Large Employers Subject to the Pay or Play Penalities

The Affordable Care Act (ACA) requires applicable large employers (ALEs) to offer affordable, minimum value health coverage to their full-time employees or pay a penalty. This employer mandate is also known as the “employer shared responsibility” or “pay or play” rules.

The employer shared responsibility rules were set to take effect on Jan. 1, 2014. However, the employer penalties and related reporting requirements were delayed for one year, until 2015. Therefore, penalties did not apply for 2014. In addition, ALEs that had fewer than 100 full-time and FTE employees in 2014 generally had an additional year, until 2016, to comply with these rules.

An important first step when assessing an employer’s potential liability under the employer shared responsibility rules is to determine if the employer meets the ALE threshold. Only ALEs are subject to the ACA’s employer shared responsibility penalties.

Applicable Large Employers (ALES)

Only ALEs are subject to the employer shared responsibility rules.

  • ALEs are employers that employ, on average, at least 50 full-time employees, including full-time equivalents (FTEs), during the preceding calendar year.
  • All ALEs are subject to these rules, including for-profit, nonprofit and government employers.

Full-Time and FTE Employees

  • A full-time employee is an individual that works, on average, at least 30 hours of service per week (130 hours per month).
  • Hours worked by employees with fewer than 30 hours per week must be counted—and then divided by 120 per month—to determine the number of FTEs.
  • The number of FTEs is then added to the full-time employee count.

Identifying an Applicable Large Employer (ALE)

To qualify as an ALE, an employer must employ, on average, at least 50 full-time employees, including full-time equivalent employees (FTEs), on business days during the preceding calendar year. All employers that employ at least 50 full-time employees, including FTEs, are subject to the ACA’s employer shared responsibility rules, including for-profit, nonprofit and government employers.

A full-time employee is an individual that works, on average, 30 or more hours of service each week. For this purpose, 130 hours in a calendar month is treated as the monthly equivalent of 30 hours of service per week. Hours worked by employees with fewer than 30 hours per week must be counted—and then divided by 120 per month—to determine the number of FTEs. The number of FTEs is then added to the actual full-time employee count.

Employers will determine each year, based on their current number of employees, whether they will be considered an ALE for the next year. For example, if an employer has at least 50 full-time employees (including FTEs) for 2015, it will be considered an ALE for 2016.

Transition Rule for Determining ALE Status

The final regulations included a special rule for employers that may be close to the ALE threshold to prepare for 2015. Rather than being required to use the full 12 months of 2014 to measure whether it has 50 full-time employees and FTEs, an employer could determine its status as an ALE for 2015 by reference to a period of at least six consecutive calendar months, as chosen by the employer, during the 2014 calendar year (rather than the entire 2014 calendar year).

Employers with Employees Working Abroad

A company that employs U.S. citizens working abroad generally will be subject to the employer shared responsibility rules only if the company had at least 50 full-time employees (including FTEs), determined by taking into account only work performed in the United States. Hours of service that must be counted when determining ALE status do not include any hours for which an employee receives compensation from sources outside of the United States. For this purpose, the United States includes only the 50 states and the District of Columbia, and does not include the U.S. territories.

The final regulations do not exempt employees that hold H-2A or H-2B visas from the definition of “employee” for purposes of the employer shared responsibility rules. Additionally, the final regulations do not adopt a special rule classifying these workers as seasonal employees.

Employers with Seasonal Workers

An employer will not qualify as an ALE if:

  • The employer’s workforce exceeds 50 full-time (and FTE) employees for 120 days or fewer during a calendar year; and
  • The employees in excess of 50 who were employed during that time were seasonal workers.

An employer to apply either a period of four calendar months or 120 days (whether or not consecutive) to determine if it qualifies for the seasonal worker exception. For this purpose, a seasonal worker means a worker who performs labor or services on a seasonal basis, including (but not limited to):

  • Workers covered by 29 CFR 500.20(s)(1). (“Labor is performed on a seasonal basis where, ordinarily, the employment pertains to or is of the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year. A worker who moves from one seasonal activity to another, while employed in agriculture or performing agricultural labor, is employed on a seasonal basis even though he may continue to be employed during a major portion of the year.”); and
  • Retail workers employed exclusively during holiday seasons.

Employers may apply a reasonable, good faith interpretation of the term seasonal worker and a reasonable good faith interpretation of 29 CFR 500.20(s)(1) (including as applied by analogy to workers and employment positions not otherwise covered under 29 CFR 500.20(s)(1)).

New Employers

An employer not in existence throughout the entire preceding calendar year will be considered an ALE for the current calendar year if it is reasonably expects to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during the current calendar year. An employer is treated as not having been in existence throughout the prior calendar year only if it was not in existence on any business day in the prior calendar year.

The determination of whether a new employer is an ALE during its first calendar year is based on the employer’s reasonable expectations at the time the business comes into existence, even if subsequent events cause the actual number of full-time (and FTE) employees to exceed that reasonable expectation.

Also, the seasonal worker exception applies to new employers, so that the employer will not be treated as an ALE if it reasonably expects:

  • Its workforce to exceed 50 full-time employees (including FTEs) for 120 days or fewer during the current calendar year; and
  • The employees in excess of 50 employed during such 120-day period to be seasonal workers.

Transition Rule for an Employer’s First Year as an ALE

A transition rule can apply for the first year that an employer is considered an ALE. It does not apply if, for example, if the employer falls below the 50 full-time and FTE employee threshold for a subsequent calendar year and then increases employment and becomes an ALE again. Under this transition rule, an ALE will not be subject to a penalty for failing to offer coverage to an employee for January through March of the first year for which the employer is an ALE if:

  • The employee was not offered coverage by the ALE at any point during the prior calendar year;
  • The ALE offers coverage to the employee on or before April 1 of the first calendar year; and
  • The coverage offered by April 1 provides minimum value.

If the ALE does not offer coverage to the employee by April 1, the ALE may be subject to a penalty with respect January through March of the first calendar year for which the employer is an ALE, in addition to any later calendar months for which coverage was not offered. If the ALE offers coverage to the employee by April 1 that does not provided minimum value, the ALE may be subject to a Section 4980H(b) penalty with respect to the employee for January through March of the first calendar year for which the employer is an ALE, in addition to any later calendar months for which coverage does not provide minimum value or is not affordable.

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