Further to my earlier blog today, on February 12, 2014, the Internal Revenue Service (the “IRS”) published final regulations on the employer “pay-or-play” requirements introduced in the Affordable Care Act (the “ACA”). These requirements become effective in 2015. They apply to an employer with at least 50 full-time equivalent employees (at least 100 for 2015). Under “pay- or- play”, such an employer will pay a penalty if it either:
(1) fails to offer to “substantially all” (70% in 2015, 95% thereafter) of its full-time employees (and their dependent children) group health coverage, and receives notice that at least one of its full-time employees, who qualifies for a premium tax credit or cost- sharing reduction, buys health coverage through an ACA health care marketplace or exchange (an “Exchange”), or
(2) fails to offer health coverage that is “affordable” (i.e., single only coverage that costs less than 9.5% of household income or another safe-harbor measure) and has “minimum value” (i.e., coverage that reimburses at least 60% of claims), and receives notice that at least one of its full-time employee, who qualifies for a premium tax credit or cost -sharing reduction, buys health coverage through an Exchange.
The monthly penalty for a failure in (1) is the number of the employer’s full-time employees less 30 (80 in 2015), multiplied by 1/12 of $2,000. The monthly penalty for a failure in (2) is number of the employer’s full-time employees, who qualify for a premium tax credit or cost -sharing reduction and buy health coverage through an Exchange, multiplied by 1/12 of $3,000, limited by the maximum penalty that could be imposed under (1).
The penalty is imposed on an employer. A multiemployer health plan pays for its participants’ benefits with employer contributions that are required to be made under collective bargaining agreements. But the plan is not the employer on which a “pay- or- play” penalty could be imposed. So why would a multiemployer health plan care about “pay- or-play”? The answer: the multiemployer health plan would like to make available to each contributing employer a health plan under which the employer could cover its employees, or at least its unionized employees, and avoid a penalty with respect to those employees.
To help the multiemployer health plans meet this goal, and to help employers who contribute to multiemployer plans avoid the “pay-or-play” penalties, the final regulations contain a transition rule. This rule was originally contained in the preamble to the proposed regulations on “pay-or-play”, and it previously applied only in 2014. The transition rule is available to an employer which is subject to “pay-or-play”, and which is required by a collective bargaining agreement or an appropriate related participation agreement to make contributions, with respect to some or all of its employees, to a multiemployer health plan. Under this rule, such an employer will not be treated, with respect to employees for whom it must make such contributions, as failing to offer the opportunity to enroll in group health coverage to full-time employees (and their dependents), and will not be subject to penalty (2) described above, so long as the multiemployer health plan:
— offers, to individuals who satisfy the plan’s eligibility conditions, coverage that is affordable and provides minimum value, and
–offers coverage to those individuals’ dependents.
For purposes of determining whether coverage under the multiemployer plan is affordable, employers may use a new safe harbor measure, under which an employee’s required contribution, if any, toward self-only health coverage under the plan does not exceed 9.5 percent of the wages reported to the multiemployer health plan. The amount of wages may be determined based on actual wages or an hourly wage rate under the applicable collective bargaining agreement or participation agreement.
The preamble to the final regulations indicates that employers may presently rely on the transition rule. It says that any future guidance that limits the scope of the transition rule will be applied prospectively, and will apply no earlier than January 1 of the calendar year beginning at least six months after the date of issuance of the guidance. This extends the transition rule beyond 2014. Moreover, it gives relying employers a reasonable period of protection, since the transition rule will be available at least until the IRS affirmatively modifies it, which may never happen, and then for at least 6 months after the modification is made. Thus, it will encourage employers to use multiemployer health plans to avoid “pay-or-play” penalties by agreeing under collective bargaining agreements to contribute to these plans.