Final "Pay or Play" Regulations Provide Transition Relief for Non-Calendar Year Plans

19 February 2014 Publication
Authors: Leigh C. Riley Belinda S. Morgan Casey K. Fleming

Legal News Alert: Employee Benefits & Executive Compensation

Last week, the IRS issued final regulations that provide additional guidance on the new “pay or play” rules (also called the employer shared responsibility rules) that will generally apply to employers’ group health plans beginning in 2015 under the Patient Protection and Affordable Care Act of 2010 (i.e., the ACA or ObamaCare).

1. Two types of “pay or pay” penalties may apply to an “applicable large employer”

Under the ACA, an “applicable large employer” may be required to pay an employer shared responsibility penalty if it fails to offer “affordable,” “minimum value” health coverage (as such terms are defined in the regulations) to substantially all of its full time employees (and their dependents). An “applicable large employer” is generally defined as an employer that employs at least 50 full-time employees (including full-time employee equivalents) during the prior calendar year. However, a special transition rule applicable only in 2015 increases this limit to 100 employees for certain employers – see our Legal News Alert titled “IRS “Pay or Play” Final Regulations Delay Compliance Date for Certain Employers, Reduce Penalty Exposure for Others” for more information.

Beginning in 2015, two types of penalties may apply to an applicable large employer:

A. Penalty for Failing to Offer Coverage. A penalty of $166 per month for each full-time employee in excess of 30 (80 for the 2015 plan year only) employed by the employer will apply if the employer fails to offer group health plan coverage to at least 95 percent (70 percent for the 2015 plan year only) of its full-time employees, and at least one full-time employee purchases coverage through a Marketplace (i.e., an exchange) and also receives a premium tax credit for that Marketplace coverage; and

B. Penalty for Offering Non-Compliant Coverage. A penalty of $250 per month will apply for each full-time employee who is either not offered coverage under the employer’s group health plan for that month, or who is offered coverage that is either unaffordable or fails to provide minimum value, but only if that employee purchases coverage through the Marketplace and also receives a premium tax credit for that Marketplace coverage.

2. Transition guidance for employers sponsoring non-calendar year plans

Although the final pay or pay regulations are generally effective on January 1, 2015, they provide certain transition relief for employers that are otherwise subject to the ACA's requirements and that sponsor group health plans maintained on a non-calendar plan year basis (i.e., plans with plan years that begin on a date other than January 1). Such employers are eligible for transition relief with respect to certain employees if (i) the employer maintained the non-calendar year plan on December 27, 2012; and (ii) since December 27, 2012, the employer has not modified the non-calendar plan’s plan year to begin on a later date (for example, the employer has not pushed the beginning of plan year from March 1 to April 1).

Employers that meet those requirements will not be subject to employer shared responsibility penalties prior to the first day of the non-calendar plan year that begins in 2015 with respect to the following groups of full-time employees:

A. Employees (whenever hired) who (i) no later than the first day of the plan year beginning in 2015, are offered affordable, minimum value coverage in accordance with the eligibility terms of the plan that were in effect on February 9, 2014; and (ii) would not have been eligible for coverage under any calendar year plan maintained by the employer (or a member of the employer’s controlled group) as of February 9, 2014; and

B. All other employees who are offered coverage no later than the first day of the plan year beginning in 2015 regardless of whether the eligibility terms of the plan reflect the terms as in effect on February 9, 2014, as long as (i) a sufficient percentage of employees were either offered or provided coverage under the non-calendar year plan prior to February 9, 2014; (ii) the coverage offered as of the first day of the 2015 plan year is affordable and provides minimum value; and (iii) the employees would not have been eligible for coverage under any calendar year plan maintained by the employer (or a member of the employer’s controlled group) as of February 9, 2014.

An employer offers or provides coverage to a “sufficient percentage” of employees (as described in (B)(i), above) if:

  • As of any date during the 12 months ending on February 9, 2014, at least 25 percent of the employer’s total employees (or alternately, at least 1/3 of its full-time employees) are covered under the non-calendar year plan; or
  • At least 1/3 of its total employees (or alternately, at least 50 percent of its full-time employees) were offered coverage under the non-calendar plan during the most recent open enrollment period ending before February 9, 2014.

For purposes of determining whether the employer offered or provided coverage to a sufficient percentage of employees, coverage offered or provided under non-calendar year plans that, as of December 27, 2012, used the same plan year, can be aggregated.

Note that this transition relief does not relieve an applicable large employer sponsoring a non-calendar year plan of its obligation to offer coverage to 95 percent (or 70 percent for 2015 only) of its full-time employees (and their dependents) beginning with the first day of the 2015 plan year. If an applicable large employer fails to do so, it may be subject to the penalty for failing to offer coverage (described above), retroactive to January 1, 2015.

Important Takeaways

  • No transition relief is available to employers sponsoring non-calendar year plans that were first effective after December 27, 2012, or that were modified after that date to push back the first day of the plan year. Rather, such employers will be subject to the employer shared responsibility rules as of January 1, 2015.
  • If an applicable large employer does not satisfy each of the applicable tests described above, it must comply with the pay or pay regulations beginning January 1, 2015.
  • In order to take full advantage of the transition relief offered by the final pay or play regulations, the employer must comply with the ACA’s requirements as of the first day of its plan’s 2015 plan year (by, for example, extending coverage to a sufficient number of full time employees as of the first day of the 2015 plan year - generally, 70 percent in 2015 and 95 percent in later years).

Over the upcoming weeks, we will be publishing a series of newsletters which summarize the most significant compliance rules addressed by the final regulations (including the affordability and minimum value rules referenced above).

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss the topic further, please contact your Foley attorney or the following:

Katherine L. Aizawa
San Francisco, California

Casey K. Fleming
Milwaukee, Wisconsin

Belinda S. Morgan
Chicago, Illinois

Leigh C. Riley
Milwaukee, Wisconsin

Erik D. Vogt
Chicago, Illinois

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