Employment, Labor & Benefits Alert
September 4‚ 2012
Agencies Issue Long Awaited Guidance under Affordable Care
Actfs Employer Shared Responsibility Rules and 90-Day Waiting
Period Limit
By Alden J. Bianchi
The Patient Protection and Affordable Care Act
(the gActh) imposes new obligations—referred to as gemployer
shared responsibilityh standards (a/k/a gpay-or-playh
requirements) — on employers with 50 or more full-time
equivalent employees. These rules, which are set out in newly
added Internal Revenue Code 4980H, will increase
administrative burdens for all affected employers and increase
costs for many or most. The Act also imposes comprehensive new
requirements on health insurance issuers in the individual and
group markets and group health plans maintained by all
employers irrespective of size. These requirements include a
limit of 90 days on the maximum length of waiting periods that
plans may impose. The 90-day waiting period limitation appears
in newly added Public Health Service Act 2708. It is
also incorporated by reference into both the Employee
Retirement Income Security Act and the Internal Revenue Code.
As a result, the limitation applies to health insurance
issuers and to group health plans in the public and private
sectors, including church-sponsored plans.
Two recent guidance items shed light on the
application of the employer shared responsibility rules and
the 90-day waiting period limitation.
- IRS Notice 2012-58. IRS Notice
2012-58 describes safe harbor methods that employers may use
to determine which employees are treated as full-time
employees for purposes of the employer shared responsibility
rules. Building on prior guidance, Notice 2012-58 clarifies
an existing safe harbor for ongoing employees and provides a
separate safe harbor for new hires.
- IRS Notice 2012-59. IRS Notice
2012-59, Department of Labor Technical Release 2012-02, and
an HHS Bulletin entitled gGuidance on 90-Day Waiting Period
Limitation under Public Health Service Act 2708h each
provide temporary guidance regarding the 90-day waiting
period limitation.
Together these notices offer rules that are for
the most part favorable to employers, particularly those in
industries with large cohorts of contingent workers, e.g.,
retail, franchise, construction, hospitality, and temporary
staffing. But while regulators have furnished standards that
are generally workable in light of the underlying statutory
provisions, the resulting costs and administrative burdens are
not insubstantial.
The Actfs employer shared responsibility
requirements apply to gapplicable large employers.h An
applicable large employer means gan employer that employed at
least 50 full-time employees, including full-time equivalent
employees, on business days during the preceding calendar
year.h Thus, whether an employer is an applicable large
employer depends on the number of full-time equivalent
employees (FTEs), which includes full-time and part-time
employees. In contrast, gassessable paymentsh (discussed
below) are determined on the basis of full-time employees
only. The Act provides that a gfull-time employeeh with
respect to any month is an employee who is employed on average
at least 30 hours of service per week. In Notice 2011-36, the
IRS said that it expects that 130 hours of service in a
calendar month would be treated as the monthly equivalent of
30 hours of service per week.
Beginning in 2014, each applicable large
employer is subject to an assessable payment if any full-time
employee is certified as eligible to receive an applicable
premium tax credit or cost-sharing reduction and either:
- No-coverage prong. The employer
fails to offer to all its gfull-time employeesh (and their
dependents) the opportunity to enroll in gminimum essential
coverageh under an geligible employer-sponsored plan.h Under
this prong, if an employer fails to make an offer of
coverage to its full-time employees, an assessable payment
is imposed monthly in an amount equal to $166.67 multiplied
by the number of the employerfs full-time employees,
excluding the first 30.
- Coverage prong. The employer offers
its full-time employees (and their dependents) the
opportunity to enroll in minimum essential coverage under an
eligible employer-sponsored plan that, with respect to a
full-time employee who qualifies for a premium tax credit or
cost-sharing reduction, either is (1) hunaffordableh or
(2) does not provide gminimum value.h If the employer
makes the requisite offer of coverage, the assessable
payment is equal to $250 per month multiplied by the number
of full-time employees who qualify for and receive a premium
tax credit or cost-sharing reduction from a health insurance
exchange. The amount of the assessable payment under the
coverage prong is capped at the amount that would be charged
under the no-coverage prong. As a result, an employer that
offers group health plan coverage can never be subject to a
larger assessable payment than that imposed on a similarly
situated employer that does not offer group health plan
coverage.
- gMinimum essential coverageh includes coverage under
an geligible employer-sponsored plan.h An eligible
employer-sponsored plan includes ggroup health plans
offered in the small or large group market within a stateh
but does not include gexcepted benefitsh as defined and
described under the Public Health Service Act, e.g.,
stand-alone vision or dental benefits, hospital indemnity
plans, etc.
