IRS Releases Guidance on Health Care Act’s “Play or Pay” Provisions
The IRS has issued extensive proposed regulations implementing the employer-shared responsibility provisions, also known as “play or pay,” of the Patient Protection and Affordable Care Act of 2010. The regulations address numerous topics, including which employers must provide affordable health coverage, the requirements for such coverage and the penalties for failing to provide it.
Although the shared responsibility provisions don’t take effect until 2014, employers will use information about the workers they employ in 2013 to determine whether they’re subject to the provisions and face the potential for penalties in 2014.
Shared responsibility basics
Beginning on Jan. 1, 2014, the health care act requires “large” employers to offer a “minimum value” of “affordable” health coverage to their full-time employees. Employers risk a penalty if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage through one of the new affordable insurance exchanges. (Under the health care act, premium tax credits are available to employees who meet certain income requirements and don’t have access to affordable employer-provided insurance.)
A large employer is one with at least 50 full-time employees, or a combination of full-time and part-time employees that’s “equivalent” to at least 50 full-time employees. A full-time employee is someone employed on average at least 30 hours per week. Under the proposed regulations, 130 hours of service in a calendar month is the monthly equivalent of 30 hours per week.
Determining large employer status
Large employer status is determined in part by calculating full-time equivalent employees (FTEs). For a given calendar month, this requires totaling the hours of service for all part-time employees, and dividing that figure by 120. For example, an employer with 40 part-timers who average 90 hours per month would have 30 FTEs (40 × 90 = 3,600; 3,600/120 = 30) who must be added to the number of full-time employees (those working at least 130 hours during the month) when determining whether the 50-FTE threshold is met.
For hourly employees, the proposed regulations require the hours to be calculated based on records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
For salaried employees, the proposed regulations provide three methods of determining the hours:
1. The same method used for hourly employees,
2. A days-worked equivalency method (each worker is credited with eight hours for each day
3. A weeks-worked equivalency method (each worker is credited with 40 hours for each week
You can apply different methods for different classifications of nonhourly employees, so long as the classifications are “reasonable and consistently applied.”
Employers must determine annually, based on their employees’ actual hours of service, whether they’ll be considered a large employer for the next year. For 2014, however, the proposed regulations provide transitional relief. Rather than considering all 12 months of 2013, you can use any six-consecutive-month period. That means you could select six months toward the beginning of the year and use the remainder of 2013 to determine whether you need to offer coverage in 2014 and, if so, establish a compliant plan.
Assessing affordability and minimum value
An employer that offers health coverage could nonetheless be subject to penalties if at least one full-time employee receives a premium tax credit because the coverage offered to the employee was either unaffordable or didn’t provide minimum value.
Generally, if an employee’s share of the premium would cost that employee more than 9.5% of his or her annual household income, the coverage isn’t considered affordable. The proposed regulations lay out three safe harbors that employers can use to satisfy the affordability requirement. An employer will avoid a penalty if:
1. The cost of the coverage won’t exceed 9.5% of the Form W-2 wages the employer pays the
employee that year,
2. The employee’s monthly contribution amount for the self-only premium is equal to or lower
than 9.5% of the computed monthly wages, or
3. The employee’s cost for self-only coverage doesn’t exceed 9.5% of the federal poverty line
for a single individual.
The affordability test applies to the lowest cost option available to the employee that also meets the minimum value requirement.
Under the minimum value requirement, a health plan must cover at least 60% of the total allowed costs of benefits provided under the plan. The IRS and the U.S. Department of Health and Human Services will make available an online minimum value calculator where employers can enter certain plan information and obtain a determination of whether the plan provides minimum value.
Large employers that don’t provide at least 95% of their full-time employees (and, after 2014, their dependents, defined as an employee’s children under age 26) with health coverage will be assessed a penalty if just one of these employees receives a premium tax credit when buying insurance in an insurance exchange. The annual penalty is $2,000 per full-time employee in excess of 30 full-time employees.
Employers that provide at least 95% of their full-time employees (and, after 2014, their dependents) with coverage that isn’t deemed affordable or that fails to provide minimum value generally must, if at least one employee receives a premium tax credit, annually pay the lesser of $3,000 for each employee receiving the credit or $2,000 for each full-time employee beyond the first 30 full-time employees.
For purposes of penalty calculations, full-time employees don’t include FTEs, only actual full-time employees. The proposed regulations describe how to determine which employees are treated as full-time employees for penalty purposes, including rules for assessing the status of ongoing employees, new hires and variable-hour or seasonal workers, as well as for other special circumstances.
Companies that share a common owner or are otherwise related are combined for purposes of determining whether they’re a large employer; the proposed regulations include rules for determining whether companies are related. If the combined total meets the 50 FTE threshold, each separate company is subject to the shared responsibility provisions — even those that don’t individually employ enough employees to satisfy the threshold.
The rules for combining related employers do not, however, apply when determining liability for and amounts of penalties. Employers that offer appropriate coverage, therefore, won’t be subject to penalties simply because another employer in its group fails to offer the coverage to its employees.
The proposed regulations would be effective for periods starting after Dec. 31, 2013. In the meantime, employers can rely on the proposed regulations for purposes of compliance with the shared responsibility provisions. If the final regulations are more restrictive, the IRS will give employers time to come into compliance. If you have questions on how the proposed regulations may affect your company, please give us a call.