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Starting in 2014, provisions of the Patient Protection and Affordable Care Act become effective known as “Pay or Play” or “Employer Shared Responsibility.” Large employers will be faced with the decision whether to offer full-time employees affordable health coverage that provides “minimum value” or whether to pay a penalty. Employers need to start evaluating the potential costs to their organization now to determine whether they will “Pay” the penalty or “Play” by offering coverage to full-time employees and their children.

Which Employers Are Subject to the Employer Mandate?

Employers who employ an average of at least 50 full-time employees and full-time equivalent employees during the preceding calendar year are subject to the Pay or Play mandate. A full-time employee is an employee who is employed for an average of at least 30 hours of service per week. For purposes of determining whether they have 50 or more full-time employees, employers must also consider full-time equivalent employees, by adding the hours worked by non-full-time employees. Employees employed by members of a controlled group of corporations must be aggregated, but certain individuals, such as partners in a partnership, independent contractors and those individuals who are not considered common-law employees can be excluded. Employers who exceed 50 full-time employees for fewer than 120 days per year because of seasonal employment may be eligible for a special exception.

How are the Penalties Calculated and Assessed?

Applicable large employers may be subject to one of two different types of penalties under the Employer Mandate.

Employers are treated as having offered coverage to all full-time employees if coverage is offered to 95% of full-time employees. This provision may prevent an employer from being subject to the subsection (a) penalty for failure to provide coverage to a small group of full-time employees, but does not protect the employer from the subsection (b) penalty if the excluded employee receives a subsidy under a healthcare Exchange.

The IRS will impose penalties by contacting the employer at the end of the year with an estimated penalty amount. Employers will have the opportunity to respond to and appeal the initial determination if they believe it is inaccurate.

What Kind of Health Coverage Must I Offer to Avoid the Penalty?

In order to avoid both the subsection (a) and (b) penalties, employers must offer “minimum essential coverage” to substantially all full-time employees and their children that is “affordable” and satisfies a “minimum value” requirement.

How do I Determine Who is a Full-Time Employee for Purposes of Offering Coverage and Calculating the Penalty?

IRS regulations provide detailed guidance on how to determine full-time employees for purposes of offering coverage and calculating penalties. An employee is considered full-time if he or she is employed, on average, at least 30 hours per week and is a common law employee. Leased employees, partners, sole proprietors and 2% or more owners of an S-corporation can be excluded. An employee must be credited for hours of service for each hour in which he or she is paid or entitled to be paid, including periods where no duties are performed, such as vacation time, holidays and sick time. Employers may choose to credit salaried employees with eight hours per day or 40 hours per week, unless such method would significantly understate the employee’s hours.

If an employer is uncertain at the time of hire whether an employee will be full-time or if the employee is a variable hour or seasonal employee, IRS guidance provides detailed rules regarding measurement periods and stability periods. We will address this topic in further detail in a future alert.

When do These Requirements Become Effective?

The Pay or Play requirements are effective for coverage periods beginning on or after January 1, 2014 but employers should act now to:

Keep in mind that these rules can be fact-specific and this article is just a summary. For more details, please contact any one of our Employee Benefits attorneys.

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