The Last Minute Guide to the Affordable Care Act's "Pay or Play" Employer Shared
Responsibility Provisions.
By: Scott D. Newsom, Esq.
With the end of the year is rapidly approaching, those employers that have not fully implemented
their responsibilities under the Employer Shared Responsibility Regulations ("Regulations") of
the Affordable Care Act ("Act") are running out of time.
As of January 1, 2015, certain employers will be required to offer "affordable,"
"minimum value health insurance" to their full-time employees and dependents, or potentially be
subject to an excise tax. This obligation has commonly been referred to as the "Employer
Mandate" or "Pay or Play."
With open enrollment for health plans currently ongoing or imminent for most
employers, some employers are in the uncomfortable position of confronting their responsibility
under the Regulations with neither confidence in their preparations nor a full understanding of
their responsibility under the law. This article is meant to serve as an outline of the broad issues
for employer's consideration and to provide a last minute overview and guide of their
responsibilities.
The Applicable Large Employers
The "Pay or Play" obligation only applies to "Applicable Large Employers." If an
employer is not an Applicable Large Employer, then, effectively, the employer does not have
any additional obligation to offer health insurance than it did prior to the Act and Regulations.
The threshold issue is the determination of whether an employer is an Applicable Large
Employer. However, many employers that are not Applicable Large Employer are either under
the mistaken belief that the rules apply to them, or they are unsure whether they meet the
definition of an Applicable Large Employer in the first place.
In short, an Applicable Large Employer is any employer with an average or 50 or more
full-time equivalent employees during the previous calendar year. “Equivalent” employees are
determined by adding the hours per month of all part-time employees, not to exceed 120 per month,
per employee, and dividing by 120. The Regulations provide a limited transition provision that
permits employers to use any consecutive 6 month period in 2014 to determine Applicable Large
Employer status for the 2015 Plan Year.
Although most employers are aware of the “50 or more full-time equivalent employee
standard,” employers must understand the potential aggregation of multiple businesses related by
common ownership. A worse scenario might be that some employers may mistakenly assume
that they may re-structure their organization into a number of smaller companies with less than
50 full-time equivalent employees to avoid the determination of Applicable Large Employer
status; in short, they may not. This aggregation rule is particularly important for family or
privately-owned businesses that may have multiple related companies with common or related
ownership.
Applicable Large Employer status is determined by the aggregation (i.e. adding the
aggregated entities' employees for purposes of the 50 or more full-time equivalent employee
threshold) of all entities with common ownership that meets certain threshold amounts. Many
employers, and even some professional advisors, have mistakenly assumed or advocated that
separately organized or incorporated entities (those with their own legal status and employer
identification numbers) are always limited to only their own actual employees for determining
whether the 50 or more full-time equivalent employee standard is met or exceeded. This is simply
incorrect. Applicable aggregation and ownership attribution rules require an in-depth analysis of the
ownership and operation of related companies to determine the total scope of the "employer" for
purposes of determining Applicable Large Employer status.
In order to prevent businesses avoiding responsibility under the Act and Regulations
through careful corporate entity planning, the Act and Regulations have simply incorporated the
aggregation rules relating to qualified retirement plans, such as pension plans and 401(k) profit
sharing plans. For determining Applicable Large Employer status, the “Employer” includes all
entities treated as a single employer under Sections 414(b), (c), (m) or (o) of the Internal Revenue
Code (“Code”), which looks at common ownership of ostensibly different businesses. Thus, all
members of the employer’s “control group” or an “affiliated service group,” (which are defined
terms under the applicable Code provisions) are aggregated for purposes of determining whether an
entity meets the threshold number of employees for Applicable Large Employer status. If the
employees of several entities participate in the same qualified plan, such as a 401(k) profit sharing
plan, the joint participation should serve as a red flag requiring a review of the entities' relationship
for purposes of the Act.
