MMA Blog

Despite Delays, A Time To Get Busy

2014 is well under way. I've read recently that those who make New Year's resolutions usually break them shortly after the two week mark; those who are still following through on February 1 have a better than even shot at keeping it going.  One resolution that business owners and managers of companies of all sizes and types should keep is to maintain clear and serious focus on efforts to comply with the Affordable Care Act (ACA).

Last year at this time I observed about the ACA that many employers were procrastinating, reluctant to dive into the real work of figuring out compliance strategies because of political, legal and other forces that suggested delay or repeal of the ACA. I observed :

"Over the last couple of years we have witnessed an interesting dynamic when it comes to planning for compliance with the [ACA]. In the run-up to the 2010 Mid-Term Congressional Elections, employers were reluctant to dive into compliance issues, believing somehow that the election might result in repeal. It didn't. Then, in the summer of 2012 the frequent refrain was: let's wait to see what the Supreme Court decides. Now, since late summer the refrain has been: let's see what the world looks like on November 7. In other words, almost from the date of its passage in 2010, employers have been watching Washington, D.C. and delaying real action because it appeared that some or all of the [ACA] would disappear."

When I wrote that at the start of 2013, I could not have imagined that there would be a whole host of additional delays related to the ACA, each of which singularly, and all of which combined, have conspired to, in some cases, lull employers into believing that they could continue to put off addressing their ACA compliance concerns. In July 2013 the Obama Administration announced and the IRS confirmed, that because the government needed time to study the reporting requirements for the so-called play or pay mandates under the ACA, enforcement of those requirements would not commence until 2015.

2013 saw Administration-implemented delays and turnabouts on key pieces of the ACA in many ways:  The delay of the enrollment for small employers on the federal exchange and extension of the enrollment deadline for individuals, the off-again on-again approach to canceled, non-ACA-compliant plans and similar delays have created an atmosphere of uncertainty.

Carrying on in the tradition of delay, the U.S. Treasury announced on February 10, 2014, through final regulations on the Shared Responsibility provisions (the so-called "pay-or-play rules") of the ACA (the Final Regulations), even more delay with respect to key aspects of the ACA.

Against this backdrop it is inevitable that some employers will ask:  do they really need to get ready for 2015? The short answer: yes, of course they do.

Employers who continue to procrastinate and put off ACA compliance efforts may pay a very high price in 2015 and beyond.  I don't, of course, have a crystal ball and cannot predict what other delays, if any, may be in store and neither can anyone else. That means that even with the delays announced in the Final Regulations employers should resolve to address ACA compliance issues early in 2014.

Listed below are key areas that we believe employers should be focused on.  Before jumping into that discussion, however, it is important to note a few key delays, clarifications and transitional relief provisions contained in the Final Regulations and their potential impact on planning:

  • Small "Applicable Large Employers" granted a one-year reprieve. The Final Regulations delay the implementation of the pay-or-play rules for employers with between 50 and 99 full-time equivalents until 2016, as long as they don't reduce headcount to qualify for the delay and generally maintain the same benefits that were in place on February 9, 2014. This is welcome relief for smaller employers. They should use the remainder of 2014 and 2015 to get ready when these rules apply to them in 2016.
  • The "95% rule" reduced to 70% for 2015. The pay-or-play rules provide that if an employer doesn't offer insurance to 95% of its full-time employees (and their children) and any one full-time employee obtains subsidized coverage on the exchange, the employer will be fined $2,000 multiplied by all of the employer's full-time employees (reduced by the first 30).  This assessment is calculated on a monthly basis (1/12th of $2,000 per month). To permit employers and opportunity to address coverage and other issues, the regulators have reduced the 95% rule to 70% for 2015 only. (They have also increased the 30-person reduction to 80 for 2015.) This relaxation of the no-insurance percentage provides all employers subject to the pay-or-play rules breathing room in 2014 and 2015 to address coverage and certain employment practices, including independent contractor issues (discussed below).
  • Transitional relief for non-calendar year plans. The Final Regulations permit, under certain circumstances, employers with non-calendar year plans to use the first day of the plan year starting on or after January 1, 2015 as their start date for compliance with pay-or-play rules. Certain requirements have to be met to qualify for this relief, including meeting certain eligibility or participation percentage requirements. This transition relief permits employers sponsoring qualifying non-calendar year plans some additional time to get ready for compliance.

