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January 9, 2013

HRB 62 - Shared Responsibility Guidance

Released January 9, 2013 I Download as a PDF

January 9, 2013 -- On January 2, 2013, the IRS issued proposed regulations, together with a set of Frequently Asked Questions relating to the Affordable Care Act’s shared responsibility requirement.  These proposed regulations follow, in large part, the various sets of guidance issued thus far. The proposed regulations are reliance regulations which means they can be relied upon now.  Any changes to these regulations would be prospective in nature with adequate time given to adjust.

As background, one of the centerpieces of the ACA is the shared responsibility requirement that takes effect in 2014.  The shared responsibility provision requires employers employing 50 or more employees to offer adequate coverage at an affordable rate, or risk becoming subject to an excise tax. 

There are two separate excise taxes that could be imposed.  There is the ‘no coverage’ excise tax, and the ‘inadequate or unaffordable’ excise tax. 

  • The ‘no coverage’ excise tax applies if an employee working 30 or more hours per week is offered no coverage or coverage that is less than minimum value, and if the employee qualifies for premium assistance, which means the individual falls below 400% of the federal poverty level and is not eligible for minimum essential coverage (“MEC”).  MEC includes most types of employer coverage, as well as government-sponsored coverage, such as Medicaid or Medicare, among others. 
  • The ‘inadequate or unaffordable’ excise tax penalty would apply if the employer offers MEC but it either does not meet minimum value, as more fully described below, or is unaffordable, as more fully described below.

What Employers are subject to the Shared Responsibility Requirement?

The shared responsibility rules apply to all public and private ‘large employers’ employing an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. 

Determining applicable status. An employer's status as an applicable large employer for a calendar year is determined by taking the sum of the total number of full-time employees (including any seasonal workers) for each calendar month in the preceding calendar year and the total number of full-time equivalent employees (including any seasonal workers) for each calendar month in the preceding calendar year, and dividing by 12. The result, if not a whole number, is then rounded to the next lowest whole number. If the result of this calculation is less than 50, the employer would not be deemed to be an applicable large employer for the current calendar year. If the result of this calculation is 50 or more, the employer would be deemed an applicable large employer for the current calendar year, unless a seasonal worker exception applies. Special rules apply to employers who were not in existence in the prior calendar year.

First year transition relief.  For purposes of determining applicable status for the first year of implementation, an employer can determine whether it is an applicable large employer for 2014 by calculating the number of its employees employed on business days in any consecutive six-month period in 2013, as chosen by the employer.

Seasonal worker exception.  For purposes of counting employees, the regulations provide an exception for employers employing seasonal workers. If an employer's workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that period were seasonal workers, the employer would not be considered an applicable large employer.

Example:  An employer employs 40 full-time employees for the entire 2015 calendar year plus 80 seasonal full-time workers who work from September through December, 2015, resulting in a rounded average of *66 employees for the year.  Because the total number of full-time employees and seasonal workers does not exceed 50 for more than 4 calendar months (120 days) during the year, the employer would not be considered a large employer in 2016.

*(40 X 8 {months} = 320) + (120 X 4 {months} = 480) = 800, then divide by 12 (months) = 66.67 

Full Time Employees          Full time & Seasonal

Control Group Rules Apply.  For purposes of determining whether an employer is an applicable ‘large employer’, the IRC control group rules apply, i.e., all employees of a controlled group of entities under IRC Section 414(b) or (c), or an affiliated service group under IRC sections 414(m) or (o) are taken into account in determining whether the members of the controlled group or affiliated service group together are an applicable large employer.  It should be noted, however, that any penalty imposed against entities of a control group or affiliated service group are applied separately to the individual entity.

It should also be noted that the term ‘employer’ also includes a predecessor employer and a successor employer.

What Type of Health Coverage must be Offered?

Generally, minimum essential coverage (“MEC”) that must be offered to employees includes the type of coverage available under most insured and self-funded employer-sponsored group health plans, without regard to grandfathered status.

What is Affordable Coverage?

