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Final “Pay or Play” Regulations Retain Core Structure but Make Many Changes

Employee Benefits Law Update

On February 10, 2014, the Internal Revenue Service released much-anticipated final regulations on the Affordable Care Act’s employer shared responsibility mandate, which is often referred to as the “Pay or Play Rule.” The final regulations retain most concepts from last year’s proposed regulations (discussed in our prior alert here), add new concepts, and answer several open questions. Overall, employers will likely welcome the certainty that comes with having final regulations along with some of the new transitional relief provided.

Background. The Pay or Play Rule requires large employers to offer health plan coverage to their full-time employees or pay a tax penalty to the federal government. The Pay or Play Rule was originally supposed to go into effect in 2014. However, during 2013 the Obama administration delayed the Pay or Play Rule for one year until 2015.

Same Core Structure Applies. The final regulations retain the same core provisions of the proposed regulations. For example, large employers will still generally want to establish a “measurement period,” “administrative period,” and “stability period” to determine which employees are “full-time.” Employers will now feel much more comfortable moving forward with implementing these provisions.

Many Tweaks. The new regulations are notable for the numerous relief provisions and industry-specific items they include. Most significantly, there is a 1-year delay for certain mid-sized employers (those with 51 – 100 full-time (and full-time equivalent) employees). There is also a “grab bag” of industry-specific guidance that is generally helpful to educational organizations, tax-exempt and governmental entities, staffing companies, agricultural and recreational organizations that use seasonal employees, companies that employ home care workers, companies with employees working internationally, and companies that contribute to multiemployer health plans.

Transition Rules. The final regulations contain numerous “transition rules” that will help employers ease into compliance with the Pay or Play Rule. We describe the most important transition rules in a chart following this alert.

Effective Date. The final regulations are effective February 12, 2014 and become applicable for periods beginning January 1, 2015. However, employers may rely on the final regulations for periods before January 1, 2015.

Action Steps. Many employers were waiting to receive additional IRS guidance before continuing (or beginning) to actively prepare for the Pay or Play Rule. With the release of the final regulations, we anticipate that employers will move forward with those preparations. Employers should not wait until 2015 (or 2016 as the case may be) to develop strategies for the Pay or Play Rule. There is no “one size fits all” Pay or Play Rule strategy. Each employer’s Pay or Play Rule strategy will be unique to that employer’s existing health plan coverage, workforce numbers and demographics, and industry standards.

Pay or Play Guide. Our Pay or Play Guide includes over 70 pages of practical tips and examples, while outlining the steps employers should take to understand if they are subject to the Pay or Play Rule, how the Pay or Play Rule penalty tax is calculated, and how that tax can be avoided. We will publish the updated Guide in the coming weeks. If you would like to receive an updated Guide at no charge and are not already on our Guide distribution list, please email John Barlament - john.barlament@quarles.com - and we will add you to the list for updates.

Links to Further Guidance. The final regulations can be found here. IRS questions and answers can be found here. The U.S. Treasury’s fact sheet on the final regulations can be found here.

For more information, contact the authors of this alert: John Barlament at (414) 277-5727 / john.barlament@quarles.com; Amy Ciepluch at (414) 277-5588 / amy.ciepluch@quarles.com; Alyssa Dowse at (414) 277-5607 / alyssa.dowse@quarles.com; or Sarah Fowles at (414) 277-5287 / sarah.fowles@quarles.com. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (312) 715-5079 / marla.anderson@quarles.com; Angie Hubbell at (312) 715-5097 / angie.hubbell@quarles.com; Charlene Kelly at (312) 715-5178 / charlene.kelly@quarles.com; David Olson at (414) 277-5671 / david.olson@quarles.com; Robert Rothacker at (414) 277-5643 / robert.rothacker@quarles.com; Sarah Touzalin at (312) 715-5179 / sarah.touzalin@quarles.com, or your Quarles & Brady attorney.

