Employee Benefits Compliance, Employer Mandate, Large Employers, Laws, Regulations & FAQs

Specifics on “Play or Pay” Final Rules for Large Employers

On February 10, 2014, the Internal Revenue Service issued long-awaited Final Regulations (227 pages) implementing the Employer Shared Responsibility provisions under the Affordable Care Act (ACA), as well as a Fact Sheet (3 pages) and Questions and Answers (15 pages).  The final regulations leave intact the basic implementation framework of the Proposed Regulations that were issued December 28, 2012, but make a number of important changes and much-needed clarifications.

This article provides additional details on our original article (published February 10, 2014) and summarizes what we consider the primary areas of interest for employers.  We will soon publish separate and more detailed articles on specific topics in the regulations.

Highlights of the Final Regulations

  • Employers with 50-99 employees will not be subject to the employer mandate until 2016, if they certify they have not reduced their workforce or materially reduced benefits they provided on February 9, 2014.
  • Employers with 100 or more full-time employees must comply with the employer mandate in 2015, but the requirements are eased in several ways.
  • The final regulations clarify how some specific categories of workers must be treated.  For example, volunteers are not counted as employees.  Seasonal employees are defined as those whose customary annual employment is six months or less.   There are special rules and a safe harbor for temporary staffing agency employees.
  • The final regulations clarify specific hours of service to count in determining full-time status, such as crediting adjunct faculty with 2.25 hours of service for each classroom hour worked.  There are also special rules for lay-over hours (e.g., airline employees) and on-call hours (e.g., hospital employees).
  • The final regulations extend most of the Transition Rules that were in the December 28, 2012 Proposed Regulations
  • Employers remain subject to the reporting requirements under IRC section 6056 for 2015, even if they are not subject to the employer mandate in 2015.  This means employers with 50-99 employees must report for 2015, and employers who sponsor non-calendar year plans that qualify for the delayed effective date must report for the entire 12 months of 2015.

Delayed Effective Date for Medium Size Employers

No penalties will apply for the 2015 plan year to employers with between 50 and 99 employees in 2014 as long as the employer provides appropriate certification. This means employers with between 50 and 99 employees have until January 1, 2016 to make sure they offer coverage to their full time employees.

Certification will be made on a form yet to be published.  It requires medium size employers to satisfy the following three conditions:

  1. Limited workforce size: The employer employed on average at least 50 but fewer than 100 full-time employees (including “full-time equivalents”) on business days in 2014.
  2. No reduction in workforce or overall hours.   The employer did not reduce its workforce size or reduce employees’ overall hours between February 9, 2014 and December 31, 2014 in order to qualify for the one-year delay.  However, an employer will still qualify for the delay if the workforce reduction is due to “bona fide business reasons” such as the sale of a division, economic changes in the employer’s industry or geographic area, termination of specific employees for poor performance, or similar changes.
  3. Maintenance of previously offered health coverage:  The employer must continue and not materially reduce the health coverage it offered on February 9, 2014.  An employer will be considered to meet this requirement if:
    • The employer contribution for employee-only coverage continues to be least 95% of the dollar amount the employer paid on February 9th, Or at least the same percentage of the total cost if the cost increases after February 9th.
    • If the employer changes the benefits offered for employee-only coverage, the new coverage must provide at least minimum value after the change; and
    • The employer must not reduce or narrow the class of employees (and dependents) who are eligible for coverage.

 Temporary Changes for Large Employers

Although employers with 100 or more full-time employees still face potential penalties in 2015 if they don’t offer health coverage to “substantially all” their full-time employees and dependents, the final regulations ease the requirements in several ways.

First, for the 2015 plan year only, “substantially all” is defined as 70% rather than 95% of full-time employees.  This means there is no potential penalty even if up to 30% of full-time employees are not offered coverage.  The exclusion of these employees may be intentional or unintentional.  In 2016 that margin of error will go back to 95% of all full time employees or 5 full time employees.

Second, for the 2015 plan year only, if an employer chooses to “pay” rather than “play,” or if the employer unintentionally fails to offer coverage to at least 70% of all full time employees, the “non-offering employer” penalty is calculated differently.  The annual penalty, prorated monthly, is calculated by multiplying $2000.00 by all full time employees, minus 80 (instead of minus 30). This change is due to the temporary (2015 only) definition that a “large” employer is one with at least 100 employees, rather than 50.

Third, an important change for some but not all large employers with non-calendar year plans is that the effective date of the employer mandate is the first day of the 2015-16 plan year (rather than January 1, 2015), as long as the following requirements are met:

  • The employer must have maintained a non-calendar year plan as of December 27, 2012 (the day before the proposed  regulations were issued) and has not modified the plan year since then, and
  • the employer offered coverage to at least 1/3, or actually covered at least 1/4, of all employees as of February 9, 2014, or
  • the employer offered coverage to at least ½, or actually covered at least 1/3, of all full-time  employees as of February 9, 2014.

