January 10, 2013
Authored by: Chris Rylands and Brian Berglund
Frequent readers of this blog will recall that the IRS previously issued some initial guidance on the employer “shared responsibility” (aka play or pay) rules under health reform. (A summary of the shared responsibility provisions and the taxes is described in our post on the prior guidance.)
Well, the New Year’s resolution of the federal agencies overseeing health reform implementation is (or should be, if it isn’t) to provide more guidance on health reform. In keeping with that resolution, the IRS recently issued proposed regulations and a set of Q&As on play or pay. The guidance covers several points and an exhaustive explanation is too long for a single post, so we will cover more details in future posts. However, there were some key features to note from the proposed guidance:
- The controlled group rules apply for purposes of determining if you are subject to the taxes (i.e. you are an applicable large employer, generally one with more than 50 employees in the prior year, under the guidance). Because the IRS has not issued final controlled group rules for tax-exempt and governmental employers, they should apply a good faith interpretation of the existing rules.
- However, the tax is assessed on a per-entity basis, without regard to the controlled group rules. This means different members of the controlled group can offer different levels and types of coverage (assuming they can satisfy any applicable nondiscrimination rules), or choose not to offer coverage, without causing an assessment on the whole group.
- Employers are required to offer coverage to dependents, which the regulations define as children, stepchildren, and eligible foster children who have not attained age 26. (Spouses are not required to be offered coverage under these rules.) However, there is no express requirement that dependent coverage be affordable or provide minimum value.
- The regulations generally adopt the lookback and stability period rules from the prior guidance with a few modifications. Most notably, however, an employer that wants to have a 12-month stability period in 2014 can have a lookback period as short as six months in 2013. This is welcome relief for employers who may not have been able to get systems in place to count hours for variable hour employees by January 1, 2013.
- An employer will not be subject to the $2,000 per employee per year failure to offer penalty (what we call the “Sledgehammer Tax”) if the employer fails to offer coverage to 5% or less of its workforce (or, for employers with 100 employees or less, 5 employees). This is designed to provide some flexibility in case an employer inadvertently fails to make an offer of coverage. However, if any of the 5% (or 5) employees enrolls in a plan through an exchange and receives a premium tax credit or cost sharing reduction, then the employer will be subject to the $3,000 per-that-employee penalty (what we call the “Tack Hammer Tax”).
- Any employer with a health plan which, on December 27, 2012, had a non-calendar year plan year, will generally not be subject to either the Sledgehammer Tax or the Tack Hammer Tax before the first day of the 2014 plan year with respect to any employee who is offered affordable minimum value coverage on the first day of the 2014 plan year.
Of course, the regulations are only proposed and final regulations could vary these rules, but the likelihood is that most or all of these features will survive in some form in the final regulations. Which of these do you find most helpful (or most surprising)?