In late August, the Department of the Treasury issued Notice 2012-58, which provides further guidance on methods employers are permitted (but not required) to use in determining which employees must be treated as full-time employees for purposes of calculating any assessable payment under the employer shared responsibility provisions in Section 4980H of the Internal Revenue Code (Section 4980H). These provisions generally apply to employers with at least 50 full-time equivalent employees (applicable large employers).
Notice 2012-58 is the latest in a series of releases from the United States Departments of Labor, Health and Human Services, and the Treasury (the Departments) addressing certain provisions of the Affordable Care Act that are of special concern to employers due to their potential impact on plan design and cost. These provisions include the employer shared responsibility provisions in Section 4980H, as well as the automatic enrollment provisions of Section 18A of the Fair Labor Standard Act and the maximum 90-day waiting period a group health plan can impose on employees who are otherwise eligible for the employer's group health plan coverage under Section 2708 of the Public Health Services Act (Section 2708). The regulatory process in developing guidance under these provisions has been characterized by coordination among the Departments and a give-and-take between the regulators and interested stakeholders, with the Departments issuing guidance describing proposals for dealing with some of the most challenging aspects of the new provisions, then refining those proposals in response to stakeholder feedback.
By way of background, beginning in 2014, an applicable large employer may be subject to the employer shared responsibility provisions of Section 4980H if at least one of its full-time employees receives a premium tax credit or cost-sharing reduction for coverage that he or she purchases on one of the new insurance exchanges. The amount of an employer's exposure under Section 4980H depends on whether the employer offers its full-time employees (and their dependents) the opportunity to enroll in a qualifying health plan. If the employer does not make a qualifying offer of coverage, the penalty is $2,000 per all full-time employees (excluding the first 30); if such an opportunity is offered, the penalty is $3,000 per full-time employee who receives a premium tax credit, capped at the penalty the employer would have paid if it had failed to offer coverage in the first instance. In general, in determining whether an employee is eligible for a premium tax credit or cost-sharing reduction, an employer will be considered to offer a "qualifying plan" if the actuarial value of the plan exceeds 60 percent and if the employee contribution to the cost of coverage is less than 9.5 percent of the employee's household income.
For purposes of determining an employer's potential Section 4980H liability, a "full-time" employee is an employee who, with respect to any month, works at least 30 hours per week, which may be different than the "full-time" standard plan sponsors are currently using to determine plan eligibility. Many of the proposals that have been put forth by the Treasury Department so far have been attempts to grapple with how employers will administer this monthly determination, particularly those employers with large numbers of workers whose hours fluctuate from week to week, much less month-to-month, like retail and hospitality.
In all, the Treasury Department has issued five notices covering a variety of issues under Section 4980H, including Notice 2012-58. Notice 2012-58 builds on proposals set forth in guidance issued earlier this year by the Departments in Notice 2012-17 and Technical Release 2012-01. In that guidance, the Departments addressed the expected scope of proposed regulations to be issued under Section 4980H. They reiterated their intent to include an employer safe harbor that allows employers to determine the affordability of coverage offered to employees by reference to their W-2 wages rather than to their household income, as originally proposed in Notice 2011-73. They also confirmed their intent to permit employers to use a "look-back/stability period" safe harbor method, originally proposed in Notice 2011-36, to determine whether employees with less predictable work schedules are full-time employees for purposes of assessing a penalty under Section 4980H. Finally, this earlier guidance addressed the interaction of Section 4980H with the Section 2708 prohibition on waiting periods in excess of 90 days.
Notice 2012-58 expands the "look-back/stability period" safe harbor method for determining whether variable hour and seasonal employees are treated as full-time employees for purposes of the employer shared responsibility provisions of the Affordable Care Act. The Notice reflects comments received in response to the previous proposals by giving employers the option to use a look-back measurement period of up to 12 months to determine whether new and ongoing variable hour employees and seasonal employees are full-time employees. The guidance also provides for the optional use of certain periods intended to enable employers to administer the determinations made, explains how employees can transition from the determination method used for new employees to that used for ongoing employees, and provides useful examples of how these expanded methods can be applied. Simultaneously with the issuance of Notice 2012-58, the Department of the Treasury issued Notice 2012-59 and the Departments of Labor and Health and Human Services issued substantially identical administrative guidance expanding and refining the proposals previously put forward on the maximum 90-day waiting period permissible under Section 2708.