Coverage under an employer-sponsored plan is deemed affordable to a particular employee if the employee's required contribution to the plan does not exceed 9.5% of the employee's household income for the taxable year. For this purpose, household income means the modified adjusted gross income of the employee and any members of the employee's family (which would include any spouse and dependents) who are required to file a federal income tax return.

Because the employer does not know household income, the regulations provide for three safe harbors that employers can use for purposes of determining affordability; they are:

  • A Form W-2 determination in which the employer’s lowest cost self-only coverage providing minimum value does not exceed 9.5% of the employee’s Form W-2 wages for the calendar year.  This method is determined at the end of the calendar year, and on an employee-by-employee basis.  In addition, to qualify for this safe harbor, the employee's required contribution must remain a consistent amount or percentage of all Form W-2 wages during the calendar year (or for plans with fiscal year plan years, within the portion of each plan year during the calendar year) so that an employer cannot make discretionary adjustments to the required employee contribution for a pay period. A periodic contribution that is based on a consistent percentage of all Form W-2 wages may be subject to a dollar limit specified by the employer.  An adjusted calculation is used when coverage is only offered for a partial year.
  • A rate of pay method in which the minimum value cannot exceed 9.5% of an amount equal to 130 hours, multiplied by the employee’s hourly rate of pay as of the first day of the coverage period (generally, the first day of the plan year).  For salaried employees, the monthly salary is used instead of the 130 hour standard.  This method is permissible only if it doesn’t cause an overall reduction to the individual’s hourly or monthly wage during the calendar year. This methodology might be useful if the employer’s workforce hours fluctuate frequently.
  • A Federal poverty line (FPL) standard in which the minimum value does not exceed 9.5% of the individual federal poverty line rate for the applicable calendar year, divided by 12.  The FPL calculation may be useful to employers that want to know for planning purposes in advance, what the maximum can be charged the employee to avoid a potential penalty.

What is the Minimum Value Standard?

For purposes of these rules, coverage is deemed to meet the minimum value standard if it covers a minimum of 60% of the total allowed cost of benefits expected to be incurred under the plan, The IRS and HHS will make a minimum value calculator available to employers for determining whether their plan provides minimum value.

Who Must Be Offered Coverage?

In a nutshell, an employer is required to offer minimum essential coverage to at least 95% of its full-time employees (employees plus their dependents beginning in 2015 and beyond), or risk becoming subject to the ‘no coverage’ penalty. 

  • If an employer offers minimum essential coverage to at least 95% of its full-time employees, then the ‘no coverage’ penalty would not be triggered, whether the trigger is lack of available coverage, or the coverage offered is inadequate or unaffordable. 
  • If the employer offers minimum essential coverage to at least 95% of its full-time employee population, and at least one of those employees goes to exchange and qualifies as a credit employee, then the  ‘inadequate or unaffordable’ penalty would apply. 
  • If the employer offers coverage to less than 95% of its full-time employee population, the ‘no coverage’ or the inadequate or unaffordable’ penalty could apply, depending on the circumstance.

It should be noted that for these purposes, dependent includes the employee’s son, daughter, stepchild or foster child up to their 26th birthday.  Dependent does not include the spouse of an employee. Failure to offer dependent coverage will not result in a penalty in 2014 as long as the employer is working toward offering dependent coverage.

Who are Full-time Employees?

The regulations define employee as a common-law employee.  It does not include a leased employee, a sole proprietor, a partner in a partnership, or a 2-percent S corporation shareholder.

A full-time employee is defined as one who works for an employer an average of at least 30 hours per week.  An employee who works 130 hours of service in a calendar month is deemed to meet the monthly equivalent of the 30 hours of service per week standard, as long as this equivalency rule is applied consistently.

A full-time equivalent employee refers to those employees working less than 30 hours per week. It should be noted that full-time equivalent employees are included in the count for purposes of determining employer size.  However, it is not mandatory to offer health coverage to these individuals unless the employer chooses to do so.

The guidance provides that individuals working outside the United States, whether a US citizen or otherwise, will not trigger a shared responsibility penalty, nor are they included in determining employer size. 

How are Hours of Service Calculated?

