Employee Benefits Compliance, Employer Mandate, Penalties

Employer Shared Responsibility: Possible Delayed Effective Date for Non-Calendar Year Plans

For calendar year plans, the Affordable Care Act (ACA) provides that the effective date of the Employer Shared Responsibility provisions (“Pay-or-Play”) is January 1, 2014. However, the proposed regulations (issued December 28, 2012) include a transition rule that allows a delayed effective date for fiscal year plans (non-calendar year plans) if certain criteria are met. For plans that meet these criteria, the delayed effective date means the employer will not be subject to a penalty (called an “assessable payment”) between January 1, 2014 and the first day of the 2014 plan year.

The two reasons the proposed regulations allow a delayed effective date are:

  • Since it is difficult to change a plan’s terms and conditions in the middle of a plan year, non-calendar year plans would have been required in many cases to comply with the “pay-or-play” provisions for the entire plan year beginning in 2013 (since January 1, 2014 would be mid-plan year).
  • In order to use the look-back measurement period method to determine employees’ status as full-time employees for the plan year that spans 2013-2014, plan sponsors would have to determine employees’ hours of service for a period before the publication of the proposed regulations.

Background: Two Types of Potential Penalties

Before explaining how the delayed effective date works, a short review of the two possible penalties under the Employer Shared Responsibility provisions is warranted. Keep in mind that neither penalty applies unless at least one full-time employee purchases health insurance in an Exchange and qualifies for a subsidy (a cost-sharing reduction and/or a premium tax credit). Additionally, an employer can be subject to only one penalty, not to both of them. The two types of penalties are:

IRC 4980H(a) penalty – the $2,000 annual penalty. An employer who does not offer “minimum essential coverage” (MEC) to at least 95% of its full-time employees and their dependents may be subject to a penalty of $2,000 annually ($167 per month) times the total number of eligible full-time employees minus the first 30 employees. The coverage also must be “affordable” and provide “minimum value.” An employer who provides coverage to some — but less than 95% of — full-time employees must include in the penalty count those employees for whom the employer is providing MEC, so the employer will pay both the penalty and its share of the cost of benefits. The penalty does not apply to those full-time employees who are in their waiting period, nor does it apply to part-time employees. The penalty will apply only if at least one employee buys health insurance in an Exchange and qualifies for a subsidy.

IRC 4980H(b) penalty – the $3,000 annual penalty. If an employer does offer MEC to substantially all its full-time employees and their dependents, but the coverage is not “affordable” or does not provide “minimum value,” the employer will be subject to a penalty equal to $3,000 annually ($250 per month) for each affected employee who buys health insurance in an Exchange and qualifies for a subsidy. This penalty cannot exceed the amount that would apply under 4980H(a) if the employer were a non-offering employer.

Background: “Affordability” and “Minimum Value”

The proposed regulations include three safe harbors for the affordability test; coverage is “affordable” if an employee’s cost for self-only coverage (under the lowest-cost option available from the employer) is not more than 9.5% of one of the following amounts:

  • The employee’s W-2 income from the employer (Box 1) for the taxable year
  • 130 multiplied by the employee’s hourly rate of pay as of the first day of the plan year, or the employee’s monthly salary as of the first day of the plan year (not multiplied by 130)
  • The Federal Poverty Line (FPL) amount for an individual (this was $11,170 in 2012)

Coverage meets “minimum value” if the plan pays at least 60% of the actuarial value of the allowed cost of benefits under the plan. This means that participants do not pay more – in co-payments, coinsurance, deductibles and other out-of-pocket amounts—than 40% of the total allowed costs.

The Transition Rule for a Delayed Effective Date

The transition rule addresses both types of penalties explained above.

First, if, as of December 27, 2012, an employer operated its health plan on a fiscal year (non-calendar year) basis, no 4980H penalty will be imposed on the employer between January 1, 2014 and the first day of the 2014 plan year for any employee who was eligible to participate in the plan under its terms as of December 27, 2012 (even if the employee did not enroll). That is, even if the coverage is not affordable or does not provide minimum value, if an employee buys coverage in an Exchange and receives a subsidy no penalty will be assessed on the employer.

The second part of the delayed effective date rule provides additionally that an employer will not be subject to a penalty under section 4980H for any month between January 1, 2014 and the first day of the 2014 plan year for any employee if at least one of the first two criteria below are met, and both the third and fourth criteria are met:

  1. The fiscal year plan (and any other fiscal year plans of the employer with the same plan year) was offered to at least one-third of the employer’s employees (total full-time and part-time) at the most recent open enrollment prior to December 27, 2012, OR
  2. The fiscal year plan actually covered at least one-fourth of the employer’s employees (total full-time and part-time) as of the end of the most recent enrollment period or on any date between October 31 and December 27, 2012 (the employer can select the date), AND
  3. All full-time employees (and dependents) are offered affordable coverage that provides minimum value no later than the first day of the 2014 plan year.
  4. The employees would not have been eligible for coverage under any calendar year group health plan maintained by the employer as of December 27, 2012.

