Clarifying Employer Insurance Mandate and Transition Relief

In conjunction with the issuance of the new employer mandate regs, IRS has released a series of questions and answers (Q&As) on the subject. The Q&As cover a variety of topics including how to determine whether an employer is subject to the mandate, how to properly identify full-time employees, and how to calculate the shared responsibility payment.

Background. For months beginning after Dec. 31, 2013, an "applicable large employer" is liable for an annual assessable payment if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, 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, see below) 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, for a full-time employee who has been certified as having enrolled in qualified health plan for which 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).

Together, Code Sec. 4980H(a) and Code Sec. 4980H(b) are called "employer shared responsibility" provisions or the "employer mandate."

An applicable large employer for a calendar year is one that employed on average at least 50 full-time employees on business days during the preceding calendar year. For determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs) are taken into account using a formula provided in Code Sec. 4980H(c)(2).

In July of 2013, IRS issued Notice 2013-45, 2013-31 IRB 116, which delayed the employer mandate until 2015 and provided transition relief for 2014 from certain related reporting requirements.

Q&A guidance. The new Q&As provide guidance on and clarify a number of issues related to the employer mandate in general and the transitional relief afforded in new final regs. Highlights follow.

Treatment of seasonal employees. Seasonal employees are taken into account in determining the number of full-time employees, subject to the following caveat: if an employer's workforce exceeds 50 full-time employees (including full-time equivalents) for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal workers, the employer is not considered an applicable large employer. Seasonal workers are workers who perform labor or services on a seasonal basis as defined by the Secretary of Labor, and retail workers employed exclusively during holiday seasons. For this purpose, employers may apply a reasonable, good faith interpretation of the term "seasonal worker." (Q&A 4)

Commonly owned or related businesses. If two or more companies have a common owner or are otherwise related, they are combined for purposes of determining whether they employ enough employees to be subject to the employer mandate. However, these rules for combining related employers do not apply for purposes of determining whether a particular company owes an employer shared responsibility payment or the amount of any payment—rather, these determinations are made separately for each related company

(Q&A 6)
Types of employers subject to the mandate. In addition to for-profit businesses, non-profit and government entity (including federal, state, local, and Indian tribe) employers are subject to the employer mandate if they are applicable large employers. (Q&As 7 - 8)

Employees exempt from individual mandate. For purposes of determining whether an employer is an applicable large employer, all employees are counted (subject to the limited exception for seasonal employees, above), regardless of whether they are exempt from the individual mandate. (Q&A 11)

Employees outside the U.S. An employer generally takes into account only work performed in the U.S. in determining whether it is an applicable large employer—so, a foreign employer with fewer than 50 full-time employees (including FTEs) in the U.S. generally won't be subject to the employer mandate. Similarly, a company that employs U.S. citizens working abroad would only be subject to the employer mandate if the company had at least 50 full-time employees (including FTEs), determined by taking into account only work performed in the U.S. (Q&As 13 -14)

"Affordable" coverage and "minimum value." To avoid paying an employer shared responsibility payment, the coverage offered must be affordable and must provide minimum value. "Affordable" means that the employee's share of the premium doesn't exceed 9.5% of his annual household income, but since employers don't have this information, they may determine affordability using the wages they pay, their employees' hourly rates, or the federal poverty level. A plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan, and IRS has provided a minimum value calculator that employers can use for this purpose. (Q&As 19 - 20)

Effect of employees purchasing other coverage, etc. If an employer offers health coverage that is affordable and that provides minimum value to its full-time employees and their dependents, the fact that some of the employees (or their spouses or dependents) either purchase health insurance through a marketplace or enroll in Medicare or Medicaid, won't cause the employer to be subject to an employer shared responsibility payment. Liability for that payment is triggered by a full-time employee's receipt of a premium tax credit, and an employee who is offered affordable coverage that provides minimum value is ineligible for the credit. (Q&As 21 - 23)

2014 transition relief. No employer shared responsibility payment will apply for 2014. The employer mandate provisions generally go into effect in 2015, with additional transition relief for mid-sized employers. (Q&A 29)

Effect on eligibility for premium tax credit. IRS clarified that the fact that an employer doesn't employ enough employees to be subject to the employer mandate does not affect its employees' eligibility for a premium tax credit. (Q&A 44)