The Final Regulations do provide some relief, but for large employers (those with 100 or more full-time equivalents) it is still full steam ahead toward a 2015 start date. What, then, are the main areas that employers should address? In no particular order of priority (they should all be a priority), I submit the following for consideration:

To Offer or Not To Offer Affordable Insurance. 

The ACA offers "applicable large employers" - those with an average of 50 or more full-time equivalent employees (100 or more full-time equivalents for 2015) during the preceding 12 months (i.e., 2014 for 2015) - two ways to comply with the ACA.

First, under the ACA an employer can choose not to offer insurance to at least 95% (70% for 2015) of its full-time employees (those working 30 hours or more per week) and their children. If they choose not to offer insurance, and any one of their full-time employees obtains federally subsidized insurance coverage on an exchange, then the employer will be assessed $2,000 per year multiplied by each of its full-time employees (reduced by the first 30 (80 for 2015) full-time employees). The assessment will be calculated monthly, and on an EIN basis, with the 30 (80 for 2015) full-time employee reduction prorated across the employer's controlled group.

Employers considering this approach should first consider that it is not a "zero-sum" game. Because the penalty is assessed on an EIN basis, it may be desirable to identify certain divisions or organizational groups within the company's controlled group that are operated under a separate EIN and not offer insurance to them. Why? Any number of reasons, including the possibility that a facility would be small enough to all but escape the penalty because of the share of the 30 (80 in 2015) person reduction allocable to that facility, could be the basis for deciding to "pay" in that facility. (Employers considering this strategy should remember that the 30 (80 in 2015) person reduction is prorated across the controlled group, however.) An employer should be well on their way to assessing whether the choice to "pay" might work at least for some parts of its organization.

Second, under the ACA an employer can choose whether to offer affordable coverage. In general, to be affordable, coverage must at least 60% actuarial value (i.e., a Bronze PlanÂ) and the cost of single coverage for the Bronze Plan cannot exceed 9.5% of each employeeââ¬â¢s household income.  If an employer chooses choose not to offer affordable insurance, and any one of its full-time employees obtains federally subsidized insurance coverage on an exchange, then the employer will be assessed $3,000 per year multiplied by each of its full-time employees who actually receive subsidized exchange coverage (or, if less, the amount determined using the "no insurance" penalty described above). The assessment will be done monthly on an EIN basis.

Most employers do not want to ask employees about household income and will want to take advantage of the safe harbors offered by the IRS. Two of the more commonly used safe harbors will be: (1) W-2 Pay and (2) Rate of Pay. In the former, employers wait until the end of the year and simply use the employee's box 1 W-2 reported adjusted gross income to determine whether the insurance is affordable. In the latter, the employer multiplies the employee's hourly rate of pay by 130; if the employee's monthly premium cost of single coverage for the Bronze Plan exceeds that sum, the plan is not affordable. Employers should be running different models now to determine which approach will work best for them.

As with much of the ACA, a one-size-fits-all approach may not work with respect to the pay or play decision - employers should be working with competent ERISA counsel and their insurance broker to determine which approach pay or play will work for them.


Our experience in Massachusetts has been that often penalties have been assessed against employers who meet the law's requirements only because employers could not prove their compliance. This is, in fact, one of the major things Massachusetts employers learned during audits conducted under the Massachusetts Universal Health Care law. It is not enough to be compliant. Employers must prove they are compliant.

I once had a business owner ask me about the audit process in Massachusetts: "Isn't this the reverse of what it should be? Doesn't the government have the obligation to prove we are not compliant? Why are we forced to prove we are compliant? Isn't that essentially saying: we're guilty until proven innocent?" The simple answer: yes. When it comes to government regulators, absent some statutory or regulatory provision otherwise, employers are typically cast in the roll of proving their innocence and regulators are not necessarily required to prove guilt.

Think of what that means in the context of the ACA.  Employees will visit the exchange and will be asked a series of questions, including whether they are (i) employed (and by whom), (ii) a full-time employee and (iii) offered affordable coverage?  The answer to each one of those questions is designed, in part, to determine whether a subsidy is available and, if a subsidy is available, whether an employer will be subjected to the ACA's penalties for not providing affordable coverage.

