The Affordable Care Act Overview
Chapter #10
B.
Table of Contents
What Coverage Must Be Offered? .................. 9
C. 4980H(a) Penalties for Failure to Offer
Coverage .................................................................... 9
I.
INTRODUCTION .............................. 2
II.
BACKGROUND ................................. 2
III.
SUMMARY OF ACA ......................... 2
D. 4980H(b) Penalties - Affordability and
Minimum Value ...................................................... 10
1.
2.
Affordability Safe Harbors ................................... 11
Determining if Coverage Provides Minimum Value
11
E. Employer Shared Responsibility Penalty
Trigger ..................................................................... 11
A.
No Lifetime or Annual Limits .......................... 3
B.
Guaranteed Eligibility ....................................... 3
C.
Pre-Existing Condition Exclusions ................... 3
VIII.
EMPLOYER REPORTING/NOTICE
REQUIREMENTS........................................... 11
D.
Out of Pocket Maximums ................................. 3
A.
FLSA §218b Model Notice.............................. 11
New Hire Wait Periods ..................................... 4
B.
IRS Form 6056 ................................................ 12
E.
1. Penalties for Failure to Offer Coverage within 90
Days……….....................................................................4
2. Use of Measurement Periods/Stability Period Safe
Harbors ............................................................................4
3. Other Substantive Eligibility Conditions .............4
IV.
INDIVIDUAL MANDATE ................ 5
C.
Certification of Eligibility for Transition
Relief (Fewer than 100 FTEs) ……………………13
IX.
MEASUREMENT PERIOD STABILITY PERIOD SAFE HARBOR ....... 13
A.
New Hires Safe Harbor................................... 13
V.
THE IMPORTANCE OF
COUNTING EMPLOYEES ............................. 6
A.
Formula to Calculate Employer Status ........... 6
B.
Common Law Employees ................................. 6
1.
2.
3.
B.
VI.
Limited Exception for Seasonal Workers ........ 7
SMALL GROUP RULES .................. 8
Ongoing Employees.............................. 15
1. Transition from New Employees to Ongoing
Employee Rules……………………………………….16
2. Ongoing Employees: Safe Harbor ........................ 15
3. Use of Optional Administrative Period ................ 16
C. Common Ownership and Control Group
Issues .......................................................................... 7
D.
Initial Measurement Period ................................... 14
Administrative Period ........................................... 14
Stability Period ..................................................... 14
C.
Look-Back Period ........................................... 16
D. Different Measurement Periods/Stability
Periods ..................................................................... 16
A.
Essential Health Benefits................................... 8
B.
Modified Community Rating ............................ 8
X.
OTHER LEGAL
CONSIDERATAIONS .................................... 16
VII.
APPLICABLE LARGE EMPLOYER
RULES 8
A. Make sure to keep ACCURATE track of hours
worked and pay correctly:...................................... 16
A.
Employer Mandate ............................................ 8
1
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B. Employees Misclassified as Independent
Contractor....………………………………………17
XI.
CONCLUSION ................................. 17
I. INTRODUCTION
The Patient Protection and Affordable Care
Act (PPACA), commonly called the Affordable
Care Act (ACA) may be the most significant
regulatory overhaul of the U.S. healthcare system
since the passage of Medicare and Medicaid in 1965.
ACA was enacted with the goals of increasing the
quality, affordability and availability of health
insurance through online healthcare exchanges, now
called Marketplaces.
II. BACKGROUND
On March 23, 2010, President Obama signed
into law the Patient Protection and Affordable Care
Act (H.R. 3590) (“the Act”). On March 25, 2010, the
House and Senate passed The Health Care and
Education Reconciliation Act of 2010 (H.R. 4827)
(the “Reconciliation Bill”) which amended several
provisions of the Act. Together, the bills comprise
the overall healthcare reform legislation package.
President Obama signed the Reconciliation Bill into
law on March 30, 2010. The law is now known as the
Affordable Care Act (“ACA”).
Subtitles A and C of title I of the Affordable Care
Act reorganized, amended and added to the provisions
of Part A of the Public Health Service Act (PHS Act)
relating to health insurance issuers in the group and
individual markets and to group health plans that are
non-federal governmental plans.
The PHS Act
provisions include section 2701 (fair health insurance
premiums), section 2702 (guaranteed availability of
coverage), section 2703 (guaranteed renewability of
coverage), and section 2794 (ensuring consumers get
value for their dollars). Subtitle D of title I of the
Affordable Care Act includes section 1302(e)
(catastrophic plans) and section 1312(c) (single risk
pool). According to the Department of Health and
Human Services, “[t]hese provisions will establish a
federal floor that ensures individuals and employers in
all states have certain basic protections with respect to
availability and affordability of health insurance
coverage.”
Federal Register, Vol. 78, No. 39,
February 27, 2013
On June 28, 2012, the U.S. Supreme Court upheld
the constitutionality of the ACA's individual mandate
as an exercise of Congress's taxing power in the case
National Federation of Independent Business v.
2
Sebelius, 567 U.S. ___ (2012). However, the Court
held that states cannot be forced to participate in the
ACA's Medicaid expansion under penalty of losing
their current Medicaid funding. Since the ruling, the
law and its implementations continue to face
challenges in Congress, federal courts and from
certain state governments, advocacy groups and
business organizations. But, for now, it is the law of
the land.
III. SUMMARY OF ACA
ACA was enacted with the goals of increasing the
quality and affordability of health insurance, lowering
the uninsured rate by expanding coverage options, and
reducing the cost of healthcare for individuals in need
through subsidies and premium tax credits. To that
end, individuals are able, today, to obtain healthcare
coverage through governmental on-line healthcare
exchanges, now called Marketplaces. Although many
provisions of ACA have already taken effect, the
Department of Treasury, Department of Labor and
Department of Health and Human Services are
continuing to provide additional guidance and
proposed rulemaking on a regular basis. According to
recent searches of the Federal Registry, over 11,000
pages of regulations have been promulgated to date.
There are three basic components of ACA: 1.The
Individual Mandate; 2. Small Group Rules and 3.
Employer Shared Responsibility Mandates. The core
principle of ACA is to ensure that persons obtain
healthcare coverage either individually or through their
employers. Significant provisions which took effect in
2014 include:
 States shall either maintain Marketplaces
(previously termed “Exchanges”) or, for states
that choose not to run a Marketplace, the
Federal government will set up and run a
Federally Facilitated Marketplace.
The
Marketplace allows individuals and small
group employers to obtain coverage and
possibly
qualify
for
premium
tax
credits/subsidies to assist with paying for the
healthcare coverage.
 For purposes of healthcare reform only, fulltime employees are defined as those who
average 30 hours or more a week of service
hours1;
1
An employee’s hours of service include the following: (1)
each hour for which an employee is paid, or entitled to
payment, for the performance of duties for the employer;
and (2) each hour for which an employee is paid, or entitled
to payment by the employer on account of a period of time
during which no duties are performed due to vacation,
holiday, illness, incapacity (including disability), layoff,
jury duty, military duty or leave of absence. 29 CFR
2530.200b-2(a).
The Affordable Care Act Overview
 Small group employers, in Texas defined as
those with 50 or fewer employees pursuant to
TX SB 1332, are not mandated to offer
healthcare coverage to their employees.
However, if small group employers do offer
coverage, there are certain parameters,
discussed below, they must follow to provide
ACA compliant plans.
 In 2015, the Employer Shared Responsibility
Mandates require Applicable Large Employers
(ALEs) to offer affordable healthcare coverage
which meets “minimum value” or face
potential penalties for failing to do so.2
 Non-exempt individuals without coverage by
March 31, 2014, face penalties for failing to
procure healthcare coverage. Depending on
the individual’s income, a subsidy or premium
tax credit may be available through the
Marketplace to offset the cost of coverage.
Significant reforms to the US Healthcare system, most
of which took effect by January 1, 2014, include:
1. Lifetime and Annual limits are eliminated as
to Essential Health Benefits (EHBs).
2. All persons who want insurance are
guaranteed coverage (as long as these persons
enroll in coverage in a timely manner).
3. Pre-existing condition limitations
are
eliminated.
4. Preventtive Care is paid by the policy at 100%
(no out of pocket charge for individual).
