IRS' Final Employer Shared Responsibility Rules: What Does It Mean to "Offer" Coverage?
Who Must Be Offered Coverage?
The final employer shared responsibility rules clarify that applicable large employers must “offer” (as described below) coverage to their full-time, common-law employees or potentially face penalties. Because the rules focus on common-law employees, employers need not offer coverage to leased employees, sole proprietors, partners in partnerships, 2 percent S-corporation shareholders, or certain limited categories of employees under Code Section 3508. In addition, the employer must also offer coverage to the dependents, but not the spouses, of its full-time employees.
“Dependents” Defined. The final rules define a “dependent” as an employee’s biological or adopted child under age 26. Stepchildren and foster children are specifically excluded. (According to the final rules, this is because those children are likely to receive health coverage either from their biological parents’ health plans or from the state foster care system, respectively. Accordingly, the IRS determined that an additional offer of coverage from a step-parent’s employer was unnecessary.) The final rules also generally exclude from the definition of “dependent” children who are not citizens or nationals of the United States. (Special rules apply, however, to dependent children who are residents of either Canada or Mexico and to certain adopted children.)
Not surprisingly, the final rules note that a dependent child will reach age 26 on the child’s 26th birthday. They also provide, however, that in order to avoid both the penalties, an employer must treat a child as a “dependent” for the entire calendar month in which the child’s 26th birthday occurs. As a result, an employer could be subject to a penalty if it immediately drops a dependent’s coverage as of his 26th birthday. Unless an employer has knowledge to the contrary, it can rely on an employee’s representations about the number and ages of the employee’s children. ‘
Transition Guidance. Many, if not most, applicable large employers probably already offer some sort of health coverage to their employees’ dependents. Nevertheless, the final rules contain transition guidance giving any employer that hadn’t previously offered compliant coverage to its employee’s dependents time to expand its plan to do so. Under that transition guidance, if the employer takes steps during the 2015 plan year to offer coverage to dependents, it will not be subject to the penalty for failing to offer coverage.
What Does It Mean to “Offer” Coverage?
Under the final pay or play rules, an applicable large employer offers coverage to “substantially all” of its full-time employees and their dependents if it offers coverage to at least 95 percent (70 percent for the 2015 plan year) of its full-time employees (or, if greater, 5 of its full-time employees). Coverage must be offered to all full-time employees, even those who already have coverage from other sources (such as Medicare, Medicaid, or a spouse’s health plan).
The rules do not appear to require the employer to separately offer compliant coverage to an employee’s dependents. Offering that coverage to the employee (who can then elect coverage behalf of his dependents) is sufficient to avoid the penalties.
Effective Opportunity to Enroll or Opt Out. An offer of coverage will be made if, at least once with respect to each plan year, full-time employees have an effective opportunity to elect to enroll in (or opt out of) coverage. Employers should keep this requirement in mind when determining how they’ll determine who will qualify as full-time employees. For example, if an employer selects a look-back period (see our related newsletter entitled “Who is a “Full-Time” Employee?” for more detail) that spans two plan years, it will need to provide eligible full-time employees with two opportunities to elect (or opt out of) coverage – once with respect to each of the two plan years.
The pay or play rules treat “evergreen” elections that automatically continue from one plan year to the next unless the employee affirmatively opts out as an offer of coverage. In addition, an employer that auto-enrolls its full-time employees in mandatory health care coverage will be treated as offering coverage to its employees, so long as it provides the employees an effective opportunity to opt out of the coverage at least once with respect to each plan year. The employer will not, however, need to give employees an opportunity to opt out if (i) the coverage provides minimum value (as defined by the ACA), and (ii) the employee’s required monthly contribution for the coverage (if any) is no more than 9.5 percent of the federally-determined poverty level for a single individual for the particular calendar year, divided by 12. (Employers must use the poverty line applicable to the 48 continental states and the District of Columbia for this determination.)
