On July 9th, the IRS announced in Notice 2013-45 that it would delay enforcement of the reporting requirements related to the “play or pay rule” (defined below) under the Patient Protection and Affordable Care Act (ACA). These reporting requirements were scheduled to be effective for 2014, but are now scheduled to become applicable beginning in 2015.
The play or pay rule under the ACA applies to “large” employers with 50 or more full-time (or full-time equivalent employees). The play or pay rule imposes a $2,000 per full-time employee shared responsibility penalty on large employers that do not provide basic medical coverage to at least 95% of their full-time employees. If the large employer provides basic medical coverage to 95% of its full-time employees but the coverage is either not affordable to the employee or is not of minimum value (as defined in the ACA), then the play or pay rule imposes a shared responsibility penalty of $3,000 per full-time employee that obtains coverage on an ACA insurance exchange.
Large employers are required to substantiate that they offered coverage to 95% of their full-time employees, and that such coverage was affordable and of minimum value (the “play”) by providing certain information to the IRS. Through this reporting, the IRS will determine whether an employer may be subject to one of the shared responsibility penalties (the “pay”) if an employee of that employer received subsidized coverage through one of the ACA insurance exchanges. Without this reporting by employers, the IRS will not be able to determine who “played” and who must “pay”.
The IRS has already issued guidance on how employers may identify those full-time employees who must be offered coverage to avoid the shared responsibility penalties. However, the IRS has not yet published regulations on how employers will substantiate to the IRS whether or not they have complied with these requirements. Notice 2013-45 explains that the play or pay IRS reporting rules will be published later this summer so that employers may voluntarily comply with the play or pay coverage and reporting requirements for 2014. However, reporting will not be required until 2015 and, as a result, the IRS will not attempt to determine actual compliance by employers until 2015.
What does the extension mean to employers?
The extension of the play or pay reporting requirement provides employers needed time to evaluate their workforce in order to determine whether they are subject to the play or pay rule and, if subject to the play or pay rule, determine how to identify and track those full-time employees that must be offered minimum value, affordable medical coverage to avoid the shared responsibility penalties.
Unlike other types of IRS deadline extensions, this extension of the play or pay reporting rule did not come with a requirement from the IRS that employers operate in “good faith” compliance with the play or pay rule. Instead, employers are encouraged (but not required) to voluntarily comply with the play or pay expanded coverage and reporting requirements in 2014.
Does the extension mean that employers are not required to modify their medical coverage in 2014 to comply with the ACA play or pay requirements?
- Employers who do not offer basic medical coverage to 95% of their full-time employees in 2014 will not be subject to the employer shared responsibility penalties (summarized above). Accordingly, employers who offer no coverage will not be required to add coverage and employers who offer coverage, but have an eligibility threshold greater than 30 hours per week will not need to reduce eligibility requirements until 2015.
- Also, employers will not be required to pay employer shared responsibility penalties (summarized above) if they fail to offer affordable, minimum value coverage to their full-time employees in 2014. Accordingly, employers who provide basic medical coverage to their employees, but such coverage is not affordable to some or all employees, will not need to lower premiums to make the coverage affordable until 2015.
- Despite the additional time to comply with the play or pay rules, employers must still be prepared to comply with the following ACA requirements beginning in 2014:
- No pre-existing condition exclusions.
- No annual dollar limits on essential health benefits.
- Waiting periods may not exceed 90 days.
- Dependent coverage must extend to age 26 (regardless of other employer coverage).
- Out-of-pocket maximums must satisfy mandated limits (non-grandfathered plans only).
- Employers must still provide the notice of the availability of the health insurance exchanges by October 1, 2013. Click here for our blog about the employer notice requirement.
- Employers must still provide Summary of Benefits and Coverage during open enrollment for 2014.
How does the extension impact certain ACA play or pay transition rules?
- Employers with non-calendar year plan years will need to monitor whether their plans will be subject to the play or pay rules for any portion of their plan year that extends into 2015. The IRS did not address this type of transition issue in Notice 2013-45. Previously these plans had more time to comply with the play or pay requirements than calendar year plans, but they may now have less time to comply than calendar year plans.
- Transition rules applicable to tracking full-time employees during 2013 may not apply for 2014. Current IRS proposed rules would allow employers to use abbreviated measurement periods and more lenient methods of identifying full-time employees in 2013 for purposes of complying with the play or pay requirements in 2014. The IRS has not announced that it will make these same transition rules available for employers in 2014 for purposes of complying with the play or pay penalties in 2015.
Should employers voluntarily comply with the play or pay rules as requested by the IRS?
- Voluntarily expanding coverage in 2014 to full-time employees or reducing the cost of premiums to make coverage affordable to all full-time employees in order to comply with play or pay rules is ultimately a business decision that each employer will have to make based on the cost of expanding coverage to voluntarily comply, the value to the employer of voluntary compliance, and already announced commitments to employees.
- Employers should consider developing the policies and procedures necessary to identify and track full-time employees during 2014 (but not necessarily offer coverage to these employees). This is because most employers must begin this fall to identify and track their full-time employees to ensure compliance with the play or pay rules in 2015. In addition, employers who have developed these policies and procedures will have a better foundation to implement the play or pay reporting rules once the IRS publishes the reporting rules guidance.
Accordingly, while we believe the delay in complying with the play or pay reporting rules will provide employers much needed breathing room to implement plan changes to comply with the play or pay requirements under the ACA, there remain several significant changes that must be implemented under the ACA for 2014. In addition, we think employers should continue to develop their policies and procedures for identifying and tracking full-time employees during 2014 to ensure a smooth transition into complying with the play or pay reporting requirements in 2015.
For more information about the ACA or employee benefits, please contact a member of our Tax, Estate Planning, and Employee Benefits Group, or call 208.344.6000.
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