The following example illustrates when the delayed effective date will apply, and the second example below illustrates when it will not.

Example #1: Delayed Effective Date Applies for September 1 Plan Year

Facts: On December 27, 2012, the employer offered only one health plan, which operated on a September 1 plan year basis; employer had 80 full-time employees and 20 part-time employees; and employer offered coverage to 50 of the full-time employees and did not offer coverage to the other 30 full-time employees or to the 20 part-time employees. Only 40 of the 50 full-time employees enrolled.

During the period from January 1 – August 31, 2014:

  • The employer will not be subject to an IRC 4980H(b) penalty for any of the 50 full-time employees who were eligible to participate in the plan as of December 27, 2012, even if an employee did not enroll and buys coverage in an Exchange as of January 1, 2014 (even if during that time period the employee qualifies for a subsidy).
  • The employer will not be subject to a 4980H(a) penalty for any full-time employees if at least one of the first two criteria below are met, and the third criterion is met:
    1. As of September 1, 2012, the plan was offered to at least 34 employees (1/3 of 100),
      ♦The plan was offered to 50 full-time employees so it meets this requirement
    2. The plan actually covered at least 25 employees (1/4 of 100) as of the end of the most recent enrollment period or on any date between October 31 and December 27, 2012 (employer selects the date),
      ♦The plan covered 40 employees so it meets this requirement
    3. By September 1, 2014, the employer offers affordable coverage that provides minimum value to all full-time employees (and dependents)

Note that if the employer does not meet this third requirement (providing coverage to all full-time employees by September 1, 2014), the employer would be subject to a potential penalty back to January 1, 2014, if any employee bought insurance in an Exchange and received a subsidy.

Example #2: Delayed Effective Date Does Not Apply for September 1 Plan Year

Facts: On December 27, 2012, employer offered one health plan, which operated on a September 1 plan year basis; employer had 80 full-time employees and 20 part-time employees; and employer offered coverage to 30 of the full-time employees and did not offer coverage to the other 50 full-time employees or to the 20 part-time employees. Only 24 of the 30 full-time employees enrolled.

During the period from January 1 – August 31, 2014:

  • The employer will not be subject to an IRC 4980H penalty for any of the 30 full-time employees who were eligible to participate in the plan as of December 27, 2012, even if an employee did not enroll and buys coverage in an Exchange as of January 1, 2014 (even if during that time period the employee qualifies for a subsidy).
  • The employer will be considered a “non-offering” employer— so will be subject to the IRC 4980H(a) penalty ($167 per month) – because neither of the following two criteria are met:
    1. As of September 1, 2012, the plan must be offered to at least 34 employees (1/3 of 100)
      ♦The plan was offered to only 30 employees, so does not meet this requirement
    2. The plan actually covered at least 25 employees (1/4 of 100) as of the end of the most recent enrollment period or on any date between October 31 and December 27, 2012 (employer selects the date)
      ♦The plan actually covered only 24 employees, so does not meet this requirement

In this example, the delayed effective date does not apply, so the employer must offer affordable coverage that provides minimum value to all full-time employees (and dependents) by January 1, 2014, in order to avoid potential penalties. If it does not, the employer will be subject to penalties between January 1 and August 31, 2014 if any affected full-time employee purchases health insurance in an Exchange and qualifies for a subsidy.

This employer could avoid the penalty by having a special mid-year open enrollment period before January 1, 2014 and offering affordable coverage that provides minimum value to at least 95% of its full-time employees and their dependents. This special mid-year open enrollment is possible because another transition rule in the (12/28/2012) proposed regulations allows an employer with a non-calendar year plan and a cafeteria plan to amend its cafeteria plan to:

  • allow participants to prospectively revoke or change their health coverage elections as of January 1, 2014, and
  • allow eligible but un-enrolled employees to prospectively enroll as of that date, even though that would not otherwise meet the definition of an allowable mid-year change event.

The plan amendment must be made by December 31, 2014 and must be retroactive to the first day of the 2013 plan year.

Although the ACA allows an employer to make this mid-year amendment to its cafeteria plan, an employer should confirm that its health insurance carrier(s) also will allow such mid-contract-year changes.