IRS and PPACA: New Employer Mandate Guidance

IRS and PPACA: New Employer Mandate Guidance

The IRS issued its long awaited proposed rules implementing the employer mandate provisions of the Patient Protection and Affordable Care Act (PPACA) on Friday, December 28th  (Rules here and FAQs here). Under the mandate, a “large employer” (defined as an employer that employs 50 or more full time employees or full-time equivalents (see our prior guidance here)) is required to offer “affordable” “qualifying” coverage to each of its full time employees (defined as employees who work more than 30 hours per week; 130 hours per month) or pay a penalty if at least one full-time employee receives a premium credit when enrolling in an exchange provided plan.

As highlighted below, the proposed rules clarify, among other things, how the mandate penalties will be assessed if some but not all full-time employees are eligible to enroll in qualifying coverage; that offers of coverage must be extended only to “dependent” children and not to spouses and that that coverage need not satisfy the “affordability” requirements; and the rules offer some transition rules.

Please note:  The following details (and the IRS’ Questions and Answers) are based upon the 144 pages of guidance the IRS published on 12/28/2012.  The comment period is longer than usual–it ends on March 18, 2013 and a public hearing will be held on April 23, 2013 at 10:00 a.m.  Outlines of the comments you intend to publicly offer on April 23rd are due by April 3rd.  So, while you may be looking to make plans based on this guidance, it is not yet final and will be the subject of some robust debate.

The highlights include the following:

  • Mandate penalty calculation – the most notable issue addressed in the proposed rules is how the mandate penalty is calculated if a “large” employer makes affordable offers of coverage to some but not all of its full-time employees. The proposal establishes a bright line test – if an employer offers coverage to at least 95% of its eligible full-time employees, it will only be subject to the $3,000 per year mandate penalty for each employee that does not receive an “affordable” offer of coverage and receives a premium credit when enrolling in an exchange provided plan; if an employer does not make an offer of coverage to at least 95% of its eligible full-time employees, then it will be subject to a $2,000 per year penalty multiplied by all of its employees (less the 30 employee statutory exemption) regardless of whether any of those employees are eligible for employer-provided coverage.1
  •  Employee “Affordability” Test – the proposed rules incorporate the announced safe harbor that stipulates that an employer only needs to make an “affordable” offer of coverage to an individual employee for that individual’s own coverage. In making this calculation, however, the proposed rules allow an employer to utilize one of three tests: a contemporaneous W-2 safe harbor test under which the affordability of coverage for an individual is assessed at the end of the calendar year and may not be based on an individual’s W-2 income for prior years; a “rate of pay” safe harbor under which affordability is measured by taking an amount equal to 130 hours multiplied by an employee’s rate of pay for hourly employees or monthly salary for salaried employees; or a “federal poverty line” test under which the coverage must not exceed 9.5% of the monthly income at 100% of the federal poverty line for individuals. If an employee is not offered coverage for the entire calendar year, then the W-2 reported income must be pro-rated if that safe harbor methodology is employed. The proposed rules would allow an employer to use more than one safe harbor provided that each “reasonable” category of employees is evaluated under the same safe harbor test.2
  • Coverage is considered “affordable” if employee contributions for single coverage do not exceed 9.5% of the employee’s wages. The regulations provide three safe harbors  that employers can use to determine if employee coverage is affordable:
    • 9.5% of an employee’s W-2 wages for the year
    • 9.5% of an employee’s monthly wages determined by multiplying the employee’s hourly rate by 130 hours per month
    • 9.5% of the Federal Poverty Level for a single individual