The third bullet above is a new alternative “significant percentage” rule. It allows employers to measure only full-time employees, not all employees as in the second bullet. The first two bullet points were in the Proposed Regulations issued in December 2012.

It is important to understand that large employers who do not meet the first bullet, plus either the second or third bullets may NOT start complying on their plan year in 2015 but instead must comply on January 1, 2015 — or may be exposed to penalty.

 Finally, large employers will not be penalized for not offering dependent coverage until 2016 unless they are already offering to dependents and then stop, and as long as they are taking steps toward providing coverage to dependents.

Information Reporting and Affordability Safe Harbor for both Medium and Large Employers

All employers with at least 50 employees remain subject to the annual information reporting requirements under IRC section 6056 for 2015, even if they are not subject to the employer mandate in 2015. This means employers with 50-99 employees must report for 2015, and employers who sponsor non-calendar year plans that qualify for the delayed effective date must report for the entire 12 months of 2015.  Some of the information required is on the plan level (e.g., affordability, monthly premium, length of waiting period, whether minimum essential coverage is offered to full-time employees and their dependents), while other information is employee specific (e.g., name, address and Social Security number of employees enrolled in coverage, for each month).  The reason large employers are required to file this information in 2015 is because the IRS needs this information to administer the premium tax credit in the Exchanges, and employees who buy coverage on the Exchange  need this information to show that they qualify for the premium tax credit.  The report for 2015 is not due until early in 2016, so the IRS notes in the Preamble that employers who are not subject to the mandate for all or part of 2015 can use actual hours worked (determined after the end of 2015) to determine who was a full-time employee in 2015.

The final regulations also addressed the “affordability” safe harbors which apply to large employers in 2015 and to medium size employers in 2016.  Under the proposed rules in December 2012, the employer sponsored health plan is affordable if the employee cost for self-only coverage does not exceed 9.5% of the full time employee’s income. There are three safe harbor options an employer may use to determine whether the monthly premium meets affordability.  The final rules clarify the three options:

  • Premium is less than 9.5% of the employee’s income on Form W-2, Box 1:  Employers who use the W-2 safe harbor will continue to use Box 1 wages, which do not include pre-tax contributions to cafeteria (IRC 125) plans or to 401(k) plans.
  • Premium is less than 9.5% of the employee’s hourly rate (as of the first of the plan year) multiplied by 130 hours:  An employer can use the “rate-of-pay” safe harbor even if the employer reduces an employee’s hourly pay rate during the plan year, but the rate-of-pay safe harbor will apply separately for each month.  This will result in a lower maximum “affordable” rate for those months an employee’s hourly rate has been reduced.
  • Premium is less than 9.5% of Federal Poverty Level (FPL) for one person:   An employer can use the FPL rate in effect six months prior to the start of the plan year, rather than at the start of the plan year.  This change will help employers administratively, since employers generally set rates three-six months before the start of the plan year.

Treatment of Specific Categories of Workers

The final regulations clarify how specific categories of workers are to be treated and/or how their hours of service are to be counted.


Bona fide volunteers at governmental and non-profit employers are not counted as employees and their hours of service do not count in calculating employer size.  Examples include fire fighters and first responders.  Such workers may be bona fide volunteers even if they receive expense reimbursement, nominal compensation or contributions to benefit plans.

Real estate agents

Real estate agents and direct sellers are not considered employees.

Seasonal Employees

Seasonal employees may be treated the same as variable hour employees, and not as full-time employees even if they are expected to work at least 30 hours per week during the work season. This means their hours may be measured using the look back measurement period method.  This is a clarification (and not a change) from the proposed regulations issued on December 28, 2012.

The proposed regulations defined seasonal employees to identify whether an employer was small or large but did not define “seasonal” employees to identify which employees are full time and should be offered coverage.  Instead, the proposed regulations suggested use of a reasonable method to define seasonal employees. The final regulations now define a seasonal employee as a worker   whose customary annual employment is six months or less.  This clarification is important because it means employers do not have to offer coverage within three months (60 days for California insured plans and HMOs) to seasonal employees who are reasonably expected (at date of hire) to work at least 30 hours per week.  Instead, employers can treat seasonal employees the same as variable hour employees, and track their hours of service during a Measurement Period of up to 12 months to determine if they are full-time employees who must be offered benefits during the associated Stability Period.

