Mid-sized employers – those who averaged between 50 and 99 full-time employees and full-time equivalents for calendar 2014 – are exempt from the §4980H penalties in 2015. Penalties cannot begin to apply to these employers until Jan. 1, 2016. However, this special transition rule does not exempt mid-sized employers from the reporting requirements. For example, if MNO Corp has 75 full-time employees and historically only offered coverage to its 40 salaried employees, it will not be subject to the $2,000 play-or-pay penalty for 2015 and indicate so by checking the transitional relief Box C on its Form 1094-C. Thus, if MNO uses a calendar plan year, it does not have to meet the 95 percent offer mandate by extending eligibility to the hours class until Jan. 1. But what if MNO’s plan year is July 1 – June 30?
Understand that this one-time transition benefit is contained in the preamble to the §4980H regulations, so IRS did not spend a lot of time being specific. Transition says that for fiscal year plans (non-calendar plan years) the portion of the plan year that extends into 2016 is exempt as well. Thus, if MNO uses a July 1 plan year, it could be exempt from penalties from January 2016 through June 2016. In other words they don’t have to offer coverage to the hourly EE’s until July 1, 2016. But, not so fast; there are conditions! There is always the proverbial “but” in ACA….
One condition is that the employer cannot have reduced its workforce or hours to position itself as a mid-sized employer. We are not aware of anyone taking this track, and IRS does not say what burden of proof is on the employer if it experiences a natural workforce reduction. Yet, the big item we have to watch is this: The employer cannot materially change the plan it was offering on Feb. 9, 2014 (the day the regulations were published in the Federal Register).
So what is a material change? Rather than develop detailed definitions of “material modification” for a one-time exemption, IRS decided to use a cost test: The current employees’ premium share must be 95 percent or more of the premium share the employer was assessing on FEb. 27, 2014. If not, IRS deems the plan to have been materially modified. The guidance does not say if we’re talking dollar amounts or percentages, but percentage makes more sense. Therefore, if MNO Corp was charging employees 35 percent of the gross premium in 2014, it could not be charging more than 33.25 percent today (95 percent of 35 percent). Does that make sense? If MNO did its renewal on July 1, 2014 and July 1, 2015 and made changes for tiers of coverage or moved from POS to PPO or whatever, what it started charging EE’s as of July 1, 2014 or 2015 must be at least 95 percent of what it charged on Feb. 27, 2014. If MNO violated this 95 percent test, then it won’t get those free six months in 2016. It needs to include that hourly classification by Jan. 1 of 2016.
We suspect few employers have been through two years of renewals without passing more of the cost on down to employees, so don’t automatically assume if you are mid-sized and have a fiscal plan year that you can wait until your 2016 renewal to comply with the §4980H(a) requirement to offer to 95 percent of full-time employees.
As a side note, we field a lot of questions regarding the measuring method for determining employer size. The first thing to understand is that irrespective of plan year, size is based on the preceding calendar year. So if an employer is trying to determine whether it is an applicable large employer (50 or more FT and FT equivalents) or a mid-size applicable large employer (50-99 FT and FT equivalents) it must look back to calendar 2014. Using the same day on each month (first of the month, fifteenth, whatever), calculate the number of FT and FT equivalents for that month. Add the total for the year; divide by 12; and round down to the next whole number. For determining applicable large employer (≥50) status only – and only in 2015 – the employer may instead measure on a continuous six-month period during 2014.
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