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May 13‚ 2011
Treasury Department/IRS Request Comments on the
Employer Mandates under the Patient Protection and Affordable Care Act
By Alden J. Bianchi
The Patient Protection and Affordable Care Act as amended by
the Health Care and Education Reconciliation Act of 2010 (together, the
“Act”) overhauled much of the country’s health care financing system and
marked the beginning of a new era of comprehensive federal health care
regulation. Where employers and employer-sponsored group health plans are
concerned, compliance with the Act initially focused on reforms in the
insurance markets and “grandfathered” plans. Recently issued Notice 2011-36
moves beyond the Act’s insurance market reforms to focus on (and invite
comments in connection with) certain of the Act’s provisions that affect
employers directly. These provisions include:
·
Auto-enrollment. Rules requiring employers with more
than 200 full-time employees that offer group health plan coverage to
automatically enroll employees in their group health plans.
·
Employer shared responsibility. An “employer shared
responsibility” mandate that applies to “applicable large employers” (i.e.,
those with 50 or more full-time equivalent employees). These rules, which
are set out in new Internal Revenue Code § 4980H, require applicable
large employers to either offer coverage to their “full-time employees” or
be potentially liable for an “assessable payment” if at least one full-time
employee qualifies for subsidized coverage or a cost-sharing reduction (or
an advance payment of such credit or reduction) through a state health
insurance exchange.
·
90-day limit on waiting periods. A rule limiting
waiting periods for group health plans and health insurance issuers
offering group health insurance coverage under new § 2708 of the Public
Health Service Act to 90 days.1
Notice 2011-36 does not provide guidance; it instead
furnishes employers, their professional advisors, and other interested
parties with an important opportunity to have their ideas heard at the
early stages of the rulemaking process. This client advisory explains the
key features of Notice 2011-36 and how it may impact the auto-enrollment,
employer shared responsibility, and waiting period rules.
Background
Auto-enrollment
Under the Act’s automatic enrollment requirement, employers
with more than 200 full-time employees, that (1) are subject to the
Fair Labor Standards Act (this includes most businesses and enterprises
involved in interstate commerce and (2) offer group health coverage to
their employees, must automatically enroll employees into health insurance
plans offered by the employer following the expiration of any applicable
waiting period. Employees must be afforded the opportunity to decline
coverage or to elect a different coverage option. This provision has no
effective date, which would ordinarily mean that it is effective on
enactment. But the Department of Labor has said that it will not enforce
this requirement until after regulations are published.
Employer Shared
Responsibility
Code § 4980H provides that an “applicable large employer”
is liable for an assessable payment if any full-time employee is certified
as eligible to receive an applicable premium tax credit or cost-sharing
reduction and either of the following situations applies:
1.
No-coverage prong. The employer fails to offer to its
“full-time employees” (and their dependents) the opportunity to enroll in
“minimum essential coverage” under an “eligible employer-sponsored plan,”
or
2. Coverage
prong. The employer offers its full-time employees (and their
dependents) the opportunity to enroll in minimum essential coverage under
an eligible employer-sponsored plan that, with respect to a full-time
employee who qualifies for a premium tax credit or cost-sharing reduction,
either is (a) ”unaffordable” or (b) does not provide “minimum
value.”
Only employees with household incomes between 100% and 400%
of the federal poverty limit are eligible to apply for a premium tax credit
or cost-sharing reduction.
Under the “no-coverage” prong, if an employer fails to make
an offer of coverage to its full-time employees, an assessable payment is
imposed monthly in an amount equal to $166.67 multiplied by the number of
the employer’s full-time employees, excluding the first 30. Under the
“coverage” prong, if the employer makes an offer of coverage, the
assessable payment is equal to $250 per month multiplied by the number of
full-time employees who qualify for and receive a premium tax credit or
cost-sharing reduction from a state health insurance exchange. The amount of
the assessable payment under the coverage prong is capped at the amount
that would be charged under the no-coverage prong. As a result, an employer
that offers group health plan coverage can never be subject to a larger
assessable payment than that imposed on a similarly situated employer that
does not offer group health plan coverage.
The Act provides that a “full-time employee” with respect to
any month is an employee who is employed on average at least 30 hours of
service per week. An applicable large employer with respect to a calendar
year is defined as an employer who employed an average of at least 50
“full-time employees” on business days during the preceding calendar year
(special rules will need to be developed for new established entities). Thus,
whether an employer is an applicable large employer depends on the number
of full-time equivalent employees (FTEs), which includes full-time and
part-time employees. Assessable payments, on the other hand, are determined
on the basis of “full-time” employees.
