Health+Benefits the March 2013 issue

What’s Cooking

The IRS has cooked up a lot of new rules for employers.
By Scott Sinder Posted on February 27, 2013

The agency’s proposed employer mandate rules require a “large employer” (50 or more full-time employees) to offer “affordable” and “qualifying” coverage to everyone who works more than 30 hours a week. If just one full-time employee receives a premium credit when enrolling in an exchange plan, the employer pays a penalty.

For employers, these rules are likely to be among the most significant. Here are some challenges your clients will likely face:

Mandate Penalty Calculation: For large employers that make affordable offers of coverage to some but not all full-time workers, the IRS establishes a bright-line test. If an employer offers coverage to at least 95% of its eligible full-time employees, it will be subject only to the $3,000-per-year mandate penalty for each employee who does not receive an “affordable” offer of coverage and receives a premium credit when enrolling in an exchange-provided plan. If an employer fails to make an offer to at least 95% of its eligible full-time staff, then it will be subject to a $2,000-per-year penalty multiplied by all of its employees (less the 30-employee statutory exemption) regardless of whether those employees are eligible for employer-provided coverage.

Employee Affordability Test: The proposed rules incorporate the announced policy that an employer need only make an “affordable” offer of coverage for an employee’s individual coverage. In making this calculation, an employer may use one of three tests: (a) a W-2 safe harbor test in which individual coverage affordability is assessed at the end of the calendar year and may not be based on an individual’s W-2 income for prior years; (b) a “rate of pay” safe harbor test equal to monthly salary or 130 hours multiplied by an employer’s rate of pay for hourly employees; or (c) a “federal poverty line” test in which coverage must not exceed 9.5% of the monthly income at 100% of the federal poverty line for individuals. 

Dependents: This coverage must be offered to an employee’s children who are not yet 26. No coverage is required for spouses or other dependents.

Commonly Owned/Controlled Businesses: The rules, as expected, apply the IRS consolidated business rules to determine whether an individual employer that is commonly owned or controlled with other employers is subject to the mandate as a “large” employer. In calculating the mandate penalty, each commonly owned or controlled employer within a corporate group pays its own penalties and is not consolidated with the other members of the group in making the assessment. But each individual employer within that corporate group gets only the benefit of its pro rata share of the 30-employee mandate penalty exemption.

Full-time Calculations: For hourly workers, an employer is required to directly track the hours to determine full-time status. For salaried workers, the rules allow an employer to choose between three different calculation methods: tracking hours; “days worked,” in which a day would be considered eight hours; or “weeks worked,” in which each week worked would be considered 40 hours.

Variable Hour/Part-time: The proposed rules largely incorporate the safe harbor provisions previously proposed but clarify that: (a) for new variable-hour employees (including seasonal workers), an employer generally can use an initial measurement period of up to one year and need not offer coverage until it is determined whether the employees qualify as full-time at the end of that measurement period; (b) if an existing part-time employee changes his or her job status, becoming a full-time employee during a stability period, that employee may continue to be treated as part-time and ineligible for coverage for the balance of that stability period (and vice versa); and (c) for breaks in service attributable to the Family & Medical Leave Act (for teachers, the rules essentially require that the break in service period be disregarded).

Employees Working Abroad: There is no mandate for employees working abroad. They are excluded from the “large” employer calculations, and no penalties are associated with them should the employer fail to offer them affordable and qualifying coverage during their overseas tenures.

For employers, these rules are likely to be among the most significant.

The IRS also is providing the following transitional relief:

• For non-calendar-year plans, the mandate compliance date is deferred until the first day of the plan’s fiscal year in 2014, provided that at least a third of the employer’s full-time employees were eligible to participate in the plan or at least 25% of the full-time employees participated, as of Dec. 27, 2012.
• Employers are allowed to use any consecutive six-month period in 2013 as the measurement period for variable-hour employees to determine if they are full-time employees. The transitional measurement period must start no later than July 1, 2013, and end no later than 90 days prior to the first day of the employer’s next plan year.
• Employers also may use any consecutive six-month period in 2013 as a measurement period to determine whether it is a large employer subject to the mandate requirements as of Jan. 1, 2014.

Scott Sinder Chief Legal Officer, The Council; Partner, Steptoe & Johnson Read More

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