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Regs on health act’s employer mandate contain many transitional rules

T.D. 9655, 02/10/2014, Reg. § 54.4980H-1, Reg. § 54.4980H-2, Reg. § 54.4980H-3, Reg. § 54.4980H-4, Reg. § 54.4980H-5 , Reg. § 54.4980H-6

IRS has issued final regs that provide guidance to employers that are subject to the employer mandate for health coverage under Code Sec. 4980H, which was enacted by the Affordable Care Act (ACA).This article discusses the 2015 and 2016 transition rules under those regs, including a rule that postpones the employer mandate until 2016 for employers with 50-99 employees.

For a general discussion of these regs and a more detailed background, see ¶ 4. For a discussion of the regs’ rules on who is an applicable large employer, see ¶ 22.

Background.For months beginning after Dec.31, 2014, an applicable large employer is liable for an annual assessable payment if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction and either the employer:

 

1. fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan (Code Sec. 4980H(a) liability); or
2. offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan that, with respect to a full-time employee who has been certified for the advance payment of an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value as these terms are defined in Code Sec. 36B(c)(2)(C) (Code Sec. 4980H(b) liability).

 

An applicable large employer for a calendar year is an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.Code Sec. 4980H(c)(2))

Final regs.The new final regs provide the following transitional rules with regard to the employer mandate:

(1) Relief for employers with 50-99 employees.For employers with 50-99 employees, who meet requirements (a) through (d) below, no assessable payment under Code Sec. 4980H(a) or Code Sec. 4980H(b) will apply for any calendar month during 2015 or, in the case of any non-calendar plan year that begins in 2015 (2015 plan year), any calendar month during the portion of the 2015 plan year that falls in 2016.

However, the relief is not available for an employer that modifies the plan year of its plan after Feb. 9, 2014, to begin on a later calendar date.Notwithstanding item (c) in the list of requirements, below, an employer with a non-calendar year plan meeting the coverage maintenance period requirements for 2015 may still be eligible for the relief for 2015, even if the employer does not meet the coverage maintenance period (defined below) requirements later (during the portion of the 2015 plan year falling in 2016).

In order to qualify for the relief:

 

a.Limited workforce size. The employer must employ on average at least 50 full-time employees (including full time equivalents (FTEs)), but fewer than 100 full-time employees (including FTEs) on business days during 2014. For this purpose, the determination of the number of full-time employees (including FTEs) is made in accordance with the otherwise applicable rules for determining status as an applicable large employer (see ¶ 22).
b.Maintenance of workforce and aggregate hours of service. During the period beginning on Feb. 9, 2014, and ending on Dec. 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 set forth at (a) above. 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, terminations of employment for poor performance, or other similar changes unrelated to eligibility for this transition relief are for bona fide business reasons and will not affect eligibility for that transition relief.
c.Maintenance of previously offered health coverage.The employer does not eliminate or materially reduce the health coverage, if any, it offered as of Feb. 9, 2014. The new rules provide exceptions to this rule for certain small reductions if 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 Feb. 9, 2014.
d.Certification of eligibility for transition relief.The employer certifies on a prescribed form that it meets the eligibility requirements set forth in paragraphs (a) through (c) above.

 

The term “coverage maintenance period” means (1) for an employer with a calendar year plan, the period beginning on Feb. 9, 2014, and ending on Dec. 31, 2015, and (2) for an employer with a non-calendar year plan, the period beginning on Feb. 9, 2014, and ending on the last day of the plan year that begins in 2015.

For employers first coming into existence in 2015 that are applicable large employers, the relief described above applies if: (1) the employer reasonably expects to employ and actually employs fewer than 100 full-time employees (including FTEs) on business days during 2015; (2) the employer reasonably expects to meet and actually meets the maintenance standards described in paragraphs (b) and (c) above, as measured from the date the employer is first in existence; and (3) the employer certifies in the manner described in paragraph (d) above.

(2) Code Sec. 4980H(a) transition relief.The preamble to the regs provides two types of Code Sec. 4980H(a) transition relief:

… For purposes of Code Sec. 4980H(a), the final regs provide that an applicable large employer member (i.e., one of multiple related entities that, due to the application of the aggregation rules, make up an applicable large employer) for a month if, for that month, it offers coverage to all but 5% or, if greater, 5, of its full-time employees.As provided in Reg. § 54.4980H-4(a), an employee is treated as having been offered coverage only if the employer also offered coverage to that employee’s dependents.But see (7) below for transition relief for a failure to offer coverage to dependents for the 2015 plan year.

Under the transition rule, 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% of its full-time employees (and, to the extent required under Reg. § 54.4980H-4(a) and the transition relief referred to at (7) below, their dependents) will not be subject to an assessable payment under Code Sec. 4980H(a).

… In general, an assessable payment under Code Sec. 4980H(a) is equal to the number of all full-time employees (excluding 30 full-time employees) multiplied by one-twelfth of $2,000 for each calendar month.For purposes of the liability calculation under Code Sec. 4980H(a) , with respect to each calendar month, an applicable large employer member’s number of full-time employees is reduced by that member’s allocable share of 30.Accordingly, an applicable large employer with 50 full-time employees that is subject to an assessable payment under Code Sec. 4980H(a) may be subject to an assessable payment based on 20 employees (that is, 50 minus 30) times one-twelfth of $2,000 for each calendar month.

