By Trish Neely, CFCI
Most employers know by now that beginning in 2014 applicable large employers must sponsor and offer full-time EEs and dependents minimum essential medical coverage at an affordable rate or else pay an assessment. What you may not know is that if your plan excludes those whom you have historically classified as benefit ineligible because they work, for example, less than 35 hours per week, you may be slapped with the assessment for failure to offer coverage to full-time employees and dependents as required under health care reform.
For purposes of the “shared responsibility” requirements of Sec. 4980H, enacted in the Patient Protection and Affordable Care Act of 2010 (PPACA), P.L. 111-148, a full-time employee is defined as “any employee who, on average, is employed at least 30 hours per week during a month.“
This raises some thorny issues far more complicated than just amending your plan and determining the budgetary impact. What if three months out of the year everyone you employ works over 30 hours – do you have to extend benefits to everyone during those months or risk paying an assessment? If someone who only works 20 hours per week is given a special assignment in January – do you extend benefits in January? What about seasonal workers that are only hired during the summer or only during open enrollment?
Congress enacted PPACA, but left many of its provisions to three agencies to work through the details. In this particular case it is the responsibility of the IRS and Department of Labor (DOL) to determine how the 30 hour average is computed and applied. Previous Notice 2011-36 described a look back safe harbor for averaging hours of ongoing employees and a look forward stability period to which the average applies. Then Notice 2012-17 addressed new hires with variable or uncertain hours. The safe harbors assist by not making you extend coverage for a month or two, only to turn around and revoke the following month; a situation that can be stressful for all parties and administratively burdensome.
The IRS recently issued two additional pieces of guidance; Notice 2012-58 which expands the measurement period for new variable-hour and seasonal employees, restates the earlier safe-harbor notice provisions, and provides definitions of variable-hour and seasonal employees, along with examples; and Notice 2012-59 which applies the 90-day waiting period. The guidance may be relied on at least through the end of 2014 when the agencies are expected to adopt formal rules.
Before we move on, an important point to make you aware of with respect to the 2014 shared responsibility assessment (also called the play or pay penalty). You will need to be aware of your employee’s 2013 hours worked to confirm who meets the FTE definition and who must thereby be extended coverage through the plan. If you choose to use the IRS safe harbors to help determine which employees and dependents you must cover you will need to establish your measurement periods beginning in 2013.
Now back to the two new pieces of guidance. IRC Notice 2012-58 expands upon the prior safe harbor concepts; IRC Notice 2012-59 in part provides guidance to the safe harbor on the application of the 90-day waiting period. The mechanics of the Safe Harbors work as follows:
The employer establishes a measurement period which is no less than three and no more than twelve months. During this measurement period an employee’s hours of service are measured and each employee who averages 30 hrs per week during the measurement period must be treated as full-time and benefits-eligible during a subsequent stability period. Generally the stability period will be the same timeframe as the measurement period; however the stability period should not be less than 6 months.
Ongoing Employee Application of the Safe Harbor
The safe harbor is applied slightly differently for existing employees vs. new hires. Existing Employees, referred in the guidance as “ongoing employees,” have been employed for one entire standard measurement period. This is the period chosen by the employer to measure the hours of service for existing employees and can be 3 to 12 months in length. The subsequent stability period can be no shorter in duration than the standard measurement period (and in no case less than six months). This stability period may either immediately follow the standard measurement period or follow an administrative period of no more than 90 days. An employer may need an administrative period to sync to the annual enrollment and/or the plan effective date.
Since some employers may have different plans and different effective dates, for different categories of employees the measurement periods may differ; for example, union vs. non-union workers, salaried vs. hourly employees or employees located in different states with different plans and plan years.
New Hire Application of the Safe Harbor
With new hires you may have two different groups to contend with:
- New hires whom you reasonably expect on date of hire to work 30+ hours weekly on average and therefore meet the full-time employee definition of §4980H. These new full-time employees must be extended benefits following any plan prescribed waiting period not to exceed 90 days.