  •  Dependents – the proposed rule clarifies that coverage must be offered only to an employee and to the employees’ children who are not yet 26 years of age; no coverage need be offered at all to the employees’ spouse or to other dependents and the “affordability” test applies only to the employee’s own individual coverage (but the dependent care coverage must still satisfy the “minimum value” rules).3
  •  Commonly owned/controlled businesses – the rules, as expected, apply the IRS consolidated business rules to determine whether an individual employer that is commonly owned/controlled with other employers is subject to the mandate as a “large” employer. The proposed rules clarify, though, that in actually calculating the mandate penalty, each commonly owned/controlled employer within a corporate group pays its own penalties (and is not consolidated with the other members of the group in making those assessments) but each individual employer within that corporate group only gets the benefit of its pro rata share of the 30 employee mandate penalty exemption.4
  • Full Time Calculations – the proposed rules differentiate between hourly and salaried workers. For hourly workers, an employer would be required to directly track the hours to determine full time status. For salaried workers, the rules allow an employer to choose between three different calculation methods: tracking of hours; utilization of a “days worked” method under which a day would be deemed to be eight hours; and utilization of a “weeks worked” method under which each week worked would be deemed to be 40 hours. Employers are allowed to use different calculation methods for different salaried employee classifications provided that the classifications are reasonable and are consistently applied. If an employer utilizes the “days worked” or “weeks worked” methodologies, it must ensure that the chosen method does not substantially understate an employee’s hours of service.5
  • Variable Hour/Part-time Employee Safe Harbors – the proposed rules largely incorporate the safe harbor provisions previously proposed but they do clarify that: (1) for new variable hour employees (including seasonal workers whose hours may vary over the course of the year instead of from month to month), an employer generally can utilize an initial measurement period of up to one year and need not offer coverage to that individual until it is determined whether that employee qualifies as full-time at the end of that initial measurement period (2) any administrative period that is utilized for on-going employees will be treated as part of the prior stability period; (3) if a part-time employee changes job status to a job that will be full-time during a stability period, that employee may continue to be treated as a part-time employee who is ineligible for coverage for the balance of that stability period (and vice-versa); and (4) for breaks in service attributable to the Family & Medical Leave Act and for teachers, the part-time safe harbor rules require either that the employer exclude the break periods from the calculations or that the average hours worked per week during the non-break periods be attributed to the break periods as well. Notably, the part-time break in service rules do not appear to address how disability periods are treated and, without additional clarification, it appears that an employer could decide to include those weeks in the measurement period calculations as weeks in which no hours were worked.  See also, our prior article on this topic (with links to support material too).6
  • Employees working abroad – the IRS clarified that there is no mandate obligation for employees working abroad so such employees are excluded from the “large” employer calculations and no penalties would be associated with such employees based on a failure to offer them “affordable” “qualifying” coverage during their overseas tenures.7
  • Penalty calculations – the IRS clarified that the IRS will initiate the process when it believes that an employer may owe a mandate penalty payment and the employer will then have the ability to challenge the assertion and to demonstrate that it has satisfied the offering requirements.8
  •  Transition relief for the mandate calculation – for employers that maintain plans that have a fiscal year that is not the calendar year, the IRS is providing a transition exemption from the mandate requirements until the first day of the plan’s fiscal year in 2014 provided that: (1) the employer offered coverage to its employees under any such plans as of December 27, 2012 and (2) at least one-third of that employer’s full-time employees were eligible to participate in that plan or at least one-quarter of that employer’s full-time employees actually were participating in that plan as of December 27, 2012.9
  •  Transition relief for smaller employers – the IRS is permitting employers to utilize any six-month consecutive period in 2013 as a measurement period to determine whether it is a “large” employer subject to the mandate requirements as of January 1, 2014.10

Additional IRS Guidance for Non-Calendar Year Plans

On Jan. 2, 2013, the Internal Revenue Service (IRS) published proposed regulations that provide further guidance on the employer shared responsibility provisions, including a transition rule for health plan coverage elected under a cafeteria plan. The regulations are not final. However, employers may rely on the proposed regulations until final regulations or other applicable guidance is issued.

Elections under 125 Plans (Cafeteria Plans)

Many employers offer health plans to employees through salary reduction under a Section 125 Cafeteria Plan. Generally, cafeteria plan elections must be made before the start of the plan year and are irrevocable during the plan year (except for a narrow set of circumstances called “status changes”).

The individual mandate and the availability of coverage through an Exchange both are effective as of Jan. 1, 2014. This date may raise issues for plans that do not have plans that run on a calendar year (1/1 to 12/31).  The IRS calls these plans “fiscal year plans.” The effective dates for these provisions are not affected by the Government’s decision to delay the employer mandate penalties.

