Employer "Pay or Play" Mandate in 2014 — Will it apply to your business?
The re-election of President Obama and the lack of change in the control of the houses of Congress effectively ensure that the provisions of Health Care Reform will remain in place and will continue along the path of implementation.
This is the third Alert in a series designed to help employers understand and address the effects of Health Care Reform on your businesses so you are in the best position to make decisions in response to these new requirements. Our first Alert dealt with the implementation of new health flexible spending account limits; our second Alert provided guidance on reporting cost of health care coverage on form W-2. At this point, most of the regulatory guidance needed has either not yet been issued or has only been issued in proposed form. Therefore, we will provide the best possible guidance based on existing knowledge.
Employer “Shared Responsibility” requirements beginning in 2014 Health Care Reform imposes “shared responsibility” for full-time employees’ health care coverage on certain employers beginning in 2014. However, an employer’s obligation to “pay or play” in 2014 is based on the employer’s workforce in 2013. This Alert outlines how to determine if your business is subject to the shared responsibility requirements in 2014, based on your 2013 workforce. An employer can – and should – use these guidelines now, based on your actual and expected 2013 workforce, to determine if you will be subject to the shared responsibility requirements in 2014, so your business can be prepared on January 1, 2014.
Future Alerts will provide detail on the “shared responsibility” requirements in 2014, including the related potential penalties for noncompliance, and outline options for employers who elect to comply with the requirements and avoid the related penalties and for employers who wish to legally avoid the requirements.
“Applicable large employers” will be subject to the “shared responsibility” requirements The “shared responsibility” mandate is imposed on every “applicable large employer” by Internal Revenue Code Section 4980H. An “applicable large employer” is any employer who employed an average of at least 50 full-time employees (including full-time equivalent employees) in the preceding calendar year. Therefore, if your business has an average of at least 50 full-time employees in 2013, you will be subject to the mandate in 2014.
Determining if your business is an “applicable large employer” for 2014 Step #1 – Is your business an “employer” for purposes of the shared responsibility requirements? Yes. All types of employers — for profit, non-profit, tax-exempt, governmental entities (federal, state, local, Indian tribal governments), closely held businesses, sole proprietors, partnerships, limited liability companies, publicly traded companies — are potentially “applicable large employers.” No category of employers is excluded.
If your business is under common control with one or more other businesses (using the Internal Revenue Code rules applicable to qualified retirement plans like Code Section 401(k) plans), all of the related businesses are treated as a single business for purposes of determining if each employer in the group is an applicable large employer. If the group meets the criteria for an applicable large employer, each individual employer in the group is treated as an applicable large employer, even if the individual employer, by itself, does not meet the criteria. The term “employer” or “business” used in this Alert refers to a group of related businesses under common control when that situation exists.
If your business was not in existence in 2013, you don’t automatically avoid applicable large employer status for 2014. If your business first comes into existence in 2014, your business will be an applicable large employer for 2014 if your business reasonably expects to employ an average of at least 50 full-time equivalent employees (FTE employees) during that calendar year.
If your business entity is created in 2014, but it is a successor employer to another business that had employees in 2013, your business’s status as an applicable large employer in 2014 will be determined based on the number of employees of the predecessor employer.
Step #2 – Who are your “employees” that must be counted? An employer is required to count all of its “common law” employees, even if the employer (or the employer’s agent) does not issue Form W-2 to the employee. For example, if your business uses a professional employer organization (“PEO”) to provide payroll and other human resources functions for your business, but the employees are considered common law employees of your business, your business must count the PEO employees providing services to your business as common law employees, even though the PEO issues Forms W-2 to those employees.
Any seasonal workers are initially included when counting your business’s employees. However, seasonal workers may be excluded when determining if your business is an applicable large employer under an exception discussed below.
An employer is also required to count its employees represented by a labor union, even if those represented employees participate in a multiemployer group health care plan through the union.
The only common law employees who are not included are employees who work entirely outside the U.S., even if they are U.S. citizens. If a common law employee works both within and outside the U.S., the employee’s hours worked within the U.S. are counted for purposes of determining if the employee is a full-time employee or for counting the employee’s hours in calculating FTE employees, as explained below.
A sole proprietor, a partner in a partnership, or a two percent owner in an S Corporation is not an employee for these purposes.
Early determination point If your business does not have at least 50 common law employees at any time during 2013 (regardless of the number of hours worked by any of those common law employees), you can stop your analysis here. Your business will not be an applicable large employer subject to the shared responsibility requirements in 2014. You will not need to perform the analysis outlined here until your business has at least 50 common law employees.
Step #3 – How many “full-time employees” does your business have? A “full-time employee” is an employee who is employed an average of at least 30 hours per week during a calendar month. An employee’s status as a “full-time employee” generally must be determined separately for each calendar month.
An employer can treat an employee paid on an hourly basis who works 130 hours in a calendar month as a full-time employee without determining the employee’s average weekly hours. However, the Proposed Treasury Regulations require the employer to apply this rule on a “reasonable and consistent basis.”
