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January 15, 2015

How the Affordable Care Act's Employer Penalty Applies in 2015 to Employers with Non-Calendar-Year Plans

Under the Affordable Care Act,1 large employers may have to pay a tax starting in 2015 known as the employer shared responsibility penalty. A transition rule applies to employers that sponsor plans that do not operate on a calendar-year basis and meet specified requirements. For those employers, the penalty is generally effective with the start of the plan year beginning in 2015 instead of January 1, 2015.2

This Capital Checkup presents an overview of the rules for this transition relief for large employers with non-calendar-year plans. (For background information on the employer penalty, see another Capital Checkup.)

Transition Relief Depends on Satisfying Several Conditions by the Start of the 2015 Plan Year

To be exempt from penalties for some or all of its full-time employees before the start of the 2015 plan year, an employer with 100 or more full-time employees, must satisfy the following conditions:

  • The employer’s non-calendar-year plan must have been in existence on December 27, 2012, and must not have been modified since then to begin on a later date.3 For example, if the employer changed the start of the plan year from July 1 to December 1 after December 27, 2012, the employer is ineligible for the transition relief.
  • The employer must offer minimum value and affordable coverage4 to at least 70 percent of its full-time employees by the first day of the 2015 plan year.
  • Employees may not have been eligible for a calendar-year plan. Non-calendar-year plan relief only applies to employees who would not have been eligible for coverage under a calendar-year plan also maintained by the employer as of February 9, 2014.5
  • Coverage must be extended to dependents. Employers must offer coverage to full-time employees’ dependent children (including adopted children) through the end of the month in which they turn 26. However, an employer will not be penalized solely for not offering dependent coverage if it takes steps during the 2015 plan year to extend coverage to dependents by the start of the 2016 plan year.
  • The employer must meet a significant-percentage test if it is extending coverage in 2015 to some previously ineligible full-time employees. This test, which only applies to newly eligible employees who would have been ineligible under the non-calendar-year plan’s February 9, 2014 eligibility rules, is described in the next section.

Significant-Percentage Test Options

There are four options for meeting the significant-percentage test. Under these options, employees who were eligible for (or actually enrolled in) coverage under a non-calendar-year plan must comprise a sufficient percentage of the employer’s workforce (looking at either all employees or just full-time employees). The required percentage varies depending on which option is selected. The table below describes the options.

 
The Significant-Percentage Tests


Test
All Employees
(e.g., Full Time,
Part Time, Seasonal)


All Full-Time Employees
Percent Actually Covered Test met if at least 25% of all employees were covered by non-calendar-year plan on any date in the 12 months ending on 2/9/14 Test met if at least 33.33% of all full-time employees were covered by non-calendar-year plan on any date in the 12 months ending on 2/9/14
Percent Offered Coverage Test met if at least 33.33% of all employees were offered coverage in non-calendar-year plan during most recent open enrollment period ending before 2/9/14 Test met if at least 50% of all full-time employees were offered coverage in non-calendar-year plan during most recent open enrollment period ending before 2/9/14

Note that an employee’s actual hire date is not important. What matters is whether similar employees were or were not eligible under the plan’s February 9, 2014 eligibility rules.

Reporting Continues to be Required

Even if large employers are exempt from penalties before the start of their 2015 plan year, they must report to the Internal Revenue Service (IRS) about all months during the 2015 calendar year under Section 6056 (employer reporting) and, if they sponsor a self-insured plan, under Section 6055 (plan reporting).6

Action Items

Large employers that sponsor non-calendar-year health plans should review whether they are exempt from penalties under Section 4980H between January 1, 2015 and the start of their plan year. They must evaluate whether they meet all applicable requirements for the transition relief, and, if so, keep records to substantiate their eligibility in case of audit.

• • •

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related guidance, including the guidance summarized in this Capital Checkup. Sibson Consulting can be retained to work with plan sponsors and their attorneys on compliance issues. Sibson has created a detailed checklist to help large employers evaluate whether they are eligible for the transition relief for some or all of their full-time employees. For more information about that checklist or for other assistance in taking advantage of transition relief from the Affordable Care Act’s employer penalties in 2015, contact your Sibson consultant or the nearest Sibson office.

 

1 The Affordable Care Act is the abbreviated name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-148, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)

2 For a discussion of this transition rule, see Sibson’s October 2014 Health Care Reform Insights. (Return to the Capital Checkup.)

3 This is the date that Treasury/IRS released a proposed rule containing this transition relief. (Return to the Capital Checkup.)

4 Minimum value and affordable coverage are discussed in Sibson’s January 15, 2015 Capital Checkup, “Affordable Care Act’s Employer Shared Responsibility Penalty Takes Effect in 2015.” (Return to the Capital Checkup.)

5 This is the date that Treasury/IRS released the final employer penalty rule. (Return to the Capital Checkup.)

6 For more information about the reporting requirements, see Sibson’s October 9, 2014 Capital Checkup, “IRS Releases Draft Instructions for Large-Employer Reporting under the Affordable Care Act.” (Return to the Capital Checkup.)