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Now that the U.S. Supreme Court has upheld most of the relevant provisions of the Affordable Care Act (ACA), employers are beginning to see guidance being issued on post-2014 compliance issues. One of the more important of these is the requirement that employers with 50 or more full-time employees (generally defined as employees working 30 or more hours a week, or 130 or more hours a month) who (i) do not offer health coverage to those employees, or (ii) offer health coverage that is unaffordable or does not meet a 60 percent actuarial value threshold, will face a financial penalty if at least one of those full-time employees receives premium assistance to purchase health insurance coverage on an exchange.Formally referenced under the ACA as the employer “shared responsibility” requirements, this has come to be known as the “pay or play” requirement. Employers, however, have been perplexed as to how full-time employee status is to be determined, and have expressed concern that having to make such a determination on a month-to-month basis could prove an administrative nightmare. On August 31, 2012, the IRS has provided guidance and a safe harbor methodology to address these concerns.

On the same day, the IRS, the Department of Labor (DOL) and the Department of Health and Human Services (DHHS) (together, the “Agencies”), issued parallel guidance on the issue of 90-day waiting periods. Under the ACA, on or after January 1, 2014, group health plans cannot impose waiting periods longer than 90-days. This guidance sought to clarify how these waiting periods are to be measured, and how they integrate with other eligibility requirements for plan coverage. While the 90-day waiting period rules are relevant to the “pay or play” requirement, they apply to all employers, not just those with 50 or more full-time employees, and they apply whether or not the group health plan is grandfathered.

Both sets of guidance are deemed to be temporary and have left a number of issues open, though the Agencies have clarified that employers can rely on this guidance at least until the end of 2014.

How Is Full-time Employee Status to Be Determined?

If an employer is confident that it can ascertain which of its employees will work on average 30 hours per week, and if it reasonably expects that new hires will work 30 or more hours per week on average, it can simply classify them as “full-time” employees for purposes of the pay-or-play requirements, and be done with it. Given, however, that hours of work may fluctuate, even for a company’s regular workforce, and many employers have some mix of full-time, part-time, variable hour, and seasonal workers who might move between those categories during any given period, such a short-hand classification practice might lead to either a higher full-time employee count or an undercount – with either triggering larger potential penalties than the employer might otherwise be subject.

Variable hour workers are those for whom it cannot be determined as of their start date if they can reasonably be expected to work an average 30 hours per week, and seasonal workers are those defined by DOL regulations as seasonal workers and retail workers during holiday season. For purposes of IRS Notice 2012-58, however, employers are able to use a good faith interpretation of “seasonal employee” until the end of 2014.

IRS Notice 2012-58 sets forth a safe harbor methodology for employers to use when seeking to make determinations as to the number of full-time employees they have – i.e., if they have 50 or more full-time employees, and if so, the number to whom they must offer adequate health care coverage, or face the “pay or play” penalties. These safe harbors are not mandatory, but it is advisable to understand them so that whatever methodology an employer uses, it provides comparable results. This safe harbor methodology consists of setting out three distinct time frames:

  • A Measurement Period - This can be a period of not less than three months, or more than 12 months, during which the average number of hours worked by employees are to be measured. For new hires, this period is called an “Initial Measurement Period” or “IMP,” and for ongoing employees (i.e., those who remain employed after having already been employed for an IMP), a “Standard Measurement Period” or “SMP.” Employers can set the start and end dates of the SMP as they see fit. The IMP, however, will generally start on the new employee’s starting date.
  • An Administrative Period - Following the IMP or SMP, and before the Stability Period (see below), the Administrative Period provides time during which the employer can make the necessary administrative determinations as to who is a full-time employee, notify those employees of their eligibility status for enrollment in the plan and enroll those employees. This Administrative Period cannot be more than 90 days and cannot reduce or lengthen either the Measurement or Stability Periods. Utilizing an Administrative Period is optional, though most employers will want to use one, even if shorter than 90 days. For new employees, however, the IMP and the Administrative Period cannot extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the new employee’s starting date (i.e., a period totaling at most 13 months, plus a fraction of a month, if the employee start date is not the first of the month and coverage is to begin on the first of the following month).
  • A Stability Period - Following the IMP or SMP (and any applicable Administrative Period), the Stability Period is the period of time during which the employer must treat the employee according to the status determined during the IMP or SMP. The Stability Period must be (i) equal to the longer of six months or the length of the applicable SMP for ongoing employees, or (ii) no more than one month longer than the IMP for new hires. For an employee who was determined to be working an average of 30 hours average per week during the IMP or SMP, he or she must be treated as a full-time employee for purposes of the ACA’s shared responsibility requirements during the associated Stability Period, even if that employee actually averages less than 30 hours of work per week during that Stability Period. On the other hand, if, during the IMP or SMP, the employee does not meet the 30 hours per week requirement, the employer will not be penalized for failing to provide them adequate health care coverage during the Stability Period, even if they in fact do average more than 30 hours per week during that period. In this latter case, however, the Stability Period can be no longer than one month beyond the applicable IMP or SMP.

