The IRS has released
proposed regulations that provide additional guidance to help
employers determine whether they are subject to the employer shared
responsibility provisions (i.e., the pay-or-play mandate)
under the Patient Protection and Affordable Care Act
("PPACA") and, if so, how to comply. Beginning in 2014,
PPACA's employer shared responsibility provisions require employers
with 50 or more full-time equivalent employees ("FTEs") to
provide affordable health care coverage that offers a minimum level
of coverage or to pay a penalty. This Alert focuses on the
sections within the proposed regulations that determine which
employers are subject to the mandate and when compliance must begin.
Employers Subject to
Mandate. The regulations provide
that employers will determine whether they meet the 50 FTE threshold
and are subject to the mandate by averaging the number of FTEs for
the calendar months of the previous calendar year.
An employer will determine
its monthly FTEs count by adding: (i) each employee who works more
than 30 hours per week (i.e., full-time), and (ii) the total
number of hours worked during a month by employees who are not
full-time, divided by 120. Monthly FTE counts are then totaled and
divided by 12. If the resulting number is 50 or more, the employer is
subject to the mandate.
The regulations clarify
means common law employee, a concept which is based on direction
- Partners in
a partnership (or members in an LLC taxed as a partnership),
sole proprietors, and 2% or more S-corporation shareholders are
- The IRS's
leased employee rules, which for certain purposes require leased
employees to be treated as employees of the service recipient,
do not apply.
employers, regardless of whether the entity is a for-profit,
non-profit or governmental (i.e., federal, state, local
or Indian tribal) employer must comply with the mandate.
- No special
rules apply to high turnover positions.
anti-abuse rules apply to temporary staffing agencies to prevent
employers from using them to avoid being subject to the
Seasonal Workers. The regulations provide a special rule
applicable to seasonal workers that allows employers to avoid being
subject to the mandate if they exceed 50 FTEs for 120 or fewer days
during the prior calendar year solely because of seasonal workers. A
"seasonal worker" is defined as: (i) a worker who performs
labor or service on a seasonal basis; (ii) retail workers employed exclusively
during the holiday season; and (iii) any other reasonable, good faith
interpretation adopted by the employer.
Controlled Groups. All employees of all members of a controlled
group (or affiliated service group) must be counted when determining
whether an employer meets the 50 employee threshold. However,
penalties imposed under the mandate will be assessed on an individual
member basis. For example, a member of a controlled group of
corporations that provides health coverage to its full-time employees
and dependents will not be subject to the penalty because another
member of the controlled group does not provide coverage. If a member
of a controlled group is assessed a penalty under the mandate, the
calculation of the penalty will be based on the number of FTEs
employed by that member and not on the total number of FTEs within
the controlled group.
Employees Working Outside
U.S. In general, only work
performed in the U.S. will be counted by employers when determining
hours of service for purposes of counting FTEs. Thus, if a foreign
employer has a large workforce worldwide but less than 50 FTEs in the
U.S., that employer would not be subject to the mandate. Employers
can also exclude workers exclusively employed outside the U.S.,
regardless of whether the workers are U.S. citizens.
Mergers and Acquisitions. Employers must count employees of predecessor
employers when determining whether they are subject to the mandate.
Successor employers may also be liable for any mandate penalties owed
by the predecessor employers.
Effective Date and
Transition Relief. Under PPACA,
the mandate was originally slated to take effect on January 1, 2014,
regardless of whether an employer's plan year or insurance policy was
based on a fiscal year. Many employers that provide group health plan
coverage through a fiscal year plan expressed concerns that, if later
regulations are issued that cause their coverage to fail to satisfy
the minimum requirements under the mandate, they would be unable to
renegotiate their insurance contracts and, therefore, be forced to
pay the penalty.
The regulations provide
transition relief for employers that offered group health plan
coverage on December 27, 2012, through a plan that operates on a
fiscal year basis. These employers will not be subject to the mandate
until the first fiscal year beginning in 2014 if either: (i)
employees were eligible to participate in the plan under its terms as
of December 27, 2012, regardless of whether or not the employee takes
the coverage; (ii) at least one-third of full- and part-time
employees were offered coverage under the plan at the most recent
open enrollment; or (iii) at least one-quarter of employees were
covered under the plan on any day between October 31, 2012 and
December 27, 2012.
While the release of the
proposed regulations provides employers with some clarity on PPACA's
employer shared responsibility mandate, the formidable challenge of
preparing for full implementation of PPACA remains. Employers face
many new administrative burdens and must make many key strategic
decisions in the coming months. Employers are advised to retain
qualified employee benefits assistance to ensure that their new
compliance obligations under PPACA are satisfied.