The final regulations note that an employee whose employment typically is for not more than six months will not cease to be a seasonal employee merely because in a particular year the employee works additional weeks.  The example given is that a ski instructor who works seven months one year due to a long snow season is still a seasonal employee, not a full-time employee.  However, a seasonal employee may still need to be offered coverage if, through the look back measurement period method, they average more than 130 hours per month.

Home Care Workers

A special rule applies for home care workers.  Often a home care worker is paid by the home care staffing agency but under the “common law” test would be classified as the employee of the service recipient.   (This is because the service recipient generally would select the individual who will provide the care, set the hours of work and the tasks to be performed.)   The special rule allows a home care worker to be considered the employee of the service recipient, rather than the agency.  Since the service recipient probably employs only one (possibly two) home care workers, the recipient would not be a large employer and the home care worker would not be entitled to health insurance.

Temporary Staffing Agency Employees

The final regulations include special rules and a safe harbor for temporary staffing agency employees.  These will help both the staffing agencies and employers who hire contingent workers through temporary agencies.  The final regulations address the following three issues:

  • Who is the common law employer (who may be subject to the employer mandate)?  The staffing agency or the “client employer”?
  • If the staffing agency is the common law employer, how will it determine at date of hire whether a new temporary agency employee is a full-time employee or a variable hour employee?
  • If the “client employer” is the common law employer, the final regulations provide a safe harbor method by which a staffing agency can provide health benefits to temporary employees on behalf of the “client employer.”

To protect both parties, we think it is likely most temporary staffing agencies will begin using the safe harbor listed above and provide minimum value coverage to all workers, and will pass on the cost of such coverage to employers who hire workers hired through the temporary agency.

Who is the “common law” employer?  Both the temporary staffing agency and the recipient employer must apply the “common law” employment test to determine who is the employer and, thus, who must determine if an employee is variable hour or full-time, and who may be obligated to offer health coverage or be subject to the potential 4980H penalty for not offering coverage.

Factors that indicate an employer is the “common law” employer include: having direct control over the way work is performed not just the outcome, requiring that work be performed at a particular location and during specified hours, providing training and tools, a continuing working relationship between the employer and worker, and the worker providing services that are integral to the business.

The contract between the staffing agency and the recipient employer can include elements intended to indicate which employer is the “common law” employer, but IRS or DOL could subsequently find otherwise.  This is the reason the safe harbor noted above (and detailed below) is so important and might just become the standard default procedure.

How to determine if a new hire is a variable hour or full-time employee:  The reason it matters whether a new hire is a full-time or variable hour employee is because for a full time employee,  the responsible employer must offer health coverage after three months (or by the 60th day for California insured plans and HMOs).  For a variable hour employee, an employer may track hours during the initial measurement period and doesn’t have to offer coverage until the associated stability period (possibly 13-14 months later) and then only if the employee was full-time during the initial measurement period.

The final regulations list the following factors a temporary staffing agency can use to determine whether a new hire is a full-time employee or a variable hour employee.  The agency also can consider additional factors, and no one factor is determinative.  A staffing agency would apply this analysis if the agency hires an employee for placement at a client employer who is not the common law employer.  The staffing agency can consider whether employees in same position of employment with the staffing agency:

  • have the right to reject temporary jobs the agency offers
  • typically have periods during which no offer of temporary employment is made
  • typically are offered temporary jobs for differing periods of time, and
  • typically are offered temporary jobs that do not last beyond 13 weeks.

New Safe Harbor Rule: A staffing agency can offer health coverage to a temporary
employee on behalf of the client employer.  If a temporary agency is not the common law employer, and the temporary agency offers an employee coverage in the temporary agency’s health plan, on behalf of the client employer, the coverage is treated as coverage offered by the client employer (for pay-or-play purposes) only if the client employer pays a higher fee to the temporary agency for an employee enrolled in health coverage than for the same employee if the employee did not enroll.

No Special Rules for the Following Categories

Independent contractors v. employees: The final regulations do not include any special rules or safe-harbor relief for determining if a worker is an independent contractor or an employee.  An employer must determine a worker’s status based on the “common law” employment standard, and there is no special relief such as the “section 530 relief”  (Revenue Act of 1978) that protects employers from after-the-fact liability for employment taxes if a government agency later determines that certain independent contractors were in fact common law employees.

Short-term employees and high-turnover positions: The final regulations do not adopt any special rules for short-term employees or high-turnover positions, because the IRS is concerned about the potential for abuse of any exception.  Short-term employees are those who are expected to average at least 30 hour per week for less than 12 months, but are not doing seasonal work expected to recur on an annual basis.  High-turnover positions are those in which a significant percentage of employees can be expected to terminate in a short period of time, such as during the first six months of employment.  The IRS notes in the Preamble that two provisions in the final regulations do address these categories.  First, an employer will not be subject to the employer shared responsibility (4980H) penalty for not offering coverage during the first three months of employment.  Second, an employer who uses the look-back measurement method will not be subject to a penalty until after the end of the first month beginning on or after an employee’s first year.

