Large employers must offer coverage to substantially all full-time employees and their dependents to avoid penalty exposure under Section 4980H(a). The final employer shared responsibility regulations:

Many employers only cover dependents up to the date they reach age 26, rather than through the entire calendar month. However, this new rule does not necessarily mean that these employers must change their plans to allow dependents to participate until the end of the month to avoid penalties.

As a general matter, a dependent that enrolls in coverage on an exchange and receives a premium assistance tax credit cannot trigger liability under Section 4980H(b) for an employer because only the employee can trigger this excise tax (and the employee, in this case, would be covered). However, under Section 4980H(a), an employer must offer coverage to 95% (70% for 2015) of full-time employees and their dependents. An employer that fails to offer coverage to a dependent is treated as if it also did not offer coverage to the employee. Therefore, it is possible that terminating coverage on a dependent’s birthday could mean that an employer is treated as having not offered coverage to the employee for that month, which could impact the calculation of the 95% test (70% in 2015). However, this seems unlikely given that the number of dependents turning age 26 in a particular year is likely relatively low.

Further, it does not appear that the new employer responsibility health coverage reporting rules require an employer to report that a dependent was not covered for a full month. As a result, it is unlikely that failure to comply with this requirement will carry a penalty.

Under the final employer shared responsibility regulations, an employer must use the same method (either the look-back measurement method or the monthly measurement method (see Issue #3: Using the Monthly Measurement Method)) for all employees in the same category. The permitted categories are:

This suggests that employers cannot use different methods for hourly employees that it classifies as full-time and hourly employees that it classifies as part-time. Therefore, if an employer uses the look-back method for part-time, variable hour and seasonal hourly employees, it must use this method for all hourly employees (including full-time hourly employees). However, the employer may use a different method of tracking hours for salaried employees.

Many employers intend to use the look-back measurement method for any employee classified as part-time, variable hour or seasonal. This method involves averaging the numbers of hours worked by the employee over the measurement period. However, many employers would prefer not to track hours of employees classified as full-time or salaried employees.

The final regulations may technically require employers to:

However, as long as the employer intends to cover full-time employees, the risk of penalties from not tracking full-time employees’ hours may be low. In this regard, employees that have employer-sponsored coverage that is affordable and provides minimum value cannot trigger penalties. However, there may be some risk if an employee changes classification from full-time to part-time, variable hour or seasonal, and the employer has not been tracking their hours.

Under the final employer shared responsibility regulations, if an employer does not use the look-back measurement method, employees must be identified based on hours of service for each calendar month (monthly measurement method). It appears that under the monthly measurement method, the employer generally counts an employee’s hours during a particular month to see if the employee was full-time (that is, averaged at least 30 hours of service per week) for that month.

Because the employer will not know the employee’s average hours for a particular month until the end of that month, it seems likely that the IRS intended for the monthly measurement period to be used "after the fact" as a method to calculate excise tax liability, rather than as a plan design method. Employers may want to consider using this method for salaried employees who generally receive health coverage.

Although the final regulations do not specify how this method works in practice, they do provide rules for certain specific situations that employers must be ready to apply if the IRS questions whether a particular employee was full-time.

The final employer shared responsibility regulations provide that an offer of coverage by one "large employer member" (that is, a member of a controlled group) to an employee for a calendar month is treated as an offer of coverage by all large employer members for that month (for more information, see Practice Note, Controlled Group and Affiliated Service Group Rules). This means that if one large employer member offers coverage to the employee for a calendar month, every other member of the same large employer is considered to have made the same offer of coverage to that employee for determining Section 4980H liability, if any, of each large employer member.

The preamble to the final regulations gives the example of large employer members operating a single plan intended to offer coverage to employees of all the large employer members. In that example, any employee offered coverage under the plan would be treated as receiving an offer of that coverage from each large employer member. Therefore, if a parent employer offers minimum essential coverage to a subsidiary’s employees, that offer of coverage is treated as an offer of coverage by the subsidiary.

If less than 95% (70% in 2015) of a large employer member’s employees receive an offer of coverage (whether directly from the member or through the parent), only that member, and not any other member of the controlled group, is liable for potential Section 4980H penalties. For this purpose, the 95% test (70% in 2015) is determined on a controlled group member-by-member basis, and not on an aggregate basis including all large employer members in the controlled group.

Citing administrative complexity and the potential for abuse, the Department of Treasury declined to follow an approach, suggested by commentators, under which a large employer member offering coverage to all of its full-time employees could have aggregated with one or more large employer members so that the aggregated group would be treated as having offered coverage to at least 95% of its full-time employees (and their dependents) to avoid a Section 4980H(a) payment. For example, if Subsidiary A only covered 90% of its full-time employees but Subsidiary B covered 100% of its full-time equivalent employees (FTEs), Subsidiary A cannot use Subsidiary B's percentage to offset its own.

One challenge employers face in applying these rules is that the regulations’ definition of large employer member is vague, and indicates only that a large employer member is "a person that, together with one or more other persons, is treated as a single employer that is an applicable large employer" (Treas. Reg. § 54.4980H-1(a)(5)). Further, a large employer is defined only as an “employer” that employs an average of 50 or more full-time employees or FTEs on business days during the preceding calendar year. Unfortunately, although it is critical to understand precisely which entities are large employer members in order to properly apply the above rules, the regulations contain almost no guidance on this point.

