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Affordable Care Act: Is Your Business ACA Compliant?

February 28, 2013

Under the federal Affordable Care Act ("ACA"), a "large employer" may have to pay severe penalties to the IRS if it does not offer affordable health coverage (insured or self-insured) to its full-time employees and their dependents in 2014. The Q&A below is provided as a helpful reference to assist you through the process.

Start Counting Full-Time Employees Now

Are you a "large employer?"
Who must be offered affordable health coverage to avoid employer penalties?

How to Count New Employees

Are the hours of new employees and ongoing employees counted in the same way?
Which new employees of a large employer should be offered health coverage in 2014?

Optional Enrollment and Coverage Periods for Ongoing Full-Time Employees of Large Employers

How may a large employer use an "administrative period" to offer health coverage to ongoing full-time employees for the next coverage period?
For what "stability period" may a large employer continue to treat an ongoing employee as having the same status determined during its standard measuring period?
May an employer use different measuring periods, administrative periods and stability periods for different classes of employees?

Optional Enrollment and Coverage Periods for New Full-Time Employees of Large Employers

Are the time periods for offering health coverage the same for new full-time employees and ongoing full-time employees?
For what period should a large employer offer health coverage to a new employee who starts as a full-time employee?
May a large employer use an administrative period for health coverage enrollment of a new variable-hour or seasonal employee who qualifies as full-time during his or her initial measuring period?
What is the initial stability period for a new variable-hour or seasonal employee?
When will a new variable-hour or seasonal employee's weekly hours be counted again after his or her initial measuring period?

ACA Penalties That Could Apply to Large Employers in 2014

What penalty would apply if minimum essential coverage is not offered?
What penalty would apply if minimum essential coverage is offered, but is not affordable or does not provide minimum value?
How is a full-time employee's household income measured for the 9.5% test?
What is the "minimum value" standard for affordable health coverage?
How does a plan calculate whether it provides minimum value?

How Transition Rules Can Minimize ACA Penalties in 2014

Do any ACA penalties apply to the employer during the part of 2014 that is before the start of its group health plan's fiscal year that begins in 2014?
What if a plan wants to delay enrolling non-covered employees until its fiscal year begins in 2014, but the employees did not meet the eligibility test in item number 1 above?
May an employee minimize the risk of personal ACA penalties, or obtain coverage in an ACA exchange, by making or changing a health coverage election during the fiscal plan year of a large employer's "cafeteria plan" (under Code section 125) that begins in 2013?
If a large employer contributes to a multiemployer health plan under a union contract, does that coverage prevent employer penalties under the ACA, for any of its employees working under that contract in 2014?

ACA Notices and Reports Health Plans and Employers Are Required to Deliver

What Notices and Reports are Required?
Must an Employer Report to IRS on Coverage Status of Employees for the 2014 Portion of a Health Plan's Fiscal Year that Begins in 2013?

What does a self-insured health plan sponsor need to know about the PCORI Fee?

Employer Notices of Health Insurance Exchange

What does an employer need to know about the Exchange Notice?
How must a health plan's COBRA election notice be revised for ACA?

Start Counting Full-Time Employees Now

An employer group should start counting employees soon, so it can see within six months whether it is a large employer. Then it will have time to evaluate future staffing and the potential costs of health coverage or ACA penalties in 2014.

Q: Are you a "large employer?" For this purpose, all members of a group of employers under common ownership (or in an affiliated service group) are treated as one employer (an "employer group"). A "large employer" for 2014 is defined as an employer group that employed an average of 50 or more full-time employees (including full-time equivalent employees), on business days during a measuring period of at least six consecutive months in 2013. The group may choose the length of this 2013 measuring period, but after 2013 each measuring period must be 12 months. "Full-time employees" and "full-time equivalent employees" are defined below.

Who is a full-time employee? An employee is a "full-time employee" for a month if employed by the employer group, on average, at least 30 hours of service weekly during the month. As an alternative for the large employer test, 130 hours of service in a month may be treated as 30 hours weekly. An employer group must count all employees required to receive a Form W-2 for work in the United States, but does not count the group's leased employees, sole proprietor, partners, or 2% shareholders of an S corporation.
How are full-time equivalent employees (FTEQs) counted? An FTEQ is a group of employees who are not full-time employees, and whose hours of service are combined to count as the equivalent of one full-time employee. An employer group's FTEQs for a month are figured by (1) counting the total hours of service (up to 120 hours for each employee) for all employees who were not full-time employees for the month, and (2) dividing their total hours by 120. That result is the number of FTEQs, which may include a fraction.
What hours are counted? "Hours of service" are those for which the employee is paid, whether working or not. Specific rules apply for (1) employees not paid on an hourly basis, (2) teachers who are not paid for preparation time or during school year breaks; and (3) unpaid hours during FMLA and USERRA leaves and time off for jury duty.
How does an employer group figure whether it has 50 full-time employees? Combine the monthly full-time employee and FTEQ totals for each month in the 2013 measuring period (which may be as short as six months), and divide by the number of months in that period, to find the average number of full-time employees for the large employer test.
Can seasonal employees be excluded? A specific rule allows an employer group to exclude some seasonal employees from the 2013 measuring period, if needed to avoid being a large employer.

Q: Who must be offered affordable health coverage to avoid employer penalties?
To avoid penalties in 2014, a member of a large employer group must offer affordable health coverage (including at least minimum essential benefits) to at least 95% of the member's full-time employees and their dependents (other than spouses).

Whose full-time employees are counted for the employer penalty rules? For the penalty rules, each member of a large employer group (1) counts its own full-time employees (at least 30 hours of service weekly, on average, per month), and (2) does not count any FTEQs described above.
What 2013 measuring period is used to count ongoing employees? The employer may choose a 2013 measuring period between three and 12 months to determine average weekly hours that will identify its ongoing full-time employees. An "ongoing employee" is an employee who is employed throughout that measuring period.

Practical Point. For example, the 2013 measuring period could be a six-month period ending October 31, 2013. That would allow two months for the employer to review staffing levels and health coverage, plan for ACA compliance in 2014 and, if health coverage will be offered, allow enrollment for coverage in 2014. A six-month measuring period would be the most flexible.

Are ongoing and new employees counted in the same way? Separate rules apply for counting the hours of "ongoing employees" (described below) and "new employees." The below section answers questions about counting new employees (those hired after the start of the following 2013 measuring period).