Specific hours of service to count in determining Full-time Status

School employees:  Employees of educational organizations are full-time employees even if they don’t work full-time all year because they have no work hours during school break periods (e.g., summer)

Adjunct faculty:  Employers are required to use a “reasonable method” for crediting hours of service for adjunct faculty.  One (but not the only) reasonable method would be to credit 2 ¼ hours for each hour of teaching or classroom time (representing a combination of teaching or classroom time and time performing related tasks such as class preparation and grading exams or papers) PLUS,   1 hour of service per week for each additional hour outside the classroom the faculty member spends such as required office hours or required attendance at faculty meetings.   This method may be used at least through December 31, 2015 even if additional guidance is issued during that time.

Layover hours (e.g., airlines):  An employer must credit all hours for which an employee is paid or that count to earn regular compensation.  For other hours, an employer may use any  “reasonable method.”   The regulations provide that one reasonable method would be to credit an employee with 8 hours/day for each day or night an employee is required to work, and give the example of crediting16 hours for two days plus an overnight stay between the two days.

On-call hours:  E.g., hospital employees.  An employer can use any “reasonable method” but it is NOT reasonable to fail to credit an employee with an hour of service for which:

  • an employee is paid or due payment by the employer
  • an employee is required to remain on-call on the employer’s premises
  •  an employee’s activities on call are subject to substantial restrictions that prevent the employee from using the time for his/her own purposes

 Extension of Most Transition Rules in the Proposed Regulations

The final rule adopts the following transition rules from the December 2012 proposed regulations, extending the rule for only 2015 unless otherwise noted.

Determining employer size:  The general rule is that employer size is calculated based on the number of full-time employees (including full-time equivalents) an employer had during the prior calendar year.  However, for determination of employer size in 2015 only, an employer can use any 6 consecutive month period (instead of the full 12 months) in 2014 to determine if it is a large employer in 2015.

Use of 6-month “look-back” Measurement Period in 2014:  Generally, the length of the stability period will determine the length of the associated (prior) measurement period.  Most employers probably will prefer to use a 12-month stability period (the same 12 months as their plan year) which will also dictate using a 12-month measurement period.  For 2014-2015 only, an employer can use a 6-consecutive month Measurement Period in 2014 and a 12-month Stability Period in 2015, but only if the 6-month measurement period:

  • Starts before July 1, 2014 and
  • Ends no later than 90 days before the first day of the 2015 plan year.

This applies only to individuals who were employees on the first day of the short Measurement Period in 2014.  For employees hired during or after this special short Measurement Period, an employer with a 12-month Initial Stability Period will have to track their hours during a 12-month Initial Measurement Period.

Non-calendar year plans:  As detailed above, non-calendar year plans do not have to comply as of January 1, 2015.  Instead, the effective date for such plans is now the first day of the 2015 plan year, but only if certain criteria are met

Dependent coverage:  As noted above, large employers who in 2013 and 2014 did not offer dependent coverage to some or all dependents will not be penalized for not offering dependent coverage in 2015 as long as they are taking steps toward providing coverage to dependents by 2016.  This special rule does not apply to employers who previously offered dependent coverage and then stopped.

Multi employer (union) plans:  The transition relief is extended indefinitely,  which means an employer will not be required to offer its own health plan to bargained employees if:

  • The employer contribution to the union plan is required under a bargaining agreement,
  • The union plan offers coverage  to full-time employees and their dependents, and
  • The union coverage offered is Affordable and provides Minimum Value

Affordability is based on the employee’s cost for self-only coverage under the union plan as a percentage of the wages reported to the plan by that employer, so an employer will be able to determine affordability.  Additionally, an employer will know whether the coverage under the union plan provides at least “minimum value” because the Summary of Benefits and Coverage (SBC) is required to state whether or not the coverage provides at least minimum value.

Cafeteria Plan Transition Rule Not Extended to 2015:  Proposed Regulations allowed non-calendar year 125 plans to allow mid-year enrollment or dis-enrollment even if there was no specified change in family status or allowable change event.  This is not extended to 2015; however, the final regulations confirm that for 2014 a non-calendar year cafeteria plan can allow enrolled employees to drop coverage and allow eligible but non-enrolled employees to enroll on or after January 1, 2014.

PDF of this article: Specifics on Play or Pay Final Rules for Large Employers