The aggregation rules look to common ownership. For example, a parent entity that owns
(or, in some circumstances has a voting interest of) 80% or more, directly or indirectly, of one or
more subsidiary entities will be combined with those subsidiaries as a single "Employer" for
purposes of determining Applicable Large Employer status. Similarly, if five or fewer of the same
individuals or entities have a combined ownership (or voting) interest of at least 80% of each of a
group of entities (subject to a further determination of whether such persons have "effective control"
of each entity), those entities shall be considered a single "Employer". Further, and particularly
applicable to the organizations who belong to the University of Toledo Center for Family &
Privately-Held Business, the aggregation rules include additional rules that attribute ownership
among family members (most notably between spouses, as well as adult and minor children) and in
certain circumstances, corporate and limited liability entities, partnerships, and trusts. Only in very
limited circumstances will individuals not be attributed the ownership of their spouse. Therefore,
families with multiple entities and various percentages of family ownership should carefully review
whether such relationships, after application of the attribution rules, result in the aggregation of one
or more family owned entities for purposes of Applicable Large Employer status.
What is the Employer's "Shared Responsibility?"
Once a determination is made as above, an Applicable Large Employer is required to make an
offer of "affordable," "minimum value" health insurance to its Full-Time Employees and their
dependents.
An Applicable Larger Employer's failure to offer health insurance to at least 95% of its actual
Full-Time Employees and their dependents may result in an excise tax. Note that the 95%
threshold is reduced to 70% for the first play year beginning in 2015.
This first excise tax is determined by multiplying the number of actual full-time employees of
the employer (but not full-time equivalent employees), minus 30, by 1/12 of $2,000 for each
month that that the opportunity to enroll in such coverage does not exist. For the first year that
the excise tax applies to the employer, the number reducing the number of employees (30) in the
penalty calculation is increased (80). This excise tax is determined on a month-to-month basis.
A second and completely separate excise tax may result if an Applicable Large Employer offers
an employer-sponsored health plan to its Full-Time Employees and either (1) the employee's
required premium cost for his or her employer group health plan is "unaffordable" (i.e. the
premium exceeds 9.5% of an employee's household income) or (2) the employer's plan does not
provide "minimum value" (i.e. the plan's share of covered health expenses is less than 60%).
This second excise tax is equal to the number of full-time employees who receive a premium
credit multiplied by 1/12 of $3,000. However, this excise tax is capped at an amount equal to the
total number of actual full-time employees of the employer (not full-time equivalent employees)
minus 30 multiplied by 1/12th of $2,000. This excise tax is also determined on a month-to-month
basis.
There are several safe harbors available for employers to use to satisfy the "minimum value"
requirement. If the monthly premium cost of employee-only coverage under the employer
sponsored health insurance is less than 9.5% of (1) the employee's W-2 box 1 wages, (2) the
employee's hourly rate of pay multiplied by 130, or (3) the Federal Poverty Level for an
individual, then the employer has offered "affordable" health insurance for purposes of its
responsibilities under the Regulations.
Each of the excise taxes above are triggered by an employee of the employer receiving a
premium tax credit in connection with the purchase of health insurance from the health insurance
exchange/marketplace. The employer will have reporting obligations due in early 2016 to ensure
the proper administration of the premium tax credits and possible imposition of excise tax
penalties under the Act and Regulation.
The employer is not required to ensure that the employee accept the offer or enroll in the
employer's health insurance plan. Further, part-time employees are not entitled to an offer of
health insurance. If it desires, an employer may even extend an offer of "unaffordable" health
insurance that does not provide "minimum value" to part-time employees.
Adoption of the Measurement, Administrative and Stability Period: An Optional but
Advisable Course of Action.
To effectively address the Pay or Play obligation, an employer must identify its actual Full-Time
Employees. Under the Regulations, a Full-Time Employee is any employee who works an
average of 30 hours of service per week or 130 hours of service per month. An employee's status
as a "Full-Time Employee" can be determined on a month-to-month basis unless the employer
affirmatively utilizes an optional procedure outlined in the Regulations.