The term “minimum essential coverage” is defined circularly
(and unhelpfully) to mean coverage under an “eligible employer-sponsored
plan.” An “eligible employer-sponsored plan” includes “group health plans
offered in the small or large group market within a state” but does not
include “excepted benefits” as defined and described under the Public
Health Service Act.2
Employer-provided health insurance coverage is deemed
“unaffordable” if the premium required to be paid by the employee exceeds
9.5% of the employee’s household income. To demonstrate that coverage is
unaffordable, the employee must obtain an affordability waiver from a state
health insurance exchange.
Coverage is deemed to provide “minimum value” if it pays for
at least 60% all plan benefits, without regard to co-pays, deductibles,
co-insurance and employee premium contributions.
Ninety-day
limit on waiting periods
Group health plans, including self-funded group health plans,
and health insurance issuers offering coverage in the group or individual
markets may not impose a waiting period that exceeds 90 days. The term
‘‘waiting period’’ for this purpose is defined in the Public Health Service
Act as ‘‘the period that must pass … before the individual is eligible
to be covered for benefits under the terms of the plan.’’
Notice 2011-36:
Proposed Approaches
Definitions of
“employer,” “employee,” and “hours of service”
The definitions of “employer,” “full-time employee,” and
“hours of service” are important in implementing the Act’s auto-enrollment,
employer shared responsibility, and waiting period requirements. Notice
2011-36 offers the following suggestions in this regard:
·
Employer. For purposes of Code § 4980H, as under
Code provisions generally, “employer” would mean the entity that is the
employer of an employee under the common-law test. All entities under
common control would be aggregated and treated as a single employer for
this purpose, which means that all employees of a single controlled group
or affiliated service group would be taken into account in determining the
employer’s status as an “applicable large employer.” The term “employee”
would mean a worker who is an employee of the employer, also applying the
common-law test. But “leased employees” (under the rules prescribed by Code
§ 414(n)(2)) would not be “employees” for this purpose, because the
Act makes no reference to leased employees.
·
Full-time employee. Code § 4980H treats, with
respect to a month, an employee who has an average of at least 30 hours of
service per week as a full-time employee. Notice 2011-36 proposed to treat
130 hours of service in a calendar month as the monthly equivalent of at
least 30 hours of service per week. This amount is set at 130 hours instead
of 120 hours because the average month consists of more than four weeks
(52x30/12=130).
·
Hours of service. The notice proposes to define “Hours
of service” with reference to existing Department of Labor guidance under
which an employee’s hours of service include (1) each hour for which
an employee is paid, or entitled to payment, for the performance of duties
for the employer; and (2) each hour for which an employee is paid, or
entitled to payment, by the employer on account of a period of time during
which no duties are performed due to vacation, holiday, illness, incapacity
(including disability), layoff, jury duty, military duty or leave of
absence. For employees paid on an hourly basis, the employer would be
required to calculate actual hours of service from records of hours worked
and hours for which payment is made or due. For employees not paid on an
hourly basis, Notice 2011-36 suggests that employers could apply
“days-worked” or “weeks-worked” equivalencies.
Applicable
Large Employers
Code § 4980H defines the term “applicable large
employer,” with respect to a calendar year, as an employer that employed an
average of at least 50 full-time employees on business days during the
preceding calendar year. The notice proposes to define “full-time” for this
purpose to mean the sum of the employer’s full-time employees and its
full-time equivalent employees. Full-time employee status is determined on
a monthly basis and it includes an employee (including a seasonal employee)
who is employed, on average, at least 30 hours of service per week (or at
least 130 hours of service in the calendar month). An employee who is not a
full-time employee under this standard (including a seasonal employee) for
a given month is taken into account in the full-time equivalent
calculation. Each “full-time equivalent employee” is treated as one
full-time employee for the year according to a series of steps suggested by
the notice. Once the calculation of full-time and full-time equivalents are
completed and summed, seasonal employees are subtracted. If the final total
is 50 or more, the employing entity is an “applicable large employer.” The
term “seasonal employees” is defined in the Act with reference to existing
Department of Labor rules3
as employees who perform labor or services on a seasonal basis, including
seasonal workers and retail workers employed exclusively during holiday
seasons. The Act provides that, if an employer’s workforce exceeds 50
full-time employees for 120 days or fewer during a calendar year, and the
employees in excess of 50 who were employed during that period of no more
than 120 days were seasonal employees, the employer would not be an
applicable large employer. The notice proposes that, for this purpose only,
four calendar months would be treated as the equivalent of 120 days.