5. Wait periods to be offered coverage cannot
exceed 90 days.3
6. The maximum out-of-pocket cost limit for
any individual Marketplace plan for 2014 can
be no more than $6,350 for an individual plan
and $12,700 for a family plan.
A. No Lifetime or Annual Limits
Starting in 2014, insurance carriers (as well as
self-insured plans) may not limit the benefits paid
out for Essential Health Benefits.
Essential
Health Benefits (“EHB”s) are defined as:



Ambulatory patient services;
emergency services;
hospitalization;


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maternity and newborn care;
mental health and substance use disorder
services
(including
behavioral
health
treatment);
 prescription drugs;
 rehabilitative and habilitative services and
devices;
 laboratory services;
 preventive and wellness services and chronic
disease management; and
 pediatric services, including oral and vision
care.
Lifetime limits and annual dollar limits can still be
applied to non-EHB services. Federal Register, Vol.
78, No. 37, February 25, 2013, Final Rules.
B. Guaranteed Eligibility
Effective for plan years beginning on or after
January 1, 2014, the insurance carriers are required
to issue a health plan to any applicant – individual or
group – regardless of the applicant’s health status or
other factors. Prior to 2014, carriers could deny
coverage based on health factors, pre-existing
conditions or medical expenses in the previous year.
Of course, there are limits. For example, an
individual is not guaranteed a health plan on his or her
way to the hospital after a car accident. Enrollment in
coverage in the group market is restricted to open and
special enrollment periods and is only available to
eligible employees who work or reside in the service
area of a network plan.
For individuals seeking coverage through a
Marketplace, open enrollment for 2014 extends
through March 31, 2014. Open enrollment will be
from Oct. 1, 2014 through Dec. 31, 2014 for coverage
beginning on Jan. 1, 2015.
C. Pre-Existing Condition Exclusions
Effective for plan years beginning on or after
January 1, 2014, ACA prohibits health plans from
imposing pre-existing condition exclusions on any
enrollees. This means that an individual cannot be
denied coverage and coverage cannot be limited to
exclude a medical condition the individual had before
the plan was effective.
D. Out of Pocket Maximums
2
Pursuant to Final Regulations issued on 2-12-14, only
groups with 100+ FTEs must provide affordable/minimum
value coverage in 2015. Those with 50+ FTEs have to
provide affordable/minimum value coverage starting in
2016 or face potential penalties for failure to do so.
3
But see Final Regulations issued on 2-20-14 relating to
orientation period possibly extending the 90 day rule.
3
In non-grandfathered plans, the most an individual
shall pay during a policy period (usually one year)
before your health insurance or plan starts to pay
100% for covered Essential Health Benefits is $6,350.
The most a family is required to pay is $12,700. This
limit must include deductibles, coinsurance,
copayments, or similar charges and any other
expenditure required of an individual which is a
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Chapter #10
qualified medical expense for the EHBs. This limit
does not have to count premiums, balance billing
amounts for non-network providers and other out-ofnetwork cost-sharing, or spending for non-essential
health benefits.
E. New Hire Wait Periods
The Public Health Service Act § 2708 (“PHS
Act”) provides that, for plan years beginning on or
after January 1, 2014, a group health plan or group
health insurance issuer shall not apply any waiting
period that exceeds 90 days. PHS Act § 2704(b)(4),
ERISA § 701(b)(4), and Code § 9801(b)(4) define a
waiting period to be the period that must pass with
respect to an individual before the individual is
eligible to be covered for benefits under the terms of
the plan. Notice 2012-59, DOL Technical Release
2012-02 and HHS Bulletin titled Guidance on 90-Day
Waiting Period Limitation under Public Health
Service Act § 2708.
The 90 days refers to calendar days, and not to
days worked. The 90-day limit applies to both eligible
employees and eligible dependents. Federal Register,
Vol. 78, No. 55, March 21, 2013, Proposed Rules
However, on February 10, 2014, the departments
jointly issued final rules wherein they discussed the
use of a “reasonable and bona fide” orientation period.
Proposed rules were subsequently issued on February
20, 2014, wherein the departments suggested that a
“reasonable and bona fide orientation period” could
not exceed one month. This orientation period must
be completed before the 90 day wait period begins.
http://www.dol.gov/opa/media/press/ebsa/20140220redfeg2.pdf
1. Penalties for Failure to Offer Coverage within 90
Days
If a non-governmental group health plan
(regardless of size) fails to comply with the 90-day
waiting period limitation in 2014, Code Section
4980D imposes a penalty of $100 for each day of the
failure as to each individual to whom the failure
relates. Such a penalty is payable by the employer
sponsoring a single-employer plan and by the plan
itself in the case of a multiemployer plan.
Additionally, under PHSA Section 2723, for nonfederal governmental plans, a civil penalty of up to
$100 per day is payable as to each individual for
whom a failure to comply with the 90-day limitation
occurs. Finally, for a plan subject to ERISA, a plan
participant or the Department of Labor may bring suit
under ERISA Section 502 to enjoin the failure of the
plan or its insurer to comply with the 90-day
limitation or for other appropriate equitable relief.
This penalty is IN ADDITION to the penalties
assessed by the governmental regulators for failure to
4
provide health insurance to eligible employees and/or
providing coverage that does not meet the
Affordability and/or Minimum Value Standards.
2. Use of Measurement Periods/Stability Period Safe
Harbors
Applicable Large Employers may have a category
of employees who works variable hours. At the time
of hire, the employer may not know if these employees
will be considered full-time. Therefore, ALEs are
permitted a reasonable amount of time to determine if
these specific employees should be considered fulltime. The employer must follow the shared
responsibility rules discussed below in the Measurement
Period/Stability Period section. IRS Notice 2012-58.
3. Other Substantive Eligibility Conditions
As long as the eligibility for health insurance is
not based solely on a wait period of longer than 90
days, an employer may use other substantive
eligibility conditions which employees must meet
before an offer of coverage is made and will be
considered to be in compliance with the PHS Act.
For example:
 Some plans require an employee to work a
specific number of hours in order to become
eligible for health plan coverage. As long
as the cumulative hours of service do not
exceed 1,200, the plan would not be
considered designed to avoid compliance.
Please note that the regulations do not allow
plans to apply cumulative hours of service
to the same individual each year which
means that once a person has met the
parameters, an employer may not require
the person to meet the parameters again on
an annual basis.
 Plans may have eligibility requirements that
tie to the job itself, and not to an interval of
time. These conditions are permitted. For
example, an employee may be required to
meet specific licensing requirements to be
eligible for the health plan. Coverage must be
offered by the 91st day after meeting the
specific licensing requirement.
 A “reasonable and bona fide” orientation
period may be imposed which cannot exceed
one month of employment.
Please note, however, employers should be careful
with these requirements. “ While a substantive
eligibility condition that denies coverage for
employees may be permissible under PHS Act
section 2708, an applicable large employer’s
denial of coverage to a full-time employee may,
nonetheless, give rise to an assessable payment
under section 4980H of the Code and its
The Affordable Care Act Overview
implementing regulations.” Federal Register
Vol. 78, No. 55, p. 17315, Ftnt. 7, March 21,
2013 Proposed Rules.
The regulations include a number of examples to
assist employers in understanding the new hire
waiting period limits:
 A group health plan provides coverage for
full-time employees. The plan year is
January 1 through December 31. Employee
A begins work on January 19, 2014. The
employer must offer coverage to Employee
A by April 19, 2014.
 Employee B is hired full-time to be a data
entry clerk as of January 30, 2014.
Company does not cover data entry clerks
under their group health plan. On April 11,
Employee B is promoted to a computer
programmer. Computer Programmers are
eligible for coverage under Company’s
health plan. The waiting period for
Employee B would begin on April 11, 2014.
Coverage must be offered by July 10, 2014.
Since Employee B works full-time,
Company will be penalized for failing to
offer coverage as of May 1, 2014.
 Company provides that only employees
who have completed specified training and
achieved specified certifications are eligible
for coverage under the plan. Employee C is
hired on May 3 and meets the plan’s
eligibility criteria on September 22. This
triggers the beginning of C’s eligibility
period for benefits and and may not exceed
90 days. Coverage under the plan must
become effective no later than December
21. Internal Revenue Bulletin: 2013-19;
May 6, 2013; REG-122706-12.