- Employer-provided health insurance coverage is deemed
gunaffordableh if the premium required to be paid by the
employee exceeds 9.5% of the employeefs household income.
In Notice 2011-73, the IRS proposed a safe harbor under
which an employer would be permitted to determine
affordability on the basis of a employeefs income as
reported on his or her Form W-2 (in Box 1) instead of
household income. Notice 2012-58 refers to this
substitution of W-2 income for household income as the
gaffordability safe harbor.h
- Coverage is deemed to provide gminimum valueh if it
pays for at least 60% of all plan benefits, without regard
to co-pays, deductibles, co-insurance, and employee
premium contributions. The IRS prescribed rules governing
the determination of minimum value in Notice 2012-31. That
guidance establishes rules for determining minimum value
based on guidance previously issued by the Department of
Health and Human Services relating to actuarial value but
modified to reflect differences in benefits offered and
populations covered under large, fully-insured plans and
self-funded plans.
For plan years beginning on or after January 1,
2014, a group health plan or group health insurance issuer
must not apply any waiting period that exceeds 90 days.
Previously issued rules under the Health Insurance Portability
and Accountability Act define a waiting period to mean gthe
period that must pass before coverage for an employee or
dependent who is otherwise eligible to enroll under the terms
of a group health plan can become effective.h The IRS has
proposed in previous guidance that assessable payments would
not be imposed during a 90-day waiting period that complies
with the requirements of the Act.
The Actfs employer shared responsibility rules
apply month-by-month. Recognizing that a month-by-month
application would be administratively challenging, the IRS in
Notice 2011-36 proposed to permit employers to use an optional
glook-back/stability period safe harborh to determine whether
ongoing (but not newly hired) employees are full-time
employees for purposes of Code 4980H. Under the
look-back/stability period safe harbor, an employer would
determine each employeefs full-time status by looking back at
a period of not less than three but not more than 12
consecutive calendar months to determine whether the employee
averaged at least 30 hours of service per week. Notice 2011-36
refers to the look-back period as the gmeasurement period.h If
an employee is determined to be a full-time employee during
the measurement period, then he or she would be treated as a
full-time employee during a subsequent gstability period,h
regardless of the employeefs number of hours of service during
the stability period (so long as he or she remained an
employee).
For an employee determined to be a full-time
employee during the measurement period, the stability period
would be a period of at least six consecutive calendar months
that follows the measurement period and no shorter than the
measurement period. If the employee is determined not to be a
full-time employee during the measurement period, the employer
would be permitted to treat the employee as not a full-time
employee during a stability period that followed the
measurement period.
In Notice 2012-17, the IRS sought to expand the
look-back/stability period safe harbor to include newly hired
employees. While the look-back/stability period safe harbor as
applied to ongoing employee was well received, the IRSfs
original efforts to expand the safe harbor to newly hired
employees was not. Notice 2012-58 modifies the
look-back/stability period safe harbor for new hires in an
effort to provide rules that are both flexible and
administrable.
For ongoing employees, Notice 2012-58 generally
adopts the look-back/stability period safe harbor originally
proposed in Notice 2011-36, with a handful of definitional
changes. The term gmeasurement periodh is changed to gstandard
measurement periodh to distinguish it from the ginitial
measurement periodh proposed for newly hired employees
(discussed below). An gongoing employeeh is an employee who
has been employed by the employer for at least one complete
standard measurement period. The standard measurement period
is defined as a time period of not less than three but not
more than 12 consecutive calendar months, as chosen by the
employer, that is applied on a uniform and consistent basis
for all employees in the gsame category.h Categories
include:
- Collectively bargained employees and non-collectively
bargained employees;
- Salaried employees and hourly employees;
- Employees of different entities; and
- Employees located in different States.
Under the safe harbor method for ongoing
employees, an employer determines each ongoing employeefs
full-time status by looking back at the standard measurement
period. If, for example, an employer selected a standard
measurement period of 12 months, the employer could choose to
make it the calendar year, a non-calendar plan year, or a
different 12-month period, such as one that ends shortly
before the start of the planfs annual open enrollment season.
If the employer determines that an employee averaged at least
30 hours per week during the standard measurement period, then
the employer must treat the employee as a full-time employee
during the subsequent stability period. If the employee did
not work full-time during the standard measurement period, the
employer would be permitted to treat the employee as not a
full-time employee during the stability period that follows,
but is not longer than, the standard measurement period.