How to Count New Employees

Q: Are the hours of new employees and ongoing employees counted in the same way? No. Separate rules apply for counting the hours of service of "new employees" and "ongoing employees" to determine if they are full-time for health coverage purposes.

Who is an ongoing employee for health coverage in 2014? An "ongoing employee" is one who is employed by a large employer throughout its 2013 standard measuring period (between three and 12 months long). An ongoing employee is treated as full-time for 2014 health coverage if he or she works on average at least 30 hours weekly during the 2013 standard measuring period. However, standard measuring periods do not apply to new employees.
Who is a new employee? A "new employee" is an employee who starts work for a large employer and: (1) never worked for the employer; (2) previously worked for the employer; but had a break in service at least 26 weeks long; or (3) previously worked less than 26 weeks for the employer, and had a break in service that was at least four weeks and was longer than the employee's last period of work for the employer. If an employee previously worked for the employer, but does not fit into category (2) or (3), the employee is treated as an ongoing employee instead of a new employee. A "break in service" is a period in which no hours of service were credited to the individual by the employer.

Q: Which new employees of a large employer should be offered health coverage in 2014? A new employee who should be offered coverage in 2014 is one who is hired after the start of the employer's 2013 standard measuring period for ongoing employees (described above), and qualifies as a full-time employee in one of the following two ways:

1. Some new employees are treated as full-time right away. If a new employee (other than a seasonal employee described below) of a large employer is reasonably expected to work on average at least 30 hours weekly, based on facts known at his or her start date, then he or she is immediately treated as a full-time employee. In that case, he or she should be offered health coverage within three months after the start date. However, this offer need not be made until 2014.

2. The status of a new employee whose hours are variable or seasonal may be determined during an initial measuring period. If a large employer does not know if a new employee will work on average at least 30 hours weekly, because he or she will be working variable hours, or is a seasonal employee described below, the employee's weekly hours may be counted during an initial measuring period chosen by the employer for all such new employees. The initial measuring period may begin on any date between the employee's start date and the first day of the next month, and may be any period between three and 12 months long.

Who are seasonal employees? "Seasonal employees" perform services on a seasonal basis, as defined by the Department of Labor, including (but not limited to) (1) retail workers employed only during holiday seasons and (2) certain agricultural workers. An agricultural worker performs work on a seasonal basis if the work is ordinarily performed only at certain seasons or periods of the year, and the work by its nature may not be carried on throughout the year. However, for counting full-time employees under ACA, seasonal employees can include other types of employees, in addition to retail and agricultural workers. This definition may change after 2014.
When should a new variable hour or seasonal employee be offered health coverage? If a new variable hour or seasonal employee is found to be a full-time employee of a large employer during the employer's initial measuring period (between three and 12 months long), the employee should be offered health coverage in 2014, by the first day of the month beginning on or after the anniversary of his or her start date.

Practical Point: For example, the initial measuring period for a new variable hour or seasonal employee who starts on July 15, 2013, could be a 10-month period beginning August 1, 2013, and ending May 31, 2014. If the employee is found to be a full-time employee during that period, the employer would have two months to offer health coverage to the employee and allow enrollment by August 1, 2014 (the first day of the month beginning after the anniversary of the start date).

If a new variable hour or seasonal employee's status changes to full-time during the initial measuring period, when should health coverage be offered in 2014? If the employment status of a new variable hour or seasonal employee changes during his or her initial measuring period, so that the employee is now expected to be a full-time employee (working at least 30 hours weekly in the future), the new employee should be offered health coverage to the employee by the first day of the fourth month after the change in status, even if the initial measuring period is not over. However, this offer need not be made until 2014. Also, this offer need not be made if the employee was offered health coverage for any reason before the fourth month.

Optional Enrollment and Coverage Periods for Ongoing Full-Time Employees of Large Employers

A large employer may find it impractical to determine which ongoing full-time employees should be offered affordable health coverage on a monthly basis during 2014. The Q&A below explains the optional "administrative period" and "stability period" that a large employer may use to offer coverage to ongoing full-time employees at intervals less frequent than monthly.

Please note: If you are unsure whether your company qualifies as a "large employer," or how to identify its ongoing and new "full-time employees" during certain measuring periods for counting hours of service in 2013, please refer to "Start Counting Full-Time Employees Now" and "How to Count New Employees" sections above.

Q: How may a large employer use an "administrative period" to offer health coverage to ongoing full-time employees for the next coverage period? Ongoing employees may be identified as full-time during an employer's "standard measuring period" before a plan year or any shorter coverage period. However, the employer will need a period of time between the end of the standard measuring period and the start of the next coverage period to see which ongoing employees are eligible for health coverage during that coverage period, to offer the coverage, and to enroll those who choose to participate. The period that an employer may use for those administrative functions is called an "administrative period."

What rules apply to an administrative period? An employer may choose an administrative period of up to 90 days between the end of each standard measuring period and the start of the next coverage period. After 2013, the administrative period must overlap any prior coverage period in which health coverage is available, so that employees who are covered during that coverage period will remain covered during the administrative period before the next coverage period. For example, employees covered for a year must remain covered during the administrative period that precedes the next year.

Practical Point: If an employer chooses a six-month standard measuring period ending on October 31, 2013, and its health plan year begins January 1, 2014, it should choose November and December of 2013 as its administrative period to prepare for the next plan year. The administrative period would be the same in later years when the employer changes to a 12-month standard measuring period ending each October 31, assuming the employer continues the same plan year.

Q: For what "stability period" may a large employer continue to treat an ongoing employee as having the same status determined during its standard measuring period? If an ongoing employee is found to be a full-time employee during a standard measuring period, or does not qualify as full-time during that period, the employer may continue to treat him or her as having that same status for health coverage available during a "stability period" beginning at the start of the next plan year.

What rules apply to a stability period? A "stability period" must be a coverage period (between six and 12 months long) that is chosen by the employer and immediately follows its standard measuring period and any administrative period used for enrollment.
How long should a stability period last? The employer can use two possible stability periods, based on the status of the employee during the prior measuring period. The period could vary as follows: (1) if an ongoing employee was a full-time employee during a standard measuring period, the following stability period (when coverage should be offered to the employee) must be at least six months long, but may not be shorter than the measuring period; or (2) if the employee was not a full-time employee during a standard measuring period, the following stability period (when coverage need not be available to the employee) may not be longer than the measuring period.