- New hires whom you expect to work less than 30 hours on average. This group may include seasonal workers or those whose hours may fluctuate based upon the cyclical nature of certain job duties.
Under the safe harbor you may establish an initial measurement period for your second category of new hires that you may choose to begin on the date of hire, or the first day of the month following date of hire. (You may also add an administrative period mentioned previously and which I will comment on later.) During this initial period you are not obligated to extend benefits. Remember the assumption here is that you reasonably expect this group of employees to work less than 30 hours on average. This initial measurement period may be no less than three and no more than twelve months.
If during this initial measurement period, the new hire works on average less than 30 hours then during the subsequent stability period there is no penalty for not offering coverage. Note: this stability period cannot be more than one month longer than the initial measurement period and cannot extend beyond the standard measurement period for existing employees.
This is usually the point in a group presentation when I ask if there are any questions. And with a topic like this it is sometimes hard for the audience to formulate questions so I am always prepared to ask and answer a few of my own. Here are the questions that were floating around in my head as I sat through a recent teleconference with some of our industry peers and then trudged through the guidance (not an easy read).
Question 1: How do I know if this article even applies to me? Who is an applicable large employer that must offer full-time EEs and dependents minimum essential medical coverage at an affordable rate or pay a penalty?
Answer: You are an applicable large employer when this goes into effect 1/1/2014, if in 2013 you employed on average at least 50 full-time equivalents (FTEs), where FTE is determined by the following formula:
FTE = (Number of EEs who work 30 hrs/wk on average) + [(Total hrs/month of remaining EEs) ÷ (120)]
Question 2: How is the assessment (penalty) calculated for an Employer?
Answer: It depends on whether you 1) didn’t offer coverage to anyone or 2) you did but it was not offered to all FTEs or it was not affordable and as a result one of your employees went to a state exchange for coverage. The penalty in 2014 for ERs that 1) offer no coverage will be $166.67/month/employee following a 30-employee reduction; for ERs who 2) do offer coverage but don’t offer affordable coverage or don’t offer to all FTEs, the penalty will be $250/month for each month an employee receives financial assistance through an exchange. Note that IRS aggregation rules apply with respect to common ownership amongst employer groups.
Question 3: What is minimum essential coverage?
Answer: Items and services covered under the following broad categories:
|Ambulatory patient services||Maternity and New Born care||Prescription Drugs|
|Emergency Services and Hospitalization||Mental health, substance abuse, behavioral health treatments||Lab services|
|Preventive & Wellness||Chronic Disease Management||Pediatric, including oral & vision care|
Question 4: What is an affordable rate?
Answer: Coverage is affordable as long as an employee pays no more than 40% of the premium and the premium does not exceed 9.5% of his/her household income.
Question 5: Should we keep or consider dropping health coverage all together?
Answer: There are many factors to take into consideration. We have prepared a chart to help employers identify all relevant information to collect and consider when contemplating such a decision. Determining hard costs will be easier than factoring in the impact on recruitment or employee morale. One of the biggest factors for larger employers (1000+ lives) to consider is the loss of Employer tax savings currently afforded employer contributions under IRC Sections 106 and 125. Sending employees to a State Exchange will cost around $2,000 per employee annually with no tax savings on that “contribution.” For smaller employers they may wonder whether a State Exchange may have more affordable rates than what they are able to negotiate in the marketplace. Small ERs are permitted to join an Exchange in 2014 to provide coverage.
Question 6: Where can I get more information?
Answer: IRC Notice 2012-58 provides some examples of different scenarios that help explain the concepts; there is also a contact name and number at the IRS for formal inquiries. For a link to this notice: Click Here. Links to the other notices identified in this article:
Notice 2012-59: Click Here
Notice 2011-36: Click Here
Notice 2012-17: Click Here This Notice includes FAQs from employers on AUTOMATIC ENROLLMENT, EMPLOYER SHARED RESPONSIBILITY, AND WAITING PERIODS that you may also find helpful.
Resource information from HealthCare.gov: Click Here