The Affordable Care Act—Countdown to Compliance for Employers, Week 45: Focus on the Transition Rules under Final Treasury/IRS Regulations Implementing the Affordable Care Act’s Employer Shared Responsibility Rules
Written by Alden J. Bianchi
The Treasury Department and the IRS last week issued long-awaited final rules implementing the Affordable Care Act’s employer shared responsibility (a/k/a “pay-or-play”) rules. Originally slated to take effect beginning January 1, 2014, enforcement was delayed a full year by IRS Notice 2013-45. The delay provided affected employers (i.e., those with 50 or more full-time and full-time equivalent employees) with additional time to understand the rules and to consider how best to comply. It also gave health insurance carriers additional time to adapt and gain approval for group health insurance policies that employers could offer to their employees under the new rules.
The final 4980H regulations break little new ground. The basic regulatory structures implementing the Act’s employer shared responsibility rules set out in proposed regulations and earlier guidance (discussed in our January 16, 2013 client advisory) remain intact. The final regulations instead:
- Fix glitches in the proposed regulations;
- Provide some important clarifications of certain provisions of the proposed regulations; and
- Extend and expand the transition rules that were provided in the preamble to the proposed regulations.
We addressed the importance of transitional rules in an earlier post. The delay in the enforcement of the employer shared responsibility rules, which came after the proposed regulation’s transition relief, led many to wonder whether final regulations under Code § 4980H would include any transition relief. After all, with an additional full 12-month period to come into compliance, why is transition relief necessary?
Not only do the final regulations preserve and extend most of the earlier transition rules, they add some new—very welcome and useful—transition rules. The following is a summary of the transition relief under the final regulations:
(1) Non-calendar year plans
The Act’s employer shared responsibility rule apply month-by-month beginning January 1, 2015. This January 1 compliance date works well for a plan with a calendar year plan year, but not so well in the case of plan that has a fiscal plan year. Recognizing that plans with other than a calendar year plan year would need to comply mid-plan year, the proposed regulations provided two sets of transition rules that applied to “fiscal year” plans. The final regulations (which instead refer to “non-calendar year plans”) retain and extend these transition rules, and add a new option. The transition rules for non-calendar year plans now include the following:
(a) Pre-2015 eligibility transition relief
The pre-2015 eligibility transition relief applies to employees (whenever hired) who are:
- Eligible for coverage on the first day of the 2015 plan year under the eligibility terms of the plan as of February 9, 2014, (whether or not they take the coverage); and
- Offered affordable coverage that provides minimum value effective no later than the first day of the 2015 plan year.
Where these conditions are satisfied, the employer will not be subject to a potential employer shared responsibility payment until the first day of the 2015 plan year.
NOTE: This relief only applies to employees to whom coverage was previously offered. Thus, penalties may still be imposed for the months in 2015 that are part of the plan year commencing in 2014 with respect to employees to whom coverage was not previously offered.
(b) Significant percentage transition relief (all employees)
If as of any date in the 12 months ending on February 9, 2014, an employer:
- Covers at least one-quarter of its employees (full-time and part-time) under its non-calendar year plan; or
- Offered coverage under the plan to one-third or more of its employees during the open enrollment period that ended most recently before February 9, 2014.
No assessable payment will be due for any month prior to the first day of the 2015 plan year with respect to employees who are offered affordable coverage that provides minimum value by the first day of the 2015 plan year. To qualify for this relief, the employee must not have been eligible for coverage as of February 9, 2014 under any group health plan maintained by his or her employer that has a calendar year plan year.
Unlike the pre-2015 eligibility transition relief described above, an employer that qualifies for this relief and who offers affordable, minimum value coverage commencing with the 2015 plan year has no Code § 4980H exposure for periods before the 2015 plan year.
Relief under this (and the next) rule applies for the period before the first day of the first non-calendar year plan year beginning in 2015 (the 2015 plan year) but only for employers that maintained non-calendar year plans as of December 27, 2012, and only if the plan year was not modified after December 27, 2012, to begin at a later calendar date.
(c) Significant percentage transition relief (full-time employees).
This relief is new to the final regulations, and was added in response to comments complaining that the transition relief provided by the proposed regulations penalized employers with large cohorts of part-time employees who were not offered coverage. This transition rule is similar to the “all employees” rule described above, except that it tests only full-time employees. Under this rule, the plan must cover at least one-third of its full-time employees, or offer coverage to at least one-half or more of its full-time employees during the relevant open enrollment period.
(2) Employers close to the 50 full-time-employee threshold.
Rather than being required to use the full twelve months of 2014 to measure whether it has 50 full-time employees (or equivalents), an employer may measure during any consecutive six-month period (as chosen by the employer) during 2014.
(3) Initial offers of coverage in January 2015
Generally, if an employer fails to offer coverage to a full-time employee for any day of a calendar month, that employee is treated as not having been offered coverage during the entire month. But for purposes of January 2015, if an employer offers coverage to a full-time employee no later than the first day of the first payroll period that begins in January 2015, the employee will be treated as having been offered coverage for January 2015.
(4) Dependent coverage
In order to avoid possible exposure for an assessable payment under Code § 4980H, an employer must make an offer of coverage to full-time employees and their dependents. The proposed regulations offered transition relief under which an employer will not be subject to an employer shared responsibility payment solely on account of a failure to offer coverage to dependents for that plan year if the employer takes steps during the 2014 plan year toward satisfying this requirement. The final regulations extend this transition relief to plan years that begin in 2015. The transition relief applies to employers for the 2015 plan year for plans under which (i) dependent coverage is not offered, (ii) dependent coverage that does not constitute minimum essential coverage is offered, or (iii) dependent coverage is offered for some, but not all, dependents. This relief is not available, however, if the employer had offered dependent coverage during either the plan year that begins in 2013 or the 2014 plan year and subsequently dropped that offer of coverage.
(5) Cafeteria plan transition rule
The proposed regulations allowed employers to amend their cafeteria plans to permit employees to elect or revoke health coverage elections mid-year absent a corresponding change in status or cost or coverage change during a non-calendar plan year that began in 2013. This relief was subsequently clarified, but not extended (see IRS Notice 2013-71). The final regulations also do not extend this relief.
(6) Transition relief for employers with at least 50 but fewer than 100 full-time employees (including full-time equivalents)
For employers with fewer than 100 full-time employees (including full-time equivalents) in 2014, that meet the conditions described below, the employer shared responsibility rules are delayed until the first day of the 2016 plan year. To be eligible for this relief, an employer will be required to certify that it meets the following conditions:
- The employer must employ on average at least 50 full-time employees (including full-time equivalents) but fewer than 100 full-time employees (including full-time equivalents) on business days during 2014;
- During the period beginning on February 9, 2014 and ending on December 31, 2014, the employer may not reduce the size of its workforce or the overall hours of service of its employees in order to qualify for the transition relief (other than for bona fide business reasons); and
- During the period beginning on February 9, 2014 and ending on the last day of the 2015 plan year, the employer does not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014.
(7) Reduction in the 95% “offer of coverage” requirement for 2015
Under the proposed regulations, an employer is deemed to have failed to make an offer of coverage to its full-time employees if it does not offer health coverage or offers coverage to fewer than 95% of its full-time employees and (unless the employer qualifies for the 2015 dependent coverage transition relief) the dependents of those employees, and at least one of the full-time employees receives a premium tax credit. For 2015 (and for any calendar months during a non-calendar year plan year beginning in 2015 that fall in 2016), the 95% threshold is lowered to 70%. (This relief is not necessary for an employer with at least 50 but fewer than 100 full-time employees that qualifies for the delayed effective date described in item (6) above.)