Generally speaking, these time periods should be applied uniformly, but the guidance allows that employers may have the IMP and/or SMP vary in length, may utilize different start or end dates, and may vary the length of Administrative Periods for the following categories of employees (though within each category these periods must be applied uniformly): (1) collectively bargained and non-collectively bargained employees, (2) salaried and hourly employees, (3) employees working for different entities, and (4) employees located in different states.

Employers can rely on this guidance through the end of 2014, and Notice
2012-58 clarifies that this reliance covers any Measurement Period that begins in 2013 or 2014 and the associated Stability Period. The Notice also reiterates that the previously announced safe harbor for determining the affordability of health care coverage for purposes of the pay-or-play penalty (which the ACA set at less than 9.5 percent of household income for single premium coverage) would be a single premium cost of less than 9.5 percent of the employee’s wages for that year, as defined for purposes of Box 1 on Form W-2, and that this safe harbor would also remain in place at least until the end of 2014.

Rules Governing the 90-Day Waiting Period Limitation

IRS Notice 2012-59 (the DOL and DHHS issued comparable guidance) provided guidance on the 90-day waiting period limitation that can also be relied on at least through the end of 2014. The Notice defines “waiting period” as “the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective.” The ACA requires that this waiting period be no longer than 90 days. This definition allows for considerable flexibility because the Notice clarifies that “being eligible for coverage” means that the employee has met all of the plan’s substantive eligibility requirements.

Examples of such requirements provided in the Notice are (i) being employed in an eligible job classification (e.g., being a full-time employee), (ii) achieving a job-related licensure requirement, or (iii) requiring that employees may be employed for a given period of time (or work a certain number of hours), but this time frame is not to exceed the time frame permitted for Measurement Periods under the pay-or-play safe harbor set forth in Notice 2012-58. Thus, the 90-day waiting period does not begin until the employee has met all other eligibility requirements and is otherwise eligible to enroll in the plan.

The only other limitation on such time periods or other conditions for eligibility is that they must not be designed to avoid compliance with the 90-day waiting period limitation. The Notice provides that the following eligibility conditions will not be considered designed to avoid the 90-day limit:

  • If coverage for variable hour employees is made effective no later than 13 months from the employee’s start date, plus the time remaining until the end of the month, if the employee’s start date is not the first day of a calendar month, this extended period of time would not be deemed as designed to avoid the 90-day limit. Time frames consistent with Notice 2012-58 are available to all employers, even if they are not large employers subject to the shared responsibility penalties.
  • A rule that part-timers must work 1,200 hours before being eligible for coverage is acceptable, but a rule requiring more than 1,200 hours would be deemed as designed to avoid compliance with the 90-day limit.
  • If an employee is eligible to enroll within the 90-day period, but takes additional time and enrolls late, there is no violation as the Plan allowed for timely enrollment.

The Notice also makes clear that an employee or dependent who is not eligible for minimum essential coverage under the employer’s plan, may enroll in a health insurance exchange and be eligible for a premium tax credit or cost-sharing reduction, during any period when coverage is not offered, including any IMP or Administrative Period before coverage is to take effect. Thus, providing for an extended length of time that an employee must be employed before being eligible for coverage, even if not a violation of the 90-day waiting period limitation, may, nevertheless, subject a large employer to pay-or-play penalties. On the other hand, a large employer would not be subject to such pay-or-play penalties simply because it imposed a valid 90-day waiting period.

Action steps

Although the requirements addressed in this guidance are not scheduled to take effect until January 1, 2014, employers planning to rely on this look-back/stability period safe harbor for identifying full-time employees during 2014 must begin counting hours of service during 2013. Planning for that should be under consideration now. Employers, and especially large employers, will need to:

  • Determine whether or not to rely on this safe harbor guidance;
  • Ensure they correctly classify common law employees and independent contractors because if the latter are deemed to be common law employees, that could trigger penalties;
  • Investigate what methods and procedures they have currently in place to track the actual hours worked by employees, and what new procedures, if any, will need to be implemented;
  • Determine what length and what start and ending dates will work best for the relevant Measuring, Administrative and Stability Periods; and
  • Assess whether their Plan’s current waiting periods pass muster, and, if not, change them.

These rules are complex and somewhat confusing. Employers will need to be careful if they wish to rely on this safe harbor guidance successfully.

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