Under the ACA, the timing of these determinations is dependent on my factors. The employer
may adopt a "Measurement" Period of not less than 3 months and not more than 12 months to
measure the hours of service of its employees. An "Administrative" Period follows, of not more
than 90 days, and may be used by the employer to review the results from the Measurement
Period and extend an offer of health insurance to those individuals who satisfy the requirements
of Full-Time Employees over the Measurement Period. The employer may then rely on the
results of the Measurement Period during a subsequent "Stability" Period equal the same number
of months of the Measurement Period. Generally, 12 month Measurement and Stability Periods
will reduce the administrative burden on employer's human resource or administrative staff.
An example of this process would be:
The employer sponsors a calendar year health plan and adopts the following periods:
 Measurement Period – October 15 through October 14
 Administrative Period – October 15 through December 31.
 Stability Period – January 1 through December 31.
The employer's ongoing employees would be measured during each Measurement period. The
Administrative period would cover the employer's open enrollment period and allow the
employer to determine which employees were Full-Time Employees under the standards of the
Regulations. The employer would then rely on the status of such employees to ensure that it
satisfied its obligations over the subsequent Stability Period.
Separate Measurement, Administrative and Stability Periods apply to new employees. The
Regulations contain rules for transitioning new employees into the standard Measurement,
Administrative and Stability Periods. In addition, the optional procedure has rules for dealing
with terminated and re-hired employees. Employers with seasonal employees gain significant
advantages by adopting the optional procedure.
The information collected through this process would assist the employer in satisfying its future
reporting obligations.
Many executive officers and human resource professionals find the complexity of this new
process daunting and overly complicated. However, the alternative to adopting this optional
process for determining Full-Time Employees is that determination of which employees are FullTime Employees is made on a month-to-month basis. Making a monthly determination on which
employees are Full-Time Employees increases an employer's administrative burden and lessens
their ability to manage potential exposure to unnecessary excise taxes. With education on the
proper implementation of the optional Measurement, Administrative and Stability period
process, and some "cheat sheets" outlining the rules, many employers see the advantage of
utilizing these rules to their advantage to manage their obligations to employees and reduce their
potential risk.
Transition Rules may Delay the Effective Date.
Generally, to comply with the employer mandate of the Act, Employers must offer their
full-time employees and their dependents (but not spouses) affordable, minimum value health
insurance on the first day of the health plan year that begins on or after January 1, 2015; thus,
employers with plans that operate on a fiscal year have until the start of their first Plan Year in 2015
before the requirement is effective.
Employers with an average of less than 100 full-time equivalent employees in 2014 are not
subject to potential penalties for non-compliance with the employer mandate until the first day of
their health insurance plan year beginning in 2016 provided that: (1) the employer does not reduce
the size of its workforce or the overall hours of service of its employees during the period between
February 9, 2014 and December 31, 2014 (with an exception for bona fide business reasons); and
(2) the employer does not eliminate or materially reduce the health coverage, if any, it offered as of
February 9, 2014 during the period beginning on February 9, 2014 and ending on December 31,
2015 (or, for employers with non-calendar fiscal year plans, ending on the last day of the 2015 Plan
Year).
Conclusion.
Time remains to address an employer's responsibilities under the Act and Regulations. Failure to
resolve open questions may result in an employer unnecessarily incurring excise taxes or additional
administrative costs and expenses. Those employers who are unsure of their Applicable Large
Employer status may wish to review that status with a legal professional familiar with the Act and
Regulations to confirm the employer's status.
Scott D. Newsom is a partner in the Tax and Benefits Department of Shumaker, Loop &
Kendrick, LLP. Scott concentrates his practice on employee benefits, executive compensation
and multiemployer retirement, and health and welfare plans. Scott represents clients in a wide
range of industries including manufacturing, construction, food services, retail, health care, and
financial services. Scott can be reached at (419) 321-1438 and by email at snewsom@slklaw.com.