Transition Relief

Type of Transition Relief Description of Relief Comments Example
"No Offer Penalty" Relief: 70% of Full-Time Employees (and Dependents) Must be Offered Coverage The final regulations require that large employers offer coverage to at least 95% of their full-time employees (and dependents) to avoid a "No Offer Penalty" under the Pay or Play Rule. The IRS reduced this requirement to 70% for 2015 and any calendar months during the 2015 plan year that fall in 2016. Accordingly, an employer will not be subject to the "No Offer Penalty" for the 2015 plan year if the employer offers coverage to at least 70% of its full-time employees (and dependents, unless the transition relief for dependent coverage applies as discussed below).

Beginning in 2016, an employer subject to the Pay or Play Rules must offer coverage to at least 95% of its full-time employees (and dependents) to avoid the "No Offer Penalty."

This transition relief does not provide relief from the "Unaffordable Coverage Penalty" under the Pay or Play Rules.
"No Offer Penalty" Relief: Reduction of 80 Full-Time Employees Used in Calculation

For the 2015 plan year, the No Offer Penalty will be equal to $2,000 for each full-time employee (less the first 80 full-time employees).

This transition relief applies only to employers with 100 or more full-time or full-time equivalent employees on business days during 2014 (or applicable large employer members that are part of such large employer)

Beginning in 2016, employers will calculate the No Offer Penalty with a 30 full-time employee reduction (instead of the 80 full-time employee reduction allowed under the transition rules).

This transition relief may indirectly reduce an employer's 2015 "Unaffordable Coverage Penalty," which is capped at the amount of the No Offer Penalty.
Pay or Play Rule Delayed until 2015 for Certain Mid-Size Employers

The final regulations provide that certain mid-size employers (those with between 51 and 100 full-time and full-time equivalent employees during 2014) will not be subject to the Pay or Play Rule during 2015 and, for employers with non-calendar plan years, during the portion of the 2015 plan year that falls in 2016.

This transition relief applies to a mid-size employer who certifies on an IRS form that the employer (1) employs on average between 51 and 100 full-time and full-time equivalent employees on business days during 2014, (2) does not reduce the size of its workforce or overall hours of workforce between February 9, 2014 and December 31, 2014 in order to meet the 51-100 employee requirement, and (3) during the "coverage maintenance period," does not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014. The "coverage maintenance period" is the period from February 9, 2014 to December 31, 2015 for an employer with a calendar year plan, and is the period from February 9, 2014 to the last day of the 2015 plan year for an employer with a non-calendar year plan.

However, an employer may reduce its workforce or the overall hours of service due to a business activity (e.g., sale of division) if the change is unrelated to this transition relief. In addition, the IRS will not treat an employer as eliminating or materially reducing health coverage if the employer meets certain requirements in the final regulations.

An employer that first comes into existence in 2015 may take advantage of this transition relief if it expects to employ fewer than 100 full-time and full-time equivalent employees during 2015 and meets similar workforce, maintenance and certification requirements.

This transition relief does not apply to employers with 100 or more full-time employees. Such employers must comply with the Pay or Play Rule beginning in 2015. Employers who are eligible for this transition relief must comply with the Pay or Play Rule beginning in 2016.

It appears that mid-size employers who qualify for this transition relief must still comply with certain related reporting requirements under the Affordable Care Act. It appears that employers qualifying for this transition relief will make the required certification as part of those reporting requirements.

The transition relief is not available to an employer that changes its plan year after February 9, 2014 to begin on a later date.
As of February 9, 2014, Employer A sponsors a calendar year plan under which 40 of its full-time employees are offered coverage with an employer contribution of $300 per month for employee-only coverage. The offer of coverage is affordable with respect to some, but not all, full-time employees. In 2014, two of Employer A’s employees voluntarily terminate employment and Employer A terminates three employees due to nonrenewal of a customer contract but does not otherwise reduce the size of its workforce or reduce any employee’s hours of service. Had those five employees continued in employment throughout 2014, Employer A would have had an average of 100 full-time employees (including FTEs) on business days in 2014. As a result of the terminations, it had an average of only 97 full-time employees (including FTEs) for business days in 2014. From February 9, 2014, through December 31, 2015, Employer A does not change the eligibility requirements for the plan (including not amending it to eliminate its existing health coverage for dependents) and continues to make an employer contribution of $300 per month toward the cost of employee-only coverage that provides minimum value. Employer A certifies in a timely manner as to its eligibility for the transition relief. In this case, no Pay or Play penalty would be due for 2015.
Non-calendar year plans: “Eligibility Transition Guidance”