If the employee (either intentionally or by mistake) claims to be full-time employee and working for an employer and then claims he is not offered affordable coverage, the penalty (as described above) will be assessed against the employer.

So, what happens if the employer is assessed the penalty and objects, claiming that either the individual: (i) was not the employer's employee, (ii) was not a full-time employee or (iii) was offered affordable coverage? The response from the reviewing agency: prove it.

Depending on the work environment, if no attention has been paid to the need to maintain sufficient records, it may be difficult to prove. Employers with variable hour or seasonal employees should be actively at work now building internal programs and working with their payroll vendors to track hours of service during 2014, which will serve as the "look back" period to determine eligibility for health insurance for 2015.

And remember: all penalties are centered on full-time employment status. If our experience in Massachusetts is any guide, employers that lack the requisite data to prove a particular employee is part-time will likely find that the government will deem them to be full-time employees, and the applicable penalty will be assessed. Employers should be working with payroll and HRIS vendors now to create systems that will flag hours employees work and maintain them in a form that will be suitable for use to prove to the government the employee's status as full- or part-time.

A system for preserving documentation demonstrating that coverage was offered and, as applicable, affordable, should be created. Employers should use 2014 wisely to put appropriate protocols and data collection systems in place.

Employee Status.

As noted above, the law requires employers to offer coverage to at least 95% of their full-time employees (and their children) (70% in 2015). If not, the penalty could be $2,000 per year multiplied by all full-time employees. Employers who use a substantial number of independent contractors, freelancers and similarly classified individuals are at some risk of being assessed the "no insurance penalty," even when they offer coverage to all of the employees they categorize as full-time. Why? Because the IRS may disagree with the independent contractor classification used by the employer and deem all of the so-called independent contractors to be employees.

So, imagine this scenario: An employer employs 1,000 full-time employees and 55 independent contractors, each of whom works an average of 35 hours per week for the employer. The employer offers affordable coverage to 100% of the full-time employees and, in fact, on average 80% of those full-time employees elect the employer coverage (costing the employer quite a few million dollars annually) every year. The employer follows this practice year over year, believing that it is in meeting fully the ACA's affordable coverage standard.

In 2019, the IRS conducts an audit and questions whether the 55 "independent contractors" aren't really "employees".  In this case, the impact on the employer is disastrous: because the 55 re-classified workers comprise greater than 5% of the employer's  full-time workforce, the IRS will deem the employer not to have met the 95% requirement and will then assess the "no insurance penalty" of $2,000 multiplied by all full-time employees for each of 2016, 2017 and 2018 (reduced by the first 30 full-time employees each year). In other words, the employer (that already spent millions of dollars each of those years to provide coverage to its eligible employees) will now be assessed a whopping $6,150,000 non-deductible penalty for the period 2015-2017. (A $2,050,000 penalty assessed for each year!)

Employers who use independent contractors, freelancers and others should (i) hire competent counsel to assess whether they are, in fact, independent contractors and (ii) monitor the size of the independent contractor workforce to keep it, if possible, below 5% of the full-time employee population, in case the IRS disagrees. (Note: even if the employer keeps the independent workers to below 5%, the $3,000 "no affordable coverage" penalty could apply with respect to them if they are reclassified by the IRS.)

2014 is a very good year to assess the use of independent contractors, freelancers and others and to implement steps to make adjustments as appropriate. If an employer's 1099 employee workforce exceeds 30%, steps should be taken in 2014 to assess whether these individuals are appropriately classified and if not, to appropriately classify them and offer them coverage or determine the risk of the pay-or-play penalty. If the 1099 employee workforce constitutes less than 5%, 2014 and 2015 should be used to undertake the same analysis.

There are many steps that employers should be taking in 2014 to comply or to get ready to comply with the ACA's 2015 requirements.  This short list of three issues for immediate attention is just that:  a short list.  Employers should resolve to work actively with competent counsel and their insurance broker to develop compliance strategies under the ACA.  The ball has dropped, ringing in 2014 as a New Year, but employers should not drop the ball on ACA compliance.

Posted February 27, 2014

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