Special Timing Rules. Generally, if an employer fails to offer an eligible employee coverage for any day of a calendar month, then the employer will be treated as not having offered the employee coverage for that month. Recognizing that employers may hire (or fire) employees mid-month, the final pay or play regulations contain special rules for offering partial month coverage.
For instance, an employer will not be subject to a penalty for failing to offer coverage for the month in which a new employee begins working if the employee’s start date is a day other than the first day of the month. Likewise, the employer will not be subject to the penalty with respect to employees whose employment terminates mid-month, so long as those employees would have been offered coverage for the entire month had they remained employed.
Facts and Circumstances Determination. Whether an employee has been given an effective opportunity to enroll in coverage (or to opt out) is based on all of the relevant facts and circumstances, including (but not limited to): the adequacy of any notice describing the availability of coverage; the period of time during which the employee can accept the offer of coverage; and any other conditions the employer imposes on the employee’s ability to accept the offer of coverage. An employer will not be treated as failing to offer coverage, however, if an employee’s coverage is terminated because the employee failed to pay his or her portion of any required premium (subject to a 30-day grace period).
An employer can likely impose some conditions on an employee’s ability to elect (or opt out of) coverage, provided those conditions are reasonable and don’t unduly burden the employee. For instance, an employer could likely require an employee to complete a short, general health survey or undergo limited biometric testing in order to enroll in the employer’s health plan. If, however, the employer’s requirements were too restrictive (such as requiring the completion of a detailed, 100-page medical survey), employees might not be viewed as receiving an effective opportunity to enroll in coverage.
Offers of Coverage on Behalf of Other Entities
Controlled Groups. An offer of coverage made by one member of an applicable large employer’s controlled group is treated as an offer of coverage by all other members of that group. For example, if a parent company maintains the group health plan for its subsidiaries, each subsidiary is treated as offering coverage with respect to the parent’s plan.
Other Multiple Employer Arrangements. Offers of coverage to employees participating in multiemployer or single employer Taft-Hartley plans (i.e., union plans) or a multiple employer welfare arrangements (MEWAs) will be treated as though they were made by the employers contributing to those plans on their employees’ behalf.
Staffing Firms. Special rules also apply to clients of staffing firms, including both traditional “temp” agencies and professional employer organizations (PEOs). Temp agencies typically provide their clients with temporary workers who perform certain specific tasks, fill vacancies, act as temporary replacements, etc. PEOs, in contrast, may also provide more extensive services to their clients – for instance, they may provide a client with comprehensive HR or IT services, acting, in effect, as the client’s HR or IT department. Whether a staffing firm or its client will be treated as a worker’s (or set of workers’) common-law employer will depend on the extent of the control the client exerts over the worker/workers.
If the staffing firm is treated as a worker’s common law employer, it will be responsible for offering the worker compliant coverage in order to avoid penalties. On the other hand, if the client is viewed as the worker’s common-law employer (which is more likely with PEO arrangements), and the worker is treated as a “full-time employee” for purposes of the pay or play rules, then the client will be obligated to offer the worker coverage. No doubt the client would prefer to avoid this situation – especially since it likely engaged the staffing firm specifically to avoid hiring its own employees.
To address this, the final pay or play rules will treat a staffing firm’s offer of coverage to a worker under the staffing firm’s group health plan as an offer of coverage by the client, so long as the fee the client pays to the staffing firm for a worker enrolled in the staffing firm’s health plan is higher than the fee the client would pay if the worker were not enrolled in that plan. This rule should provide staffing firm clients with some comfort about their obligation to offer compliant coverage to workers provided by the staffing firm. The employer should, however, enlist the staffing firm’s assistance in clearly documenting the difference in worker cost.
Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.
Legal News is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss the topic further, please contact your Foley attorney or the following:
Katherine L. Aizawa
San Francisco, California
415.438.6483
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Casey K. Fleming
Milwaukee, Wisconsin
414.319.7314
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Belinda S. Morgan
Chicago, Illinois
312.832.4562
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Leigh C. Riley
Milwaukee, Wisconsin
414.297.5846
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Erik D. Vogt
Chicago, Illinois
312.832.4903
[email protected]