The first transition rule for non-calendar year plans provides that if an employer maintained a non-calendar year plan as of December 27, 2012, and did not modify the plan year after December 27, 2012 to begin at a later calendar date, no Pay or Play penalty will apply to employees who would be eligible for coverage beginning on the first day of the 2015 plan year under the eligibility terms of the plan as in effect on February 9, 2014.

All transition rules for non-calendar year plans require that the plan year was not modified after December 27, 2012 to begin at a later calendar date. This could limit the transition relief available to employers that changed their plan year during 2013 to take advantage of “early renewal” opportunities or who changed their plan year during 2013 to delay implementation of certain aspects of health care reform.

All transition rules for non-calendar year plans appear to require that the employer use a plan design, eligibility provisions, and a cost structure that will cause the employer to avoid penalties for the 2015 plan year, and thus it appears these transition rules are not applicable to employers who are subject to a Pay or Play penalty for the 2015 plan year. In other words, an employer cannot rely on these transition rules to simply delay the Pay or Play penalties to a later date during 2015.

For example, the relief applies only to employees who are offered affordable coverage that provides minimum value no later than the first day of the 2015 plan year. Also, this relief applies only if the employer offers minimum essential coverage to a sufficient percentage of its full-time employees (95% or, if the relief above applies, 70%) as of the first day of the 2015 plan year.

If an employer maintains a calendar year plan as of February 9, 2014 in addition to the non-calendar year plan, this relief does not apply to those employees who are eligible for the calendar year plan.

If an employee terminates employment before the beginning of the 2015 plan year but would otherwise be eligible for coverage beginning on the first day of the 2015 plan year under the eligibility terms of the plan as in effect on February 9, 2014, this relief will still apply to that employee.
Employer Z has 600 employees, all of whom are full-time employees within the meaning of the final regulations, and Employer Z maintained a plan with an April 1 plan year as of December 27, 2012 (and did not later change the plan year). All of Employer Z’s employees are eligible for coverage under the plan under the eligibility terms as in effect on February 9, 2014, but the coverage is not affordable. All of Employer Z’s employees are offered affordable coverage that provides minimum value no later than April 1, 2015. In this case, no Pay or Play penalty will be due for any employee of Employer Z before April 1, 2015.
Non-calendar year plans: “Significant Percentage Guidance (All Employees)”

The second transitional rule for non-calendar year plans seems to be designed to allow a non-calendar year plan additional time to expand its eligibility provisions and offer coverage to those who were not previously eligible for coverage.

Like the first transitional rule for non-calendar year plans, this rule only applies to an employer that maintained a non-calendar year plan as of December 27, 2012, and did not modify the plan year after December 27, 2012 to begin at a later calendar date.

The second transitional rule will apply if the plan either (1) had, as of any date between February 10, 2013 and February 9, 2014, at least 1/4 of its employees covered under the non-calendar year plan, or (2) offered coverage under the non-calendar year plan to 1/3 or more of its employees during the open enrollment period that ended most recently before February 9, 2014. If one of these rules is met, no Pay or Play penalty will apply 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 no later than the first day of the 2015 plan year.

This relief applies only if the employer offers minimum essential coverage to a sufficient percentage of its full-time employees (95% or, if the relief below applies, 70%) as of the first day of the 2015 plan year.

If an employer maintains a calendar year plan as of February 9, 2014 in addition to the non-calendar year plan, this relief does not apply to those employees who are eligible for the calendar year plan.