While the rules may appear complicated, they offer employers a common sense approach to determining whether a variable hour or seasonal employee should be treated as a full-time employee. In addition, the two Notices, read together, show how an employer can design its group health plan to take advantage of the safe harbor approach to determining the full-time status of newly-hired employees detailed under Notice 2012-58 with the 90-day maximum waiting period rules set forth in Notice 2012-59. In an effort to eliminate further uncertainty and enable employers to begin planning for 2014, the guidance permits employers to rely on Notices 2012-58 and 2012-59 at least through the end of 2014.
Determining Full-Time Status
In general, the framework set forth in Notice 2012-58 builds off the safe harbor method first proposed in Notice 2011-36, under which an applicable large employer may use a measurement period of up to 12 months to determine whether an employee will be treated as full-time for each month during a corresponding stability period.
The Notice introduces terms and concepts that will become familiar to employers establishing methods for determining full-time employee status. These include:
- Variable Hour Employee. A new employee is a variable hour employee if, based on the facts and circumstances at the date the employee begins providing services to the employer, it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week.
- Seasonal Employee. The Affordable Care Act does not define seasonal worker for purposes of determining when someone is a full-time employee. Notice 2012-58 states that through at least 2014, employers are permitted to use a reasonable, good faith interpretation of the term "seasonal employee" for this purpose.
- Ongoing Employee. An ongoing employee is an individual who has been employed by the employer for at least one complete standard measurement period.
- Standard Measurement Period. A standard measurement period is a time period of not less than three but not more than 12 consecutive calendar months, as chosen by an applicable large employer for determining the full-time status of an ongoing employee.
- Initial Measurement Period. The initial measurement period is a time period of not less than three but not more than 12 consecutive calendar months, as chosen by an applicable large employer for determining the full-time status of a new variable hour or seasonal employee.
- Stability Period. For ongoing employees, a stability period is a period of at least six consecutive calendar months that is no shorter in duration than the standard measurement period and that begins after the standard measurement period and any applicable administrative period. The stability period for new employees must be the same length as the stability period for ongoing employees (i.e., at least six consecutive calendar months that is no shorter in duration than the initial measurement period) and begins after the initial measurement period and any associated administrative period.
- Administrative Period. An administrative period is a period of not longer than 90 days following the end of an initial or standard measurement period and before the associated stability period, during which an employer can complete standard duties associated with group health plan administration, such as making eligibility determinations and notifying and enrolling eligible employees. For new employees, the permissible 90-day period between the initial measurement period and the initial stability period is reduced by the number of days between the date of hire and the first day of the initial measurement period.
- Permissible Employee Categories. Permissible employee categories are those categories of employees for which employers may use measurement periods and stability periods that differ either in length or in their starting and ending dates. The categories are (1) collectively bargained employees and non-collectively bargained employers, (2) salaried and hourly employees, (3) employees of different entities, and (4) employees located in different states.
Ongoing Employees
Under the safe harbor method, employers can have a standard measurement period with a different start and duration for each permissible employee category, so long as the determination is made on a uniform and consistent basis for all employees in the same category. If an employee averages at least 30 hours per week (or 130 hours per month) during the applicable standard measurement period, then the employer must treat the employee as a full-time employee during the subsequent stability period, regardless of the employee's number of hours worked during the stability period. If the employer determines that the employee did not average 30 hours per week during the standard measurement period, the employer can treat that employee as not a full-time employee during the stability period that follows, but is not longer than, the standard measurement period.
In Notice 2012-58, the IRS has established a permissible administrative period of up to 90 days. This period neither reduces nor lengthens the standard measurement period or the stability period, but overlaps with the prior stability period to ensure continued coverage for ongoing employees who were are eligible for coverage based on a determination of full-time status during a prior standard measurement period.
New Employees
The Notice modifies the prior proposal set forth in Technical Release 2012-1 by lengthening the maximum permissible initial measurement period for newly hired variable hour and seasonal employees from six to 12 months. If an employee is determined to be a full-time employee, he or she must be treated as a full-time employee for each month in a stability period that is the same length as the stability period for ongoing employees. If an employer is permitted to treat the employee as not a full-time employee during the stability period, the duration of the stability period cannot exceed the duration of the initial measurement period by more than one month and it must not exceed the remainder of the standard measurement period (plus any associated administrative period) in which the initial measurement period ends. The Notice also provides guidance on how to transition from the new employee rules to the ongoing employee rules.
For a new employee who is reasonably expected at his or her start date to work full-time, the Notice makes clear that no penalty under Section 4980H will be assessed with respect to the first three calendar months of employment, so long as coverage is offered at or before the conclusion of those three months.
Application of these rules is best explained by the many examples provided throughout the Notice.
