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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.