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IRS Issues New Guidance on Affordable Care Act Employer "Play-or-Pay" Mandate

March 17, 2014


A core provision of the Affordable Care Act ("ACA") is its employer-shared responsibility mandate (also known as "play-or-pay"). This component of the ACA requires an employer having 50 or more full-time equivalent employees to offer its full-time employees health care coverage that is both affordable and provides minimum value. Failure to do so exposes the employer to an assessment of substantial excise tax penalties. The play-or-pay mandate was scheduled to become effective for 2014; its effective date was later deferred until 2015.

The ACA provides for two forms of the play-or-pay penalty.

  • "No Coverage" Penalty. If an applicable large employer fails to offer coverage to substantially all of its full-time employees, and if even one full-time employee who is not offered coverage receives premium assistance for a policy purchased through a health insurance exchange, the employer will be subject to a non-deductible penalty of $2,000 per year, multiplied by the total number of its full-time employees (including full-time employees actually covered under the employer's group health plan). When performing the penalty calculation, the number of full-time employees otherwise taken into account is reduced by 30.
  • "Inadequate Coverage" Penalty. If the employer offers health coverage, but that coverage is either "unaffordable" with respect to a full-time employee, or does not provide "minimum value," and if by reason of such the employee receives premium assistance for a policy purchased under the insurance exchange, the employer will be liable for an annual penalty of $3,000 for each employee so receiving premium assistance.

In January of 2013, the IRS issued proposed regulations addressing various aspects of the play-or-pay rules. The IRS recently released its long-awaited final regulations implementing the play-or-pay mandate. These regulations provide guidance on a number of key issues that had been left unanswered by the proposed regulations. Moreover, the new regulations provide for various forms of transition relief for 2015 that will allow for a smoother glide path toward compliance for many employers.

A summary of the more significant provisions of the final regulations is below.

2015 Transition Relief Rules

Postponement of Effective Date for Mid-Size Employers

Under the statutory rules, an employer is an "applicable large employer" for a calendar year, and thus will be governed by the employer play-or-pay mandate for that year, if it employed on average at least 50 full-time equivalent employees during the preceding calendar year. The final regulations offer temporary relief to mid-size employers. Employers that employed on average between 50 to 99 full-time equivalent employees during 2014 will be exempt from the play-or-pay rules for 2015, and, in the case of a non-calendar year plan, for the calendar months during the portion of the 2015 plan year that occur in 2016. However, in order to qualify for this one-year postponement, the employer must satisfy all of the conditions prescribed below.

  1. The employer must not reduce its work force during the period of February 9, 2014, to December 31, 2014, for the purpose of qualifying for the transition relief. Reductions in work force for "bona fide" business reasons are permissible.
  2. The employer must not eliminate or materially reduce any health coverage offered as of February 9, 2014, prior to the end of the employer's 2015 plan year (i.e., the plan year beginning in 2015).
  3. The employer must certify that it satisfies the above conditions. This certification is to be made on a form to be prescribed by the IRS, and will be filed as part of the new annual ACA reporting required of employers.

Relaxation of 95% Minimum Coverage Standard

Under the general play-or-pay rules, an employer is subject to the "no coverage" penalty if it does not make health coverage available to at least 95% of its full-time employees. For 2015 (and in the case of a fiscal year plan, for each month in 2016 that is part of the 2015 plan year), the no-coverage will not be assessed if the employer offers coverage to at least 70% of its full-time employees.

As is the case with regard to the 95% standard, an employer may still be liable for the "inadequate coverage" play-or-pay penalty if it offers health coverage to at least 70% of its full-time employees (thereby avoiding the no coverage penalty), but at least one full-time employee who is not offered coverage receives a premium tax credit to help pay for coverage purchased on an insurance exchange.

Calculation of "No Coverage" Penalty

When calculating the $2,000 per year ($166.67 per month) per full-time employee "no coverage" penalty calculation, the number of full-time employees otherwise taken into account is reduced by 30. Solely for 2015, and for the calendar months of a fiscal year plan falling in 2016, the number of full-time employees taken into account for penalty calculation purposes is reduced by 80.

Non-Calendar Year Plans

Temporary relief is available to an employer that maintains a plan on a fiscal (non-calendar) year basis. Subject to prescribed conditions, a play-or-pay penalty will not be assessed for any calendar month in 2015, or for any calendar month that falls within the plan year beginning in 2015, with respect to employees who are offered coverage as of the first day of the 2015 plan year.

Comment: The transition play-or-pay relief applies with respect to plans that were maintained on a non-calendar year basis as of December 27, 2012. Consequently, this transition relief will not be available to a calendar year plan that last year had shifted to a plan year beginning December 1, 2013 (for example) so as to defer the timing of the application of certain ACA rules.

Shorter Look-Back Calculation Period

The determination of applicable large employer status is made by calculating the average number of full-time equivalent employees for the entire preceding calendar year. For purposes of calculating whether an employer is an applicable large employer in 2015, the average number of full-time equivalent employees may be calculated using any six-month consecutive period in the 2014 calendar year. For subsequent calendar years, the look-back must be the entire preceding calendar year.

