The health care reform law created a new "Pay or Play Rule," which employers must address. The Pay or Play Rule generally requires that "large" employers (i.e., those with 50 or more full-time or full-time equivalent employees) offer health plan coverage to full-time employees or potentially pay a penalty to the federal government.
A persistent question for large employers has been how to define a "full-time" employee. The importance of "full-time" status cannot be overstated, because if an employer does not offer health plan coverage to just one full-time employee who then receives a federal subsidy to purchase health insurance at a Health Exchange, the employer could face a penalty of $2,000 per full-time employee per year. Also, if an employer offers health plan coverage to all full-time employees but the coverage does not offer "minimum value" or is not affordable for the employee, the employer could face a penalty of $3,000 per year for each full-time employee who receives a federal subsidy to purchase health insurance at a Health Exchange.
Fortunately, the Internal Revenue Service recently published guidance on this topic. Employers can rely on this guidance through at least December 31, 2014. This certainty will help employers design and model their health plans as they anticipate Health Exchanges and their upcoming 2013-2014 health plan changes.
The new guidance is incredibly detailed and applies various rules to different categories of employees (for example, "Variable Hour" employees, "New" employees and "Seasonal" employees). It also requires employers to classify all their employees into one of these different categories. This classification could be time-consuming and expensive.
In general, two rules apply for determining whether an employee is full-time and when he or she must be offered health plan coverage:
The following diagram illustrates the measurement period, administrative period and stability period:
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Employers should not delay in taking action
The Pay or Play Rule becomes effective on Jan. 1, 2014. One common misconception is that employers need not consider the Rule until later in 2013. However, as noted in the illustration above, an employee's hours in the fourth quarter of 2012 can affect his or her "full-time" status for all of 2014, although there may be some flexibility on this point under the federal guidance. In addition, some health plans renew on dates other than January 1 (such as February 1 or April 1). These plans will have a plan year which ends after January 1, 2014. For example, a plan year that starts on February 1, 2013 will end on January 31, 2014. Thus, for one month of the plan year, the plan must be compliant with the Pay or Play Rule or an employer will face a Pay or Play Rule penalty. Such an employer must either ensure that the plan is compliant by February 1, 2013 or be prepared to make any needed changes in the middle of the plan year (e.g., in December 2013).
Develop a strategy
Employers will likely need to consider potential strategies, plan design revisions and perhaps even changes to the composition of their workforce to prepare for the Pay or Play rule. Armed with information about the full-time status of employees, employers should:
For more details about the Pay or Play Rule, see the Quarles & Brady LLP Pay or Play Guide (a 50-page overview of the rule for employers), available through www.quarles.com. John Barlament, a partner in the Employee Benefits group at Quarles & Brady LLP, can be reached at (414) 277- 5727 or email@example.com. Sarah Fowles, an associate in the Employee Benefits group at Quarles & Brady LLP, can be reached at (414) 277-5287 or firstname.lastname@example.org.