 One month would be determined by adding
one calendar month and subtracting one
calendar day, measured from an employee’s
start date in a position that is otherwise
eligible for coverage. For example, if an
employee’s start date in an otherwise
eligible position, is May 3, the last
permitted day of the orientation period is
June 2.
https://www.federalregister.gov/articles/20
14/02/24/2014-03811/ninety-day-waitingperiod-limitation
IV. INDIVIDUAL MANDATE
Under the Affordable Care Act, the federal
government, state governments, insurers, employers
and individuals are given shared responsibility to
reform and improve the availability, quality and
5
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affordability of health insurance in the United States.
Starting in 2014, the individual shared responsibility
provision calls for each individual to have minimum
essential health coverage (known as minimum
essential coverage) for each month, qualify for an
exemption, or make a payment when filing his or her
federal income tax return.
This Mandate applies to individuals of all ages,
including children. The adult or married couple who
claims a child or another individual as a dependent for
federal income tax purposes is responsible for making
the payment if the dependent does not have coverage
or an exemption.
Exemptions are as follows:
1. Religious conscience. A person is a member
of a religious sect that is recognized as
conscientiously opposed to accepting any
insurance benefits. The Social Security
Administration administers the process for
recognizing these sects according to the criteria in
the law.
2. Health care sharing ministry. A Person is a
member of a recognized health care sharing
ministry.
3. Indian tribes. A Person is a member of
a federally recognized Indian tribe.
4. No filing requirement. A person’s income is
below the minimum threshold for filing a tax
return. The requirement to file a federal tax return
depends on that person’s filing status, age and
types and amounts of income. To find out if a
person is required to file a federal tax return, use
the IRS Interactive Tax Assistant (ITA).
5. Short coverage gap. A person went without
coverage for less than three consecutive months
during the year. For more information, see
question 22.
6. Hardship. The
Health
Insurance
Marketplace, also known as the Affordable
Insurance Exchange, has certified that a person
has suffered a hardship that makes you unable to
obtain coverage.
7. Unaffordable coverage options. A person
can’t afford coverage because the minimum
amount he must pay for the premiums is more
than eight percent of your household income.
8. Incarceration. A person is in a jail, prison,
or similar penal institution or correctional facility
after the disposition of charges against you.
9. Not lawfully present. A Person is not a U.S.
citizen, a U.S. national or an alien lawfully
present in the U.S.
Federal Register, Vol. 78, No. 169, August 30, 2013,
Rules
and
Regulations;
See
also
The Affordable Care Act Overview
Chapter #10
http://www.irs.gov/uac/Questions-and-Answers-onthe-Individual-Shared-Responsibility-Provision
For, those individuals who do not qualify for an
exemption and who do not have coverage by March
31, 2014, the fee for not having insurance in 2014 is
$95 per adult and $47.50 per child or 1% of taxable
family income (up to $285 for a family), whichever is
greater. In 2015, the fee increases to $325 per adult
($162.50 per child) or 2% of family income,
whichever is greater. In 2016, the fee increases to
$695 per individual or 2.5% of family income.
Thereafter, the Tax Penalty will increase by the rate of
inflation going forward, or 2.5% of family income.
For additional information, see:
http://obamacarefacts.com/obamacare-individualmandate.php.
(FTE) employees in 2015, the employer must offer
healthcare coverage or face potential fines. If the
employer has between 50 and 99 FTEs, the employer
is not required to offer coverage in 2015 but must
prepare a certification to be submitted to the IRS
indicating the number of FTEs in 2014.
For purposes of determining if the employer is an
ALE, the formula requires the following steps:
1. Determine the total number of full-time
employees (including any full-time seasonal
workers) for each calendar month in the
preceding calendar year;
2. Take the total number of part-time hours
worked each month, regardless of the number
of persons working these hours and divide this
number by 120.
Perform this formula
monthly;
3. Add the number of full-time employees and
full-time equivalents described in Steps 1 and
2 above for each month of the calendar year4:
a. Add up the 12 monthly numbers;
b. Divide by 12 and round down.
V. THE IMPORTANCE OF
COUNTING EMPLOYEES
Key to knowing the rules to follow under ACA is
determining the size of the employer. For ACA
purposes, the size of the employer rests on its
workforce numbers from the previous calendar year.
Those employers with at least 50 Full-Time and
full-time Equivalent employees (FTEs) are subject to
the 26 USC section 4980H (ACA) “pay or play”
employer shared liability penalties for failing to offer
affordable, minimum value health coverage in 2016.
For 2015, those employers with 100 or more FTEs are
obligated to offer benefits or potentially face penalties
for the failure to do so. These employers are termed
Applicable Large Employers or ALEs.
An ALE is defined under Section 4980H(c)(2) as
an employer who employed an average of at least 50
full-time employees on business days during the
preceding calendar year. Generally, for purposes of
determining applicable large employer status, a fulltime employee includes any employee who was
employed on average at least 30 hours a week and, in
order to determine if the employer is an ALE, fulltime equivalent employees (formula of part-time
hours worked) must be included in the formula.
Employers with fewer than 50 full-time and FTEs
are not mandated to offer coverage and will not face
penalties but, if these employers do offer coverage,
there are restrictions as to the ACA Compliant Plans
which must be offered and how the premiums for the
coverage will be calculated which ALEs do not face.
Those mandates are discussed in more detail herein.
A. Formula to Calculate Employer Status
For 2015, the formula is based on the employer’s
size for a 6 consecutive month period in 2014. If an
employer has 100 or more Full-Time Equivalent
6
If the average per month is 50 (100 or more for 2014)
or more, the employer is an Applicable Large
Employer and must comply with offering coverage or
face potential 4980H penalties.
Example: During each month of 2015, an employer
has 35 full-time employees, each of whom averages
32 hours of service per week, and 40 part-time
employees, each of whom averages 90 hours of
service per month. In this example, each of the 35
employees who average 32 hours of service per week
count as one full-time employee for each month. To
determine the average number of full-time equivalent
employees for each month, take the total hours of
service of the part-time employees (up to 120 hours of
service per employee) and divide by 120. The result is
that the employer has 30 full-time equivalent
employees each month (40 × 90 ÷ 120 = 30). By
adding the two categories of employees together, the
employer would have 65 full-time and full-time
equivalent employees. Therefore, the employer is an
applicable large employer for 2016.
B. Common Law Employees
For purposes of determining if an entity employs
at least 50 full-time employees, employees are defined
as those common law employees who work on average
4
For 2014, the employer only has to use a consecutive 6
month period for this analysis. If the employer is unsure if
it has over 100 ALEs, the employer may use the last 6
months of 2014 for this analysis and will not be subject to
the 4980H penalties until April 1, 2015.
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Chapter #10
at least 30 hours per week.
A common law
employee/employer relationship exists when the
employer for whom services are performed has the
right to control and direct the individual who
performs the services, not only as to the result to be
accomplished by the work but also as to the details
and means by which that result is accomplished.
That is, an employee is subject to the will and
control of the employer not only as to what shall be
done but how it shall be done. In this connection, it
is not necessary that the employer actually direct or
control the manner in which the services are
performed; it is sufficient if the employer has the
right to do so. The right to discharge is also an
important factor indicating that the person possessing
that right is an employer. Other factors
characteristic of an employer, but not necessarily
present in every case, are the furnishing of tools and
the furnishing of a place to work to the individual
who performs the services. In general, if an
individual is subject to the control or direction of
another merely as to the result to be accomplished by
the work and not as to the means and methods for
accomplishing the result, he is not an employee. IRS
Notice of Proposed Rulemaking; December 28, 2012;
[REG-138006-12]; p.14.
Conversely, a leased employee (as defined in
section 414(n)(2)), a sole proprietor, a partner in a
partnership, or a 2-percent S corporation shareholder
are not common-law employees. Federal Register,
Vol. 78, No. 1, p. 241, January 2, 2013 Proposed
Rules.