Practical Points: To avoid any inconsistency between those two possible stability periods, an employer should choose a stability period that is the same length as the prior standard measuring period. To simplify health plan administration, many employers will use a 12-month period for both purposes in 2014 and later years, except that the 2013 measuring period could be as short as six months. In that case, the stability period would be the plan year. If an employer's standard measuring period and stability period are both six months long, it must allow open enrollment twice during each plan year, so that ongoing full-time employees qualifying during a six-month standard measuring period may enroll for the next six-month stability period.

May an employer choose a 2014 stability period longer than its 2013 measuring period? If an employer chooses a 2014 stability period that is longer than six months (such as its plan year), the employer may choose a 2013 standard measuring period that is shorter than the stability period. However, the 2013 measuring period must be at least six months long and end no earlier than 90 days before the next health plan year begins (January 1, 2014 or later). If the 2013 measuring period ends before that plan year, this will allow an employer time to determine, before that plan year, whether or not its ongoing employees are full-time, and to rely on their full-time or part-time status for that plan year or any shorter stability period starting in 2014.
May an employer change its standard measuring period and stability period for ongoing employees? An employer may change future standard measuring periods and related stability periods, but generally may not change a stability period after the prior standard measuring period has begun.

Q: May an employer use different measuring periods, administrative periods and stability periods for different classes of employees? A member of a large employer group may choose different measuring periods, administrative periods, and stability periods only for the classes of employees within each of the following categories: (1) each group of employees covered by a collective bargaining agreement, (2) collectively bargained and non-collectively bargained employees, (3) salaried employees and hourly employees, and (4) employees whose primary places of employment are in different states. For example, different periods may be used for salaried employees and hourly employees.

Optional Enrollment and Coverage Periods for New Full-Time Employees of Large Employers

A large employer may find it impractical to determine every month which new full-time employees should be offered affordable health coverage during 2014. The Q&A below:

states the length of time that a large employer may delay offering coverage to a new full-time employee;
explains the optional administrative and stability periods that a large employer may use to either (1) avoid offering coverage every month to each new variable-hour or seasonal employee who qualifies as full-time for that month, or (2) exclude the employee for an extended period if he or she does not qualify as full-time during his or her unique initial measuring period; and
recommends a health plan amendment that, among many others, may be required for 2014.

Q: Are the time periods for offering health coverage the same for new full-time employees and ongoing full-time employees? No, the following separate offering periods will apply for offering health coverage to full-time employees who are identified as "new employees" or "ongoing employees":

New employees: Each new employee may be offered coverage within 90 days after being hired as a full-time employee. However, if it was not clear whether the employee would be full-time until the end of his or her unique "initial measuring period," the coverage may be offered during an "administrative period" starting after that measuring period and ending before that employee's unique "initial stability period" for that coverage.
Ongoing employees: As explained above in the section titled "Optional Enrollment and Coverage Periods for Ongoing Full-Time Employees of Large Employers," ongoing full-time employees may be offered coverage during an "administrative period" starting after an employer's "standard measuring period" and ending before the employer's next "stability period" (usually a plan year).

Q: For what period should a large employer offer health coverage to a new employee who starts as a full-time employee?

When should a new full-time employee first be offered health coverage? If a new employee is a full-time employee when hired, but is not a seasonal employee, he or she should be offered health coverage within 90 days after the employee's start date.

Practical Point: Group health plans that currently make employees eligible at the start of the next month after 90 days of service must be amended for the 2014 plan year, so that coverage is available within 90 days after a full-time employee begins work. For example, employees hired as full-time could be eligible at the start of the next month after 60 days of service.

For what stability periods should the new full-time employee's eligibility continue? After the employee's initial waiting period (up to 90 days), his or her eligibility for health coverage should continue during (1) the employer's stability period for ongoing employees' coverage in which the employee first becomes eligible, and (2) any later stability period starting before the employee transitions from "new" to "ongoing" employee status. Those "stability periods" are coverage periods (between six and 12 months long, but usually a plan year) chosen by the employer. After the employee is employed for a standard measuring period (generally the same length as the stability period), the employee's full-time status will be tested again during that measuring period, just like other ongoing employees.

Q: May a large employer use an administrative period for health coverage enrollment of a new variable-hour or seasonal employee who qualifies as full-time during his or her initial measuring period? Yes, most employers will need time between the end of the employee's initial measuring period and the beginning of the employee's initial stability period for coverage to (1) see whether the employee is eligible for health coverage, (2) offer the coverage, and (3) enroll the employee for that stability period.

What is a new employee's administrative period after his or her initial measuring period? An employer may choose to have an administrative period of up to 90 days between (1) the end of the initial measuring period in which a variable-hour or seasonal employee qualifies as full-time, and (2) the start of his or her initial stability period for coverage.

For example, if an employer hires a new variable-hour or seasonal employee on May 15, 2013, the employer's 10-month initial measuring period for the employee starts on that date and ends March 14, 2014, and the employer's 12-month initial stability period for coverage of the employee starts May 1, 2014, the administrative period to prepare for the employee's initial stability period would be the six-week period between March 14 and May 1 of 2014.

Q: What is the initial stability period for a new variable-hour or seasonal employee? That depends on whether the new employee is a full-time employee during his or her initial measuring period (a period between six and 12 months long beginning between his or her start date and the first day of the next month). After that, the employee's status (full-time or otherwise) will remain the same during his or her initial stability period.

What is the initial stability period for new variable-hour or seasonal employees who qualify as full-time during their initial measuring periods? The initial stability period for these new full-time employees must be the same length as the employer's stability period for ongoing employees (usually the plan year). The new full-time employee's initial stability period after his or her initial measuring period must be at least six months long (but not less than the initial measuring period), and must begin right after the employee's initial measuring period and any administrative period needed for enrollment.

For example, if (1) a new variable-hour or seasonal employee qualified as full-time during his or her 10-month initial measuring period ending March 14, 2014; and (2) the employer chose a six-week administrative period to enroll the employee, his or her initial stability period for coverage could be a 12-month period starting on May 1, 2014.