Example: An employer may use hours worked in the six-month period from April 1, 2014, through September 30, 2014, to determine its status as an applicable large employer for 2015.

Optional Measurement Periods

Monthly Measurement Period

The proposed regulations implied that employers were effectively required to use the look-back measurement period method for determining whether an employee had full-time status.

The final requirements make clear that the look-back approach is an optional safe harbor, and that the statutory "monthly measurement period" is also available. This monthly measurement method requires employers to treat an employee as being full-time for coverage purposes for any month in which the employee works 130 hours.

Comment: The monthly measurement period approach may be suitable for application to salary employees who are often presumed to be full-time employees.

Application to Different Classes of Employees

In general, an employer must use the same measurement period approach (i.e., either the look-back or monthly measurement period approach) for all employees. An exception allows an employer to elect to use a different measurement approach for the following categories of employees:

  • Salaried employees versus hourly employees;
  • Collectively-bargained employees versus non-collectively-bargained employees;
  • Groups of bargaining unit employees covered under separate labor agreements; and
  • Employees whose primary places of employment are in different states.

Only the above categories are permitted. As such, an employer cannot use the look-back measurement method for variable hour employees and the monthly measurement method for hourly employees with more predictable periods of service.

Employee Designations

Factors to Establish Full-Time Employee

A new employee must be treated as a full-time employee from the start if it is reasonable to assume that the employee will work on average at least 30 hours per week. The final regulations clarify that the reasonableness of any ‎determination will be based on the facts and circumstances present as of the employee's start date. ‎The regulations further state that the reasonableness standards to be considered must include the following:

  • Whether the employee is replacing an employee who was (or was ‎not) full-time;
  • The extent to which weekly hours of service of employees in the same or ‎comparable positions have varied above and below 30 hours during recent measurement periods; and ‎
  • Whether the job was documented or communicated to the new hire as requiring hours of ‎service that would average 30 (or more) per week.

‎Variable Hour Employees

A variable hour employee is an individual for whom the employer cannot determine, as of the employee's start date, as to whether the employee is ‎reasonably expected to average at least 30 hours of service per week because the employee's hours are variable or otherwise ‎uncertain. This determination is based on the facts and circumstances existing as of an employee's start ‎date (taking into consideration the same factors as applicable to a full-time employee determination described above). ‎

The regulations permit an employer to use the wait-and-see approach (via the look-back measurement period method) to establish whether the employee will in fact average over 30 hours per week during the applicable measurement period. However, the final regulations confirm that for purposes of determining whether an employee is a ‎variable hour employee, the employer may not take into account the likelihood that the ‎employee may terminate employment with the employer before the ‎end of an initial measurement period.‎

Comment: See exception for "seasonal employees" below.

‎Part-Time Employees

The proposed regulations did not expressly address the treatment of part-time employees who were not variable employees (i.e., employees who clearly will not work on average at least 30 hours per week). The final regulations close this hole by essentially holding that part-time employees are to be treated and tested for full-time status on the same basis as variable employees.

Comment: An employer will not be able to merely assume that a part-time employee will never earn full-time status based on hours. As a result, part-time employees will need to be included with variable employees for testing purposes.

Seasonal Employees

Under the ACA rules, an employee who regularly works at least 30 hours per week may nevertheless be treated the same as variable employees (meaning the employer can apply the look-back, wait-and-see approach to test for full-time status) if the worker qualifies as a "seasonal employee." This is an exception to the general rule that prohibits an employer from considering the likelihood of the employee not remaining in employment in establishing full-time employee status.

The final regulations provide that a seasonal employee means an employee in a position for which the customary annual employment is six months or less. In turn, "customary" means that by the nature of the position, an employee in this position typically works for a period of six months or less, and that period should begin each calendar year in approximately the same part of the year, such as summer or winter.

In certain unusual instances, the employee can still be considered a seasonal employee even if the seasonal employment is extended in a particular year beyond its customary duration. An example provided by the final regulations is a ski instructor whose customary period of annual employment is six months, but is asked in a particular year to work an additional month because of an unusually long or heavy snow season. In that situation, the employee would still be considered a seasonal employee.

Comment: This new seasonal employee status rule may be of particular interest to employers. The key will be to identify the positions for which customary annual employment is less than six months.

‎On-Call Employees

For purposes of determining whether an "on-call employee" is full-time, an employer must use a reasonable method for determining the hours ‎of service performed during on-call duty. In all cases, the on-call employee must be credited service for hours for which:

  • Payment is made ‎by the employer;
  • The employee must remain on the employer's premises; and
  • The employee's ‎activities while on call are so restricted that the employee is prevented from using the time ‎effectively for his or her own purposes.‎

Change from Full-Time to Part-Time Employee Status</strong< p>

One of the most interesting features of the final regulations is the new provision that will allow an employer to immediately apply the monthly measurement period method to a part-time employee who moves from a full-time position, with the result that the employee need not be treated as a full-time employee for the subsequent "stability periods."