Employer Y has 1,100 employees. 1,000 of Employer Y’s employees are full-time employees and 100 of Employer Y’s employees are not full-time employees. Employer Y maintained a plan with a July 1 plan year as of December 27, 2012 (and did not later change the plan year).

Employer Y chooses December 1, 2013 to measure the number of employees it covered. On December 1, 2013, Employer Y covered 23% of its employees under the plan and so does not meet the 1/4 rule. During the open enrollment period that ended most recently before February 9, 2014, Employer Y offered coverage under the plan to 45% of its employees and so meets the 1/3 rule.

Employer Y offers affordable coverage that provides minimum value to all full-time employees as of the first day of the 2015 plan year. Employer Y will not be subject to any Pay or Play penalty for the period before July 1, 2015.
Non-calendar year plans: “Significant Percentage Guidance (Full-Time Employees)

The third transitional rule for non-calendar year plans is designed for employers that cannot satisfy the second transition rule for non-calendar year plans due to large numbers of seasonal or part-time employees.

Like the first transitional rule for non-calendar year plans, this rule only applies to an employer that maintained a non-calendar year plan as of December 27, 2012, and did not modify the plan year after December 27, 2012 to begin at a later calendar date.

The second transitional rule will apply if the plan either (1) had, as of any date between February 10, 2013 and February 9, 2014, at least 1/3 of its full-time employees covered under the non-calendar year plan, or (2) offered coverage under the non-calendar year plan to 1/2 or more of its full-time employees during the open enrollment period that ended most recently before February 9, 2014.

If one of these rules is met, no Pay or Play penalty will apply 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 no later than the first day of the 2015 plan year.

This relief applies only if the employer offers minimum essential coverage to a sufficient percentage of its full-time employees (95% or, if the relief below applies, 70%) as of the first day of the 2015 plan year.

If an employer maintains a calendar year plan as of February 9, 2014 in addition to the non-calendar year plan, this relief does not apply to those employees who are eligible for the calendar year plan.

Employer W has 2,000 employees, of whom 500 are full-time employees and 1,500 are not full-time employees. Employer W maintained a plan with a July 1 plan year as of December 27, 2012 (and did not later change the plan year).

Employer W chooses December 1, 2013 to measure the number of employees it covered. On December 1, 2013, Employer W covered 20% of its full-time employees under the plan and so does not meet the 1/3 rule. During the open enrollment period that ended most recently before February 9, 2014, Employer W offered coverage under the plan to 60% of its full-time employees and so meets the 1/2 rule.

Employer W offers affordable coverage that provides minimum value to all full-time employees as of the first day of the 2015 plan year. Employer W will not be subject to any Pay or Play penalty for the period before July 1, 2015.
Offers of Coverage for January 2015

This transition rule is designed for employers who will offer coverage to full-time employees on a day other than the first day of January 1, 2015.

This transition rule provides that if an employer offers coverage to a full-time employee no later than the first payroll period that begins in January 2015, the employee will be treated as having been offered coverage for January 2015.
This transition rule applies only for January 2015. Employer V has never offered health plan coverage to employees. Employer V will begin offering coverage to its full-time employees effective the first payroll period of January 1, 2015, which begins January 12, 2015. Those full-time employees offered coverage beginning January 12, 2015 will be treated as having been offered coverage for the entire month of January 2015.
Period, Long Stability Period

The final regulations recognize that employers who wish to adopt a 12-month measurement period and a 12-month stability period under the look-back measurement method will have time constraints due to the final regulation being published in February 2014. The transition rule allows an employer to adopt a shorter measurement period (such as six months) but keep the longer stability period (such as 12 months). To rely on this transition rule, the transition measurement period must be at least six months long, must begin no later than July 1, 2014 and must end no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2015.

If an employer hires an employee during or after the transition measurement period described above, the general Pay or Play Rules for new employees under the look-back measurement method would apply.

