On February 10, 2014, the IRS released final regulations implementing the employer penalty under the Affordable Care Act (“ACA”). The final regulations are complex and address numerous aspects of the employer penalty. We previously released an article dealing with the transition rules under the final regulations and we will be issuing an article in the near future regarding seasonal and variable hour employees. Below, you will find information on the following from the final regulations:
• Changes regarding how to determine full-time employee status;
• Clarifications regarding how to determine affordability; and
• Further explanation of what constitutes an “offer of coverage.”
Full-Time Employee Status
Under the ACA and the proposed regulations, a full-time employee (“FTE”) is, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer. 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week. These methods are referred to as the “monthly measurement method.” Look back measurement methods are also available and are not discussed herein.
New Weekly Rule
Under the monthly measurement method, employers have the option of determining FTE status by using a weekly rule. Under the weekly rule, FTE status for certain calendar months is based on hours of service over 4 weekly periods and for certain other calendar months is based on hours of service over 5 weekly periods as follows:
• with respect to a month with 4 weekly periods, an employee with at least 120 hours of service is an FTE; and
• with respect to a month with 5 weekly periods, an employee with at least 150 hours of services is an FTE. For purposes of this rule, the 7 continuous calendar days that constitute a week (for example Sunday through Saturday) must be consistently applied for all calendar months of the calendar year.
Rehired Employees and Employees Returning from a Short Leave of Absence
To avoid characterizing former employees as rehired employees after a short period of absence, the final regulations clarify that under the monthly measurement method, an employee must be treated as a continuing employee, rather than a new hire, unless:
• the employee has had a period of at least 13 weeks during which no hours of service were credited (26 weeks for an employee of an employer that is an educational organization); or
• the employee is not credited with any hours of service during a period that is both at least 4 consecutive weeks’ duration and longer than the employee’s immediately preceding period of employment.
Aggregation of Hours of Service
Hours of service must be counted across all large employer members of a controlled group where an employee accrues hours of service in a calendar month for various large employer members. For example, an employee who for a calendar month averaged 25 hours of service per week with large employer member A and 15 hours of service per week with large employer member B, the employee would be an FTE for that calendar month.
Exclusions from Definition of Hour of Service
On-Call Hours “On-call” hours are hours for which an employee has been directed by the employer to remain available to work, but where s/he is not performing services. In some cases, employees are paid a reduced hourly wage for on-call hours. In other cases, employees are not paid additional compensation for on-call hours but are required to remain on call periodically as a condition of employment. Until further guidance is issued, employers of employees who have on-call hours are required to use a reasonable method for crediting hours of service that is consistent with the employer penalty provisions. The regulations indicate that it is not reasonable for an employer to fail to credit an employee This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional. with an hour of service for any on-call hour for which (a) payment is made or due by the employer; (b) the employee is required to remain on-call on the employer’s premises or (c) the employee’s activities while remaining on-call are subject to substantial restrictions that prevent the employee from using the time effectively for the employee’s own purposes. Volunteer Employees An hour of service is generally defined as an hour for which an employee is paid or entitled to payment. Hours worked by a volunteer who does not receive, and is not entitled to receive, compensation in exchange for the performance of services are not treated as hours of service for purposes of the employer penalty. However, to address volunteers who receive compensation in the form of expense reimbursements, stipends, contributions to employee benefit plans, or nominal wages, the final regulations provide that hours of service do not include hours worked as a “bona fide volunteer.” A “bona fide volunteer” is any volunteer who is an employee of a government entity or an organization described in Code Section 501(c) that is exempt from taxation under Code Section 501(a) whose only compensation from that entity or organization is in the form of (i) reimbursement for (or reasonable allowance for) reasonable expenses incurred in the performance of services by volunteers, or (ii) reasonable benefits (including length of service awards), and nominal fees, customarily paid by similar entities in connection with the performance of services by volunteers. Student Employees The final regulations do not include a general exception for student employees; however, they do provide that hours of service do not include hours of service performed by students in positions subsidized through the federal work study program or a substantially similar program of a state or political subdivision thereof.