Another issue relates to employees performing services for an employer that is a client of a professional employer organization (PEO) or other employer organization or staffing firm (third party). The final employer shared responsibility regulations include a rule for an offer of coverage to these employees made by the third party on the client employer’s behalf under a plan established or maintained by the third party. Such an offer is treated as an offer of coverage made by the client employer. The fee the client employer would pay to the third party for an employee enrolled in health coverage under the plan must be higher than the fee the client employer would pay to the third party for the same employee if the employee did not enroll in health coverage under the plan. This is consistent with the final regulations under the individual mandate, which treat coverage provided by a third party, such as a PEO or staffing firm, as minimum essential coverage under an eligible employer-sponsored plan.

Although it may be unlikely, it is possible that the IRS would, even in the absence of abuse, reclassify individuals who are working for a staffing firm as common law employees of the company that contracted with the staffing firm. Therefore, it would be prudent for employers to specify in staffing agreements that a portion of the fee being paid to the staffing firm is for health coverage.

A waiting period is "the period that must pass before coverage for an individual who is otherwise eligible to enroll under the terms of a group health plan can become effective." The final waiting period rules explain that being otherwise eligible to enroll under the terms of a group health plan means having met the plan’s substantive eligibility conditions. One of these conditions is satisfying a reasonable and bona fide employment-based orientation period, which lasts for a maximum of one month.

For example, consider a full-time employee that is hired on June 15. An employer could impose an employment-based orientation period from June 15 to July 14 (determined by adding one calendar month and subtracting one calendar day). Assuming that the employee has met the plan’s other substantive eligibility conditions, the plan would have no more than 90 days after the end of the employment-based orientation period to enroll the employee.

However, employers must also comply with the rule that coverage be effective by the first day of the calendar month following a period of three full calendar months in which the full-time employee began employment. In this example, that date is October 1, 2015, which is 79 days from the end of the employment-based orientation period, not 90 days. Accordingly, while the orientation period can be used to extend the waiting period maximum that would otherwise apply, it will still be necessary to offer minimum essential coverage (that has minimum value and is affordable) to full-time employees at the beginning of the fourth month following three full months of coverage to avoid a possible penalty under the employer shared responsibility regulations.

There is speculation that the new orientation period was developed to allow companies to have coverage start consistently on the first of the month following three full months after the hire date, as permitted under the employer shared responsibility regulations, without violating the 90-day waiting period rules. Under proposed regulations addressing the length of a reasonable and bona fide orientation period (which were issued along with the final waiting period regulations), one month is the maximum allowed length of any reasonable and bona fide employment-based orientation period. During an orientation period, the Departments envision that:

An employer could create a formal orientation period for employees (no longer than one month) that would be established for the new hire to be set up in the employer’s administrative system and receive orientation and training for the job’s requirements. This orientation period can be created for one class of employees and, if necessary, a separate orientation period for another class of employees (if it does not exceed one month). Currently, no guidance specifies particular steps an employer must take to adopt an orientation period, but examples may include:

The final waiting period rules allow a plan to impose a cumulative hours of service requirement as a condition of plan eligibility, if the requirement does not exceed 1,200 hours. The plan’s waiting period must begin on the first day after the employee satisfies the plan’s cumulative hours of service requirement and may not exceed 90 days. The provision is designed to be a one-time eligibility requirement only. For example, a plan may not re-apply this requirement to the same individual each year.

However, unlike the waiting period rules, there is no "cumulative hours of service" exception under the employer shared responsibility regulations. Whether delaying coverage due to a cumulative hours of service requirement could lead to penalties under the employer shared responsibility regulations may depend on whether the employee is classified upon hire as a full-time employee. If the employee is classified as full-time on the hire date (that is, reasonably expected to work at least 30 hours per week), coverage generally must be offered by the first day of the fourth full calendar month of employment, regardless of whether there is a cumulative hours of service requirement.

For example, a full-time employee is hired on June 15. The plan has a cumulative hours of service requirement of 1,000 hours, which the employee meets on December 15. However, in this case coverage must be offered by October 1 (the first day of the fourth full calendar month of employment), regardless of the fact that the employee did not meet the cumulative hours of service requirement until December 15. If the employer does not offer the employee coverage, the Section 4980H(b) penalty could be assessed (and the employee would count against the 95% (70% for 2015) threshold under the Section 4980H(a) penalty).

A large employer member who employs an average of 50 or more full-time employees or FTEs in the prior calendar year (that is, employers subject to the employer responsibility rules) must:

In addition, all employers who sponsor self-funded group health plans, insurers, government agencies and others that provide minimum essential coverage (reporting entities) must:

For Section 6056 reporting purposes, a large employer member may hire a third-party agent (for example, a plan administrator) to file on its behalf, but the large employer member remains liable for the reporting. Special rules apply for governmental units and multiemployer plans.

The final regulations implementing the information reporting requirements contain two notable areas of transition relief, one that applies both to Sections 6055 and 6056 and another that applies only to Section 6056.

Simplified reporting alternatives are available for employers subject to the Section 6056 employer responsibility requirements.