Calculating the payment—failure to offer coverage to any or to sufficient percentage of employees. If an applicable large employer doesn't offer coverage, or offers coverage to fewer than 95% of its full-time employees (and their dependents), the employer shared responsibility payment equals the number of full-time employees (but not FTEs) employed for the year (minus up to 30) multiplied by $2,000, as long as at least one full-time employee receives the premium tax credit. If coverage is offered for some months but not others, the amount of the payment per month is one-twelfth of the above. However, for any calendar month in 2015 or any calendar month in 2016 that falls within an employer's non-calendar 2015 plan year, the penalty only applies for an applicable large employer with at least 100 full-time employees (including FTEs) that does not offer coverage to at least 70% of its full-time employees (and their dependents), and the payment equals the number of full-time employees the employer employed for the month (minus 80) multiplied by one-twelfth of $2,000, provided that at least one full-time employee receives a premium tax credit for that month. (Q&As 24, 38)


Calculating the payment—coverage offered, but at least one employee still gets credit. If an applicable large employer does offer coverage to at least 95% of its full-time employees (and their dependents) but has one or more full-time employees who receive a premium tax credit, then the payment is computed separately for each month and equals the number of employees who receive the credit for that month multiplied by one-twelfth of $3,000 (capped at the amount of full-time employees for the month, minus up to 30, multiplied by one-twelfth of $2,000—to make sure that the payment for an employer that offers coverage can never exceed the payment that it would owe if it didn't). However, for 2015, the penalty only applies for an applicable large employer with at least 100 full-time employees (including FTEs) that does offer coverage to at least 70% of its full-time employees but still has at least one full-time employee who receives the credit. (Q&A 25, 39)

Final Regs Cover Who is a Full-Time Employee for Purposes of Employer Insurance Mandate for 2015

We have been awaiting clarification as to the definition of Full-Time Employee for purposes of compliance with the upcoming Employer Mandate for health insurance for 2015.  As reported by Thomson Reuters, the IRS has recently issued final regs on the employer shared responsibility provisions under the Affordable Care Act (ACA). an assessable payment (i.e., employer shared responsibility payment) may in certain circumstances be imposed on an employer that employs a certain number of full-time employees and fails to provide adequate health insurance to its employees. This article provide rules on identifying who is a full-time employee under the regs.

Background. For months beginning after Dec. 31, 2014, an applicable large employer is liable for an annual assessable payment under Code Sec. 4980H if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, 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, for a full-time employee who has been certified as having enrolled in qualified health plan for which an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value. (Code Sec. 4980H(b) liability).

A full-time employee for any month is an employee who is employed on average at least 30 hours of service per week. (Code Sec. 4980H(c)(4)) Under Code Sec. 4980H(c)(2), 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. In determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs) are also taken into account. The number of FTEs is determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.

Full-time employees. The final regs provide two methods for determining full-time employee status: the monthly measurement method under Reg. § 54.4980H-3(c), and the look-back measurement method under Reg. § 54.4980H-3(d). A full-time employee is, with respect to a calendar month, one who is employed an average of at least 30 hours of service per week. (Reg. § 54.4980H-1(a)(21))

The final regs adopt a standard of 130 hours of service per calendar month for determining whether an employee is a full-time employee under both the look-back measurement method and the monthly measurement method. The 130 hours of service standard is equal to 30 hours of service per week multiplied by 52 weeks and divided by 12 calendar months. (T.D. 9655, 02/10/2014)

For employees paid on an hourly basis, an employer must calculate actual hours of service from records of hours worked and hours for which payment is made or due. (Reg. § 54.4980H-3(b)(2)) Except as otherwise provided, an employer must calculate hours of service by:

• Using actual hours of service from records of hours worked and hours for which payment is made or due;
• Using a days-worked equivalency under which the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service; or
• Using a weeks-worked equivalency whereby the employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service. (Reg. § 54.4980H-3(b)(3)(i))

Monthly measurement method. Under the monthly measurement method, an applicable large employer determines each employee's status as a full-time employee by counting the employee's hours of service for each calendar month. This rule (except with respect to the weekly rule, see below) applies for purposes of the determination of status as an applicable large employer. (Reg. § 54.4980H-3(c)(1))

New employees. Under the monthly measurement method, an employer will not be subject to a Code Sec. 4980H(a) assessable payment with respect to an employee because of a failure to offer coverage to that employee before the end of the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible for an offer of coverage under the employer's group health plan, if the employee is offered coverage no later than the day after the end of that three-month period. If the coverage for which the employee is otherwise eligible provides minimum value, the employer also will not be subject to a Code Sec. 4980H(b) assessable payment during that three-month period. An employee is otherwise eligible for an offer of coverage in a month if the employee meets all conditions to be offered coverage under the plan other than the completion of a waiting period, within the meaning of Reg. § 54.9801-2.