What is the initial stability period for a new variable-hour or seasonal employee who does not qualify as a full-time employee during his or her initial measuring period? In this case, the employer may treat the employee as not full-time during an initial stability period that immediately follows the employee's initial measuring period. The employee's initial stability period for exclusion from coverage cannot (1) be more than one month longer than his or her initial measuring period, nor (2) exceed the balance of the employer's standard measuring period for ongoing employees (plus any administrative period) in which the new employee's initial measuring period ends.

The extra month allows an employer to use an initial stability period of up to 12 months, plus a one-month administrative period, for exclusion from coverage. As an alternative, an employer could use a shorter initial measuring period, such as 10 months, plus a more practical administrative period of three months. In each case, the employer would still comply with the rule that the initial measuring period and administrative period combined may not extend beyond the end of the first calendar month beginning on or after the anniversary of the employee's start date.

Practical Point: However, any such maximum initial stability period will often be cut short if the employer's standard measuring period (plus any administrative period) ends before the initial stability period. An employer's standard measuring period will usually be a 12-month period ending two or three months before its plan year, and its administrative period will be that two or three-month period.

For example, if (1) a new variable-hour or seasonal employee did not qualify as full-time during his or her 10-month initial measuring period ending March 14, 2014; and (2) the employer chose an 11-month stability period and two-month administrative period for such employees, that would result in a maximum 13-month exclusion period ending April 14, 2015. However, if the employer's plan year is a calendar year, that exclusion period would instead end on December 31, 2014. That would occur because the employer's standard measuring period for ongoing employees would probably be a 12-month period ending September 30, 2014, and its administrative period in that case would be the three-month period ending December 31, 2014.

Q: When will a new variable-hour or seasonal employee's weekly hours be counted again after his or her initial measuring period? After a new variable-hour employee or seasonal employee has been employed for an entire standard measuring period used by the employer for ongoing employees, the employer will again test the employee for full-time status during that measuring period, just like other ongoing employees. An employer's standard measuring period will usually be a 12-month period ending two or three months before its plan year.

ACA Penalties That Could Apply to Large Employers in 2014

Under the federal Affordable Care Act ("ACA"), a "large employer" may have to pay severe penalties to the IRS if it does not offer affordable health coverage to its full-time employees and their dependents during certain periods in 2014. A large employer must consider two possible kinds of penalties under ACA, as explained below. None of these penalties are deductible for federal income tax purposes, so they are more costly than they may appear.

Please note: If you are unsure whether your company qualifies as a "large employer," or how to identify its ongoing and new "full-time employees" during certain measuring periods for counting hours of service in 2013, please refer to the "Start Counting Full-Time Employees Now" and "How to Count New Employees" sections above.

Q: What penalty would apply if minimum essential coverage is not offered? Each employer in a large employer group must pay a $2,000 annual penalty (prorated on a monthly basis) for each of its full-time employees (except its prorated share of the first 30 of the group's employees), if:

during 2014 (or any later year) any of its full-time employees buys federally subsidized health insurance in a public health insurance exchange operated under ACA; and
during that year, the employer did not offer "minimum essential coverage" (as described below) to at least 95% of its full-time employees and each of their dependents (other than a spouse).

After 2014, the $2,000 penalty will be increased for any inflation in the average per-person cost of health insurance premiums in the U.S.

What is "minimum essential coverage?" ACA defines it as coverage under any group health plan (insured or self-insured) offered by an employer to an employee. However, this does not include (1) on-site medical clinics; (2) separate coverage limited to dental or vision benefits, accident or disability income benefits, or long-term care benefits; (3) separate coverage limited to a specified disease or illness; or (4) separate hospital indemnity or other fixed indemnity insurance. In addition, health coverage provided by employer contributions to a health reimbursement account, health savings account or health flexible spending account under a "cafeteria plan" will probably not qualify as minimum essential coverage. To avoid the $2,000 penalty, the employer's minimum essential coverage does not have to be affordable or provide minimum value (although a different penalty may apply as described below).
What does it mean to "offer" health coverage? The employer must provide the employee with an opportunity to enroll or decline coverage at least once during the plan year.

Practical Point: This offer will generally be made during an open enrollment period for the plan year. Most employers will use an "administrative period" before the plan year as the open enrollment period. See the sections above entitled Optional Enrollment and Coverage Periods for Ongoing Full-Time Employees or New Employees for more information.

Q: What penalty would apply if minimum essential coverage is offered, but is not affordable or does not provide minimum value? Even if an employer avoids the $2,000 penalty, the employer must pay a $3,000 annual penalty (prorated on a monthly basis) for each full-time employee who buys federally subsidized health insurance in a state health insurance exchange operated under ACA, if one of the following three situations exists:

The coverage is unaffordable. An employee's required contribution (before or after taxes), for the lowest cost single health coverage offered by the employer is not affordable if it exceeds 9.5% of the employee's household income (measured as described below).
The coverage has less than minimum value. Minimum value can be tested several ways, as described below.
The employee is not covered. The employer avoided the $2,000 penalty by offering minimum essential coverage to 95% of its full-time employees, but the employee was among the five percent who did not receive the offer.

Practical Point: For most plans, the most difficult test is affordability, when applied to the lowest paid full-time employees. The health plans offered by most employers will pass the minimum value test, which is described below after the household income definition.

The total of these $3,000 penalties for all affected employees cannot exceed the total of all $2,000 penalties the employer would have had to pay if it did not offer minimum essential coverage to any of its full-time employees. An employer cannot be liable for both types of penalties.

After 2014, the $3,000 penalty will be increased for any inflation in the average per-person cost of health insurance premiums in the U.S.

Q: How is a full-time employee's household income measured for the 9.5% test? Technically, "household income" under ACA includes the modified adjusted gross income of the employee, his or her spouse and any dependents who must file an income tax return. However, because employers do not know an employee's household income, most employers would rather use the employee's income paid by the employer. To do so, an employer may choose among the following three "safe harbor" options, which may be used separately for different categories of full-time employees, if the employer offers health coverage that provides minimum value (described below):

Rate of Pay: If the employer wants to determine affordability at the earliest time in a health coverage period, the employer may assume that the employee's household income for all months during that period is one of the following amounts (if his or her pay is not reduced during the calendar year or any shorter period of employment):
- For a salaried employee, his or her monthly salary as of the first day of the coverage period; or
- For an hourly employee, an amount equal to 130 hours multiplied by his or her hourly rate of pay as of the first day of the coverage period.
Wages: If the employer is willing to determine affordability after each calendar year, and each employee's required contribution during the plan year is a consistent dollar amount or percentage of the employee's wages reported in Box 1 of his or her IRS Form W-2, those wages may be treated as the employee's household income. If necessary for a partial year of eligibility, annual W-2 wages may be prorated for each month of employment during the year.
Federal Poverty Line: The federal poverty line for a single individual, under the most recently published poverty guidelines as of the first day of the plan year, may be treated as the household income of an employee. However, this will allow an employer to comply with the affordability rule only if a category of its full-time employees is required to make relatively small employee contributions for single health coverage. For example, if the federal poverty line is $11,000 for 2014, single coverage with at least minimum value would be affordable only if the monthly required contribution by an employee is not more than $87.08 ($11,000 x .095 = $1,045 ÷ 12).

