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Pay or Play Penalty—Identifying Full-time Employees

June 26, 2014

The Affordable Care Act (ACA) imposes a penalty on certain large employers that do not offer minimum essential coverage to substantially all full-time employees and dependents. Large employers that offer this coverage may still be liable for a penalty if the coverage is unaffordable or does not provide minimum value. A large employer is only liable for a penalty if one or more of its full-time employees receive a premium tax credit or cost-sharing reduction for coverage under an Exchange. The ACA’s employer penalty rules are often referred to as “employer shared responsibility” or “pay or play” rules.

The employer penalty provisions were set to take effect on Jan. 1, 2014. However, on July 2, 2013, the Treasury announced the delay of the employer penalties and related reporting requirements for one year, until 2015. Therefore, these payments will not apply for 2014. On July 9, 2013, the IRS issued Notice 2013-45 to provide more 

On Feb. 12, 2014, the IRS published final regulations on the employer shared responsibility rules. These regulations finalize provisions in proposed regulations released by the IRS on Jan. 2, 2013. The final regulations delay the pay or play rules for an additional year for medium-sized employers. Under the final regulations, applicable large employers that have fewer than 100 full-time employees generally will have an additional year, until 2016, to comply with the pay or play rules. Large employers with 100 or more full-time employees must comply with the pay or play rules starting in 2015. 

The final regulations provide guidance on how applicable large employers should identify full-time employees for purposes of offering health plan coverage and avoiding a pay or play penalty. As transition relief, the final regulations also allow for shorter measurement periods for stability periods starting in 2015 under the look-back measurement method. 

Who is considered an ”employee?” Under the common law standard, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services with respect to the result to be accomplished, along with the details and means by which it is done. This is a factual determination and is not necessarily dependent on the label the employer has placed on the relationship in the past.

In general, leased employees are not considered employees of the service recipient for purposes of the pay or play rules. Also, an independent contractor, a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder and real estate agents and direct sellers (under Tax Code section 3508) are not counted as employees.

Who is a full-time employee?

A full-time employee is an employee who was employed on average at least 30 hours of service per week. The final regulations generally treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week.

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