Members of Religious Orders
Until further guidance is issued, a religious order is permitted, for purposes of determining whether an employee is an FTE, to not count as an hour of service any work performed by an individual who is subject to a vow of poverty as a member of that order when the work is in the performance of tasks usually required (and to the extent usually required) of an active member of the order. Adjunct Faculty, etc. Until further guidance is issued, employers of adjunct faculty (and of employees in other positions that raise similar issues with respect to the crediting of hours of service) are required to use a reasonable method for crediting hours of service with respect to those employees that is consistent with the employer penalty provisions. With respect to adjunct faculty members of an educational organization who are compensated on the basis of the number of courses or credit hours assigned, it is noted a wide variation of work patterns, duties, and circumstances apply in different institutions, academic disciplines, and departments, and apply to different courses and individuals, and that this might factor into the reasonableness of a particular method of crediting hours of service in particular circumstances. Until further guidance is issued, one (but not the only) method that is reasonable for this purpose would credit an adjunct faculty member of an institution of higher education with (a) 2¼ hours of service (representing a combination of teaching or classroom time and time performing related tasks such as class preparation and grading of examinations or papers) per week for each hour of teaching or classroom time (in other words, in addition to crediting an hour of service for each hour teaching in the classroom, this method would credit an additional 1¼ hours for activities such as class preparation and grading) and, separately, (b) an hour of service per week for each additional hour outside of the classroom the faculty member spends performing duties s/he is required to perform (such as required office hours or required attendance at faculty meetings). Although further guidance may be issued regarding these matters, the method described above may be relied upon at least through the end of 2015. To the extent any future guidance modifies an employer’s ability to rely on that method, the period of reliance will not end earlier than January 1 of the calendar year beginning at least 6 months after the date of issuance of the guidance (but in no event earlier than January 1, 2016). Of course, employers may credit more hours of service than would result under the method described above and also may offer coverage to additional employees beyond those identified as FTEs under that method.
Layover Hours for Airline Industry Employees and
Until further guidance is issued, with respect to categories of employees whose hours of service are especially difficult to identify or track, or for whom the final regulations’ general rules for determining hours of service may present special challenges, employers are required to use a reasonable method for crediting hours of service that is consistent with the employer penalty provisions. With respect to layover hours, it is not unreasonable for an employer to not credit a layover hour as an hour of service if the employee receives compensation for the layover hour
beyond any compensation that the employee would have received without regard to the layover hour or if the layover hour is counted by the employer towards the required hours of service for the employee to earn his or her regular compensation. For example, if an employer requires that an employee perform services for 40 hours and credits layover hours towards the 40 hours, then it would not be reasonable for the employer to fail to credit the layover hours as hours of service. For layover hours for which an employee does not receive additional compensation and that are not counted by the employer towards required hours of service, it would be reasonable for an employer to credit an employee in the airline industry with 8 hours of service for each day on
which an employee is required, as a practical matter, to stay away from home overnight for business purposes (that is, 8 hours each day (or 16 hours total) for the two days encompassing the overnight stay). The employee must be credited with the employee’s actual hours of service for a day if crediting 8 hours of service substantially understates the employee’s actual hours of service for the day (including layover hours for which an employee receives compensation or that are counted by the employer towards required hours of service). Other methods of counting hours of service may also be reasonable, depending on the relevant facts and circumstances.
There are three safe harbors for determining affordability: (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor. If an employer meets the requirements of the safe harbor, the This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional. offer of coverage is deemed affordable for purposes of the Offer Coverage Penalty regardless of whether it is affordable
to the employee for subsidy purposes which take into account household income and number of tax dependents.
Use of Multiple Methods
An employer may choose to use one or more of the safe harbors for all of its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. Reasonable categories generally include specified job categories, nature of compensation (e.g., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name would not be considered a reasonable category.