Q: What is the "minimum value" standard for affordable health coverage? A plan provides "minimum value" if the plan (rather than participants) is designed to pay at least 60% of the total "allowed costs" of benefits provided under the plan. However, the minimum value calculation is not affected by the level of employer or employee contributions for the plan's insurance premiums or self-insured benefits.

As described below, "minimum value" is determined by an actuarial estimate based on plan design and national benefit usage statistics, rather than the actual cost of plan benefits. "Allowed costs" are the estimated costs covered by the plan before applying any deductibles, copayments or coinsurance ("cost-sharing payments"). In other words, a plan provides minimum value if participants are not expected to pay more than 40% of estimated allowed costs through cost-sharing payments.

A portion of a plan sponsor's annual contributions to covered employees' health reimbursement accounts (if integrated with the plan and usable only for cost-sharing payments) or health savings accounts can be applied to reduce their estimated cost-sharing payments for a plan year.

Practical Point: "Minimum essential coverage" offered to avoid the $2,000 employer penalty (based on all full-time employees) does not have to meet the minimum value standards. The minimum value standard is needed only to avoid the $3,000 employer penalty, which is based on the limited number of full-time employees who buy federally subsidized health insurance in a state health insurance exchange operated under ACA.

Q: How does a plan calculate whether it provides minimum value? The U.S. Department of Health and Human Services ("HHS") rules allow one of the following three methods to be used:

MV Calculator: To determine whether a typical health plan provides minimum value ("MV"), a plan sponsor may enter information into the MV Calculator created by HHS. This information will include the plan's benefits, coverage of services, and cost-sharing terms. If the plan includes non-typical terms, either of the following two methods can be used instead of the MV Calculator.
Safe Harbor Checklists: HHS will provide plan design-based "safe harbor" checklists that plan sponsors may compare with the benefits and cost-sharing terms of their health plans. If the plan provides at least the level of benefits in a checklist, the plan will be treated as providing minimum value without being evaluated by an actuary. However, these checklists are not yet available.
Actuarial Certification: If a plan includes non-typical features that do not fit into the MV Calculator or any safe harbor checklist described above, the plan sponsor may have an actuary review the plan and certify whether it provides minimum value.

How Transition Rules Can Minimize ACA Penalties in 2014

Regulations issued under the federal Affordable Care Act ("ACA") provide three transition rules that will help a member of a large employer group (an "employer") minimize the risk of IRS penalties in 2014, for itself, its employees and their families, if the employer maintains a group health plan or "cafeteria" plan using a fiscal year other than a calendar year (a "fiscal year plan") that begins in 2013 and ends in 2014. Those risks could arise during that part of the plan's fiscal year which extends into 2014, if the employer does not offer affordable health coverage (with minimum value) to its full-time employees and their dependents during that part of the fiscal year in 2014.

A fourth transition rule simplifies compliance with ACA in 2014 if the employer contributes to a multiemployer health plan under a union contract.

All of these transition rules are described below.

Q: Do any ACA penalties apply to the employer during the part of 2014 that is before the start of its group health plan's fiscal year that begins in 2014? ACA regulations will provide the employer with transition relief from ACA penalties for that part of 2014, if the following two steps are taken:

Identify employees eligible for the 2014 plan year under the plan's 2012 rules. If the employer maintained the fiscal year plan as of December 27, 2012, the relief applies for each full-time employee of the employer (whenever hired) who would be eligible for coverage on the first day of the plan's fiscal year beginning in 2014 (the "2014 plan year"), under the plan's eligibility rules that were in effect on December 27, 2012.
Offer those employees affordable coverage. If each of those employees is offered affordable coverage (with at least minimum value) no later than the first day of the 2014 plan year, no employer penalty will be due for that employee during the portion of 2014 before the first day of the 2014 fiscal plan year. The terms "affordable coverage" and "minimum value" are explained in the section above titled "ACA Penalties That Could Apply to Large Employers in 2014."

Practical Point: This transition rule is important for fiscal year plans, because the terms of health coverage are difficult to change in the middle of a plan year. For example, if a plan's next fiscal year begins October 1, 2013, but did not qualify for the transition relief, it would have to comply with ACA as of January 1, 2014, for the last nine months of that plan year. In this case, the plan would have to decide whether to comply for its entire fiscal year beginning in 2013, change its plan year to a calendar year beginning January 1, 2014, or try to qualify under the following additional transition rules for fiscal year plans.

Q: What if a plan wants to delay enrolling non-covered employees until its fiscal year begins in 2014, but the employees did not meet the eligibility test in item number 1 above?

1. Significant percentage test. The ACA regulations also provide relief for an employer that has a significant percentage of its employees eligible for (or covered under) one or more fiscal year plans that have the same plan year as of December 27, 2012, and wants to offer coverage to certain other employees who did not meet the eligibility test described in item 1 above under questions Q1. A "significant percentage" means that either:

An employer may determine whether a "significant percentage" of its employees was eligible for (or covered under) the fiscal year plan or plans as of (a) the end of the most recent enrollment period, or (b) any date between October 31, 2012, and December 27, 2012.

2. Which employees can be added to the fiscal year plan in its 2014 plan year? If either of those significant percentage tests is met by an employer, no employer penalty will be due for any month before the first day of the 2014 plan year of each of its fiscal year plans, for any of the employer's full-time employees who satisfy both of these tests:

Practical Point: If either of the two transition rules for fiscal year plans (under questions Q1 and Q2) is satisfied, no employer penalty will be assessed for full-time employees who are not offered coverage that complies with ACA during the portion of a 2013 plan year that continues into 2014.

