Benefits and Compensation

New IRS Rule Consolidates and Clarifies Guidance on Employer Play-or-pay Mandate

Employers trying to comply with health reform’s play-or-play mandate — and calculate their exposure to penalties — now have more insight based upon a new notice of proposed rulemaking and a new set of questions and answers from the IRS.

Under reform, employers have to calculate full-time equivalent employees for one or more of the following reasons: (1) to see whether they meet the large-employer definition (50 or more FTEs), which subjects them to reform’s “shared responsibility” (pay-or-play) requirements; and (2) to calculate their liability if they fail no-coverage, unaffordable-coverage or inadequate-coverage tests. 

Employers must pay penalties under health reform if they fail to offer coverage to 95 percent of workers; or offer coverage that (1) is unaffordable; or (2) fails to meet minimum value standards, the proposed rule states.

The proposed rule is built on, and invokes Notices 2011-36, 2011-73, 2012-17, 2012-58, and 2012-59. These notices describe how employers will: (1) determine whether a worker is full-time or does not have enough hours to be entitled to coverage; (2) count new hires when it is not clear whether they will work full-time or part-time; and (3) set a stable period during which the worker is assumed to be full-time and require health coverage (or part-time and not need coverage). All the guidance describes how employers can determine whether they offer unaffordable or insufficient coverage, and thus are subject to penalties.

The IRS Q&A answers several practical questions that are central to employers trying to maximize compliance and minimize exposure to penalties, by tailoring the scope of plan coverage and complying with the law.

The relevant employer shared-responsibility provisions are in Section 4980H of the Internal Revenue Code.

Counting Full-timers

The IRS’ definition of FTE appears designed to prevent companies from avoiding their responsibility through restructuring workforces into part-timers.

Employers are subject to the coverage mandate when they employ at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. (For example, the IRS says, 40 full-time employees employed 30 or more hours per week on average plus 20 half-time employees employed 15 hours per week on average are equivalent to 50 full-time employees).

The agency also heads off attempts by owners to split companies in subdivisions that would enable several subsidiaries with fewer than 50 FTEs to skirt the coverage requirement.

Employers are not allowed to exclude paid leave from calculations to arrive at the average number of hours worked per week. For employees paid on an hourly basis, employer calculations of hours of service must include vacation, holiday, illness, incapacity and jury duty, the proposed rule states.

Representatives from business requested special methods (rather than a mere hour count) to calculate full-time status for workers in their fields, including adjunct professors and airline pilots. The government said it would consider adding safe harbors for jobs in such fields, the proposed rule states.

The rule also addresses a wide range of other issues, including:

  • whether a large foreign corporation with a small U.S. presence (under 50 employees) would be subject to section 4980H;
  • how to apply the seasonal worker exception for purposes in determining whether an employer is an applicable large employer;
  • special issues related to reform’s look-back measurement method presented by educational institutions, under which work schedules are based on an academic year;
  • the rules’ applicability to various categories of employees, including new, ongoing and commission-based employees; and
  • a clarification that minimum essential coverage must be offered to employees’ dependents.

Safe Harbors

The rule also establishes several safe harbors in determining affordability of coverage. For example, a W-2 safe harbor would allow that employers to assess unaffordability for each employee with reference to the employee’s W-2 wages only. The employer would not need to collect data on household income.

The rules also provide for transition relief for certain types of plans: (1) large employer-sponsored plans based upon a calendar (fiscal) year; and (2) cafeteria plans for cafeteria plan years beginning in 2013.

Comments on the proposed rule will remain open until March 18, 2013, and a public hearing will be held on the proposal on April 23, 2013. Employers can rely on the proposed regulations for guidance pending the issuance of final regulations or other guidance. Final regulations will be effective as of a date not earlier than the date they are published in the Federal Register.

Thompson Information Services will be provided a detailed overview of the proposed rule.