Final Regulations Implementing the Massachusetts Fair Share
Premium Contribution Issued

The recently enacted Massachusetts health care reform act—H.4850, An Act Providing Access to Affordable, Quality, Accountable Health Care (the “Act”)—imposes new health insurance mandates on both individuals and employers. The employer mandates include a “fair share” premium contribution requirement under which an employer with 11 or more full-time equivalent employees in the Commonwealth must either (i) make a “Fair and Reasonable Premium Contribution” to the health insurance costs of its employees, or (ii) pay to the Commonwealth an annual per employee “fair share” employer contribution of up to $295. A final regulation (the “final regulation”) issued September 8, 20061 provides guidance on what constitutes a “Fair and Reasonable Premium Contribution” on the part of an employer. The fair share requirement takes effect October 1, 2006.

The Fair Share Premium Contribution

In assessing whether an employer makes a Fair and Reasonable Premium Contribution, the final regulation establishes two tests—a primary test and a secondary test. If an employer passes either test for a year, then it has no obligations to make any fair share contributions to the Commonwealth. But if an employer is unable to pass either test, it must make a per employee fair share contribution not to exceed $295.00, pro-rated for full-time equivalency.

For purposes of testing compliance with the fair share contribution rules, the final regulation defines the term “Employer” to mean an “Employing Unit.” An “Employing Unit” for this purpose is defined broadly to mean and include individuals, partnerships, firms, associations, trusts, trustees, estates, joint stock companies, insurance companies, domestic or foreign corporations, among others, which have or had “one or more individuals performing services for him or it within the Commonwealth of Massachusetts.” Nothing in this definition requires that corporations and other entities be combined for testing purposes in a manner similar to that prescribed by the “controlled group” rules of Internal Revenue Code §§ 414(b), (c) and (m). An employer could, as a consequence, break itself up into multiple entities for purposes of limiting its exposure under this rule. (According to their informal remarks at industry conferences and other forums, the regulators have made it clear that they are aware of this issue, and they will be on the lookout for abuses.)

The Primary Test

Under the primary test, an Employer is deemed to make a Fair and Reasonable Premium Contribution if 25% or more of the employer’s “Full-time” Massachusetts employees are enrolled in the employer’s group health plan. (These employees are referred to as “Enrolled Employees.”) This test measures the “take-up” rate, i.e., the rate at which employees have agreed to accept the coverage and terms that the employer is offering. For purposes of this rule, a “group health plan” is defined as a plan that provides medical care, whether insured or self-funded, that is “sponsored and paid for, in whole or in part, by an employer…” (emphasis added). Thus, the primary test does not require the employer to make any particular level of contribution, so long as the employer contributes something to the plan, nor does it require any particular level or type of coverage.

For purposes of applying the primary test, the term Full-time employee is defined to mean those employees who work at least 35 hours per week. Part-time employees are excluded. There is no adjustment to take account of other coverage that a full-time employee might have, such as through a spouse. An employer may, however, exclude a full-time employee if the employee claims exemption from the individual mandate because of sincerely held religious beliefs and has filed the necessary affidavit. To take advantage of this exclusion, the employer must maintain documentation to verify that the employee has claimed such an exemption. Also excluded from the definition of Full-time employees are independent contractors, and seasonal and temporary employees, which have the following meanings:

Independent Contractors. Independent contractors are defined with reference to M.G.L. c. 151A, § 2. Under this provision, a worker is classified as an “independent contractor,” only if he or she (i) is free from control and direction in the execution of his or her job, (ii) performs a service outside the usual course of business of the employer, and (iii) routinely works in an independently established trade, occupation, profession or business.

Seasonal Employees. The term “seasonal employee” is defined in M.G.L. c. 151A, s. 1(bb) to mean employment that is seasonal in nature and lasts up to four months.

Temporary Employees. Temporary employees are employees whose employment, whether part-time or full-time, is explicitly temporary in nature and does not exceed 12 consecutive weeks during the period from October 1 through September 30.

To demonstrate compliance with the primary test, the percentage of Enrolled Employees is calculated by dividing (i) the total payroll hours of full-time Enrolled Employees by (ii) the total payroll hours of all full-time employees. Calculations under the primary test are based on the period from October 1 to September 30 each year. For this purpose, the total payroll hours of Enrolled Employees means the total payroll hours for which both wages were paid and the employee was enrolled in the health plan. If an employee works both part time and full time during the year, only the payroll hours of the period in which the employee worked full time are counted.