Q: May an employee minimize the risk of personal ACA penalties, or obtain coverage in an ACA exchange, by making or changing a health coverage election during the fiscal plan year of a large employer's "cafeteria plan" (under Code section 125) that begins in 2013? Yes, if the employer amends the cafeteria plan by the end of 2014 to allow those actions, which otherwise would not be allowed during the fiscal plan year without a status change. The amendment can be retroactive to the start of the fiscal plan year beginning in 2013. This would allow eligible employees to coordinate their health coverage with ACA (and minimize the risk of penalties on the employee or family members) during the fiscal plan year as follows:

Late health coverage election. An eligible employee who did not elect the cafeteria plan's health coverage for its fiscal plan year starting in 2013 would have a second chance to enroll the employee and eligible family members in the health coverage option on or after January 1, 2014. An employee might do this to avoid ACA's individual penalty for the first part of the 2014 calendar year.
Cancel or change health coverage election. A participant who did enroll in the cafeteria plan's health coverage, for its fiscal plan year starting in 2013, would be allowed to cancel or change that election once during that fiscal plan year. An employee might change an election by enrolling eligible family members who were not enrolled for the fiscal plan year starting in 2013, but wants to avoid ACA's individual penalty for 2014. Another employee might cancel the employer's health coverage because it is not affordable, if the employee, a spouse or a dependent becomes eligible to purchase subsidized coverage through a health insurance exchange under ACA.

Q: If a large employer contributes to a multiemployer health plan under a union contract, does that coverage prevent employer penalties under the ACA for any of its employees working under that contract in 2014? Yes, if the following transition rule conditions are met (for coverage in 2014 only):

Full-time employee. The employer may identify each of the employer's full-time employees who are eligible for the multiemployer health plan by counting only their hours worked for the employer during its measuring period under ACA.

Practical Point. This means that the ACA penalties will not apply to the employer in 2014, for any employee (such as a construction worker) who qualifies for the multiemployer health plan's coverage as a full-time worker in the covered industry, based on hours worked for this employer and other contributing employers, but does not work enough hours for the employer to be treated as full-time under the ACA. This may change for 2015.

Plan contributions. The union contract requires the employer to contribute to the multi-employer health plan for each of its full-time employees (as determined above).
Offer of coverage. The multiemployer health plan offers coverage to the full-time employee and his or her dependent children.
Affordable coverage. The personal health coverage offered to the full-time employee by the multiemployer health plan is affordable coverage and provides benefits with at least a minimum value. The terms "affordable coverage" and "minimum value" are explained above in the section above titled "ACA Penalties That Could Apply to Large Employers in 2014"

ACA Notices and Reports Health Plans and Employers Are Required to Deliver

Under the federal Affordable Care Act ("ACA"), a group health insurer or an employer sponsoring a group health plan may have to pay severe penalties to the U.S. Department of Labor or the IRS if the insurer or employer does not deliver certain employee notices and government reports each year, beginning in 2013. Those reports also apply to plans with fiscal years that begin in 2013 and end in 2014.

Q: What Notices and Reports are Required? The four required notices and reports are described below in the order in which they must be delivered.

Summary of Benefits and Coverage
During any group health coverage enrollment period beginning after September 13, 2012, the insurer of a group health insurance plan (or the plan administrator of a self-insured plan) must provide a brief Summary of Benefits and Coverage ("SBC") of the plan to each eligible employee along with other enrollment materials. If an employee is allowed to enroll during a plan year, an SBC must be delivered to employees who enroll during plan years beginning on or after September 13, 2012. The U.S. Department of Labor has provided a sample form for an SBC.
Practical Point. The SBC requirement applies to all employee enrollments that occur in the 2013 plan year and later years. For example, if an employer enrolls any newly hired or newly eligible employees in its group health plan this year, those employees must receive an SBC.

Generally, the SBC must include the following:
- uniform definitions of standard insurance terms and medical terms;
- descriptions of:
  - the health coverage and limitations on coverage;
  - cost-sharing provisions (including deductible, coinsurance and copayment obligations); and
  - provisions on renewability and continuation of coverage;
- a section labeled "coverage facts," including examples of common benefit situations;
- a statement that the SBC is a summary and the plan document should be consulted;
- a contact number for additional questions; and
- an Internet address where a copy of the actual plan document can be reviewed and obtained.
An SBC describing coverage to be offered after 2013 must also include the following statements:
- whether or not the plan provides minimum essential coverage (as described above under the title "What penalty would apply if minimum essential coverage is not offered?"); and
- whether or not the plan provides minimum value, which means that it covers at least 60% of the total allowed costs of benefits provided under the plan. To pass this test, the plan's deductible and co-payment rules would not require a typical covered person to pay more than 40% of the cost of those benefits.
Health Plan Cost Information Report on Form W-2
For each calendar year after 2011, every employer that sponsors a group health plan must include the cost of each employee's group health coverage (if any) on the employee's IRS Form W-2, which is due during January of the next year. That cost must include the per-employee premium (or similar cost for a self-insured plan) paid during the year by both the employer and the employee for the coverage (including any employer contribution to a flexible spending account or health reimbursement account). This cost report is required only for information purposes and will be separate from the employee's taxable compensation reported on the Form W-2. However, this report need not include costs for separate dental, vision, or long-term care coverage. Employers that filed fewer than 250 W-2 Forms for 2011 were exempt from this reporting for 2012, but they will have to include group health coverage cost information on Forms W-2 filed for 2013 (due in January 2014).
Written Notice to Employees Regarding ACA Health Insurance Exchanges and the Employer's Health Plan
Each employer that is subject to federal overtime laws is required to send a written notice to current employees by October 1, 2013, including the following information informing the employee:
- of the existence of the health insurance exchanges, including a description of services provided by the exchanges, and how the employee may contact an exchange;
- whether or not the employer sponsors a group health plan;
- if the employer's group health plan (if any) pays less than minimum value (60% of the total allowed costs of benefits provided under the plan), that the employee may be eligible for a premium tax credit against his or her federal income taxes, if the employee purchases a qualified health plan through an exchange; and
- if the employee purchases qualified health coverage through an exchange, that (a) the employee may lose any employer contribution available to pay some or all of the premiums for a group health plan offered by the employer; and (b) any such employer contribution may be excludable from the employee's income for federal income tax purposes.
Reports to IRS and Employees about the Health Coverage Status of Full-Time Employees in 2014
(a) Report to IRS. For 2014 and each later calendar year, each employer that is a member of a large employer group is required to file with the IRS a report including the following information on the employer's health coverage and its full-time employees:
- The number of full-time employees for each month of the year, which may be based on a "look-back" measuring period in the prior year;
- whether or not the employer offered minimum essential coverage (described above under the title "What penalty would apply if minimum essential coverage is not offered?") to those full-time employees (and their dependent children);
- if any such coverage offer was made:
  - the length of the waiting period for that coverage;
  - the months during the year for which the coverage was available;
  - the monthly premium for the lowest cost coverage option in each enrollment category;
  - the percentage of total allowed costs of plan benefits that was payable by the plan for the year; and
- the name, address and taxpayer identification number of each of those full-time employees; and the months in which the employee (and any dependent children) were covered under any such plan.

