ErisaALERT 2013-01 Shared Responsibility Regarding Health Coverage (pay or play) Part I

On January 2, 2013 the IRS issued proposed regulations regarding Shared Responsibility Regarding Health Coverage.  The proposed regulations offer some clarification, flexibility and transition rules.  The material is complex and will be discussed in three ErisaALERTs. In this ErisaALERT, we will summarize key provisions of both the statute and the proposed regulations.  In Part II we will discuss the application of some of the complex rules and in Part III we will discuss the potential administrative and recordkeeping requirements.

The rule

An applicable large employer (ALE) must offer minimum essential coverage (more guidance expected) to full-time employees and their dependents (not spouses) that is affordable AND provides minimum value (calculators not finalized yet) or face an assessable penalty.

Applicable large employer

Generally, an employer is an ALE if it employs on average at least 50 full-time employees (including full-time equivalents (FTE)) during the previous calendar year.  Practically speaking, an employer knows if it employs more than 50 full-time employees, if it does, then it really doesn’t have to go through the FTE calculation.  This would be the case if the workforce is predominantly salaried employees or it could also be true if there is a mix of salaried and hourly employees where the hourly employees generally work a traditional full-time schedule (35 or 40 hours per week).  In fact, the preamble to the regulations states “For most employers, their status as an applicable large employer will be evident without the need for an actual employee calculation…”

Calculating FTE is relevant for employers close to the 50 full-time employee threshold, especially if the employer has a large seasonal workforce. We will provide more details in our next ErisaALERT – Shared Responsibility, Part II.

Three prong test

An applicable large employer is subject to an assessable penalty if the employer does not offer minimum essential coverage or if the coverage that is offered is either not affordable or does not provide minimum value.

Minimum essential coverage (MEC)

The minimum essential coverage definition in the statute includes a number of governmental programs (Medicaid, CHIP etc) and “coverage under an eligible employer sponsored plan”.  An eligible employer sponsored plan is a government plan or “any other coverage offered in the small or large group market within a State.” The proposed regulations provide that future regulations are expected to provide more guidance on the definition of minimum essential coverage and eligible sponsored plan.

Affordable coverage

The statute provides that employer provided coverage is unaffordable if the employee premium is greater than 9.5% of household income. Since employers do not know an employee’s household income, previous guidance offered a safe harbor providing that affordable coverage is coverage where the employee’s contribution doesn’t exceed 9.5% of the employer’s lowest cost self-only coverage offered to employees.  The proposed regulations offer additional safe harbors relating to rate of pay and the Federal Poverty Line. We will provide more details in our next ErisaALERT – Shared Responsibility, Part II.

Employers must review their plan’s cost structure to determine if at least one offering satisfies the affordability requirement.

Minimum value

A plan fails to provide minimum value if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of those costs.

Notice 2012-31 requested comments on the following methods of determining minimum value:

• Actuarial value calculator
• Minimum value calculator to be made available by HHS and IRS
• Checklists

Plans with nonstandard features that cannot utilize the above methods may require an actuarial certification.

HHS provided proposed regulations regarding methodologies for determining minimum value including a minimum value calculator. Additional calculators are expected to be provided by the IRS.

More guidance is expected in this area.

 

Assessable penalty

There are two potential penalties: one penalty for not offering minimum essential coverage to full-time employees and another penalty for offering minimal essential coverage that is not affordable or of minimum value.  The penalty will be assessed if one full-time employee who purchases coverage on an exchange is eligible for a premium subsidy or tax credit.

The penalty for no coverage equals $2,000 times each full-time employee (subject to the substantially all exception noted below). The full-time employee count is reduced by 30 before calculating the penalty.

The penalty for coverage that is not affordable or does not meet the minimum value requirements is $3,000 for each full-time employee purchasing coverage on the exchange. The maximum penalty cannot exceed the no coverage penalty.

 
Overview of some key provisions that were clarified in the proposed regulations
 

• Applicable large employers (ALE) (50 or more full-time employee equivalents) must offer full-time employees and their dependents the opportunity to enroll in minimum essential coverage. The addition of dependents is a clarification. Dependent does not include spouse.
• Affordability safe harbor expanded to include a rate of pay safe harbor and federal poverty level safe harbor.  In addition, the proposed regulations permit adjustments for a partial year of coverage.
• Controlled group rules apply in determining whether or not an employer is an ALE.  For example, if the controlled group meets the ALE definition then each member of the controlled group is an ALE regardless of the number of employees.
• An ALE will be treated as offering coverage to its full-time employees (and dependents) for a calendar month if it offers coverage to all but five percent or if greater five of its full-time employees (the substantially all test).

Transition rules
 

• Plans with non-calendar year plan years will not be subject to the assessable penalty from January 1, 2014 to the first day of the 2014 plan year if the plan offers minimum value, affordable coverage on the first day of the 2014 plan year.
• Cafeteria plans with non-calendar year plan years may be amended no later than December 31, 2014 to retroactively amend the plan to allow a participant to prospectively revoke a salary reduction election for accident and health plans once during the plan year. In addition, the plan

can allow an employee who made a salary reduction election before the beginning of the plan year to make another prospective salary reduction election regardless of whether the employee experienced a change in status.  The preamble indicates that such changes will allow employees who want to enter an Exchange to cease contributions under the cafeteria plan and permit employees who previously declined coverage to avoid the individual mandate penalty by electing coverage.

• Employers that intend to adopt a 12 month measurement period and a 12 month stability period, for 2014 only, may adopt a transition measurement period that is at least 6 months, that begins no later than July 1, 2013 and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014.  For example, a calendar year plan could select an April 15, 2013 through December 15, 2013 measurement period with administrative period ending December 31, 2013. Without this transition rule, many employers would have been required to begin their measurement periods in 2012.
• Plans offering coverage to employees only will have to expand coverage to include dependents of full-time employees.  Any employer that takes steps during 2014 toward offering coverage to dependents of full-time employees will not be liable for a penalty in 2014 solely because they don’t offer coverage to dependents.
• Employers that participate in multiemployer plans subject to collective bargaining agreements will not be subject to a penalty if coverage is offered to full-time employees and their dependents and the coverage is affordable and provides minimum value.  Affordability is determined according the affordability safe harbors and minimum value is determined in accordance with existing guidance.

Practically speaking

As an employer or plan sponsor:

1. You may not have to calculate the number of full-time equivalents.
2. You will have to calculate the number of full-time employees.
3. You can avoid the penalty via plan design.
4. You will have to maintain necessary documentation.

Our next ErisaALERT will provide more details on some of the key provisions of the regulations.

You may want to check our blog or facebook page periodically for quick updates on compliance issues.

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ACA, shared responsibility