For purposes of determining the number of hours of service an employee works, not only are actual working hours counted, but also hours in which an employee is paid but does not work, such as vacation, holiday, sick leave, disability leave, layoff, military duty or other paid leave of absence.

In determining whether an individual is regularly scheduled to work 30 or more hours per week:   

  • For employees paid on an hourly basis, the employer would calculate actual hours of service from records of hours worked, and hours for which payment is made or due.
  • For employees paid on a non-hourly basis, the employer would calculate hours of service by using one of the following 3 methods:
    • Using actual hours of service from records of hours worked, and hours for which payment is made or due;
    • Using a days-worked equivalency whereby 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.

An employer is not required to use the same method for all non-hourly employees, and may apply different methods for different classifications of non-hourly employees, provided the classifications are reasonable and consistently applied. Similarly, an employer member in a control group status, for example, would not be required to apply the same method of calculation for  non-hourly employees used by other employer members of the group provided that the classifications are reasonable and consistently applied by the employer members of the control group.

The regulations make it clear that calculating the days-worked equivalency or weeks-worked equivalency cannot be used in such a way that would cause an employee to lose full-time status.  For example, an employer cannot use a days-worked equivalency for an employee working three 10-hour days per week because the days-worked equivalency would reduce the hours of service to 24 hours per week.

Leaves of Absence.  The proposed regulations provide a method for averaging hours for employees who return to work following an unpaid leave of absence, such as unpaid Family and Medical Leave, and military leave (USERRA).  In this instance, the employer would determine the individual’s average hours of service per week, excluding the unpaid leave period.  In the alternative, the employer could credit the hours of unpaid leave equal to the individual’s average weekly rate.

Special Rules for School and Colleges

Special rules apply to educational organizations, such as primary, secondary, preparatory, or high schools, and colleges and universities, with regard to calculating periods of employment breaks during the academic terms.  In a nutshell, if during the regular school year, an employee works 30 or more hours per week, the individual will be deemed to work 30 or more hours per week during the summer. 

The regulations leave open the opportunity to future guidance to other types of unique work forces, such as adjunct professors and airline pilots.  In the meantime, an employer must use reasonable efforts to determine whether an individual works 30 or more hours per week.  For example, with regard to adjunct professors, the employer must count class preparation time, not just actual class time.  In other words, the regulations go to great lengths to ensure that employers do not find loopholes to avoid the intent of the law.

When Must Coverage be Offered?

For full-time employees, coverage must be offered within 90 days of employment (3 months, according to the regulations).  For all plans, both large and small, the maximum waiting period can be no longer than 90 days for plan years beginning on or after January 1, 2014.  An employer would not risk the imposition of an excise tax as long as coverage provided within this time frame. 

It should be noted that one of the requirements of making an offer of coverage is that employees have a reasonable opportunity to enroll at least once per year. 

An employer’s obligation with respect to offering minimum essential coverage ceases if, during the course of the plan year, coverage terminates due to the employee’s failure to timely pay his/her share of premium.

What Happens if an Individual’s Full-time Status is not known at Date of Hire?

The rules allow the use of a look-back period.  If an individual is deemed to work 30 or more hours per week, the individual is deemed to be a full-time employee during a stability period.  A look-back period can be between 3 and 12 months.  The stability period must be at least 6 months but no shorter than measurement period. 

For a new hire, an initial measurement period can be used rather than the standard measurement period.  The initial measurement period can be measured from date of hire or shortly thereafter.  The standard measurement period is one defined by the employer and can be the calendar year or any other period defined by the employer.

For individuals hired with a variable or seasonal work schedule, and for whom it is not possible to determine whether the individual will qualify, an employer can use a measurement period, as defined by the employer, to determine whether the individual qualifies under the terms and conditions of the employer plan. 

  • A variable hour employee is one whose working hours are variable or otherwise uncertain such that it cannot be determined whether the individual will be working a minimum 30 hours per week during the initial measurement period. 
  • A seasonal worker is one who works on a seasonal basis, as defined under the federal wage and hour law, and retail workers employed exclusively during holiday seasons.