(b) Statement to Employees. If an employer is required to make such an IRS report, the employer is also required to send, to each full-time employee named in the report, a statement of the information reported to IRS for that employee, along with the employer's name and address, and the telephone number of a contact person designated by the employer.

(c) Due Date for Report and Statements. The report to the IRS and the statements to employees will be due by January 31 after each reporting year. The first reporting year is 2014, so the first reports will be due in January 2015.

(d) Coordination with Insurer. If an employer's coverage is provided by a group health insurer, the employer may contract with the insurer to have the insurer make the general report to IRS and send the individual statements to employees.

Unfortunately, the IRS has not yet issued any guidance on the IRS reporting and employee statement rules.

Q: Must an Employer Report to IRS on Coverage Status of Employees for the 2014 Portion of a Health Plan's Fiscal Year that Begins in 2013? Yes. An employer that is a member of a large employer group may be able to use the transition relief for fiscal year health plans to delay complying with ACA health coverage rules until the start of the plan's fiscal year beginning in 2014 (as described above under the title "Do any ACA penalties apply to the employer during the part of 2014 that is before the start of its group health plan's fiscal year that begins in 2014?"). However, the employer must still comply with the employee coverage reporting requirements (described under the preceding item 4) for the entire 2014 calendar year, including the 2014 portion of a fiscal year that begins in 2013. The calendar year reporting will be essential to IRS administration of the premium tax credit for employees who qualify during 2014 and purchase coverage through an ACA exchange. For purposes of the initial coverage report due in January 2015 for the calendar year 2014, any such employer will be able to identify its full-time employees for the 2014 portion of the 2013 fiscal year of its plan, after 2014 has ended, by using actual service data rather than a "look-back" method for measuring hours.

Please note: If you are unsure whether your company qualifies as a member of a "large employer group," please refer to the section above entitled "Start Counting Full-Time Employees Now."

New Fee Related to Health Plans Due July 31, 2013

Under the federal Affordable Care Act, a health insurer or an employer sponsoring a self-insured health plan must pay an annual PCORI Fee to fund a trust fund for a new government program, beginning as soon as July 31, 2013. That program is the Patient Centered Outcomes Research Institute (PCORI). This Legal Alert will discuss the PCORI Fee payable by employers that sponsor self-insured health plans, but not the similar PCORI Fee payable by health insurers.

Practical Point: The PCORI Fee must be paid by health insurers or employers regardless of the number of individuals covered by the plan.

Q: What does a self-insured health plan sponsor need to know about the PCORI Fee?

Who must pay the PCORI Fee? Two kinds of entities that provide health benefits in the U.S. must pay the PCORI Fee:
- 1. The plan sponsor of each self-insured health plan: The PCORI Fee cannot be paid from any health plan assets that are not general assets of the plan sponsor.
- 2. The insurer: If an employer sponsors an insured health plan, the insurer will pay the PCORI Fee, but the insurer may include the cost in premiums.
How are "self-insured health plans" defined for the PCORI Fee? For this purpose, "self-insured health plans" generally provide major medical benefits, but do not include health savings accounts, separate dental, vision or long-term care plans, or health flexible spending accounts primarily funded by employee contributions. Health reimbursement accounts are also treated as self-insured health plans unless offered to employees covered by a self-insured health plan providing major medical benefits. Health flexible spending accounts primarily funded by employers are also treated as self-insured health plans. Employee assistance plans and wellness programs are not treated as self-insured health plans unless they provide significant medical care. If an employer purchases "stop loss" insurance to limit its risk under a self-insured health plan, the plan is still considered self-insured.
When and how must the PCORI Fee be reported and paid?
- 1. July 31, 2013 Deadline. The first PCORI Fee is due to the IRS by July 31, 2013, for policy and plan years that ended in 2012 (but not before October 1, 2013). For example, an employer sponsor sponsoring a self-insured health plan must report and pay the fee by July 31, 2013, for a plan year that ended on December 31, 2012. The PCORI Fee must be reported on IRS Form 720 filed with the payment.
- 2. Deadlines After 2013. For policy and plan years ending after 2012, the PCORI Fee and Form 720 is due by July 31 of the calendar year beginning after the last day of the policy year or plan year. For example, a plan sponsor must report and pay the fee by July 31, 2014, for a plan year that ended on June 30, 2013. However, no PCORI Fee or report will be due for plan years ending after September 30, 2019, unless the law is changed.
How is the PCORI Fee calculated? The PCORI Fee for a plan year of a self-insured health plan is equal to $1.00 times the average number of individuals covered by the plan during that year. The $1.00 PCORI Fee increases to $2.00 for the first plan year ending on or after October 1, 2013, and may be further increased each year before it expires in 2019. "Covered individuals" mean (a) covered employees and their covered family members, (b) qualified beneficiaries receiving continuation coverage under COBRA, and (c) covered retirees and their covered family members. Any individual covered by more than one self-insured plan with the same plan sponsor is counted only once.
One of three alternative methods may be used to figure the average number of individuals covered by a self-insured health plan during a plan year, as follows:
- 1. The Actual Count Method. Under this method, the average number of covered individuals during the plan year is equal to the sum of the totals of covered individuals on each day of the year, divided by the total number of days in the year.
- 2. The Snapshot Methods. To use either of the following two snapshot methods, the employer chooses a date in each quarter of the plan year to count the relevant individuals, but the dates in the last three quarters must be within three days of the date chosen in the first quarter. For example, if January 25th is used in the first quarter, a date near the 25th day of the first month in the quarter must be used in the other three quarters.
  - Snapshot Count Method. On each of those four dates, the employer counts all of the covered individuals. To find the average for the plan year, the employer then adds those four quarterly totals and divides that total by four.
  - Snapshot Factor Method. On each of those four dates, the employer (a) counts the number of participants with spouse or family coverage and multiplies that number by 2.35, (b) counts the number of participants with self-only coverage, and (c) adds both of those totals for the quarter. To find the average for the plan year, the employer then adds those four quarterly totals and divides that total by four.
- 3. The Form 5500 Method. If the self-insured health plan sponsor files Form 5500 for the plan year being taxed, by July 31 of the next calendar year (when the PCORI Fee is due), this method allows the plan sponsor to determine the average number of individuals covered by the plan during the plan year from the Form 5500, as follows:
  - Self-only Coverage. If the plan covers only employees, and not spouses or dependents, the average number of covered individuals is the sum of the total participants at the beginning of the year and the total participants at the end of the year, divided by two. For example, if the plan had 100 participants at the beginning and 120 at the end of the year, the average would be 110 (100 + 120 ÷ 2).
  - Family Coverage. If the plan covers employees and any of their family members, the average number of covered individuals is the sum of the total participants at the beginning of the year and the total participants at the end of the year. For example, if the plan had 100 participants at the beginning and 120 at the end of the year, the average would be 220 (this represents the average number of covered employees (110), plus their family members (assumed to be one for each covered employee, on average).

