Determining Whether and When an Employer Is Subject to the ACA Play or Pay Penalties
Alison Smith Fay
Perhaps the most important aspect of the Affordable Care Act for employers is the potential for penalties when an employer fails to offer health coverage to its full-time employees. These shared responsibility penalties, popularly referred to as the “play or pay” penalties or “employer mandate,” can be severe. Earlier this year, the Internal Revenue Service issued final regulations implementing the play or pay penalties, which are set forth in Section 4980H of the Internal Revenue Code. This article reviews the rules for determining whether and when an employer is subject to the play or pay rules and includes a description of the transition relief that may delay or soften the impact of the rules for certain employers.
Originally, the play or pay penalties were scheduled to go into effect on January 1, 2014. However, in the summer of 2013, the government announced a delay of the penalties until 2015.
General Rules for Determining Applicable Large Employers Subject to Play or Pay
Only “applicable large employers” are subject to the play or pay rules. An applicable large employer is an employer that has an average of 50 or more full-time employees (or a combination of full-time employees and full-time equivalents) in the prior calendar year. For this purpose, a full-time employee is any employee who is employed on average at least 30 hours per week, or 130 hours per month.
A full-time equivalent is a combination of employees, each of whom is not a full-time employee because he or she is not employed on average at least 30 hours per week, but who, in combination are counted as the equivalent of a full-time. The number of full-time equivalents is determined by adding all of the hours of service of non-full-time employees during a calendar month and dividing by 120.
Workforce hours are determined on a monthly basis. See Example 1 below for an employer that averages more than 50 full-time employees (counting full-time equivalents).
Shorter Period Transition Rule
To determine applicable large employer status for 2015 only, an employer may use a period of at least six consecutive calendar months, chosen by the employer in 2014. Use of the shorter period transition rule may allow employers that are on the edge to avoid the play or penalties. See Example 2 below for an employer with the same workforce number as the example above. Using the shorter period transition rule the employer averages fewer than 50 full-time employees (counting full-time equivalents) allowing it to escape the potential for penalties.
Controlled Group Rules Apply
Employers should be aware that affiliated employers who are under common control or part of a controlled group of corporations or affiliated service group must aggregate their employees for purposes of determining whether they are subject to the play or pay rules.
Play or Pay Penalties
The play or pay rules impose two separate penalties. However, only one of the penalties applies, not both. The “(a) penalty” applies to an employer that offers fewer than substantially all of its full-time employees and their dependents health coverage, but only if at least one full-time employee purchases subsidized coverage from the exchange. The “(b) penalty” is applied only to those full-time employees who actually obtain subsidized exchange coverage. See the chart below for further details.
Transition Relief for (a) Penalty
To avoid the (a) penalty, an employer must offer “substantially all” of its full-time employees (and their dependents) health coverage. Ordinarily, “substantially all” means 95%. Under a transition rule applicable only for 2015, “substantially all” means 70%, not 95%. In calculating the (a) penalty, an employer reduces the total number of full-time employees by 30. Transition relief for 2015 permits an employer to reduce the number of full-time employees by 80 rather than 30. For an employer with a non-calendar year plan, this 2015 transition relief extends into 2016 for those months that fall within an employer’s 2015 non-calendar plan year, but only if there is no modification of the plan year after February 9, 2014 to begin the plan year on a later calendar date, for example, changing the start date from January 1 to December 1.
Transition Relief for Employers with 50 to Fewer Than 100 Full-Time Employees (including Full-Time Equivalents)
Under a special transition rule, the employer mandate is delayed from 2015 to 2016 for certain employers that employ on average fewer than 100 full-time employees (including full-time equivalents). To be eligible for the relief, an employer that satisfies the workforce size requirement: (a) must not reduce the number of employees or hours of service that employees accrue except for a bona fide business reason; and (b) must not materially reduce the coverage offered on February 9, 2014. These prohibitions are applicable during the coverage maintenance period, which extends from February 9, 2014 until the end of 2014 for a calendar year plan, and for a non-calendar year plan, until the end of the 2014 plan year. In addition, an employer must certify that the requirements for the transition relief are satisfied. The certification will be required as part of the employer’s annual report that will be filed for the first time in 2016 for the 2015 calendar year. The fewer than 100 full-time/full-time equivalent threshold, including full-time equivalents, is determined in the same way used to determine applicable large employer status. The shorter period transition rule can also be used as demonstrated in Example 2 above.
IRS Establishes December 31, 2014 Deadline to Amend Qualified Plans for Same-Sex Marriage Issues
On April 4, 2014, the Internal Revenue Service issued IRS Notice 2014-19 providing guidance with respect to amending qualified retirement plans to implement the United States Supreme Court’s decision regarding same-sex marriages in United States v. Windsor, 133 S Ct. 2675 (2013). Plan sponsors should be aware that the deadline to amend their qualified retirement plans for Windsor is the later of: (i) the otherwise applicable deadline for adopting plan amendments under prior IRS guidance or (ii) December 31, 2014. For governmental qualified retirement plans, the deadline is the close of the first regular legislative session that ends after December 31, 2014. As a practical matter, for most non-governmental qualified retirement plans, the deadline is December 31, 2014. A number of decisions must be made when amending benefit plans to implement Windsor, so plan sponsors should act promptly in reviewing all of their benefit plans (including but not limited to pension, profit sharing and 401(k) plans, health and welfare plans, cafeteria plans and non-qualified plans) to determine what (if any) actions are required or recommended.
Restatement Time for Pre-Approved Plans
Kathleen Salas Bass
If your defined contribution plan – 401(k), profit sharing, money purchase – uses an Internal Revenue Service pre-approved plan document, it is restatement time again... The last round of restatements ended back in April 2010. The IRS issued Announcement 2014-16 notifying plan sponsors and service providers that it is issuing opinion letters on pre-approved defined contribution plans (prototype and volume submitter) on March 31, 2014, and that the two-year window for plan sponsors to adopt the new pre-approved documents is April 30, 2016. This means that plan sponsors whose plans are currently on a pre-approved document should begin the process of restating their plans and coordinating with their document providers. This includes plans that:
Rely on the IRS opinion letter issued on the pre-approved document;
Have an individually-designed plan that is substantially similar to the pre-approved document such that the IRS has permitted the plan to remain on the six-year cycle for pre-approved plans rather than on the five-year staggered remedial amendment cycle based on the plan sponsor’s employer identification number (EIN); or
Have an individually designed plan but intend to adopt a pre-approved plan and the plan sponsor has signed a Form 8905, Intent to Adopt a Pre-Approved Plan, by the applicable deadline for the plan’s staggered remedial amendment cycle.
Plan Sponsors who wish to submit their plans to the IRS for an individual favorable determination letter, such as individually-designed plans that are on the six-year pre-approved document cycle, may begin to submit their restatements to the IRS as early as May 1, 2014 and no later than April 30, 2016.