C. Common Ownership and Control Group Issues
The ACA requires employers that are “related
entities” to count employees as if they are employed
by a single entity. The ACA rules are similar to the
rules applicable to qualified employee pension plans
in this regard and are found in Sections 414(b), (c),
(m) and (o) of the Internal Revenue Code. Therefore,
all entities and organizations treated as a single
employer under the rules contained in Code §414 are
combined in determining if an employer is an
“applicable large employer.” Consequently, a number
of smaller organizations (that may not each have 50
FTEs) could be subject to 4980(H) liability if they are
considered under common control according to §414
rules.
However, once the “control group” or “common
ownership” analysis is completed for purposes of
determining whether the employer is an ALE, these
rules no longer apply to healthcare coverage. This
means that each entity in the control group has the
ability to choose its own health plan and any penalties
assessed for non-compliance are entity specific.
7
Federal Register, Vol. 78, No. 1, p. 221, January 2,
2013.
Also, in calculating the 4980H(a) liability, the
“not counting the first 30 rule” would apply
proportionality to each member entity. For example, a
member entity that accounts for 50% of the total fulltime employees in the control group would pay a
penalty of $2000 per year times the number of fulltime employees in that specific entity not counting the
first 15 (50% of 30).
D. Limited Exception for Seasonal Workers
Seasonal worker's hours are included when
determining applicable large employer status;
however, an employer will not be an applicable large
employer if it employed 50 or more full-time
employees for no more than 120 days in the preceding
calendar year, and the employees causing it to reach
or exceed the 50 full-time employee threshold were
seasonal employees employed no more than 120 days
during the preceding calendar year.
For these purposes, four calendar months may be
treated as the equivalent of 120 days. The four
calendar months and the 120 days are not required to
be consecutive. Until further guidance is issued, an
employer may use a reasonable, good faith
interpretation of existing U.S. Department of Labor
guidance on the definition of seasonal employees.
Federal Registry, Vol. 78, No. 1, p. 222, January 2,
2013.
Example: An employer employs 40 full-time
employees for all of 2014. In addition, the employer
also has 80 seasonal full-time workers who work from
September through December 2014. The employer has
40 full-time employees during each of eight calendar
months of 2014, and 120 full-time employees during
each of four calendar months of 2014, resulting in an
average of 66 full-time employees (rounding fractions
down). However, the employer's workforce equaled or
exceeded 50 full-time employees (including seasonal
workers) for no more than four calendar months in
2014, and the number of full-time employees would be
less than 50 during those months if seasonal workers
were disregarded. Accordingly, the employer is not an
applicable large employer for 2015.
E. Seasonal Employees
In the Final Rules published on 2-12-14, the
regulators finally addressed what is meant by
“seasonal employees’.
The final regulations
provide that a seasonal employee means an
employee in a position for which the customary
annual employment is six months or less. The
reference to customary means that by the nature of
the position an employee in this position typically
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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. In certain unusual instances, the
employee can still be considered a seasonal
employee even if the seasonal employment is
extended in a particular year beyond its customary
duration (regardless of whether the customary
duration is six months or is less than six months).
For example, if ski instructors at a resort have a
customary period of annual employment of six
months, but are asked in a particular year to work an
additional month because of an unusually long or
heavy snow season, they would still be considered
seasonal employees.
VI. SMALL GROUP RULES
Small employer groups, in Texas those with 50 or
fewer employees, are not required to offer eligible
employees healthcare coverage. However, if these
employers do offer coverage, beginning on January 1,
2014 or the first date of the plan year, whichever is
later, there are several applicable ACA mandates to
which these plans must adhere.
A. Essential Health Benefits
While a small group employer will not face
penalties/fines for not offering healthcare coverage to
its employees, if the small group employer chooses to
offer ACA compliant healthcare coverage, it must
offer a plan that includes Essential Health Benefits
(“EHB”s). EHBs are:
 Ambulatory patient services;
 emergency services;
 hospitalization;
 maternity and newborn care;
 mental health and substance use disorder
services ( including behavioral health
treatment);
 prescription drugs;
 rehabilitative and habilitative services and
devices;
 laboratory services;
 preventive and wellness services and chronic
disease management; and
 pediatric services, including oral and vision
care.
Federal Register, Vol. 77, No. 227, November 26,
2012, Proposed Rules; see also Federal Register, Vol.
78, No. 37, February 25, 2013, Final Rules.
B. Modified Community Rating
Beginning in 2014, carriers are prohibited from
basing the premium rate charged on small group
8
employer plans on anything except for the following
factors:
1. Whether the plan or coverage covers an
individual or family;
2. Location (Rating area or community in
which the employer is located5);
3. Age (within a 3:1 ratio for adults)
4. Tobacco use (within 1.5:1)
Federal Register, Vol. 78, No. 39, February 27, 2013
What this rating system means in reality is that
carriers may no longer obtain medical data from small
employer groups nor may the carriers take into
consideration the health of the group when
determining the premiums to be charged.
VII. APPLICABLE LARGE
EMPLOYER RULES
The Employer Shared Responsibility Provisions
are found in Pension Excise Tax Regulations (26
CFR part 54) Section 4980H. Section 4980H was
added to the Code by section 1513 of the Patient
Protection and Affordable Care Act, enacted
March 23, 2010, Public Law 111–148, and
amended by section 1003 of the Health Care and
Education Reconciliation Act of 2010, enacted
March 30, 2010, Public Law 111–152, and further
amended by the Department. This is referred to
collectively as the “Employer Mandate”.
In accordance with the Employer Mandate and for
purposes of the Section 4980H Employer Shared
Responsibility Rules, Applicable Large Employers or
ALEs, (generally, employers who employed at least 50
full-time employees, including full-time equivalent
employees, on business days during the preceding
calendar year)6 must either offer Minimum Essential
Coverage (“MEC”), which is affordable and meets
minimum value, to substantially all eligible employees
or face potential fines for failing to do so. IRS Notice
2012-58. Originally, coverage was required to be
offered or penalties were to be assessed in 2014.
However, on July 2, 2013, the IRS issued a notice
delaying the Employer Mandate until 2015. IRS
Notice 2013-45.
A. Employer Mandate
In g eneral, Section 4980H provides that an
applicable large employer (ALE) is subject to an
5
Section 2701(a)(2) of the Act directs each state to
establish one or more rating areas and charges the Secretary
of Health and Human Services (HHS) with reviewing the
adequacy of the state-established rating areas.
6
For 2015, these rules apply to Large ALEs who have an
FTE count of 100 or more for 6 consecutive months in
2014. In 2016, this rule applies to all ALEs.
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assessable payment if either (1) the employer fails
to offer to its full-time employees (and their
dependents7) the opportunity to enroll in minimum
essential coverage (MEC) under an eligible
employer-sponsored plan and any full-time
employee is certified to the employer as having
received an applicable premium tax credit or costsharing reduction (section 4980H(a) liability), or (2)
the employer offers its full-time employees (and
their dependents) the opportunity to enroll in MEC
under an eligible employer-sponsored plan and
one or more full-time employees is certified to the
employer as having received an applicable
premium tax credit or cost-sharing reduction
(section 4980H(b) liability). An employer may be
liable for an assessable payment under section
4980H(a) or (b) only if one or more full-time
employees are certified to the employer as having
received an applicable premium tax credit or costsharing reduction.
The assessable payment under section
4980H(a) is based on all (excluding the first 80 in
2015 and then first 30 starting in 2016) full-time
employees, while the assessable payment under
section 4980H(b) is based on the number of fulltime employees who are certified to the employer
as having received an applicable premium tax
credit or cost-sharing reduction with respect to that
employee’s purchase of health insurance for
himself or herself on an Exchange. In contrast, an
employee’s receipt of a premium tax credit or cost
sharing reduction with respect to coverage for a
dependent will not result in liability for the
employer under section 4980H. Under section
4980H(b), liability is contingent on whether the
employer offers minimum essential coverage
(MEC) under an eligible employer- sponsored plan,
and whether that coverage is affordable and
provides minimum value, as determined by
reference to the cost and characteristics of
employee-only coverage offered to the employee.
Section 4980H(c)(4) provides that a full-time
employee with respect to any month is an
employee who is employed on average at least 30
hours of service per week.