Practical Point: For the PCORI Fee due on July 31, 2013, transition rules allow plan sponsors to use any reasonable method to calculate the average number of individuals covered during the plan year being reported.

Is the PCORI Fee deductible for federal income tax purposes? Yes, when paid by an employer as an ordinary and necessary business expense.

Employer Notices of Health Insurance Exchange

Under the federal Affordable Care Act ("ACA"), a group health insurer or an employer sponsoring a group health plan must notify current employees about the ACA Health Insurance Exchanges by October 1, 2013 and revise its COBRA election notices for use in 2014. These notices apply to current and future employees, in addition to any continuation of coverage that begins after 2013.

How Must an Employer Notify its Employees about the ACA Health Insurance Exchanges? In the near future, most employers will have to give two notices about the public health insurance exchanges created under the federal Affordable Care Act:

1. Exchange Notice. Nearly all employers must notify their employees about the availability of coverage after 2013 through a public health insurance exchange (an "Exchange Notice"). An Exchange Notice must be given to current employees before October 1, 2013. If an employee is hired on or after that date, the notice must be given within 14 days after the hire date.

Practical Point: The Exchange Notice requirement is not limited to large employers, or employers who offer health plans.

2. Revised COBRA Notice. Employers that are required to offer continuing group health coverage under the federal law called "COBRA" must revise the plan's COBRA election notices to describe a public health insurance exchange as an alternative to continuing the employer's coverage at the covered person's expense. The revised COBRA notice must be used for COBRA continuation coverage that begins after 2013.

Q: What does an employer need to know about the Exchange Notice?

What employers must give the Exchange Notice? Employers governed by the federal Fair Labor Standards Act ("FLSA") must give the Exchange Notice.
Which employers are governed by the FLSA? The FLSA applies to nearly every employer that does more than a half million dollars of business annually; and certain other employers, regardless of their revenues.
Who must receive the Exchange Notice? All full-time and part-time employees of the employer, whether or not they are eligible for any health plan sponsored by the employer. The Exchange Notice need not be given to any former employees or dependents of employees.

Practical Point: The FLSA, which also includes overtime rules, has a broader definition of employee than the one used for payroll tax purposes. Some individuals working as independent contractors may be considered employees under the FLSA, if they are economically dependent on the employer. This means that an employer should give the Exchange Notice to individual contractors who work a high percentage of their time for the employer, to avoid missing anyone who may be an employee under the FLSA.

What must be included in the Exchange Notice? The Exchange Notice must include the following information:
- A statement that a new public health insurance exchange exists, a brief description of the services provided by the exchange, and contact information for the exchange;
- A statement informing the employee that, if he or she purchases a qualified health plan through the exchange, the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code; and
- A statement informing the employee that, if the employee purchases a qualified health plan through the exchange, (a) the employee may lose the employer contribution (if any) to any health plan offered by the employer and (b) all or a portion of any such contribution may be excludable from income for federal income tax purposes.

Practical Point: The U.S. Department of Labor has made available two model forms of Exchange Notice, one for employers that sponsor a group health plan and another for employers that do not. The model notice for employers with a health plan includes an extra page on which the employer may provide information about its plan that an employee would need to apply for coverage through an exchange. The model notices are available on the Department's website at www.dol.gov/ebsa/healthreform. The model notices refer to an exchange as a "Health Insurance Marketplace."

Q: How must a health plan's COBRA election notice be revised for ACA?

A health plan's COBRA election notice must be revised to advise an individual who is eligible to purchase continuing health coverage under COBRA that (a) a new coverage alternative is available after 2013 through a public health insurance exchange and (b) a tax credit may be available to help pay premiums for coverage purchased on the exchange.

Practical Point: The U.S. Department of Labor's model COBRA notice, which is available on the Department's website at www.dol.gov/ebsa/healthreform, now includes the following revised language referring to an exchange (referred to as the Health Insurance Marketplace):

The first paragraph of the model COBRA Notice has been revised as follows:
"This notice contains important information about your right to continue your health care coverage in the [enter name of group health plan] (the Plan), as well as other health coverage alternatives that may be available to you through the Health Insurance Marketplace. Please read the information contained in this notice very carefully."

This new paragraph has been inserted at the end of the model COBRA notice:
"There may be other coverage options for you and your family. When key parts of the health care law take effect, you'll be able to buy coverage through the Health Insurance Marketplace. In the Marketplace, you could be eligible for a new kind of tax credit that lowers your monthly premiums right away; and you can see what your premium, deductibles and out-of-pocket costs will be before you make a decision to enroll. Being eligible for COBRA does not limit your eligibility for coverage for a tax credit through the Marketplace. Additionally, you may qualify for a special enrollment opportunity for another group health plan for which you are eligible (such as a spouse's plan), even if the plan generally does not accept late enrollees, if you request enrollment within 30 days."

Do you have questions? Please contact Maslon's Employee Benefits Group if you have questions or would like more information about how the Affordable Care Act may impact your company.