Separate rules apply for counting hours worked by an employee who is not paid on an hourly basis. An employer must use one of the following methods:
- Based on actual hours worked, if records of hours worked are kept;
- On a days-worked equivalency, under which the employee is credited with eight hours worked for any day on which the employee actually worked at least one hour; or
- On a weeks-worked equivalency, under which the employee is credited with 40 hours for any week in which the employee actually worked at least one hour.
An employer can use different methods for different classifications of non-hourly employees as long as the classifications are reasonable and consistently applied. However, use of the days-worked or weeks-worked equivalency must generally reflect hours actually worked (or for which payment is due) and cannot be used to understate an employee’s hours worked so that an employee who regularly works at least 30 hours per week is not treated as a full-time employee. For example, using the days-worked equivalency for an employee who is normally scheduled to work three 10-hours days during a week would not be acceptable, because the days-worked equivalency would result in the employee not being treated as a full-time employee even though the employee regularly works 30 hours per week.
Use of a “look-back measurement period,” an “administrative period,” and a “stability period” in identifying full-time employees is not permitted for purposes of determining applicable large employer status. These optional mechanisms are only applicable when identifying the full-time employees to whom health care coverage must be offered under the shared responsibility requirements, and will be discussed in our next Alert.
Step #4 – How many “full-time equivalent employees” does your business have? As with its full-time employees, an employer must determine the number of its “full-time equivalent employees” (“FTE employees”) for each calendar month. FTE employees are determined by first adding up all hours worked in the calendar month by all employees who are not determined to be full-time employees. No more than 120 hours can be counted for any individual non-full-time employee in this calculation.
The total number of hours worked in the calendar month by all non-full-time employees are then divided by 120 (rounded to two decimal places), to determine the number of FTE employees for that calendar month.
Step #5 – What is your business’s average number of full-time employees for 2013? For each calendar month in 2013, an employer adds its full-time employees for that month to its FTE employees for that month. These monthly totals are then added together, with the result divided by 12 (rounded down to the next whole number) to determine the employer’s average number of full-time employees for 2013.
If this monthly average for 2013 is at least 50, the employer will be an applicable large employer subject to the shared responsibility requirements for 2014.
If this monthly average for 2013 is less than 50, the employer will not be an applicable large employer and will not be subject to shared responsibility requirements in 2014.
If your business employs seasonal workers, an available exception may enable your business to fall below this 50 full-time employee threshold. For this exception, a “seasonal worker” is an employee who is employed on a seasonal basis, including retail workers employed exclusively during holiday seasons. Employers are permitted to apply a reasonable, good faith interpretation of “seasonal worker,” including a reasonable, good faith interpretation of rules under Labor Regulations Section 500.20(s)(1) (under the Migrant and Seasonal Agricultural Worker Protection Act) for this purpose.
Under the seasonal worker exception, if your daily total of full-time employees/FTE employees exceeds 50 for 120 days or less in a single calendar year (even if the days are not consecutive), and all of your employees in excess of 50 on those days are seasonal workers, you are not treated as having employed an average of at least 50 full-time employees for that calendar year. Accordingly you are not an applicable large employer and you are not subject to the shared responsibility requirements for the following calendar year.
The seasonal worker exception can also be applied on a monthly, rather than daily, basis. If your monthly full-time employee/FTE employee total exceeds 50 for four or fewer calendar months in a single calendar year (even if the calendar months are not consecutive), and all of your employees in excess of 50 during those months were all seasonal workers, you are not treated as having employed an average of at least 50 full-time employees for that calendar year. Therefore you are not an applicable large employer and you are not subject to the shared responsibility requirements for the following calendar year.
Transition rule for 2014 In many cases, an employer’s status as an applicable large employer for 2014 will be obvious without requiring the employer to identify and count its full-time employees and determine the number of its FTE employees on a monthly basis. However, employers to whom the seasonal workers exception may apply, employers with a significant number of non-full-time employees, and employers whose workforce is expected to fluctuate above and below the 50 full-time employee threshold during 2013 will need to implement new procedures to determine whether or not they will be applicable large employers in 2014. To provide some relief for this first year of implementation, the Internal Revenue Service has established a transition rule for applicable large employer determinations for 2014.
Under this transition rule, an employer is allowed to determine its status as an applicable large employer in 2014 based on its average number of full-time employees/FTE employees for any period of at least six consecutive calendar months in 2013. This measurement period is not required to either begin on January 1, 2013 or end on December 31, 2013. For example, under this transition rule, an employer could select a period of at least six months ending on October 31, 2013, so that the employer has the months of November and December 2013 to make any required changes to the employer’s group health care plan, or establish a group health care plan, before January 1, 2014.
Your business is not required to notify the Internal Revenue Service if it is applying the transition rule or what determination period of at least six consecutive months you are electing to use. However, your records should clearly document these elections to support your determination that you are not an applicable large employer for 2014, especially if your average full-time employees would be at least 50 if all calendar months of 2014 are reflected.
The next Alert in this series will detail the shared responsibility requirements for applicable large employers and the related potential penalties.
For more information information, please contact:
Antoinette M. Pilzner 248.220.1341
Dale R. Vlasek
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