B. What Coverage Must Be Offered?
7
The term dependent means a child (as defined in
section 152(f)(1)) of an employee who has not attained
age 26. A child attains age 26 on the 26th anniversary
of the date the child was born. Dependent does not
include the spouse of an employee. However, state
law may define spouses as dependents.
Federal
Registry, Vol. 78, No. 1, p. 241, January 2, 2013.
Pursuant to 2-10-14 Regulations, foster children and stepchildren are also excluded from being dependents.
9
ALEs are not required to offer all Essential Health
benefits to be compliant with ACA. They are simply
required to offer MEC coverage which is defined as:
 Employer-sponsored coverage (including
COBRA coverage and retiree coverage)
 Coverage purchased in the individual market,
including a qualified health plan offered by
the Health Insurance Marketplace (also
known as an Affordable Insurance Exchange)
 Medicare Part A coverage and Medicare
Advantage plans
 Most Medicaid coverage
 Children's Health Insurance Program (CHIP)
coverage
 Certain types of veterans health coverage
administered by the Veterans Administration
 TRICARE
 Coverage provided to Peace Corps volunteers
 Coverage under the Nonappropriated Fund
Health Benefit Program
 Refugee Medical Assistance supported by the
Administration for Children and Families
 Self-funded health coverage offered to
students by universities for plan or policy
years that begin on or before Dec. 31, 2014
(for later plan or policy years, sponsors of
these programs may apply to HHS to be
recognized as minimum essential coverage)
 State high risk pools for plan or policy years
that begin on or before Dec. 31, 2014 (for
later plan or policy years, sponsors of these
program may apply to HHS to be recognized
as minimum essential coverage)
Minimum essential coverage is defined in § 5000A(f)
of the Internal Revenue Code8.
C. 4980H(a) Penalties for Failure to Offer
Coverage
The penalty amount for not offering health
coverage to “substantially all” of the eligible
employees (defined by the IRS as all but 5% or 5
employees, whichever number is greater) is $2,000
per annum for each full-time employee, excluding the
first 30 full-time employees. Federal Registry, Vol.
78, No. 1, January 2, 2013.
In 2015, the Final Regulations issued on 2-10-14
advise that only 70% of the eligible employees need
be offered coverage for 4980H(a) penalties, however
the employer may still be subject to other fines,
penalties and damage claims which are applicable
8
Minimum essential coverage does not include
coverage providing only limited benefits, such as coverage
only for vision care or dental care, and Medicaid covering
only certain benefits such as family planning, workers'
compensation, or disability policies.
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including $100 a day ERISA violation for failing to
offer coverage to eligible employees, 4980H(b)
$3,000 penalties and discrimination lawsuits for the
failure to offer coverage to 30% of the eligible
employees.
Section 4980H(c)(2)(D)(i) provides that the number of
individuals employed by an ALE as full-time
employees shall be reduced by 309 solely for purposes
of calculating the Pay or Play penalty under section
4980H(a). Federal Registry, Vol. 78, No. 1, p.231
January 2, 2013.
For example, an employer has 35 full-time
employees, and 40 part-time employees, each of
whom averages 90 hours of service per month. Using
the formula discussed in Section V. A of this Article,
the employer would have 65 full-time and full-time
equivalent employees. Therefore, the employer is an
applicable large employer for 2015. If the ALE did
not offer coverage to its eligible employees in 2015,
and one eligible employee sought coverage through
the Marketplace and received premium tax
credits/subsidies, the penalty would be as follows: [35
(Full-time eligible employees) – 30 = 5] X $2,000 =
$10,000. This penalty is not tax deductible and is
calculated on a monthly basis which equates to $167 a
month.
The Final Rules of 2-12-14 advise that “[t]he
number 80 applies for purposes of the 2015 transition
rule in lieu of the number 30 that applies under the
general rule because this maintains the same 20-fulltime-employee difference between the applicable
threshold number (50 under the general rule; 100
under the 2015 transition rule) and the number of fulltime employees (30 under the general rule; 80 under
the 2015 transition rule) by which the applicable large
employer’s number of full- time employees is
reduced.” Federal Registry, Vol. 79, No. 29, p. 8576,
February 12, 2014.
The IRS has explained that “substantially all”
means that if an employer offers coverage to all but
5% or, if greater, five of its full-time employees
(provided that an employee is treated as having
been offered coverage only if the employer also
offered coverage to that employee’s dependents)
the employer will be considered in compliance with
the Employer Shared Responsibility Mandates.
Federal Registry, Vol. 78, No. 1, p. 232, January 2,
2013.10
As further transition relief, for each calendar
month during 2015 and any calendar months during
the 2015 plan year that fall in 2016, an applicable large
employer member that offers coverage to at least 70
percent (or that fails to offer to no more than 30
percent) of its full-time employees will not be subject
to an assessable payment under section 4980H(a).
Applicable large employer members qualifying for the
transition relief continue to be subject to a potential
assessable payment under section 4980H(b). Federal
Registry, Vol. 79, No. 29, p. 8565, February 12, 2014.
Section 4980H(c)(2)(D)(ii) also provides that in
the case of persons treated as a single applicable large
employer under the control group/common ownership
rules, only one 30 (80 for 2015 only)-employee
reduction is allowed with respect to those persons and
the reduction is allocated among them ratably on the
basis of the number of full-time employees employed
by each. Federal Register, Vol. 78, No. 1, p. 231,
January 2, 2013.
D. 4980H(b) Penalties - Affordability and
Minimum Value
Section 4980H(b) liability may arise because,
with respect to a full-time employee who has been
certified to the employer as having received an
applicable premium tax credit or cost-sharing
reduction, the employer’s coverage is unaffordable
within the meaning of section 36B(c)(2)(C)(i) or
does not provide minimum value within the
meaning of section 36B(c)(2)(C)(ii).
Employers who offer coverage to at least 95%
(70% for 2015 only) of their full-time employees, but
whose employees receive tax credits/subsidies through
the Marketplace because coverage is not affordable
and/or does not meet minimum value, will be subject to
a fine of up to $3,000 per annum for each eligible
employee who receives a premium tax credit/subsidy.
In 2016, if an ALE has at least 50 full-time
employees and offers coverage to at least 95% of
the eligible full-time employees, the ALE is still
subject to a penalty starting in 2015 if:
 A full-time employee’s contribution for
employee-only coverage exceeds 9.5% of the
employee’s household income (Note: see
below regarding a proposed affordability
“safe harbor”) or the plan’s value is less than
9
Fines may be reduce by 80 full-time employees for 2015
only. The Final Rules of 2-10-14 advise that “The number
80 applies for purposes of the 2015 transition rule in lieu of
the number 30 that applies under the general rule because
this maintains the same 20-full-time-employee difference
between the applicable threshold number (50 under the
general rule; 100 under the 2015 transition rule) and the
number of full-time employees (30 under the general rule;
80 under the 2015 transition rule) by which the applicable
large employer’s number of full- time employees is
reduced.”
10
Author’s Note: Remember, however, that the
Substantially All Safe Harbor does not prevent an ERISA
or discrimination lawsuit from being filed. As well, this
Safe Harbor does not protect against fines assessed of $100
per day for failure to offer coverage to eligible employees.
10
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60%; and
 The employee’s household income is
b e t w e e n 1 0 0 % a n d 400% of the
federal poverty level; and
 The employee waives the ALE’s coverage
and
purchases
coverage
in
t he
Mar ket pl ace ( previ ousl y Exchan ge)
and r ecei ves premium tax credits/subsidies.
In 2015, this penalty only applies to ALEs with
100 or more FTEs. However, if anALE offers
affordable minimum value coverage to 70% of its
eligible workforce, the employer could be subject to
this penalty as to the 30% to whom it failed to offer
coverage.
The penalty will be calculated separately for
each month in which any of the above conditions
apply. The amount of the penalty for a given month
equals the number of full- time employees who
receive a premium tax credit for that month
multiplied by 1/12 of $3,000.
1. Affordability Safe Harbors
Coverage is "unaffordable" if the employee's
share of the premium is more than 9.5% of his or her
annual household income. However, employers
generally do not know their employees' household
incomes. The proposed regulations provide the
following affordability safe harbors that employers
may use to determine if their coverage is affordable:
 W-2 safe harbor:
If the employee's
contribution for single coverage under the
employer's lowest cost medical option does
not exceed 9.5% of the employee's Box 1, W2 pay for that year, the affordability test is
satisfied.
