June 3, 2011
Treasury Department Seeks Comments from Employers on Affordable Care Act's Free-Rider Penalty and Waiting Period Ban
On May 3, 2011, the Treasury Department and the Internal Revenue Service (IRS) issued Notice 2011-36 requesting public comments on certain provisions of the Affordable Care Act1 applicable to employers and group health plans beginning in 2014.2 Specifically, the Treasury Department and the IRS request comments on how to define full-time employees for purposes of the Affordable Care Act’s employer shared responsibility provision (commonly known as the free-rider penalty), how to implement the separate prohibition on health plans imposing waiting periods of more than 90 days, and how to coordinate implementation of these two provisions.
Comments must be submitted by June 17, 2011. The Treasury Department and the IRS intend to use the comments they receive to draft a proposed rule, which also will be subject to public comment.
Background on the Free-Rider Penalty
The Affordable Care Act requires large employers (those with 50 or more full-time employees) to pay a penalty if just one of their full-time employees obtains subsidized coverage through a state health insurance exchange beginning in 2014. The amount of the penalty will vary depending on whether or not the employer offers health coverage to its employees, as noted in the table below:
|Penalty Determined by Whether the Employer
|Coverage Provided||No Coverage Provided|
|$3,000 times the number of full-time employees who obtain subsidized coverage in the exchange, up to a maximum determined by the calculation to the right||$2,000 times the number of full-time employees (not counting the first 30)
An employee is eligible for subsidized coverage in the exchange if the employer’s plan:
- Is unaffordable (i.e., costs more than 9.5 percent of household income), or
- Does not provide minimum value (i.e., provides coverage worth less than 60 percent of plan costs).
To determine whether an employer is a large employer, hours worked by part-time employees and some seasonal employees will be counted. However, if the employer meets the 50-full-time-employee threshold and becomes subject to a penalty, the penalty would only be assessed with respect to employees who work full time during the month at issue.
The free-rider penalty rule treats a person as a full-time employee if he or she works on average at least 30 hours per week (the 30-hour threshold).
Input Sought on Definition of "Full-Time Employee" and Operation of the Free-Rider Penalty
The definition of “full-time employee” is critical to the operation of the free-rider penalty rule. The definition will be used for purposes of both determining whether an employer is a large employer and is subject to the penalty, and whether an employee who goes into an exchange and receives a subsidy is a full-time employee.
The IRS suggests various ways of counting hours of service to reach the 30-hour threshold. For example, the IRS suggests counting hours of service monthly in some circumstances, using 130 hours per month instead of the 30-hour per week number. The notice also suggests ways of dealing with the requirement to count full-time employees on a monthly basis, including using a “look-back period” that would determine which employees would be treated as full-time employees in a subsequent “stability period.”
In addition to comments on these definitions and calculations, the Treasury Department and the IRS seek comments on some general issues related to operation of the free-rider penalty, including what happens with respect to certain groups such as nonresident aliens or seasonal workers.
Input Sought on the 90-Day Waiting Period
Under the Affordable Care Act, effective for plan years beginning on or after January 1, 2014, group health plans (whether grandfathered or not) may not impose a waiting period of more than 90 days. The Treasury Department and the IRS seek comments on which employees should be subject to the new 90-day limit, how that limit should be calculated, and how the waiting period should apply to common employer eligibility and enrollment practices. The notice specifically asks for comments on how the waiting period should be applied when employers have a 90-day service requirement, calculated from the date of hire, and the plan does not permit mid-month enrollment. It also asks for comments on probationary periods, where the plan’s waiting period begins after the employee has completed the probationary period.
Implications for Employers
Employers that want to provide input on these key questions need to submit their comments no later than June 17, 2011. Comments may be submitted in various ways, including by e-mail. Employers will have an additional opportunity to provide comments at a later date after the Treasury Department and the IRS release their proposed rule.
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As with all issues involving the interpretation or application of laws and regulations, sponsors of group health plans should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related regulations. Sibson can be retained to work with plan sponsors and their attorneys on compliance issues.
- The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup text.)
- The news release announcing Notice 2011-36 and Notice 2011-36 are available on the IRS website. (Return to the Capital Checkup text.)
Capital Checkup is Sibson Consulting's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.