The effect of this rule is surprisingly difficult to succinctly summarize due to the varying length of the administrative period an employer could select (0 - 90 days) and the varying length of the measurement period the employer could select (apparently, 6 months to 11 months, although 11 months is reduced in some situations).

An employer with a plan year beginning on July 1 must use a measurement period that is longer than 6 months to comply with the requirement that the measurement period begin no later than July 1, 2014 and end no earlier than 90 days before the stability period.

Measurement periods beginning after July 1, 2014 cannot rely on this transitional relief and must follow the typical rule that the measurement period is equal in length to the stability period. In addition, mid-size employers who are not subject to the Pay or Play Rules in 2015 (as described above) cannot rely on this transition rule in 2016. Accordingly, such mid-size employers must adopt a 12-month measurement period in 2015 if they would like to adopt a 12-month stability period that begins in 2016.

An employer with a calendar year plan may use a transition measurement period from April 15, 2014 through October 14, 2014 (six months), followed by an administrative period ending on December 31, 2014.

In addition, an employer with a July 1, 2014 plan year may use a 10-month transition measurement period from June 15, 2014 through April 14, 2015, followed by an administrative period from April 15, 2015 through June 30, 2015.
Determination of Large Employer Status

Some employers will be close to 50 full-time (and full-time equivalent) employees. These employers may need extra time to determine if they are subject to the Pay or Play Rule. The IRS has provided a transition rule for these employers. The transition rule allows an employer the option to determine its "large employer" status with respect to a period of at least six consecutive calendar months in the 2014 calendar year (rather than the entire 2014 calendar year).

This transitional rule can be used for purposes of the new transitional rule for employers with 51-100 full-time (and full-time equivalent) employees described above.

This rule will be helpful for such employers who otherwise would have needed to verify their size as of December 31, 2014 (and then offered, or not offered, coverage as of January 1, 2015 -- an administratively difficult task).

However, whether an employer meets the requirements of the seasonal worker exception for purposes of determining large employer status for 2015 is based on the entire 2014 calendar year.

Employer U, which does not use seasonal workers, counts its full-time and full-time equivalent employees from January 1, 2014 through June 30, 2014. Employer U employs an average of 48 full-time and full-time equivalent employees during those six consecutive months. Employer U is not a large employer for 2015 and is not subject to the Pay or Play Rule for 2015.

Employer U must re-determine during 2015 whether it is a large employer for 2016, and will have to make that determination based on the entire 2015 calendar year.
"Dependents" who Must be Offered Coverage In order to avoid a Pay or Play Rule penalty, an employer must offer coverage to full-time employees and their "dependents." The Pay or Play final regulation requires that coverage be offered to an employee's children (but not the employee’s stepchildren or foster children) who have not yet attained age 26. However, "dependent" does not include a spouse or, presumably, a domestic partner. Under a special transitional rule, an employer does not need to offer dependent coverage in 2015, as long as it "takes steps" in 2014 or 2015 (or both) to provide such coverage.

This relief applies to employers for the 2015 plan year with respect to plans under which (1) dependent coverage is not offered, (2) dependent coverage that does not constitute minimum essential coverage is offered, or (3) dependent coverage is offered for some, but not all, dependents.

This relief is not available to the extent the employer offered dependent coverage during the 2013 or 2014 plan years. If coverage was offered to some, but not all, dependents during the 2013 or 2014 plan year, the relief applies only with respect to dependents who were not offered coverage at any time during the 2013 or 2014 plan year.
Employer T offers no coverage to employees’ dependents during the 2013 or 2014 plan years. However, during the 2014 and 2015 plan years, Employer T takes steps to extend coverage to employees’ dependents, such as working with its TPA or insurer to obtain cost estimates and to select plan designs for dependent coverage. Assuming these are sufficient steps, it appears Employer T is not required to offer dependent coverage during 2015 to comply with the Pay or Play Rule (though of course it must comply with other requirements of the Pay or Play Rule).