This rule applies only once per period of employment of an employee and applies with respect to each of the three full calendar months for which the employee is otherwise eligible for an offer of coverage under a group health plan of the employer. The relief is available even if the employee terminates before that date (and before coverage is offered). (Reg. § 54.4980H-3(c)(2))

Weekly rule. Under an optional method (the weekly rule), an employer is allowed to determine an employee's full-time employee status for a calendar month under the monthly measurement method based on the hours of service over successive one-week periods. Full-time employee status for certain calendar months is based on hours of service over four-week periods and for certain other calendar months on hours of service over five-week periods. In general, the period measured for the month must contain either the week that includes the first day of the month or the week that includes the last day of the month, but not both. A week for this purpose means any period of seven consecutive calendar days applied consistently by the applicable large employer for each calendar month of the year. For calendar months calculated using four week periods, an employee with at least 120 hours of service is a full-time employee, and for calendar months calculated using five week periods, an employee with at least 150 hours of service is a full-time employee. (Reg. § 54.4980H-3(c)(3))

However, for purposes of coordination with both the premium tax credit and the Code Sec. 5000A individual shared responsibility provisions—which are applied on a calendar month basis—an applicable large employer is only treated as having offered coverage under Code Sec. 4980H for a calendar month if it offers coverage to a full-time employee for the entire calendar month, regardless of whether the employer uses the weekly rule. (T.D. 9655, 02/10/2014)

Look-back measurement method. Under the look-back measurement method in the final regs, employers may determine the status of an employee as a full-time employee during a future period (i.e., the stability period), based upon the hours of service of the employee in a prior period (i.e., the measurement period). (Reg. § 54.4980H-3(d)(1)) The stability period is a period selected by an applicable large employer, that immediately follows, and is associated with, a standard measurement period or an initial measurement period (and, if elected by the employer, an administrative period of no longer than 90 days). (Reg. § 54.4980H-1(a)(45)) The standard measurement period is a period of at least three months but not more than 12 months, as determined by the employer. (Reg. § 54.4980H-1(a)(46))
The employer determines the months in which the standard measurement period starts and ends, provided that the determination is made on a uniform and consistent basis for all employees in the same category. (Reg. § 54.4980H-3(d)(1))

Illustration: If an applicable large employer chooses 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 period. (Reg. § 54.4980H-3(d)(1))

If the applicable large employer determines that an employee was employed on average at least 30 hours of service per week during the standard measurement period, then the applicable large employer must treat the employee as a full-time employee during a subsequent stability period, regardless of the employee's actual number of hours of service during the stability period, so long as he remains an employee. (Reg. § 54.4980H-3(d)(1))

The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability under Code Sec. 4980H and not for purposes of determining status as an applicable large employer. (Reg. § 54.4980H-3(d)(1))


New employee. Under the final regs, the application of the look-back measurement method to a new employee depends on the employer's reasonable expectations with respect to the status of the new employee at his start date. If a new employee who is reasonably expected to be a full-time employee at his start date is offered coverage by the first day of the month immediately following the conclusion of the employee's initial three full calendar months of employment (and if the employee was otherwise eligible for an offer of coverage during those three months), the employer isn't subject to a Code Sec. 4980H(a) assessable payment for those initial three full calendar months of employment (or for the period prior to the initial three full calendar months of employment). To avoid liability under Code Sec. 4980H(b) for the initial three full calendar months, the coverage offered after the initial three full calendar months of employment must provide minimum value. Otherwise, with respect to a new employee who is reasonably expected to be a full-time employee at his start date, the employer may be subject to a Code Sec. 4980H assessable payment beginning with the first full calendar month in which an employee is a full-time employee.