Under the transition rule, for 2015 plus any calendar months of 2016 that fall within the employer’s 2015 plan year, if an applicable large employer with 100 or more full-time employees (including FTEs) on business days during 2014 (or an applicable large employer member that is part of such an applicable large employer) is subject to an assessable payment under Code Sec. 4980H(a), the assessable payment under Code Sec. 4980H(a) with respect to the transition relief period will be calculated by reducing an applicable large employer member’s number of full-time employees by that member’s allocable share of 80 rather than 30.

(3) Non-calendar year plans.There are three sets of transition rules in this area:

…If an applicable large employer member maintained a non-calendar year plan as of Dec. 27, 2012, and the plan year was not modified after Dec. 27, 2012 to begin at a later calendar date, the following rule applies with respect to employees of the applicable large employer member (whenever hired) who would be eligible for coverage effective beginning on the first day of the 2015 plan year under the eligibility terms of the plan as in effect on Feb. 9, 2014: if an employee described in the preceding sentence is offered affordable coverage that provides minimum value (MV) no later than the first day of the 2015 plan year, no Code Sec. 4980H assessable payment will be due with respect to that employee for the period prior to the first day of the 2015 plan year.

…A transitional rule under which, for certain non-calendar year plans, no payment under Code Sec. 4980H will be due for any month prior to the first day of the 2015 plan year with respect to employees who (1) are offered affordable coverage that provides MV no later than the first day of the 2015 plan year, and (2) would not have been eligible for coverage under any group health plan maintained by the applicable large employer member as of Feb. 9, 2014, that has a calendar year plan year.

…A transitional rule under which, for certain non-calendar year plans, no payment under Code Sec. 4980H will be due for any month prior to the first day of the 2015 plan year with respect to full-time employees who (1) are offered affordable coverage that provides MV no later than the first day of the 2015 plan year, and (2) would not have been eligible for coverage under any group health plan maintained by the applicable large employer member as of Feb. 9, 2014, that has a calendar year plan year.

(4) Shorter measurement periods permitted for stability period starting during 2015.For purposes of Code Sec. 4980H, the term full-time employee means, with respect to any month, an employee who is employed on average at least 30 hours of service per week with an employer.(Code Sec. 4980H(c)(4)(A)) The final regs include an optional alternative method to determine full-time employee status (for purposes other than determining applicable large employer status) referred to as the look-back measurement method (see ¶ 22 for more details).

The transitional rule provides that, for purposes of stability periods beginning in 2015, employers may adopt a transition measurement period that is shorter than 12 consecutive months but that is no less than 6 consecutive months and that begins no later than July 1, 2014, and ends no earlier than 90 days before the first day of the plan year beginning on or after Jan. 1, 2015.For example, an employer with a calendar year plan may use a measurement period from April 15, 2014, through Oct. 14, 2014 (six months), followed by an administrative period ending on Dec. 31, 2014.

This transition guidance applies to a stability period beginning in 2015 through the end of that stability period (including any portion of the stability period falling in 2016), and applies to individuals who are employees as of the first day of the transition measurement period.

(5) Shorter period permitted for determining applicable large employer status for 2015.An applicable large employer is, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including FTEs) on business days during the preceding calendar year.(Code Sec. 4980H(c)(2); Reg. § 54.4980H-2)

Under the transition rule, an employer may determine its status as an applicable large employer by reference to a period of at least six consecutive calendar months, as chosen by the employer, during the 2014 calendar year (rather than the entire 2014 calendar year).Thus, an employer may determine whether it is an applicable large employer for 2015 by determining whether it employed an average of at least 50 full-time employees (including FTEs) on business days during any consecutive six-month period in 2014.

(6) Coverage for January 2015.The final regs provide, in general, that if an applicable large employer member fails to offer coverage to a full-time employee for any day of a calendar month, that employee is treated as not offered coverage during that entire month.(Reg. § 54.4980H-4(c))

Recognizing that many employers offer coverage for a new year effective as of the first day of the first pay period beginning on or after the first day of the year, the transitional rule provides that, if an applicable large employer member offers coverage to a full-time employee no later than the first day of the first payroll period that begins in January 2015, the employee will be treated as having been offered coverage for January 2015.

(7) Coverage for dependents.In order to avoid a potential assessable payment under Code Sec. 4980H, an applicable large employer member must offer coverage to its full-time employees and the full-time employees’ dependents.

To provide employers sufficient time to expand their health plans to add dependent coverage, the transitional rule, extending a provision that was in the proposed regs, provides that any employer that “takes steps” during its 2015 plan year toward satisfying the Code Sec. 4980H provisions relating to offering coverage to full-time employees’ dependents, will not be liable for any assessable payment under Code Sec. 4980H solely on account of a failure to offer coverage to the dependents for that plan year.

The relief is not available to the extent the employer offered dependent coverage during either the plan year that begins in 2013 (2013 plan year) or the 2014 plan year (meaning the relief is not available to the extent the employer had offered dependent coverage during either of those plan years and subsequently dropped that offer of coverage).