IRS Describes Potential Approaches to Employer Shared Responsibility Under Health Care Reform
Treasury and the IRS have given us a peek at how they may implement the employer shared responsibility provisions of health care reform, set to take effect in 2014. These provisions, commonly known as the "play or pay" mandate, will impose a penalty on applicable large employers that do not provide employee health care benefits satisfying the requirements of the Affordable Care Act.
Notice 2011-36, issued Tuesday, cannot be considered guidance. Instead, it presents possible approaches for determining who is a full-time employee for purposes of the shared responsibility provisions and solicits comments on those approaches. It also invites input on the application of health care reform's 90-day limitation on coverage waiting periods.
Definition of Employer, Employee, and Hours of Service
The Notice explains that Treasury and the IRS expect to conform the definitions of employer, employee, and hours of service to existing regulatory definitions and rules applicable to employer-provided health and retirement benefits. Thus, "employer" would mean the entity that is the employer of an employee under the common law test, and "employee" would mean a worker who is an employee under the common law test. "Hours of service" for hourly employees would include actual hours worked and hours for which payment is made or due (for vacation, holiday, illness, incapacity, jury duty, and the like). For non-hourly employees, employers could use the hourly employee method, a days-worked equivalency (the employee is credited with eight hours of service for each day worked), or a weeks-worked equivalency (40 hours of service per week for each week worked). An employer could use different methods for determining hours of service for different classes of non-hourly employees and could change the method each calendar year.
Determining Whether an Employer Is an Applicable Large Employer
An "applicable large employer" is one that employed an average of 50 or more full-time employees during the preceding year, determined based on the sum of full-time employees and full-time equivalent employees (FTEs). Full-time employees are those averaging 30 hours of service per week (or, as the IRS contemplates, 130 hours per month) with the employer. The number of FTEs is determined by calculating the aggregate number of hours of service (not above 120) for employees who are not full-time for the month and dividing the aggregate number by 120. Special rules apply to seasonal employees, and the IRS contemplates using a complex, six-step process to determine the number of full-time employees. The Notice provides examples to illustrate the process it is considering.
Potential Methods for Determining Full-Time Employee Status (for calculating the penalty)
Beginning in 2014 an applicable large employer will pay a penalty for any month that any full-time employee is certified to receive a federal premium tax credit or cost-sharing reduction and either (1) the employer does not offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan, but the coverage is unaffordable or does not provide minimum value (within the meaning of the Code) for the full-time employee(s) certified to receive a premium tax credit or cost-sharing reduction.
The penalty under (1) is based on all (excluding the first 30) full-time employees, while the penalty under (2) is based on the number of full-time employees certified to receive a premium tax credit or cost-sharing reduction. Treasury and the IRS recognize that, for purposes of calculating the penalty, having to determine full-time employee status on a monthly basis would be difficult and burdensome. Accordingly, they are considering possible alternatives to monthly determination, one of which would permit applicable large employers to use a look-back/stability period safe harbor, described further in the Notice.
General Request for Comments
The Notice requests comments on a variety of other issues related to shared responsibility, as well as on the interpretation and coordination of the Affordable Care Act's 90-day limitation on waiting periods for health insurance coverage.
Notice 2011-36 provides a helpful advance look at how the agencies in charge of health care reform intend to implement the particularly complicated (and controversial) employer shared responsibility provisions. Interested parties should take advantage of the opportunity to help shape the regulations to which most employers will become subject. Comments are due by June 17, 2011, and we expect proposed rules in the coming months.