Rate of Pay Safe Harbor
The final regulations allow an employer to apply the rate of pay safe harbor to an hourly employee even if the employee’s rate of pay is reduced during the year. In this situation, the rate of pay is applied separately to each calendar month, rather than to the entire year and the employee’s required contribution may be treated as affordable if it is affordable based on the lowest rate of pay for the calendar month multiplied by 130 hours. The rate of pay safe harbor cannot
be used, as a practical matter, for tipped employees or for employees who are compensated solely on the basis of commissions. In this case, employers can use the two other
affordability safe harbors.
Federal Poverty Line Safe Harbor
The proposed regulations provided that, in the interest of administrative convenience, employers may use the most recently published poverty guidelines as of the first day of the plan year of the large employer’s health plan. The final regulations specify that employers are permitted to use the
guidelines in effect 6 months prior to the beginning of the plan year, to provide employers with adequate time to establish premium amounts in advance of the plan’s open enrollment
For purposes of determining whether coverage under the multiemployer plan is affordable, employers participating in the plan may use any of the affordability safe harbors set forth in the final regulations. Coverage under a multiemployer plan will also be considered affordable with respect to an FTE if the employee’s required contribution, if any, toward self-only health coverage under the plan does not exceed 9.5% of the wages reported to the multiemployer plan, which may
be determined based on actual wages or an hourly wage rate under the applicable collective bargaining agreement or participation agreement. If any assessable payment were due under the employer penalty, it would be payable by a participating large employer member and that member
would be responsible for identifying its FTEs for this purpose (which would be based on hours of service for that employer).If the large employer member contributes to one or more multiemployer plans and also maintains a single employer plan, the interim guidance applies to each multiemployer plan but not to the single employer plan.
To ensure avoidance of the employer penalty, large employers must, in part, offer coverage to their FTEs and their dependent children. For employer penalty purposes only, the final regulations exclude both foster children and stepchildren from the definition of dependent – the final definition now only includes any biological or adopted child. However, foster children and stepchildren may have to be eligible for purposes of the requirement of a plan to cover children to age 26. The final regulations exclude a child who is not a U.S. citizen or national from the definition of dependent, unless that child is a resident of a country contiguous to the United States or that child is adopted where (a) for the taxable year of the taxpayer, the child has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household and (b) the taxpayer is a citizen or national of the United States. To avoid penalty, large employers must extend coverage through the end of the month in which the dependents attain age 26.
Offer of Coverage
An offer of coverage to an employee performing services for an employer that is a client of a professional employer organization (“PEO”) or other staffing firm (in the typical case in which the PEO or staffing firm is not the common law employer of the individual) (referred to here as a “staffing firm”) made by the staffing firm on behalf of the client This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional. employer under a plan established or maintained by the staffing firm, is treated as an offer of coverage made by the client employer if the fee the client employer would pay to the staffing firm for an employee enrolled in health coverage under the plan is higher than the fee the client employer would pay to the staffing firm for the same employees if the employee did not enroll in health coverage under the plan.
Home Care Workers
The final regulations clarify that the recipient of service by a home care worker may be the common law employer of the home care worker, rather than the home care agency. Therefore, the home care agency would not be required to make an offer of coverage to the home care worker in such case. For example, if the service recipient has the right to direct and control the home care provider as to how they perform services, including choosing the provider, electing the services to be performed, and setting hours of service, the service recipient is the common law employer and the home care agency would not be subject to the employer penalty for that particular provider.
Application to Multiemployer and Single Employer
Taft-Hartley Plans, MEWAs and Other Similar
The final regulations clarify that for purposes of the employer penalty, an offer of coverage includes an offer of coverage made on behalf of an employer, and that this would include
an offer made by a multiemployer or single employer Taft- Hartley plan or a MEWA to an employee on behalf of a contributing employer of that employee.
Method of Offer
The offer can be made electronically. An employee’s election of coverage from a prior year that continues for every succeeding plan year unless the employee affirmatively elects to opt out of the plan constitutes an offer of coverage for purposes of the employer penalty provisions.
The final regulations do not apply any specific rules for demonstrating that an offer of coverage was made. The otherwise generally applicable substantiation and recordkeeping requirements apply.
This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional.