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Blake Christian
Blake Christian

IRS provides health care act enrollment guidance

FAQs clarify how employers can comply with the health care automatic enrollment mandate.

March 22, 2012
by Blake E. Christian, CPA, MBT

The Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, which the Senate passed in late 2009, and the House passed on March 21, 2010, was signed into law by President Barack Obama on March 23, 2010. Approximately two years later, guidance is coming from multiple government agencies to provide clarity on the steps necessary to comply with more than 2,400 pages of congressional legalese and the related $900 billion cost. As the actual multiyear implementation takes place (see Christian, “New Healthcare Act,” Corporate Taxation Insider, April 29, 2010), employers and employees are evaluating the logistical and economic impact of these complex provisions.

Automatic enrollment overview
Section 1511 of the PPACA added Section 18A to the Fair Labor Standards Act (FLSA), which directs employers with more than 200 full-time employees, and who are subject to FLSA oversight, to automatically enroll any new “full-time employee” into one of the employer’s health benefit plans (subject to any waiting period authorized by law). Those employers must also continue to enroll existing employees in those plans. Finally, Section 18A of the FLSA requires that an employee be notified of the automatic enrollment and have an opportunity to “opt out” of any coverage in which the employee was automatically enrolled (Notice 2011-36).

In December 2010, the Departments of Labor, Health and Human Services, and Treasury (the departments) issued frequently asked questions (FAQ) regarding Section 18A of the FLSA (FAQs About Affordable Care Act Implementation Part V and Mental Health Parity Implementation). Those FAQs made clear that, while the secretary of Labor would be providing guidance in the form of future regulations that will be issued by 2014, employers will not be required to comply with Section 18A until that time.

The following additional FAQ guidance was provided in Notice 2012-17, issued Feb. 9:

FAQ 1. 2014 effective date likely deferred: Because of the complexities associated with the automatic enrollment provisions, as well as other provisions such as the “shared responsibilities” rules (for assessing charges/taxes on certain employers with more than 50 employees who do not provide coverage for their employees) and the maximum 90-day waiting period before employees must be eligible for coverage (see Notices 2011-36 and 2011-73), the Department of Labor does not anticipate having guidance issued in time to allow for a 2014 effective date. Therefore, employers will likely have additional time beyond 2014 in which to comply with Section 18A of the FLSA.

FAQ 2.
W-2 wages used to determine household income: The IRS intends to issue proposed regulations and other guidance consistent with Notice 2011-73, which will allow employers to use employees’ Box 1 W-2 income (rather than researching family “household income”) as a “safe harbor” to determine whether the insurance premiums are “affordable” under the PPACA. While this option provides for administrative simplicity, it will also generally understate the household income of the employee and therefore classify more employees as being under the “affordable” threshold.

FAQ 3. Coordination of shared responsibility and 90-day waiting-period provisions:
Upcoming guidance is expected to provide safe-harbor provisions, including a rule that, for at least the first 3 months following the hiring of a new employee by an employer sponsoring a group health plan, no “employer responsibility payment” will be required under Sec. 4980H.

FAQ 4. Classifying “full-time, existing” employees for purposes of Sec. 4980H:
In determining whether a fee or tax will be imposed on an employer for lack of adequate medical insurance coverage for existing full-time employees at the effective date of the PPACA, the IRS intends to issue proposed regulations and other guidance that will contain safe-harbor “lookback/stability periods” for up to the prior 12 months. Guidelines applicable to newly hired employees are discussed in FAQ 5, below. A minimum average of 30 hours per week is generally the threshold for “full-time” classification under the PPACA.

FAQ 5. Classifying “full-time, newly hired” employee:
Since there is no long-term history of average hours worked for new employees, the IRS anticipates issuing rules that allow three-month and six-month evaluation periods to allow new employees’ work patterns to develop prior to determining their classification of “full-time” vs. “part-time.” If the employee averages more than 30 hours a week in the first three months, there is a rebuttable presumption that the employee is “full-time,” and the employer must offer that employee coverage under the employer’s group health plan. However, if the facts and circumstances indicate the first three months are not representative (e.g., the initial employment period is a holiday season, or an off-season), then a second three-month evaluation period may be appropriate.
In addition, depending on the employer’s initial expectations of each employee’s projected weekly hours, and results for the first three months, an additional three-month evaluation period may be required before coverage is determined to be mandated.

FAQ 6.
No imposition of 90-day waiting period rule to part-time employees: The IRS clarified that it has no intention, or authority under the Act, to impose mandatory group health coverage for part-time employees (generally less than 30 hours per week) of either large or small employers.

FAQ 7. Additional 90-day waiting-period guidance:
When the Public Health Service Act (PSA) Section 2708 provisions become effective in 2014 or later, in determining when the general 90-day maximum “waiting period” begins and ends, the departments intend to stick with the original guidelines that, once the employee meets the “full-time” classification (if later than the date of hire), the 90-day period begins and group medical must generally be offered during the subsequent 90-day period.

The strict 90-day maximum waiting-period limit generally applies when eligibility by the employer is based solely on lapse of time.

Employers may impose other conditions for eligibility provided the conditions are not designed to avoid compliance with the 90-day limitation. Thus, eligibility based on full-time status, a bona fide job category, or receipt of a license may be permissible. For example, the exclusion of computer programmers from coverage will not necessarily violate the PSA waiting-period standard (FAQ 7, Example 3).

Future guidance is also expected to include eligibility for coverage once the employee completes a specified cumulative number of hours of service within a specified period (such as 12 months). For example, Employer X requires part-time employees to accumulate 750 hours from the date of hire before becoming eligible for insurance coverage. Provided the employer offers coverage within 90 days of the employee’s meeting the 750 cumulative hours test, it is anticipated that future guidelines will allow such a coverage delay. It should be noted that, if the employee works an average of less than 30 hours per week, the employer is not required to offer coverage, but may offer such a cumulative test for ease of administration.

The aforementioned guidance, along with the 2011 IRS notices, offers employers some valuable insights into how to structure future group health coverage. However, designing and implementing employee benefit plans requires extensive analysis and employee education. Therefore, as much lead time as possible is needed for CFOs, human resources departments, and employees to evaluate their future structuring options. This process becomes even more complex when employees are working under a collective bargaining agreement and the employer must also work through multiyear union contract negotiations. Therefore, continued release of guidance will be critical for successful PPACA implementation.

The various governmental departments administering the PPACA are requesting public comments through April 9, 2012. Comments can be sent:

  • Electronically to: e-ohpsca-er.ebsa@dol.gov; or
  • By regular mail to: Office of Health Plan Standards and Compliance Assistance, Employee Benefits Security Administration, Room N-5653, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Please note that the departments ask that any submissions not include personal information such as name, address, or contact information. This likely relates to the fact that such submissions may become public information at some point in time.

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Blake E. Christian, CPA, MBT, is a tax partner in the Long Beach, Calif., office of Holthouse, Carlin & Van Trigt LLP (www.hcvt.com). He can be reached at blakec@hcvt.com or 562-216-1800.