The measurement period and stability period must be the same for all individuals in a particular classification of employees. The rules only allow four types of classifications of employee; they are:

  1. Collectively bargained employees and non-collectively bargained employees;
  2. Each group of collectively bargained employees covered by a separate collective bargaining agreement;
  3. Salaried employees and hourly employees; and
  4. Employees whose primary places of employment are in different States.

The rules provide for an optional administrative period of up to 90 days that may be imposed in between the end of a measurement period and the start of a stability period.  Any administrative period imposed must overlap with the prior stability period to avoid a potential gap in coverage.

What Happens if an Individual’s Employment Status Changes? 

Generally, the individual remains in the same employment status for the duration of the measurement period.  For variable or seasonal employees, if the change in employment status occurs within the initial measurement period, they would have to be re-classified within 4 months of the change in employment status.

For re-hired employees, an employee who terminates service and is re-hired is deemed to meet full-time status if the period between termination of service and re-hire is at least 26 consecutive weeks (employers may choose to apply a shorter period of time).

How are Employers Notified about Potential Penalties?

The regulations provide a methodology for how an employer will be notified by the IRS of its shared responsibility penalty.  Generally, this determination will be made after the date the individual taxpayers file their tax returns.

How are the Penalties Calculated?

  • No coverage excise tax penalty. If an employer fails to offer minimum essential health coverage to at least 95% of its full-time employees (employees plus their dependents beginning in 2015 and beyond) for any calendar month, and employs at least one credit employee*, the excise tax penalty is calculated monthly as (number of full-time employees minus the first 30) multiplied by $166.67 (equivalent of $2,000 per year).
  • Inadequate or unaffordable excise tax penalty.   If the employer offers health coverage to at least 95% of its full-time employees and employs at least one credit employee*, and such coverage fails to meet a minimum value standard or is unaffordable, then the monthly excise tax penalty is the lesser of:
    • Number of credit employees* multiplied by $250 (equivalent of $3,000 per year), or
    • (Number of full-time employees minus the first 30) multiplied by $166.67 (equivalent of $2,000 per year)

*A credit employee is one who works at least 30 hours per week and who is eligible for a premium tax credit or cost sharing assistance for buying insurance through an exchange.

What is the Effective Date of the Shared Responsibility Requirements?

Generally, the shared responsibility requirement takes effect January 1, 2014 without regard to the plan year. 

Transition Relief for ‘Non-Calendar Plan Year’ Plans.  The IRS provides transitional relief to plans, which on December 27, 2012, had a plan year different from the calendar year.  For example, if a plan year runs July 1st to June 30th, the plan will not risk being subject to a shared responsibility penalty until the first day of the plan year beginning in 2014 (July 1, 2014 in this example), as long as coverage was offered to at least one-third of the employer’s employee population (including both full and part-time employees) during the most recent open enrollment period, or the non-calendar year plan covered at least one-fourth of the employer’s employee population.

What Should an Employer Do?

  • Determine employer size. 
  • Determine which employees are full-time (30+ hours per week or 130 hours per month).
  • Determine which employees are part-time (fewer than 30 hours per week or 130 per month).
  • Determine which employees are variable or seasonal.
  • Decide whether to take advantage of a look-back (measurement) and stability period. 
  • If using a measurement/stability period:
    • Define it for new employees (initial) and define it for on-going employees (standard).
    • Add to new hire practice, a determination of whether the individual is full-time, part-time, variable or seasonal.  If variable or seasonal, track hours worked during measurement period.
  • If you’re not using a measurement/stability period, analyze status each month.
  • Define methodology for determining affordability: Form W-2 method, the rate of pay method or the Federal poverty line (FPL) standard.
  • Make certain employees are given an effective opportunity to enroll in the plan (at least once per plan year).
  • Know your risk.  How many full-time employees are offered minimum essential coverage?  Is it affordable?  To avoid a penalty risk, offer adequate coverage at an affordable rate.  It is the offer, not the take-up rate that matters.

 

 

 About the Author:  Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc.  She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law.  Ms. McLeese is based in the CBIZ Leawood, Kansas office.

 

 

 

The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. The information contained herein is not intended to replace or substitute for accounting or other professional advice. Attorneys or tax advisors must be consulted for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein. As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

 

 

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