Tax Alert: Final ACA Play or Pay Regulations Defer Penalty Risk

Final ACA “play or pay” regulations defer penalty risk for midsize employers, offer other
2015 relief

The IRS has released its long-awaited final regulations implementing the Affordable Care Act’s (ACA’s) employer shared-responsibility — also known as “play or pay” — provision that applies to “large” employers, including for-profit, nonprofit and government entities. The final regs push out one year, from 2015 to 2016, the risk of play-or-pay penalties for eligible midsize employers that otherwise would be considered large employers under the ACA. They also provide other significant relief for 2015 and clarify certain aspects of the play-or-pay provision.

Play-or-pay in a nutshell

The play-or-pay provision imposes a penalty on large employers that don’t offer “minimum essential” health care coverage — or that offer coverage that isn’t “affordable” or doesn’t provide at least “minimum value” — to their full-time employees (and their dependents) if just one full-time employee enrolls in a qualified health plan through a government-run health insurance exchange and receives a premium tax credit. Under the ACA, a large employer is one with at least 50 full-time employees or a combination of full-time and part-time employees that’s equivalent to at least 50 full-time employees. This involves totaling part-time employees’ monthly hours and dividing that figure by 120 to calculate full-time equivalent employees (FTEs). That figure is then added to the total number of actual full-time employees. A full-time employee generally is someone employed on average at least 30 hours a week, or 130 hours in a calendar month.

Relief for midsize employers

Under the final regs, eligible midsize employers will not be subject to the play-or-pay provision until 2016.

To qualify for the midsize-employer penalty relief, an employer must:

  • Employ on average fewer than 100 full-time employees or the equivalent during 2014,
  • Maintain its workforce size and aggregate hours of service (meaning the employer may not reduce its workforce or overall hours of employee service to qualify),
  • Maintain the health care coverage it offered as of Feb. 9, 2014, and
  • Certify that it meets these requirements.

Be aware that these employers will still be subject to the ACA’s large-employer information-reporting requirements in 2015.

Relief for larger employers

Under the ACA, large employers that don’t offer at least 95% of their full-time employees minimum essential health coverage will be assessed a penalty if one of their full-time employees receives a premium tax credit when buying health care insurance from an insurance exchange. The annual penalty is $2,000 per full-time employee in excess of 30 full-timers.

The final regs provide that large employers that don’t qualify for the midsize-employer penalty relief in 2015 can avoid the penalty for not offering minimum essential coverage by offering such coverage to at least 70% of their full-time employees. The 95% requirement will apply in 2016 and beyond.

Other transitional relief

The final regs extend and expand transitional relief in other ways as well, such as the following:

  • In preparing for 2015, employers can determine whether they had at least 100 full-time employees or the equivalent in 2014 by reference to a period of at least six consecutive months (instead of a full year).
  • Employers with plan years that don’t start on Jan. 1 can begin compliance with the play-or-pay provision at the start of their plan years in 2015.
  • The requirement to offer coverage to full-time employees’ dependents will not apply in 2015 if an employer is taking steps to arrange for such coverage in 2016.

The IRS indicated it will consider whether it’s necessary to extend any of this transitional relief beyond 2015.

Affordability safe harbors

Generally, if an employee’s share of the premium would cost that employee more than 9.5% of his or her annual household income, the coverage isn’t considered affordable. Because an employer generally won’t know an employee’s household income, the proposed regulations provided safe harbors under which an employer can determine affordability. The final regs maintain the proposed safe harbors with some minor changes.

Under these safe harbors, affordability can be determined based on:

  • The employee’s Form W-2 wages,
  • His or her rate of pay (unlike under the proposed regs, the rate-of-pay safe harbor is available even if the employee’s rate of pay fell during the year), or
  • The federal poverty line.

If the employer meets the requirements of a safe harbor, the offer of coverage will be deemed affordable.

Clarifications on who’s a full-time employee

The final regs allow employers to use an optional look-back measurement method to determine whether employees with varying hours and seasonal employees are full time for purposes of determining large employer status. They also clarify the application of the look-back and alternative monthly methods of determining full-time status.

Additionally, the final regs clarify whether certain types of workers will be considered full time. For example, bona fide volunteer hours worked for government or tax-exempt entities won’t cause the volunteer to be considered a full-time employee.

More regs to come

The IRS is expected to soon issue final regulations that will substantially streamline information-reporting requirements related to the play-or-pay provision. We’ll keep you apprised of the relevant changes. In the meantime, if you have questions on how these or other ACA provisions may affect your company, please give us a call.

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