 Rate of pay safe harbor: If the employee's
contribution for single coverage under the
lowest cost medical option offered by the
employer does not exceed 9.5% of the
employee's monthly wage amount, the
affordability test is satisfied. Please note
however, that this method of calculation
cannot be used for tipped or commission
based employees. Federal Registry, Vol. 79,
No. 29, p. 8564, February 12, 2014.
 Federal poverty line safe harbor: If the
employee's contribution for single coverage
under the employer's lowest cost medical
option does not exceed 9.5% of the federal
poverty level for a single individual, the
affordability test is satisfied. The federal
poverty guidelines are generally updated each
year. The latest U.S. government figures
available
are
for
2013.
See
https://www.federalregister.gov/articles/2013
11
/01/24/2013-01422/annual-update-of-thehhs-poverty-guidelines.
2. Determining if Coverage Provides Minimum
Value
In general, an employer's health coverage
provides "minimum value" only if it covers at least
60% of the total allowed costs of benefits that are
expected to be incurred under the plan. The HHS has
provided a minimum value calculator available to help
employers determine whether their coverage provides
minimum value. The link to this calculator is found
here:www.cms.gov/CCIIO/Resources/.../mvcalculator-final-4-11-2013.xlsm.
Employers will input certain information about their
plan (e.g., deductibles and co-pays) into the calculator
and get a determination as to whether their coverage
provides minimum value.
E. Employer Shared Responsibility Penalty
Trigger
Neither the penalty for failing to offer any
coverage or the failure to offer affordable minimum
value coverage are triggered simply because a fulltime employee seeks coverage from the Marketplace.
These penalties are only triggered if one full-time
employee obtains subsidized Marketplace coverage.
An employee can obtain subsidized Marketplace
coverage only if:
1.
his or her household income is between
100% and 400% of the federal poverty line
(currently $11,490 - $45,960 for individual;
$23,550-$94,200 for family of 4);
2.
he or she enrolls in Marketplace coverage
and is not eligible for Medicaid (or other
government coverage);
3.
and either no employer coverage is offered
or the employer coverage offered fails to
meet either a minimum value test or an
affordability test.
VIII. Employer Reporting/Notice
Requirements
Today, there are not many mandates placed on
employers with respect to notifying employees and the
federal government of the status, availability and
contents of the employer’s health plan. However,
there are two which you should know well:
A. FLSA §218b Model Notice
In accordance with FLSA § 218b, virtually all
employers (those subject to the Fair Labor Standards
Act) were required to provide a Marketplace Notice to
ALL of their employees no later than October 1, 2013.
As well, all employers subject to the FLSA are
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required today and moving forward to provide newly
hired employees with this Notice within 14 days of
employment.
The intended purpose of the Notice is to advise
employees of their rights and responsibilities with
respect to the Marketplace as well as information
regarding the employer’s health plan (what it is, who
is eligible and if it meets affordability and minimum
value tests). While employers may create their own
Notices (tracking the language required in FLSA
§218b, the U.S. Department of Labor also provided
Model Notices for use here:
http://www.dol.gov/ebsa/healthreform/index.html.
The Notices are available on the U.S. DOL website in
English and Spanish. Please note that the expiration
date of the DOL Notice was November 30, 2013.
However, as there has not been an updated notice
provided, employers are still allowed to use the
expired notice.
According to the U.S. Department of Labor, the
notice provided by the employer, or its designated
representative, must include:
1. Informing the employee of the existence of
Exchanges (now known as “Marketplaces”)
including a description of the services provided
by the Exchanges, and the manner in which the
employee may contact Exchanges to request
assistance;
2. If the employer plan's share of the total
allowed costs of benefits provided under the plan
is less than 60 percent of such costs, that the
employee may be eligible for a premium tax
credit under section 36B of the Internal Revenue
Code (the Code) if the employee purchases a
qualified health plan through an Exchange; and
3. If the employee purchases a qualified health
plan through an Exchange, the employee may
lose the employer contribution (if any) to any
health benefits plan offered by the employer and
that all or a portion of such contribution may be
excludable from income for Federal income tax
purposes.
U.S. DOL FAQs about Affordable Care Act
Implementation Part XI; Part XVI.
While there were no fines/penalties specifically
associated with an employer’s failure to provide this
Notice by October 1, 2013, ACA has a $100 a day
general “noncompliance” penalty which may come
into play should an employer fail to provide this
notice. This general penalty requires employers to
correct compliance failures within 30 days of
discovery or self-report a $100 a day penalty for
failing to comply on IRS Form 8928 for each day
the employer failed to comply with a PPACA
12
mandate. U.S. DOL’s Technical Release No. 201302.
B. IRS Form 6056
Under Section 6056 of the Internal Revenue Code
(“IRC”), Applicable Large Employers must report to
the IRS information about their compliance with the
employer shared responsibility provisions of Section
4980H of the IRC and about the healthcare coverage
they have offered employees.
Originally, this
reporting requirement was set to begin for the 2014
tax year.
However, pursuant to Notice 2013-45
(2013-31 IRB 116), the Department of Treasury
provided transitional relief for 2014 from the 6056
reporting requirements and postponed the requirement
until the 2015 tax year.
Section 6056 also requires those employers to
furnish related statements to employees by January 31
of the calendar year following the calendar year for
which the return must be filed so that the employees
may use the statements to help determine whether, for
each month of the calendar year, they can claim on
their tax returns a premium tax credit under section
36B of the IRC. The IRS has advised that the
information reported will be used to administer and
ensure compliance with the eligibility requirements
for the employer shared responsibility provisions and
the premium tax credit. Source: Federal Register,
Vol. 78, No. 174, September 9, 2013 Proposed Rules.
C. Certification of Eligibility for Transition
Relief (Fewer than 100 FTEs)
In order not to be subject to the ALE rules in
2015, an employer with between 50 and 99 FTEs must
certify on a prescribed form (expected to be the Form
6056) that it meets the eligibility requirements set
forth in paragraphs (1) through (3) listed below.
An employer is eligible for the transition relief if
it satisfies the following conditions:
(1) Limited Workforce Size. The employer employs on
average at least 50 full-time employees (including
FTEs) but fewer than 100 full-time employees
(including FTEs) on business days during 2014.
(2) Maintenance of Workforce and Aggregate Hours
of Service. During the period beginning on February
9, 2014, and ending on December 31, 2014, the
employer does not reduce the size of its workforce or
the overall hours of service of its employees in order
to satisfy the workforce size condition. A reduction in
workforce size or overall hours of service for bona
fide business reasons will not be considered to have
been made in order to satisfy the workforce size
condition. For example, reductions of workforce size
or overall hours of service because of business activity
such as the sale of a division, changes in the economic
marketplace in which the employer operates,
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Chapter #10
terminations of employment for poor performance, or
other similar changes unrelated to eligibility for the
transition relief are for bona fide business reasons and
will not affect eligibility for that transition relief.
(3) Maintenance of Previously Offered Health
Coverage. During the coverage maintenance period
the employer does not eliminate or materially reduce
the health coverage, if any, it offered as of February 9,
2014. An employer will not be treated as eliminating
or materially reducing health coverage if (i) it
continues to offer each employee who is eligible for
coverage during the coverage maintenance period an
employer contribution toward the cost of employeeonly coverage that either (A) is at least 95 percent of
the dollar amount of the contribution toward such
coverage that the employer was offering on February
9, 2014, or (B) is the same (or a higher) percentage of
the cost of coverage that the employer was offering to
contribute toward coverage on February 9, 2014; (ii)
in the event there is a change in benefits under the
employee-only coverage offered, that coverage
provides minimum value after the change; and (iii) the
employer does not alter the terms of its group health
plans to narrow or reduce the class or classes of
employees (or the employees’ dependents) to whom
coverage under those plans was offered on February 9,
2014. The term coverage maintenance period means
(1) for an employer with a calendar year plan, the
period beginning on February 9, 2014, and ending on
December 31, 2015, and (2) for an employer with a
non-calendar year plan, the period beginning on
February 9, 2014, and ending on the last day of the
plan year that begins in 2015. Internal Revenue
Bulletin 2014-9, February 24, 2014.