90-Day Maximum Waiting Period
Section 2708 of the Public Health Services Act, as incorporated into the Code and ERISA, prohibits any group health plan from imposing a waiting period longer than 90 days. A waiting period is the period of time that must pass before coverage for an employee or dependent who has otherwise met the plan's substantive eligibility conditions (such as being in an eligible job classification or achieving job-related licensure requirements specified in the plan's terms) can become effective.
Notice 2012-59 provides temporary guidance on what the Departments will consider to be compliance with Section 2708, at least through the end of 2014. Under this guidance, eligibility conditions that are based solely on the lapse of a time period are permissible for no more than 90 days; other conditions for eligibility are generally permissible, so long as they are not designed to avoid having to comply with the 90-day waiting period limitation. The waiting period limitation will be considered satisfied if the employee can elect coverage that begins within a permissible 90-day period, even if the employee takes additional time to elect coverage.
In providing guidance on the application of the 90-day waiting period limitation to employees who work less predictable schedules, Notice 2012-59 builds on the safe harbor method set forth in Notice 2012-58 for newly hired variable hour and seasonal employees. Under the Notice, if a group health plan conditions eligibility on an employee regularly working a specified number of hours per period (or working full time), and it cannot be determined that a newly hired employee is reasonably expected to regularly work that number of hours per period (or work full time), the plan may take a reasonable period of time to determine whether the employee meets the plan's eligibility condition. The reasonable period may include a measurement period that is consistent with the timeframe permitted for these determinations under Section 4980H (i.e., no more than 12 months), whether or not the employer is an applicable large employer subject to Section 4980H. For employees who satisfy the hours of service or full-time status requirement, coverage must be made effective no later than 13 months from the employee's start date (plus if the employee's start date is not the first day of a calendar month, the time remaining until the first day of the next calendar month).
More to Come
Notice 2012-58 indicates that upcoming proposed regulations under Section 4980H will reflect the proposals and issues described in the Notice and certain other issues on which comments are specifically requested. Given the short comment deadline of September 30, 2012, employers might expect to see proposed regulations prior to the end of this year.
In addition, representatives of the Internal Revenue Service have recently confirmed that the proposed regulations will address a number of other important questions raised by the application of Section 4980H. We would expect these to include:
- What does it mean for an employer to "offer" coverage to employees? In Notice 2011-21, the IRS stated that it expected proposed regulations to make clear that an employer "offering coverage to all, or substantially all, of its full-time employees would not be subject to the 4980H(a) assessable payment provision" (emphasis added). This implies that an employer could avoid exposure for the more costly $2,000 assessment even if some of its full-time employees are not eligible for coverage under the employer's group health plan. For example, notwithstanding that an employer excludes certain full-time employees based on their geographic location, the nature of the work or their status as seasonal employees, will the employer be deemed to be offering coverage to its full-time employees thereby avoiding the assessment under Section 4980H(a)?
- Whether an employer that offers coverage to "substantially all" its full-time employees might still have exposure under 4980H(a) for a failure to offer coverage if it does not offer family or other dependent coverage?
- How does an employer determine whether its health plan is affordable (i.e., whether the employee contribution exceeds 9.5 percent of household income)? It is expected that proposed regulations will confirm that affordability will be based on the wages paid to an employee by the employer and reported on the employee's Form W-2. While such employee could still receive a premium tax credit or cost-sharing reduction from an exchange if the cost of the employer's coverage exceeds 9.5 percent of his or her household's adjusted gross income, the employer will not be assessed a penalty under Section 4980H if the employee's contribution toward the cost of employer coverage does not exceed 9.5 percent of the employee's income reported on Form W-2.
- Will employers that offer their employees a "defined contribution" health plan, such as a health reimbursement arrangement (or HRA) be considered to "offer" coverage for purposes of Section 4980H and, if so, can such a plan design continue to exist post-2014 when other provisions of the Affordable Care Act that prohibit the imposition of a lifetime or annual limit on benefits are in full effect? Moreover, how would the 60 percent minimum value and the 9.5 percent affordability standards apply to this type of plan design? Could an employer "integrate" an HRA or other similar funding arrangement with a plan purchased on the individual market (whether on the new exchanges or otherwise) and rely on the individual market policy to meet any applicable Affordable Care Act provisions?
- How will the provisions of Section 4980H be applied to employers that participate in multiemployer plans?
Consistent with the past guidance issued, the Departments have signaled a keen awareness of the importance of providing timely guidance on these and other issues under Section 4980H on which employer can rely at least through 2014. Given the lead time necessary for employers to review and, if desired, make changes to plan design and eligibility for coverage effective on or after January 1, 2014, we believe that the Departments are working hard to provide the guidance needed in the not too distant future.