Determining
employer shared responsibility liability
Assessable payments under Code § 4980H(a) (i.e., the
“no-coverage prong”) are determined by reference to the number of full-time
employees employed for a given month, while liability under Code
§ 4980H(b) (i.e., the “coverage prong”) is determined by reference to
the number of full-time employees with respect to whom an applicable
premium tax credit or cost-sharing reduction is allowed or paid for a given
month. The Treasury Department and IRS concede in the notice that:
[A] determination of full-time employee status on a
monthly basis for purposes of calculating an employer’s potential § 4980H
liability may cause practical difficulties for employers, employees, and
the State Exchanges. These difficulties include uncertainty and inability
to predictably identify which employees are considered full-time and,
consequently, inability to forecast or avoid potential § 4980H liability.
To address these concerns, the regulators propose an
alternative standard under which applicable large employers could use a
look-back/stability period safe harbor. Under this approach, an employer
would be permitted to determine each employee’s full-time status by looking
back at a defined period of not less than three but not more than twelve
consecutive calendar months (the measurement period), to establish whether
the employee averaged at least 30 hours of service per week (or at least
130 hours of service per calendar month) during the measurement period.
If the employee is determined to be a full-time employee
during the measurement period, then the employee would be treated as a
full-time employee during a subsequent “stability period,” regardless of the
number of the employee’s hours of service during the stability period, so
long as he or she remained an employee. For an employee who was determined
to be a full-time employee during the measurement period, the stability
period would be a period of at least six consecutive calendar months and no
shorter in duration than the measurement period. What is not clear is how
the look-back/stability period safe harbor rules would apply in the case of
employees hired during, or who move into full-time status during, the
measurement period. The notice says only that safe harbor will need to be
adapted and its application will be limited in some respects.
Treasury and IRS requested comments on other possible
alternative methods of determining full-time employee status for purposes
of calculating an applicable large employer’s potential assessable payment.
Comments are also invited on a series of specific questions relating to how
a look-back/stabilization period might work.
Request for
comments
The Notice concludes with a general request for comments
under Code § 4980H. Separately, comments are requested on the manner
in which the 90-day waiting period under the Public Health Service Act
might be implemented, and how this requirement might coordinate with the Act’s
employer mandates.
Conclusion
Notice 2011-36 is important in at least two respects: First,
it marks an important inflection point in the regulatory implementation of
the Act. The Act’s employer mandates are now front and center. Second,
while the rules implementing the Act’s insurance market reforms were, for
the most part, issued as interim final regulations that provided for little
or no input from the regulated community, the regulators are now soliciting
input at the front end of the rulemaking process. This should not be seen
as a change of heart on the part of the regulators. The insurance market
reforms began to take effect a mere six months after the Act’s passage,
leaving little time to issue guidance. The employer mandates generally have
a much longer lead time, giving the regulators the luxury of time to
solicit comments. One hopes that interested parties will engage in the
process and provide the regulators with their views. The result might well
be a set of workable rules that cause only as much disruption as is
necessary to implement the Act.
* * *
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1 This requirement is not
technically an employer mandate. It is rather one of the Act’s insurance
market reforms that take effect in 2014. It is included in
the notice because of its close relationship to the auto-enrollment and
employer shared responsibility rules.
2 “Excepted benefits” include
(i) coverage only for accident, or disability income insurance, or any
combination thereof, (ii) coverage issued as a supplement to liability
insurance, (iii) liability insurance, including general liability insurance
and automobile liability insurance, (iv) workers’ compensation or similar
insurance, (v) automobile medical payment insurance, (vi) credit-only
insurance, (vii) coverage for on-site medical clinics, (viii) other similar
insurance coverage, specified in regulations, under which benefits for
medical care are secondary or incidental to other insurance benefits, and
(ix) any of the following if provided under a separate policy, certificate,
or contract of insurance: limited scope dental or vision benefits; benefits
for long-term care, nursing home care, home health care, community-based
care, or any combination thereof; other limited benefits similar to those
above, to the extent specified in regulations; coverage only for a
specified disease or illness; hospital indemnity or other fixed indemnity
insurance; or Medicare supplemental health insurance, coverage supplemental
to TRICARE, or similar coverage supplemental to coverage under a group
health plan.
3 29 C.F.R.
§ 500.20(s)(1).
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