The Internal Revenue Service has released its much-anticipated proposed regulations governing the shared responsibility provisions of the Affordable Care Act (ACA). The IRS also has released a set of questions and answers that provide additional detail on these requirements. The ACA included a new section 4980H to the Internal Revenue Code that implements the employer shared responsibility or “pay or play” employer mandates. As of January 1, 2014, employers with 50 or more full-time employees (including full-time equivalent employees) generally will be required to offer at least 95% of their full-time employees (and their dependents) “minimal essential” health benefit coverage or pay a penalty if any full-time employee receives a federal subsidy to purchase insurance through a health exchange. This penalty will be $2,000 for each full-time employee in excess of 30 employees. Covered employers that fail to provide minimum value (i.e., the plan’s share of the total allowed costs of benefits provided under the plan must be at least 60 % of those costs) or provide coverage deemed unaffordable (i.e., the cost of coverage must exceed 9.5% of the employee’s compensation) will pay the aforementioned penalty or $3,000 to each full-time employee who receives a premium tax credit to enable them to purchase coverage through the future health insurance exchanges, whichever is the lesser amount.

The proposed rule incorporates various provisions of previously-issued guidance materials (IRS Notices 2011-36 - definitions of employer, employee, and hours of service;  2011-73 – affordability of coverage; 2012-17 – determining full-time employee; (pdf) and 2012-58 – interim guidance) with some modification, and provides instruction on additional issues. According to the proposal, employers may rely on the proposed regulations for guidance until a final rule or other materials are issued.

The proposed rule and accompanying IRS Q and A address the following topics:

Which Employers are Subject to the Employer Shared Responsibility provisions?

• The proposal incorporates many of the conditions set forth in Notice 2011-36. Generally, an employer will be considered a “large employer” for purposes of this rule if it employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50 employees. An employer’s status will be based on the actual hours of service of employees in the prior year, although the rule does include transition relief for determining large employer status for 2014. An employer generally must take into account only work performed in the United States.
• Companies that have a common owner or are otherwise related generally are combined together for purposes of determining whether they employ at least 50 full-time employees (or an equivalent combination of full-time and part-time employees).
• The proposal explains that the final rule will include anti-abuse provisions to prevent employers from using temporary staffing agencies for the express purpose of evading their obligations under the Affordable Care Act. For example, “if an individual performs services as an employee of an employer, and also performs the same or similar services for that employer in the individual’s purported employment at a temporary staffing agency or other staffing agency of which the employer is a client, then all the hours of service are attributed to the employer for purposes of applying section 4980H.”

Determining full-time employees

• A “full time” employee under the proposal is one who was employed on average at least 30 hours of service per week. In keeping with Notice 2011-36, the proposed regulations use a 130-hour standard as a monthly equivalent of 30 hours per week.
• For purposes of determining hours of service, the proposed rule incorporates the guidance set forth in Notice 2011-36 providing that an employee’s hours of service includes the following: (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. In response to comments, the proposed rule omitted Notice 2011-36’s 160-hour limit on paid leave, so all periods of paid leave must be taken into account.
• The proposal provides rules for hourly employees and non-hourly employees, generally consistent with the approach outlined in Notice 2011-36.
• The proposed rule includes specific hours of service requirements for teachers and other employees of educational entities; employees compensated on a commission basis; adjunct faculty; transportation employees; and temporary staff members, among other special employment situations.
• The proposal codifies the “look back” method for determining the number of an employer’s employees, which was discussed in prior guidance, and also provides additional guidance with respect to payroll periods and other issues.
• Although through at least 2014, employers are permitted to use a reasonable, good faith interpretation of the term “seasonal employee” for purposes of this notice, the IRS notes that final regulations may provide a specific time limit.
• An employer is not subject to the Play-or-Pay penalty for failing to offer new employees coverage for the first three months of employment.

How is the Play-or-Pay Penalty Assessed?

• The proposed regulations provide that employers must offer “minimum essential coverage” to at least 95% of full-time employees and their “dependents” to avoid paying a penalty. The proposed regulations define an employee’s dependents as a child (as defined in IRC Section 151(f)(1)) who is under 26 years of age. The term “dependent” does not, therefore, include an employee’s spouse.
• The penalty will be calculated for each calendar month.
• Employers may take advantage of one of three safe harbors, detailed in the proposal, to determine whether the plan they offer is “affordable.”

Comments on the proposed rule must be received by March 18, 2013. Comments may be submitted electronically through the federal eRulemaking portal or sent by mail to: CC:PA:LPD:PR (REG-138006-12), Internal Revenue Service, room 5203, POB 7604, Ben Franklin Station, Washington, DC 20044. Written comments may also be hand-delivered to CC:PA:LPD:PR (REG-138006-12), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.

In addition, the IRS intends to hold a public hearing on the proposed rule on April 23, 2013 at 10:00 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Suggested topics the IRS should address at this hearing must be submitted by April 3, 2013.

The proposed regulations provide much-needed direction for employers as they address the Play-or-Pay provision. Although additional guidance is still needed on other aspects of the ACA, the critical decision of whether to “play” or “pay” is just ahead.

For more information on this new proposal, see Littler's ASAP: IRS Issues Proposed Rule on ACA Play or Pay Requirements by Ilyse Schuman and David Weiner.

Photo credit: Andriy Solovyov