IRS Offers First Proposed Regulations on “Play or Pay;” Mostly Good News, but Much Complexity

Posted by on January 2, 2013 | Be the First to Comment

The IRS has released its first set of formal, proposed regulations, and a parallel set of questions and answers, on the health reform law’s “play or pay” mandate on employers. Lockton is preparing two separate Alerts to address the 144 pages of regulations, but here’s a sneak preview:

Some Non-Calendar Year Plans Get a Reprieve

Health reform’s “play or pay” mandate on employers applies January 1, 2014, but after pressure from many employer groups the IRS proposes to permit some employers with non-calendar year plans to delay coverage offers to their full-time employees until the first day of the plan year beginning in 2014. But many large retail, hospitality, staffing and seasonal employers will not be able to take advantage of this special accommodation unless they’re offering employees at least some coverage today. See our impending Alert (Part I) for the details.

Penalty Calculations Apply on an EIN-by-EIN Basis

In determining whether an employer is subject to the play or pay rules in the first instance, all full-time equivalent employees in the controlled group are counted.

But once it’s determined that a controlled group of employers is subject to the play or pay mandate, the mandate’s obligations and penalties would be applied–under the proposed regulations–not on a controlled group basis, but on an employer-by-employer (EIN-by-EIN) basis. This means that if one employer in a controlled group decides not to offer coverage to its full-time employees, only that employer–not every employer in the controlled group–would be penalized.

 “All Full-Time Employees” Means 95 Percent…and “Dependents” Do Not Include Spouses

The health reform law requires an employer subject to the play or pay mandate to offer minimum essential coverage to all its full-time employees and dependents, or pay a penalty. The proposed regulations would deem an employer in compliance if it offered coverage to at least 95 percent of its full-time employees, and the employees’ children under age 26. The proposed rules would not require the employer to offer coverage to spouses.

Three Affordability Safe Harbors

When determining whether an offer of coverage to a full-time employee is “affordable” under the health reform law, an employer would be permitted to use one of three “affordability safe harbors,” one based on W-2 pay, one based on the employee’s rate of pay as of the beginning of the plan year, or one based on the federal poverty level.

Updated Rules on Measurement Periods

The guidance makes important changes to the “measurement period” and “stability period” concepts described by the IRS in late August, and summarized by our Alert on September 10, 2012.

Changes include guidance relating to breaks in employment, crediting hours for gaps in service by employees of school districts and other educational institutions, shrinking the measurement period to ignore gaps in coverage due to some unpaid leaves, special rules and restrictions on staffing companies, adjusting measurement periods to embrace payroll periods that extend outside a measurement period’s boundaries, and much more.

Cafeteria Plan “Change in Status” Rules

The guidance permits certain employees to change their cafeteria plan elections to take advantage of certain entitlements under the health reform law in 2014.

Effective Date and Reliance

Generally, the proposed regulations–when finalized–will apply for 2014 except where they deal with matters already addressed in earlier guidance (such as the IRS’s important Notice in late August, addressing how to determine “full-time employees” for 2014). However, employers may rely on the proposed regulations before they are finalized, if they find it helpful to do so. Generally, earlier guidance continues to apply for 2014.