EXAMPLE: Employer A’s headcount from October 1 to September 30 in a year is (i) 50 employees who work 40 hours each week for the entire period, (ii) 20 employees who work 30 hours per week for the entire period, and (iii) 20 employees who work 40 hours per week for 26 weeks during the period and 30 hours per week remaining 26 weeks. Employer A’s total payroll hours of full-time employees is the sum of (i) 50 x 40 104,000, plus (ii) 20,800 or 124,800. For Employer A to satisfy the primary test, the total payroll hours of Enrolled Employees must be at least 31,200 (or 25% times 124,800).

Because the primary test does not establish a minimum level or type of medical coverage, plans that place limits on coverage, either as to the types of procedures covered or the amounts paid, can nevertheless qualify as group heath plans. For example, a mini-program with a minimal employer contribution would qualify as a group health plan for purposes of this rule. Such a plan may be insufficient to attract 25% of full-time employees, however, particularly since it is unlikely to provide “creditable coverage” for purposes of satisfying the Act’s individual mandate. This means that employees will still need to obtain other coverage that satisfies the individual mandate or pay the tax penalties for failing to obtain coverage. As a result, employers that want to take advantage of the primary test will likely need to offer coverage that qualifies as creditable coverage for purposes of the individual mandate.

The Secondary Test

If an employer cannot pass the primary test, it can still be deemed to make a Fair and Reasonable Premium Contribution if it can pass the “secondary test,” which requires that the employer offers to pay “at least 33% of the premium cost of any Group Health Plan offered by the Employer to its Full Time Employees that were employed at least 90 days during the period from October 1 [through] September 30, 2007.” Unlike the primary test, the secondary test is not based on “take-up” but is instead based on the amount that the employer contributes to the plan. As is the case with the primary test, there is no requirement that the underlying group health plan provide creditable coverage. But if coverage is not creditable, employees will need to obtain coverage elsewhere in order to comply with the individual mandate. Since this test is based entirely on the quality of the offering, whether an employee has other coverage is irrelevant.

Because the definition of Full-Time employee is set out under the primary test, it is not clear from the final regulation whether the definition on Full-Time employee carries over into the secondary test. Representatives of the Commonwealth’s Executive Office of Health and Human Services, in their informal remarks on the subject, have expressed the view that the definition is intended to be the same for both purposes. Also not clear is whether the exceptions for seasonal and temporary employees apply. So, for example, can the employer exclude from this test employees who have not worked 90 days in the year and employees who do not perform services for 12-consecutive weeks? Lastly, the 90-day requirement appears to refer to business days.

Special Rules for Leasing Companies

The final regulation also contains a series of special rules dealing with Employee Leasing Companies. Where an employer retains workers though an Employee Leasing Company, it is the leasing company that must calculate and remit the Fair Share Contribution on behalf of the client company. Presumably, this obligation can be shifted by agreement, but responsibility will remain with the leasing company. The final regulation defines the term “Employee Leasing Company” to mean an entity (i.e., sole proprietorship, partnership, corporation or other form of business) whose business consists largely of leasing employees to one or more client companies under long-term contractual arrangements that retain to the employee leasing company “a substantial portion of personnel management functions, such as payroll, direction and control of workers, and the right to hire and fire workers provided by the employee leasing company . . ..” 2

This special leasing company rule imposes the principle compliance obligation on the leasing company, but it says nothing about how workers are counted for purposes of the primary and secondary tests. Also unclear is whether this result would change depending on whether leasing company is a staffing company (whose employees are more likely to be employees of the employee leasing company) or a Professional Employer Organization (whose employees, despite claims of “co-employment” for many purposes, are almost certainly the employees of the client company for tax and benefits purposes).

As a practical matter, employers must generally wait until the end of the year, i.e., September 30, in order to perform these tests. But they need to begin immediately to collect the date necessary to demonstrate compliance. Although the first compliance deadline is not until September 30, 2007, employers will need data beginning with October 1, 2006 in order to demonstrate compliance (or calculate the amount of the fair share contribution owed to the Commonwealth).

¹ 114.5 CMR 16.00 Determination of Employer Fair Share Contribution (September 8, 2006).

² 114.5 CMR § 16.02.

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discussed in this advisory or any other employee benefits
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