IRS "Pay or Play" Final Regulations Delay Compliance Date for Certain Employers, Reduce Penalty Exposure for Others

19 February 2014 Publication
Author(s): Leigh C. Riley Casey D. Knapp Belinda S. Morgan

Legal News Alert: Employee Benefits & Executive Compensation

Earlier this 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).

As a reminder, effective in 2015, the ACA provides that an employer who employs at least 50 full-time employees (including full-time employee equivalents (FTEs)) may be required to pay an employer shared responsibility penalty unless it offers affordable, minimum value health coverage (as defined in the regulations) to substantially all of its full time employees (and their dependents). Although these rules were originally intended to be effective in 2014, the Internal Revenue Service previously delayed the compliance deadline until 2015.

The final regulations include transition relief that further delays the effective date for complying with the shared responsibility requirements for employers with at least 50, but fewer than 100 full-time employees, and for employers that will be subject to the rules in 2015, temporarily relaxes the requirement to offer coverage to substantially all full-time employees. This newsletter summarizes these two transition rules.

1. Employers with at least 50, but fewer than 100 full-time employees are generally not subject to the “pay or play” rules until the 2016 plan year

Provided they meet the conditions described below, employers that employ at least 50, but fewer than 100 full-time employees (including FTEs) on business days during 2014 will not need to comply with the employer shared responsibility rules until the 2016 plan year.

  • Staffing Reductions. During the period beginning on February 9, 2014 and ending on December 31, 2014, the employer cannot reduce its number of employees (or the number of hours worked by employees). This rule does not prohibit reductions in hours or employees for bona fide business reasons.
  • Coverage Reductions. During the period beginning on February 9, 2014 and ending on the last day of the 2015 plan year, the employer cannot eliminate or materially reduce the health coverage, if any, it offered to its employees as of February 9, 2014. The employer will not be treated as eliminating or materially reducing its health plan's coverage as long as:
    • It continues to make an employer contribution toward the cost of employee-only coverage that is either (A) at least 95 percent of the dollar amount the employer was contributing on February 9, 2014; or (B) the same (or a higher) percentage of the total cost of coverage that the employer was contributing as of February 9, 2014;
    • If the benefits provided under the employee-only coverage option are modified, the coverage provides “minimum value” after the change; and
    • The plan is not amended to exclude or narrow any class of employees (or their dependents) to whom coverage was offered on February 9, 2014.

Note that employers with non-calendar year plans may be eligible for relief for 2015, even if this requirement is not met during the portion of the 2015 plan year that falls in 2016.

  • Certification. The employer must certify, in writing, that it satisfies the requirements described above, and submit that certification to the IRS. The IRS has indicated that employers will provide this certification with the annual return they file to report any employer-sponsored health coverage.

We will be addressing how to determine the number of full-time employees and FTEs in an upcoming newsletter.

2. The penalty for failure to offer coverage will generally not apply if an employer offers coverage to at least 70 percent (rather than 95 percent) of its full-time employees during the 2015 plan year

The pay or play rules generally provide that an employer will be subject to penalties if, in a given month, it offers coverage to less than 95 percent of its full-time employees (and their dependents) and at least one full-time employee receives a premium tax credit for coverage through a Marketplace (i.e., an exchange). For the 2015 plan year, however, an employer will not be subject to this penalty if it extends coverage to at least 70 percent (rather than 95 percent) of its full-time employees (and their dependents).

Note that the transition relief offered by the final regulations is limited to penalties associated with an employer’s failure to offer coverage to substantially all of its full-time employees. The employer may still be subject to penalties for each full-time employee who (1) is not offered coverage (or the coverage offered is unaffordable or does not provide “minimum value”), and (2) obtains coverage through a Marketplace and receives a premium tax credit with respect to that coverage.

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 penalty provisions 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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