EEs to Join Plan Mid-Year

An employee who is eligible to enroll in an employer’s plan, but did not do so, may wish to enroll in the employer’s plan in the middle of the plan year to meet the individual mandate requirements. (On June 26, 2013, the IRS issued Notice 2013-42 to provide transition relief from the individual mandate for certain months in 2014 to individuals who are eligible to enroll in employer-sponsored fiscal year plans.)

EEs to Leave Plan Mid-Year

An employee who is already covered under a fiscal year plan might wish to discontinue coverage under that plan and enroll in an Exchange plan in the middle of the plan year.

Transition Rule for 2013 Plan Years

Under the proposed regulations, an applicable large employer may choose to amend its cafeteria plan to permit either (or both) of the following changes in salary reduction elections, which apply regardless of whether employees experience a change of status event under the cafeteria plan regulations:

  • An employee who made a salary reduction election through his or her employer’s cafeteria plan for health plan coverage with a fiscal year beginning in 2013 can prospectively revoke or change his election regarding the plan during that plan year.
  • An employee who did not make a salary reduction election under his employer’s cafeteria plan for health plan coverage with a fiscal deadline beginning in 2013 (before the applicable deadline under the cafeteria plan regulations) can make a prospective salary reduction for coverage on or after the first day of the cafeteria plan’s 2013 plan year.

These changes are permitted only once during the plan year, and only with respect to accident and health plan coverage offered under a fiscal year plan.  It is unclear how the delay of the employer mandate penalties will impact this transition relief.


Employers that wish to allow the change in election rules permitted under this transition relief must incorporate the rules in their written cafeteria plans. Cafeteria plans can be amended retroactively to implement these transition rules.  A Summary of Material Modifications must be made and distributed by December 31, 2014, and must be effective retroactively to the date of the first day of the cafeteria plan’s 2013 plan year.

Plans must also ensure that their carriers (whether a fully insured plan or the stop-loss re-insurer) are informed of the change, and agree to permit the change under the terms of their policies.  (Ignoring this step could mean that the employer will self-insure the claims of the new enrollees).

Transition Relief – Individual Mandate

Beginning in 2014, PPACA requires most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty (the individual mandate/tax).

According to the IRS in Notice 2013-42, without transition relief, many individuals eligible to enroll in fiscal year plans would need to enroll in 2013 (before the individual mandate becomes effective) in order to maintain minimum essential coverage for months in 2014.

IRS Notice 2013-42 provides transition relief for certain employees with respect to the individual mandate. Under this transition relief, an employee (or an individual having a relationship to the employee) who is eligible to enroll in an employer-sponsored fiscal year plan with a plan year beginning in 2013 and ending in 2014 (the 2013-2014 plan year) will not be liable for the individual mandate penalty for certain months in 2014. The transition relief begins in January 2014, and continues through the month in which the 2013-2014 plan year ends.

Please contact your Sales Executive or Account Manager to discuss the challenges that arise from adopting or not adopting these changes.

Links Cited


  1. Proposed 26 C.F.R. § 54.4980H-5
  2. Proposed 26 C.F.R. § 54.4980H-5
  3. Proposed 26 C.F.R. § 54.4980H-1a(11) (definition of “dependent).  Page 58 of 144:  “The term dependents, as defined in these proposed regulations for purposes of section 4980H, does not include any individual other than children as described in this paragraph of the preamble, including an employee’s spouse. Thus, an offer of coverage to an employee’s spouse is not required for purposes of section 4980H because section 4980H refers only to dependents (and not spouses). This definition of dependents applies only for purposes of section 4980H and does not apply for purposes of any other section of the Code.”
  4. Proposed 26 C.F.R. § 54.4980H-4.
  5. Proposed 26 C.F.R. § 54.4980H-3(b).
  6. Proposed 26 C.F.R. § 54.4980H-3(c).
  7. See, e.g., IRS “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act” at FAQ 9 (Dec. 28, 2012)
  8. Id. at FAQ 17.
  9. Id. at FAQ 18.
  10. Id. at FAQ 19.