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February 14‚ 2012
HHS, DOL, and IRS Issue FAQs Addressing Automatic
Enrollment, Employer Shared Responsibility, and Waiting Periods under the
Affordable Care Act
By Alden J. Bianchi
A handful of important Affordable Care Act1 provisions affecting
employers and employer-sponsored group health plans take effect in or after
2014. Some provisions, such as the employer shared responsibility rules
under Internal Revenue Code § 4980H, and standards that apply to
waiting periods under Public Health Service Act § 2708, do so by the
Act’s terms, while others, such as amendments to the Fair Labor Standards
Act (that technically took effect on enactment), do so as a
matter of regulatory grace. Either way, the Affordable Care Act will
require major changes to the design, maintenance, and operation of
employer-sponsored (and other) group health plans. A recently issued set of
frequently asked
questions (FAQs)2
from the Departments of Health and Human Services, Labor, and Treasury/IRS
(collectively, the “Departments”) provide interim relief in certain
instances, and signal the Departments’ thinking as to others. This client
advisory explains and summarizes the FAQs.
Automatic Enrollment
The Act adds new Fair Labor Standards Act (FLSA) § 18A
requiring employers subject to the FLSA that have more than 200 full-time
employees to automatically enroll new full-time employees in one of the
employer’s health benefits plans (subject to any waiting period authorized
by law), and to continue the enrollment of current employees in a health
benefits plan offered through the employer. Employers subject to the Act’s
automatic enrollment requirement must provide adequate notice and the
opportunity for an employee to opt out of any coverage in which the
employee was automatically enrolled. The Act specifies no special or
deferred effective date for the automatic enrollment rules, which means
that the rule is technically effective on enactment (i.e., March 23, 2010).
But in a set of frequently asked questions issued December 22, 2010, the Labor
Department deferred enforcement until the issuance of regulations.
According to the FAQs, “the Department of Labor has concluded
that its automatic enrollment guidance will not be ready to take effect by
2014.” Therefore, employers are not required to comply with FLSA section
18A until after 2014.3
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:
·
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
·
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,
is unaffordable or fails to provide minimum value.
The term “full-time employee” is defined to mean an employee
who is employed on average at least 30 hours per week. Liability under Code
§ 4980H is determined month by month.
In IRS Notice 2011-36,4
the Service proposed a “look-back/stability period safe harbor” for
determining whether current employees (i.e., those who are not newly hired
or transferred) are full-time employees for purposes of the employer shared
responsibility provisions. Under the look-back/stability period 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 he or she 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. The stability period would be a
period of at least six consecutive calendar months and no shorter in
duration than the measurement period.
Current employees
The FAQs endorse and expand on the notice 2011-36
look-back/stability period safe harbor. For purposes of determining whether
an employee (other than a newly hired employee) is a full-time employee, it
is anticipated that the guidance will allow look-back and stability periods
not exceeding 12 months.5
Newly hired employees
For purposes of determining whether a newly hired employee is
a full-time employee, the FAQs propose the following: 6
·
If a newly hired employee is reasonably expected to work
full-time on an annual basis and does work full-time during the first three
months of employment, the employee must be offered coverage under the
employer’s group health plan as of the end of the initial three-month
period.
·
If, based on the facts and circumstances as of the time of
hire, it cannot reasonably be determined that a newly-hired employee is
expected to work full-time:
o If
the employee works full-time during the first three months of employment, and
the employee’s hours during that period are reasonably viewed, as of the
end of that period, as representative of the average hours the employee is
expected to work on an annual basis, the employee will first be considered
a full-time employee as of the end of the initial three-month period.
o If
the employee works full-time during the first three months of employment,
but the employee’s hours during that period are reasonably viewed, as of
the end of that period, as not representative of the average hours the
employee is expected to work on an annual basis, the plan is permitted an
additional three-month period to determine the employee’s status, during
which time no assessable payment would be required.
The FAQ notes that forthcoming guidance is expected to
coordinate the rules for newly hired employees with those applicable to
other employees (including employees who are transferred from one
employment classification or status to another).
90-Day Limitation on Waiting Periods
For plan years beginning on or after January 1, 2014, the Act
bars a group health plan or group health insurance issuer from applying any
waiting period that exceeds 90 days. A “waiting period” is defined as “the
period that must pass with respect to the individual before the individual
is eligible to be covered for benefits under the terms of the plan.” In
contrast to the employer responsibility rule under Code § 4980H, the
rules governing waiting periods do not distinguish between full-time and
part-time employees. The FAQs state flatly that the Departments do not
intent to “require the employer to offer coverage to any particular
employee or class of employees, including part-time employees,” noting that
the applicable rule merely “prohibits requiring an otherwise eligible
employee to wait more than 90 days before coverage is effective.” Moreover,
according to the FAQs, the Act does not penalize small employers for
choosing not to offer coverage to any employee, or large employers for
choosing to limit their offer of coverage to full-time employees. The FAQs
also clarify the Departments’ intention that, at least for the first three
months following an employee’s date of hire, an employer that sponsors a
group health plan will not, by reason of failing to offer coverage to the
employee under its plan during that three-month period, be subject to the
employer responsibility payment under Code § 4980H.7
Conclusion and Next Steps
The frank recognition by the Department of Labor that the
automatic enrollment rules will not be ready by 2014 is welcome news to
employers, if for no reason other than it means one less thing to worry
about at a time when compliance with other of the Act’s important and
substantive requirements is mandated.
The FAQs’ anticipation of a rule under which the 90-day
waiting period commences with the date of first eligibly is similarly
welcome, as is its explicit recognition that small employers need not offer
coverage to any employee and that a large employer can limit coverage to
full-time employees. While employers and their advisors generally
anticipated each of these positions, the FAQs provide confirmation and
furnish a measure of certainty.
In contrast to the FAQs’ proposals on automatic enrollment
and the 90-day waiting period, the discussion of what constitutes a
“full-time” employee for purposes of Code § 4980H is both substantive
and novel. For employers with large, stable workforces and few part-time,
seasonal, or temporary workers, determining who is a full-time employee will
present little challenge. Industries and sectors such as banking, finance,
and technology, for example, are not likely to be very concerned with the
manner in which the Departments choose to define “full-time.” But
industries with large cohorts of contingent workers — e.g., staffing,
retail, construction, and hospitality (among others) — will be very
interested in what the Departments decide.
Lastly, the FAQs fail to address at least one very import set
of rules, relating to non-discrimination standards for fully-insured group
health plans, that could have a major impact on plan design and coverage.
It will do little good for an employer to successfully navigate the
assessable penalty and waiting period rules only to find that it has failed
the applicable non-discrimination standards.
* * *
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1 Patient Protection and Affordable
Care Act, Pub. L. No. 111-148 (2010), as amended by the Health Care and
Education Reconciliation Act of 2010 (Pub. L. 111-152 (2010)), the Medicare
and Medicaid Extenders Act of 2010 (Pub. L. 111-309 (2011)), and the
Department of Defense and Full-Year Continuing Appropriations Act of 2011
(Pub. L. 112-10 (2011)).
2 Substantially identical versions
of the FAQs were issued by the Treasury Department and the IRS (Notice
2012-17); by the Labor Department (Technical Release No. 2012-01); and by
the Department of Health and HumanServices.
3 Q&A 1.
4 2011-21 I.R.B. 792 (available at: www.irs.gov/pub/irs-drop/n-11-36.pdf).
5 Q&A 4.
6 Q&A 5.
7 Q&A 3.
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