IX. Measurement Period Stability Period Safe Harbor
The Department of Treasury has provided a safe
harbor to allow Applicable Large Employers
additional time to measure the hours worked by
employees when it cannot be determined if the
employee is reasonably expected to work on average
at least 30 hours per week (“variable hour worker”).
As explained in Notice 2011-36 and subsequent
notices, determining full-time employee status on a
monthly basis may cause practical difficulties for
employers, employees, and Affordable Insurance
Marketplaces (f/k/a Exchanges). For employers, these
difficulties include uncertainty and inability to
predictably identify which employees are full-time
employees to whom coverage must be provided to
avoid a potential section 4980H liability.
According to the IRS “[t]his problem
is particularly acute if employees have
13
varying
hours
or
employment
schedules (for example, employees
whose hours vary from month to
month).
A
month-by-month
determination may also result in
employees moving in and out of
employer coverage (and potentially
Exchange coverage) as frequently as
monthly. This result would be
undesirable from both the employee's
and the employer's perspective, and
would also create administrative
challenges for the [Marketplaces].”
IRS Notice of Proposed Rulemaking;
December 28, 2012; [REG-13800612]; p.33.
The stated purpose of this Safe Harbor is
“intended to encourage employers to continue
providing and potentially to expand group health plan
coverage for their employees by permitting employers
to adopt reasonable procedures to determine which
employees are full-time employees without becoming
liable for a payment under § 4980H, to protect
employees from unnecessary cost, confusion, and
disruption of coverage, and to minimize administrative
burdens on the Affordable Insurance Exchanges
[Marketplaces]”. IRS Notice 2012-58.
There are two categories of employees and
different rules apply to each. The first category is a
new hire, which is a person who, upon hiring, it
cannot be determined if the person will average 30
hours or more of service hours a week. The second
category is an ongoing employee, one who has
completed a full standard measurement period. Both
types of employees must be “variable hour” workers
which is defined as “[a]n employee… [for whom],
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. (The 30 hours per week
average reflects the statutory definition of full-time
employee in § 4980H(c)(4) and is the definition of
“full-time employee” as used in this notice.) IRS
Notice 2012-58
A. New Hires Safe Harbor
If an employer maintains a group health plan that
would offer coverage to the employee only if the
employee were determined to be a full-time employee,
the employer may use both a measurement period of
between three and 12 months (the same as allowed for
ongoing employees) and an administrative period of up
to 90 days for variable hour and seasonal employees.
However, the measurement period and the
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administrative period combined may not extend
beyond the last day of the first calendar month
beginning on or after the one-year anniversary of the
employee’s start date (totaling, at most, 13 months and
a fraction of a month). Federal Register, Vol. 78, No.
1, p. 227, January 2, 2013.
1.
Initial Measurement Period
For purposes of the Initial Measurement Period,
the employer measures the hours of service completed
by the new employee for a period of 3 to 12 months
(employer choice) beginning either on the employee’s
first day of service or the first of the month following
first date of service. At the conclusion of this period,
the employer determines whether the employee
completed an average of 30 hours of service per week
or more during this period. If the employee averaged
30 hours or more of service hours during the initial
measurement period, and is still employed, the
employer must offer coverage for the stability period
which must be a period of at least six consecutive
calendar months and no shorter than the initial
measurement period.
If a new variable hour or seasonal employee is
determined not to be a full-time employee during the
initial measurement period, the employer is permitted
to treat the employee as not a full-time employee
during the stability period that follows the initial
measurement period. This stability period for such
employees must not be more than one month longer
than the initial measurement period and must not
exceed the remainder of the standard measurement
period (plus any associated administrative period) in
which the initial measurement period ends.
Note: An employee or related individual is not
considered eligible for minimum essential coverage
under the plan and the employer is therefore not
subject to the 4980H penalties during this period.
However, the employee may be eligible for a
premium tax credit or cost-sharing reduction through
a Marketplace during any period when coverage is
not offered, including any measurement period or
administrative period prior to when coverage takes
effect.
2. Administrative Period
In addition to the initial measurement period, the
employer is permitted to apply an administrative
period before the start of the stability period. The
purpose of this administrative period is to allow the
employer the opportunity to assess whether coverage
is owed and offer coverage, if owed.
This
administrative period must not exceed 90 days in total.
For this purpose, the administrative period includes all
periods between the start date of a new variable hour
or seasonal employee and the date the employee is
first offered coverage under the employer’s group
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health plan, other than the initial measurement period.
Thus, for example, if the employer begins the initial
measurement period on the first day of the first month
following a new variable hour or seasonal employee’s
start date, the period between the employee’s start date
and the first day of the next month must be taken into
account in applying the 90-day limit on the
administrative period. Similarly, if there is a period
between the end of the initial measurement period and
the date the employee is first offered coverage under
the plan, that period must be taken into account in
applying the 90-day limit on the administrative period.
Again, the combined length of 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 (totaling, at
most, 13 months and a fraction of a month).
Example:
12-Month Initial Measurement Period Preceded by
Partial Month Administrative Period and Followed by
2-Month Administrative Period:. For new variable
hour employees, Employer B uses a 12-month initial
measurement period that begins on the first day of the
first month following the start date and applies an
administrative period that runs from the end of the
initial measurement period through the end of the
second calendar month beginning on or after the end of
the initial measurement period. Employer B hires
Employee Y on May 10, 2014. Employee Y’s initial
measurement period runs from June 1, 2014, through
May 31, 2015. Employee Y works an average of 30
hours per week during this initial measurement period.
Employer B offers coverage to Employee Y for a
stability period that runs from August 1, 2015 through
July 31, 2016.
Conclusion.
Employer B does not satisfy the
standards for the safe harbor method because the
combination of the initial partial month delay, the
twelve-month initial measurement period, and the two
month administrative period means that the coverage
offered to Employee Y does not become effective until
after the first day of the second calendar month
following the first anniversary of Employee Y’s start
date. Accordingly, employer B is potentially subject
to a payment under §4980H and fails to comply with
PHS Act § 2708. Notice 2012-58.
3. Stability Period
For an employee determined to be full-time during
the measurement period, the employee would be
treated as full time during the subsequent stability
period during which coverage must be offered as long
as the employee remains employed and regardless of
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the number of hours the employee works during the
stability period.
The stability period must be a period of at least six
consecutive calendar months that follows the
measurement period and is no shorter in duration than
the measurement period. If the employee were
determined not to be a full-time employee during the
measurement period, the employer would be permitted
to treat the employee as not a full-time employee
during a stability period that followed the
measurement period, but the stability period could not
exceed the measurement period. IRS Notice 2012-58;
IRS Notice 2011-36.
Example:
Company offers health coverage to full-time
employees working 30 or more hours per week.
Employee C is hired as a variable-hour employee, with
hours expected to fluctuate between 20 and 45 per
week. Employee C’s first day of work is October 25,
2014. On the date of hire, it is not known if Employee
C will work 30 or more hours per week. Company has
an 11-month measurement period, and their
administrative period is one month measured from the
first of the month following the end of the
measurement period. Employee C works full-time
during the measurement period, and must therefore be
offered coverage by November 1, 2015. This
arrangement satisfies the waiting period rules. IRS
Notice 2012-58.
B. Ongoing Employees
For ongoing employees, employers generally will
be permitted to use the safe harbor method based upon
measurement and stability periods described in Notices
2011-36 and 2012-17. The measurement period the
employer chooses to apply to ongoing employees is
referred to in this notice as the “standard measurement
period.” An “ongoing employee” is defined by the
IRS as “generally an employee who has been
employed by the employer for at least one complete
standard measurement period”. IRS Notice 2012-58.
1. Transition from New Employee Rules to Ongoing
Employee Rules
Once a new employee, who has been employed
for an initial measurement period, has been
employed for an entire standard measurement period,
the employee must be tested for full-time status,
beginning with that standard measurement period, at
the same time and under the same conditions as other
ongoing employees. Accordingly, for example, an
employer with a calendar year standard measurement
period that also uses a one-year initial measurement
period beginning on the employee’s start date would
test a new variable hour employee whose start date is
15
February 12 for full-time status first based on the
initial measurement period (February 12 through
February 11 of the following year) and again based
on the calendar year standard measurement period (if
the employee continues in employment for that entire
standard measurement period) beginning on January
1 of the year after the start date.
