IRS issues proposed rules on Employer Mandate
January 9, 2013
The Employer Mandate
Large employers with 50 or more full-time or full-time equivalent employees must offer full-time employees and their dependents (i.e., children up to age 26) coverage that is affordable and provides minimum value beginning in 2014 or face penalties if any full-time employee purchases coverage on an Exchange and receives a federal premium subsidy.
On January 2, 2013, Treasury and the Internal Revenue Service (IRS) issued proposed regulations and questions and answers on Shared Responsibilities for Employers, commonly known as the “employer mandate” of the Patient Protection and Affordable Care Act (PPACA).
Comments are due by March 18, 2013 and a public hearing is scheduled for April 23, 2013. Although these regulations are not final, the guidance indicates that employers may use the proposed regulations in making coverage and plan design decisions for 2014.
The proposed regulations include the following changes and clarifications:
Transitional Relief for Non-1/1 Effective Date Plans
Although the law states that the “employer mandate” applies beginning January 1, 2014, the regulatory guidance includes the following exceptions for employers whose plan year does not begin on January 1:
- For full-time employees who were eligible for coverage (whether or not actually covered) on December 27, 2012, the employer will not pay a penalty if they are offered affordable, minimum value coverage on the first day of the 2014 plan year.
- If the plan (a) was offered to at least one-third of all employees (full-time and part-time) at the most recent open enrollment period prior to December 27, 2012 or (b) covered one-quarter of employees (full-time and part-time) as of December 27, 2012, the employer is not subject to the penalty for any full-time employees provided they are offered affordable, minimum value coverage on the first day of the 2014 plan year.
Employers cannot now change their plan year to take advantage of this transitional relief for non-calendar year plans.
Requirements for Offering Coverage to Full-Time Employees and Dependents
Full-time employees are employees who average 30 hours of service per week or 130 hours per month. Hours of service include hours worked as well as hours for which an employee is paid such as vacation, holidays and paid leaves of absence.
Employers will meet the requirement to offer coverage to “substantially all” full-time employees if they offer coverage to 95% of full-time employees and their dependents. No penalties will apply for any month in which an employer offers coverage to all but 5% of its full-time employees (or five full-time employees, if greater).
If an employer does not currently offer dependent coverage, no penalty is due for the plan year beginning in 2014 if the employer takes steps to offer dependent coverage during the 2014 plan year. For plan years beginning in 2015 or later, employers must offer coverage to full-time employees and their dependents to avoid penalties.
Dependents are defined as children up to age 26. Spouses are not included in the definition of dependents in this guidance, so employers are not required to offer coverage to spouses.
Determining if an Employer Has 50 or More Employees
Employers will use information about the number of employees they have in 2013 to determine whether they have 50 full-time employees and are a “large employer” subject to the employer mandate in 2014. Employers can use any period of at least six consecutive months in 2013 to measure the number of full-time employees. For example, an employer could measure during the period from January 1, 2013 through June 30, 2013 and then use the rest of the year to establish a plan and enroll employees.
- Only employees working in the United States are counted in determining whether an employer has 50 full-time employees or full-time equivalents.
- Companies that have a common owner are combined for purposes of determining whether they are subject to the mandate. However, any penalties would be the responsibility of each individual company.
- If a business hires seasonal workers and the workforce exceeds 50 full-time employees for 120 days or less during a calendar year, the employer is not considered to have 50 full-time employees.
- Teachers and other employees of educational organizations who work full-time during the academic year are considered full-time employees and cannot be treated as seasonal.
Determining if Coverage is Affordable and Provides Minimum Value
Coverage is considered “affordable” if employee contributions for single coverage do not exceed 9.5% of the employee’s wages. The regulations provide three safe harbors that employers can use to determine if employee coverage is affordable:
- 9.5% of an employee’s W-2 wages for the year
- 9.5% of an employee’s monthly wages determined by multiplying the employee’s hourly rate by 130 hours per month
- 9.5% of the Federal Poverty Level for a single individual
This regulation did not include any additional guidance about how “minimum value” will be determined. We are still awaiting the Minimum Value Calculator and safe harbor checklists.
If a full-time employee receives subsidized coverage through an Exchange, the employer will be notified and given an opportunity to respond before the IRS requires payment of the penalty.
Following are links for more details: