It is no secret that the Patient Protection and Affordable Care Act (PPACA) requires many employers to provide health insurance coverage to full-time employees, or pay a tax penalty. Employers subject to “Play or Pay” let out a collective sigh of relief when the final regulations, issued in February 2014, provided some additional transition relief in an attempt to ease the compliance burden for many companies. However, things are not always as they seem.
Beginning in 2015, employers with 50 or more full-time equivalent employees must offer health insurance to full-time employees working an average of 30 or more hours per week (and their dependent children). If coverage meeting certain minimum requirements is not offered, the employer may face non-deductible tax penalties. Numerous clarifications and nuances in the final regulations could catch unsuspecting employers in a quagmire of non-compliance, resulting in tax penalties that could have been mitigated or avoided altogether. Read on for our take on the 6 top play or pay traps to avoid.
#6: Neglecting to Count “Hours of Service”
What is an “hour of service” according to the employer mandate rules of healthcare reform? An hour of service is any hour for which an employee is paid or entitled to be paid. The definition includes hours that the employee is actually present at work performing services, but also include other hours that the employee is not at work but is entitled to be paid, like paid vacation days, paid holidays, jury duty days. Employers must count “hours of service” to determine the amount of full-time equivalents necessary to calculate the employer’s size. Hours of service must also be counted to determine whether an employee is considered full-time for purposes of offering coverage.
These rules have a direct impact on an employer’s liability under Code §4980H. Counting hours of service can also be particularly difficult for certain types of employees, like adjunct professors. Special rules exist for certain types of employees. Bottom line – don’t make the mistake of recording only the hours that employees are physically present at work.
#5: Ignoring Other Employers Within the Same Controlled Group
Splitting up a single corporate entity into multiple entities owned by the same individual, holding company, or group of individuals was one of the initial reactions to the employer mandate and its application to employers with 50 or more full-time equivalent employees. If each entity contained fewer than 50 full-time equivalent employees, the employer mandate could be avoided, right? Wrong.
Under Code §414, a commonly owned group of entities – also known as a controlled group – may be treated as a single employer in certain circumstances. Both the proposed and final employer mandate regulations incorporate the provisions of Code §414. This means that all of the employees of each entity within a controlled group must be counted for determining whether or not an employer has 50 or more full-time equivalent employees, and is subject to the employer mandate
Employers who are a subsidiary of a parent company, employers who own subsidiary companies, or employers who are owned by individual owners who have ownership in other companies should consult their attorney regarding whether or not the entity is part of a controlled group. If the answer is yes, the employer mandate may apply even though the employer employs less than 50 full-time equivalent employees within a single corporate entity.
#4: Failing to Identify and Measure Variable Hour Employees
Healthcare reform presents many complex issues and challenges for employers, but one of the most difficult items is the Look-back Measurement Method for variable hour and seasonal employees. A variable hour employee is an employee that the employer does not reasonably expect to work an average of 30 hours or more per week when that employee is hired. Many employers have an internal definition of full-time that is something more than 30 hours per week – it could be 32 hours, 36 hours or 40 hours. In this scenario, employers often ask if they can measure employees working fewer hours than what their internal definition of full-time requires, or measure employees whose hours vary from week to week but are always above 30.
For purposes of healthcare reform compliance, internal employer definitions of full-time are disregarded. Employees reasonably expected to work an average of 30 hours per week when hired should be counted as full-time employees, regardless of the employer’s internal definition of full-time. If an employee is expected to work fewer than 30 hours per week, the employer should be prepared to administer either the Look-back Measurement Method or the Monthly Measurement Method for that employee.
Failing to identify whether an employee is full-time or variable hour may throw off an employer’s size calculation, which may impact the availability of transition relief and penalty calculation. Likewise, a failure to offer coverage to an individual who is considered full-time under the rules can expose an employer to unanticipated penalties.
#3: Classifying Short Term Workers as Seasonal
In the proposed regulations, the IRS and Treasury recognized that the rules are difficult to apply to certain categories of employees, particularly seasonal employees. However, the Agencies provided very little guidance as to the meaning of seasonal under the rules. In fact, the proposed regulations allowed employers to adopt a reasonable definition of a seasonal employee. Employers, industry stakeholders and others clamored for a more concrete definition of a seasonal employee, and the Agencies provided one in the final regulations.
Under the final regulations, a seasonal employee is an employee whose customary annual employment is 6 months or less, and whose position begins about the same time each year. Employers have adopted any variety of internal definitions of seasonal, and not all of these definitions align with the definition in the regulations. Employers in some industries hire “seasonal” employees to work 8 or 10 months out of the year. An employee who works 8 or 10 months out of the year is NOT a seasonal employee under the final employer mandate regulations. Likewise, an employee who works 6 months or less, but whose position does not begin at a consistent time each year, is NOT a seasonal employee. These employees are likely considered short-term employees under the rules and should be offered coverage if working full-time.
#2: Misclassifying Independent Contractors and/or Temporary Staffers
To avoid penalties, employers are required to offer coverage to their “common law” full-time employees. An individual is a common law employee of a company if the company has the right to “control and direct the individual who performs the work, not only as the result to be accomplished by the work but also as to the details and means by which that result is accomplished.” Wait…do employers who pay some individuals with a Form 1099 have to worry about this? The answer is yes. If workers paid with a Form 1099 should actually be employees and are classified incorrectly as independent contractors, the employer could be on the hook for an offer of coverage.
When it comes to temporary staffers, an individual might be issued a Form W-2 by one company, but another company has the right to control and direct that individual as to what job needs to be done and how to do it. Here, the company that has the right to control and direct that individual has the obligation to offer coverage, even though it is not the employer for payroll purposes. There are rules that allow the client employer to take credit for an offer of coverage made by a staffing agency, but the arrangement between the client employer and the staffing agency must meet certain requirements.
There are specific rules that apply in this situation (the IRS has a 20 factor test!) and the results of the analysis may vary depending on the facts of the particular arrangement. A failure to properly identify common law employees will impact an employer’s size calculation and may result in increased penalty exposure. In addition to the complications presented by healthcare reform, the Department of Labor and the IRS have active initiatives to identify individuals who have been misclassified, often with hefty fines and other consequences for the employer.
#1: Failing to Comply on the Correct Date
The IRS and Treasury issued a plethora of transition relief rules for employers when the final regulations were published. The final regulations modify and carry forward some of the transition relief rules contained in the proposed rules, but also add new transition relief rules. A “delay” of the employer mandate until 2016 for employers with 50 to 99.9 full-time equivalent employees was widely publicized as a result of one of these transition rules. However, this “delay” comes with a few strings attached. Employers of this size who do not currently offer a plan, or who offer a plan but make significant changes to the benefits or employer contributions may not qualify for this delay.
The final regulations also contain transition relief rules for non-calendar year plans. Non-calendar year plans may escape penalties for the months prior to the start of their 2015 plan year if certain conditions are met. If an employer either does not offer a plan or does not meet the required conditions, the employer may be penalized beginning January 1, 2015.
There is additional transition relief for employers who do not currently offer a plan, and other rules that modify the calculation of the penalties under Code 4980H for the 2015 calendar year. Determining the date on which penalties may begin to apply if not in compliance, and how much exposure an employer may have, is a crucial step in developing a strategy to avoid penalties or mitigate the impact of the employer mandate. Employers should work closely with an attorney or benefits consultant to determine the appropriate compliance date.
Now What?
More than 400 public comments urged the IRS and Treasury to provide rules or additional guidance regarding numerous situations in the employer mandate final regulations. The Agencies did just that, resulting in a new set of rules more complicated than the first. Avoiding penalties may require changes to internal recordkeeping systems, personnel management, and budgetary planning. Many of these changes cannot be accommodated overnight… or in the span of a few weeks.
For employers who have not analyzed how the employer mandate applies, the time to determine the best strategy for managing the mandate is now and the consultants at HCW are ready to help.