An employee determined to be a full-time
employee during an initial measurement period or
standard measurement period must be treated as a fulltime employee for the entire associated stability
period. This is the case even if the employee is
determined to be a full-time employee during the
initial measurement period but determined not to be a
full-time employee during the overlapping or
immediately following standard measurement period.
In that case, the employer may treat the employee as
not a full-time employee only after the end of the
stability period associated with the initial
measurement period. Thereafter, the employee’s fulltime status would be determined in the same manner
as that of the employer’s other ongoing employees.
In contrast, if the employee is determined not to be
a full-time employee during the initial measurement
period, but is determined to be a full-time employee
during the overlapping or immediately following
standard measurement period, the employee must be
treated as a full-time employee for the entire stability
period that corresponds to that standard measurement
period (even if that stability period begins before the
end of the stability period associated with the initial
measurement period). Thereafter, the employee’s
full-time status would be determined in the same
manner as that of the employer’s other ongoing
employees. IRS Notice of Proposed Rulemaking;
December 28, 2012; [REG-138006-12], p. 40.
2. Ongoing Employees: Safe Harbor
Under the safe harbor method for ongoing
employees, an employer determines each ongoing
employee’s full-time status by looking back at the
standard measurement period (a defined time period
of not less than 3 but not more than 12 consecutive
calendar months, as chosen by the employer). The
employer has the flexibility to determine the months
in which the standard measurement period starts and
ends, provided that the determination must be made
on a uniform and consistent basis for all employees in
the same category. For example, if an employer chose
a standard measurement period of 12 months, the
employer could choose to make it the calendar year, a
non-calendar plan year, or a different 12-month
period, such as one that ends shortly before the start of
the plan’s annual open enrollment season. If the
employer determines that an employee averaged at
least 30 hours per week during the standard
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measurement period, then the employer treats the
employee as a full-time employee during a subsequent
“stability period”, regardless of the employee’s
number of hours of service during the stability period,
so long as he or she remained an employee. IRS
Notice 2012-58.
For an employee whom the employer determines
to be a full-time employee during the standard
measurement period, the stability period would be a
period of at least six consecutive calendar months that
is no shorter in duration than the standard
measurement period and that begins after the standard
measurement
period
(and
any
applicable
administrative period, as discussed below). If the
employer determines that the employee did not work
full-time during the standard measurement period, the
employer would be permitted to treat the employee as
not a full-time employee during the stability period
that follows, but is not longer than, the standard
measurement period. IRS Notice 2012-58
3.
Use of Optional Administrative Period
Because employers may need time between the
standard measurement period and the associated
stability period to determine which ongoing employees
are eligible for coverage, and to notify and enroll
employees, an employer may make time for these
administrative steps by having its standard
measurement period end before the associated stability
period begins. IRS Notice 2012-58
The Optional Administrative Period:
•
•
•
•
Cannot exceed 90 days.
For ongoing employees must overlap previous
stability period.
May not extend either the measurement or
coverage period.
Must include all days between start date and
when employee first enrolled in coverage
(except the initial measurement period).
C. Look-Back Period
In order to use the Measurement Period/Stability
Period Safe Harbor as to variable hour workers,
employers must start tracking their employee hours
now in order to know to whom coverage must be
offered in 2015. Under the look-back/stability period
safe harbor method, an employer would determine
each employee’s full-time status by looking back at a
defined period of not less than three but not more than
12 consecutive calendar months, as chosen by the
employer (the measurement period), to determine
whether during the measurement period the employee
averaged at least 30 hours of service per week. If the
employee were determined to be a full-time employee
during the measurement period, then the employee
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would be treated as a full-time employee during a
subsequent “stability period,” regardless of the
employee’s number of hours of service during the
stability period, so long as he or she remained an
employee.
D. Different
Measurement
Periods/Stability
Periods
Employers may use measurement periods and
stability periods that differ either in length or in their
starting and ending dates for the following categories
of employees:
 Collectively bargained employees and noncollectively bargained employees.
 Salaried employees and hourly employees.
 Employees of different entities.
 Employees located in different states.
IRS Notice 2012-58.
Generally, once a MP/SP has been chosen, the
employer may only change its standard measurement
period and stability period for subsequent years, but
generally may not change the standard measurement
period or stability period once the standard
measurement period has begun. IRS Notice of
Proposed Rulemaking; December 28, 2012; [REG138006-12]; p.35.
X. OTHER LEGAL
CONSIDERATAIONS
It is imperative that we, as attorneys, keep in mind
other legal and regulatory issues which may harm an
unwitting employer. To that end, following is a brief
summary of other regulations, regulatory initiatives
and legal complications that may bear out in the wake
of ACA:
A. Make sure to keep ACCURATE track of hours
worked and pay correctly:
In fiscal year 2013, the U.S. Department of Labor
Wage and Hour Division recovered nearly a quarter of
a billion dollars in back wages for workers around the
country whose employers improperly denied them pay
they had earned. The cases processed during that 12month period benefited more than 269,250 workers
who recouped $249,954,412 in back wages. Nearly a
third of that money was secured for low-wage
workers. "Employers who commit minimum wage,
overtime and other wage violations deny workers their
full hard-earned income, and we are committed to
ensuring that the money is in the hands of those who
worked for it," said Laura Fortman, principal deputy
administrator for the Wage and Hour Division. "That's
money that they will spend on the rent, on
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transportation, to put food on the table, and to buy
clothes for their kids." Since the beginning of 2009,
the Wage and Hour Division has closed 145,884 cases
nationwide, resulting in more than a billion dollars in
back wages for 1,238,589 workers. U.S. DOL News
Brief, December 12, 2013
Not only do these statistics clearly indicate that
the U.S. Department of Labor is committed to
ensuring workers are paid correctly, but this reinforces
the need to accurately track hours worked to
determine who in workforce will be eligible for
benefits under ACA and when.
B. Employees Misclassified as Independent
Contractors
Both the U.S. Department of Labor and the Internal
Revenue Service have announced that addressing the
issue of misclassified workers is a high priority for
their
audit
and
enforcement
activities.
http://www.dol.gov/whd/workers/misclassification/
Independent Contractors (1099 workers) are by
definition NOT employees. Therefore, independent
contractors are not counted for ALE purposes.
Independent Contractors are also, generally, not
eligible for healthcare coverage through the company.
If a person is misclassified as an independent
contractor, not only may the employer owe overtime
for hours worked beyond 40 in a regular workweek,
but the employer could be subject to fines and
penalties for its failure to offer the misclassified
employee health insurance benefits and/or depending
on the makeup of the organization, the number of
misclassified workers could cause an employer to be
an ALE when otherwise, it would not be.
Complying with the ACA’s provisions requiring
employers to count their employees and identify
which are “full-time,” as a foundational matter, begin
with distinguishing employees from independent
contractors. The financial stakes for errors in worker
classification are high and will only increase once the
ACA is fully effective.
Non-employee status should be examined and
documented. Now is the time to correct the
misclassification of workers who are erroneously
treated as independent contractors. However, this does
not mean that workers who currently are employees
should be reclassified as independent contractors to
avoid the ACA’s mandates.
XI. CONCLUSION
There are many aspects of ACA still to be worked
out and many unanswered questions lingering.
However, with over 20,000 pages of regulations,
notices and proposed regulations already promulgated,
it is important that we advise our clients as to what
17
they need to do to avoid fines and penalties. Items
you may want to discuss with your clients include:
1. Determination of whether the employer is a
small group employer or an ALE;
2. Legal analysis of common ownership and
control group issues to ensure that an
employer does not think he/she is a small
group employer when, in fact, the employer is
an ALE.
3. Educate your ALEs on the importance of
accurately tracking the workforce today to
determine who may be eligible for coverage
in 2015 and to set up appropriate
measurement periods/stability periods.
4. Analyze your clients’ use of independent
contractors to ensure these persons are not
misclassified.