Such factors include, but are not limited to:
– Whether the employee is replacing an employee who was or was not a full-time employee;
– The extent to which employees in the same or comparable positions are or are not full-time employees; and
– Whether the job was advertised or otherwise communicated to the new hire as a full-time employee position.
Variable Hour Employees. The proposed regulations generally provide that, with respect to variable hour employees, an employer can use an initial measurement period in combination with any administrative period that does not extend beyond 13 months and a fraction of a month (i.e., beyond the last day of the first calendar month beginning on or after the employee’s first year anniversary). The final regulations retain this treatment of variable hour employees.
Temporary Staffing Firms. The final regulations set forth factors relevant to the determination of whether a new employee of a temporary staffing firm intended to be placed on temporary assignments at client organizations is in fact a variable hour employee. The factors include the following:
– Whether employees in the same position with a staffing firm retain, as part of their continued employment, the right to reject temporary placements that the staffing firm offers the employee.
– Whether employees in the same position with a staffing firm typically have periods during which no offer of temporary placement is made.
– Whether employees in the same position with a staffing firm typically are offered temporary placements for different periods of time.
– Whether employees in the same position with a staffing firm typically are offered temporary placements that do not exceed 13 weeks.
The determination as to whether a new employee is a variable hour employee or a full-time employee must be made on the basis of the staffing firm’s reasonable expectations on the individual’s start date.
Part-Time Employees. The final regulations clarify the application of the employer mandate rules to part-time employees. Specifically, the regulations define “part-time employees” as those employees who, on their start date, are not reasonably expected to be full-time employees (and are not seasonal or variable hour employees). New part-time employees must be treated in the same manner as new variable hour employees and new seasonal employees.
Short-Term and High Turnover Employees. Because of the concern for potential abuse, the Treasury Department has declined to adopt any special provisions for short-term employees. This category includes employees who are reasonably expected to average at least 30 hours of service per week but who are hired on a short-term basis (e.g., interns). Employees in this category are hired into positions expected to continue for less than 12 months. This category does not include seasonal employees. A short-term employee with a tenure of under 3 months generally should not raise issues under 4980H because the employer generally would not be subject to liability with respect to those employees (assuming that, had the employee continued working beyond 3 months the employee would have been offered affordable coverage providing minimum value).
The regulations governing the pay or play mandate are complex and, at times, unclear. The above information is intended to highlight some of the more important changes and in no way addresses all aspects of the available guidance.
For additional information regarding the pay or play mandate, contact your McGrath North attorney or a member of our Employee Benefits and ERISA practice group.