Recognizing that employers may need time between
the standard measurement period and the associated stability
period to determine which ongoing employees are eligible for
coverage and to notify and enroll employees, Notice 2012-58
provides for an gadministrative periodh of up to 90 days that
commences before the standard measurement period ends and
before the associated stability period begins. An
administrative period may neither reduce nor lengthen the
measurement period or the stability period. Ongoing employees
who are eligible for coverage because of their status as
full-time employees based on a prior measurement period must
continue to be offered coverage during the administrative
period.
Example 1: An employer
chooses a 12-month stability period that begins January 1
and a 12-month standard measurement period that begins
October 15. The period between the end of the standard
measurement period (October 14) and the beginning of the
stability period (January 1) is the administrative period.
Previously-determined full-time employees already enrolled
in coverage must continue to be offered coverage during the
administrative period.
Notice 2012-58 provides rules governing the
treatment of gnew variable hour employees or seasonal
employeesh as full-time employees for Code 4980H
purposes.
- A new employee is a gvariable hour employeeh if, based
on the facts and circumstances at the start date, it cannot
be determined that the employee is reasonably expected to
work on average at least 30 hours per week. A new employee
who is expected to work initially at least 30 hours per week
may be a variable hour employee if, based on the facts and
circumstances at the start date, the period of employment at
more than 30 hours per week is reasonably expected to be of
limited duration and it cannot be determined that the
employee is reasonably expected to work on average at least
30 hours per week over the initial measurement period. Thus,
for example, a variable hour employee would include a retail
worker hired at more than 30 hours per week for the holiday
season who is reasonably expected to continue working after
the holiday season but is not reasonably expected to work at
least 30 hours per week for the portion of the initial
measurement period remaining after the holiday season
- While the Act defines the term gseasonal workerh
(generally with reference to regulations issued by the
Secretary of Labor), it does not address how the term
gseasonal employeeh might be defined for purposes of
determining the amount of any assessable payment under Code
4980H. Notice 2012-58 fills this gap, at least
temporarily, by permitting employers to use ga reasonable,
good faith interpretation of the term eseasonal employeef
for purposes of this notice.h
It is with respect to newly-hired variable hour
and seasonal employees that Notice 2012-58 diverges from prior
guidance by introducing the concept of an initial measurement
period. The ginitial measurement periodh must be between three
and 12 months, as selected by the employer. The employer
measures the hours of service completed by the new employee
during the initial measurement period and determines whether
the employee completed an average of 30 hours of service per
week or more during this period. If a new variable hour or
seasonal employee is determined not to be a full-time
employee during the initial measurement period, the employer
may treat the employee as not a full-time employee during the
stability period that follows the initial measurement period.
But the stability period must not:
- Be more than one month longer than the initial
measurement period, nor
- Exceed the remainder of the standard measurement period,
plus any associated administrative period for new hires
(explained below), in which the initial measurement period
ends.
Example 2: For new variable
hour employees, an employer uses a six-month initial
measurement period that begins on the start date and applies
an administrative period that runs from the end of the
initial measurement period through the end of the first full
calendar month beginning after the end of the initial
measurement period. Employee Z is hired May 10, 2014. His
initial measurement period runs from May 10, 2014, through
November 9, 2014, during which he works an average of 30
hours per week. The employer offers coverage to Z for a
stability period that runs from January 1, 2015 through June
30, 2015. Here, the employer uses (1) an initial measurement
period that does not exceed 12 months; (2) an administrative
period totaling not more than 90 days; and (3) a combined
initial measurement period and administrative period that
does not last longer than the final day of the first
calendar month beginning on or after the one-year
anniversary of Employee Zfs start date. The employer is not
subject to any payment under Code
4980H.
Once a newly-hired employee has been employed
for an initial measurement period, he or she must then be
tested for full-time status under the rules governing standard
measurement periods at the same time and under the same
conditions as other ongoing employees. For example, an
employer with a calendar year standard measurement period that
also uses a one-year initial measurement period beginning on
the employeefs start date would test a new variable hour
employee whose start date is February 12 for full-time status
first based on the initial measurement period (February 12
through February 11 of the following year) and again based on
the calendar year standard measurement period (if the employee
continues in employment for that entire standard measurement
period) beginning on January 1 of the year after the start
date.
Where an employee is a full-time employee during
an initial measurement period but not during the standard
measurement period that begins within the initial measurement
period, the employer may treat the employee as not a full-time
employee only after the end of the stability period
associated with the initial measurement period. If the
employee is determined not to be a full-time employee during
the initial measurement period, but is determined to be a
full-time employee during the overlapping or immediately
following standard measurement period, the employee must be
treated as a full-time employee for the entire corresponding
stability period.
Notice 2012-58 provides for a separate
administrative period for newly-hired employees, which cannot
exceed 90 days and which includes all periods between the
start date of a new variable hour or seasonal employee and the
date the employee is first offered coverage under the
employerfs group health plan, other than the initial
measurement period. The combined length of the initial
measurement period and the administrative period cannot extend
beyond the last day of the first calendar month beginning on
or after the first anniversary of the employeefs start date.
The following examples help illustrate how administrative
periods apply to new variable hour employees.
Example 3: An employer adopts
a 12-month initial measurement period that begins on the
start date and applies an administrative period from the end
of the initial measurement period through the end of the
first calendar month beginning on or after the end of the
initial measurement period. Employee Y is hired on May 10,
2014. Employee Yfs initial measurement period runs from May
10, 2014, through May 9, 2015. Employee Y works an average
of 30 hours per week during this initial measurement period.
The employer offers coverage to Employee Y for a stability
period that runs from July 1, 2015 through June 30, 2016.
Because Employee Y works an average of 30 hours per week
during his initial measurement period and the employer uses
(1) an initial measurement period that does not exceed 12
months; (2) an administrative period totaling not more than
90 days; and (3) a combined initial measurement period and
administrative period that does not last beyond the final
day of the first calendar month beginning on or after the
one-year anniversary of Employee Yfs start date, the
employer is not subject to any payment under Code
4980H.
Example 4: Same facts as
Example 3 except that the employer selects an 11-month
initial measurement period that begins on the start date and
applies an administrative period from the end of the initial
measurement period until the end of the second calendar
month beginning after the end of the initial measurement
period. Employee Yfs initial measurement period runs from
May 10, 2014, through April 9, 2015, and the employer offers
coverage to Employee Y for a stability period that runs from
July 1, 2015 through June 30, 2016. The result is the same:
the employer is not liable for an assessable payment under
Code 4980H.
In the first example, the 12-month initial
measurement period was followed by a 1-plus partial month
administrative period; in the second example, an 11-month
initial measurement period was followed by a 2-plus partial
month period. In each case, the combined initial measurement
period and administrative period does not last beyond the
final day of the first calendar month beginning on or after
the one-year anniversary of the employeefs start date.
For plan years beginning on or after January 1,
2014, a group health plan or health insurance issuer offering
group health insurance coverage is barred from applying any
waiting period that exceeds 90 days. A waiting period is
defined as gthe period that must pass before coverage for an
employee or dependent who is otherwise eligible to enroll
under the terms of a group health plan can become
effective.h
Notice 2012-59 clarifies that, gbeing eligible
for coverage means having met the planfs substantive
eligibility conditions (such as being in an eligible job
classification or achieving job-related licensure requirements
specified in the planfs terms).h Nothing in the Act or
elsewhere requires an employer to offer coverage to any
particular employee or class of employees, including part-time
employees. The 90-day waiting period limitation merely
prevents an otherwise eligible employee (or dependent) from
having to wait more than 90 days before coverage becomes
effective. Thus, other coverage conditions are generally
permitted, unless the condition is designed to avoid
compliance with the 90-day waiting period limitation. Notice
2012-59 also clarifies that in instances where an employee may
elect coverage that would begin on a date that does not exceed
the 90-day waiting period limitation, the 90-day waiting
period limitation is considered satisfied. There is,
therefore, no violation merely because employees take
additional time to elect coverage.
In the case of newly-hired employees, Notice
2012-59 coordinates with the approach taken under Notice
2012-58 such that a plan may take a reasonable period of time
to determine whether the employee meets the planfs eligibility
condition, including a measurement period. Generally, the time
period for determining whether an employee meets the planfs
eligibility condition will not be considered to be designed to
avoid compliance with the 90-day waiting period limitation if
coverage is made effective no later than 13 months from the
employeefs start date (or, if the employeefs start date is not
the first day of a calendar month, the time remaining until
the first day of the next calendar month).
Unlike Code 4980H, which applies only to
applicable large employers, the 90-day limitation on waiting
periods applies to all employers without regard to size.
Notice 2012-59 permits plans to take a reasonable period of
time to determine whether the employee meets the planfs
eligibility condition, gwhich may include a measurement period
that is consistent with the timeframe permitted for such
determinations under Code section 4980H.h Thus, an employer
may use a measurement period that is consistent with Code
4980H whether or not it is an applicable large
employer.
Employers are generally permitted to rely on
both Notices 2012-58 and 2012-59 through the end of 2014. In
the case of Notice 2012-58, employers will not be required to
comply with any subsequent more restrictive guidance until at
least January 1, 2015. The Notice 2012-58 reliance period
covers measurement periods beginning in 2013. This means that
although Code 4980H takes effect January 2014, the
determination of full-time status under the safe harbors must
commence before then.
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Copyright © 2012 Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.