General Rule

By way of background, the proposed regulations (and now the final regulations) are clear in regard to a part-time employee who moves to a full-time position. In that event, the employee must be offered coverage by the first day of the fourth calendar month following the change of position. However, the proposed regulations did not address the opposite situation—a full-time employee who moves to a part-time position. The final regulations add guidance in this regard.

Under the general look-back measurement period rules, if an employee is deemed to be a full-time employee for a "stability period," the employee must continue to be treated as a full-time employee even if the employee voluntarily or involuntarily moves to a part-time position.

New Rule

As an exception to this general rule, the final regulations permit an employer to apply the monthly measurement method to that employee if the employee ‎experiences a change in employment status such that, if the employee had begun employment ‎in the new position or status, the employee would have reasonably been expected not to be ‎employed on average at least 30 hours of service per week (for example, the employee transfers to a part-time position of only 20 hours of service per week). Any change to the monthly measurement method that is made so as to allow the employer to treat the employee as being part-time may not be effective prior to the first ‎day of the fourth full calendar month in which the calendar month following the change in employment status occurs.

Conditions to Special Rule

This special change in status rule only applies if:

  • The employee at issue was offered ‎minimum value coverage for the entire period beginning on the first day of the calendar month following the employee's initial ‎three full calendar months of employment through the calendar month in which the change in ‎employment event occurred; and
  • The employee actually ‎averages fewer than 30 hours of service per week for each of the three full calendar months ‎following the change in employment event.

Scope of Change

Under this special rule, an employer may apply the ‎monthly measurement method to an employee even if it does not apply the ‎monthly measurement method to other employees in the same category of employees. For example, an employer could apply the monthly measurement method to an hourly employee who moves to a part-time position, even if the employer uses the look-back measurement method to determine the full-time employee status of ‎all other hourly employees.

If an employer elects this option, it may continue to apply the monthly measurement ‎method for the employee (i.e., it may continue to treat the employee as part-time) through the end of the first full measurement period that would have applied had the employee remained under the ‎applicable look-back measurement method.‎


The following is based on an example set forth in the regulations.

Assume that an employer uses the look-back measurement method to determine the full-time employee status for all of its employees. On May 10, 2015, the employer hires Sara as a full-time employee. The employer offers Sara‎ coverage that provides minimum value. For its ongoing employees, the employer ‎uses the look-back measurement period method, and has chosen to use a 12-month standard measurement period starting October 15 and a 12-month stability period associated with that standard measurement period starting January 1.

Sara continues in employment with the employer and averages more than 30 hours of service per week for all measurement periods through the measurement period ending October 14, 2016. On February 12, 2017, Sara experiences a change in position of employment with the employer to a position under which the employer‎ reasonably expects Sara to average fewer than 30 hours of service per week. For the calendar months after February 2017, Sara averages fewer than 30 hours of service per week. The employer ‎offers Sara coverage that provides minimum value continuously from September 1, 2015, through May 31, 2017 (i.e., through the three full calendar months following the change in position).

Based on the above facts, effective June 1, 2017, the employer ‎may elect to apply the monthly measurement method to Sara. As such, it may treat Sara as a part-time employee for the remainder of the stability period ending December 31, 2017, and for the entire 2018 calendar year (which is through the end of the first full measurement period following the change in employment status, plus the associated administrative period).

Other Coverage Standards

Rehired Employees‎

The proposed regulations stated that an employer could treat a rehired employee as a new employee for play-or-pay purposes if the ‎employee did not have an hour of service for at least 26 consecutive ‎weeks before the employee returned to work. The final regulations reduce the period to 13 weeks (other than for educational institutions).

The final regulations also continue to allow for the optional rule of parity. This rule permits an employer to elect to treat a rehired employee whose break in service is less than 13 weeks as a new employee if the number of consecutive weeks during which the employee was separated from service exceeds the greater of:

(i) Four consecutive weeks; or

(ii) The number of consecutive weeks of the employee's period of employment immediately preceding the separation from service.

If the separation from service is less than four consecutive weeks, the employee will not be treated as a new employee, pursuant to this rule of parity.

Coverage of Dependents

The ACA exposes a large employer to the no-coverage play-or-pay penalty if the employer fails to offer substantially all of its full-time employees "and their dependents" the opportunity to enroll in the plan and any full-time employee receives premium assistance for insurance exchange coverage.

  • The final regulations (as did the proposed regulations) provide that the term "dependent" does not include an employee's spouse. Consequently, offering coverage to an employee's spouse is not required.
  • The proposed regulations defined a "dependent" for play-or-pay purposes as an employee's biological child, stepchild, adopted child, or foster child who is under 26 years of age. The final regulations exclude stepchildren and foster children from the list of recognized dependents for these penalty purposes. The stated rationale for excluding these children is that stepchildren are often eligible for coverage under the biological parent's plan, and foster children often have coverage under a state program.
  • A child is a dependent for the entire calendar month in which he or she attains age 26.

For further information or questions regarding the actions required of employers to comply with the employer play-or-pay mandates of the Affordable Care Act, please contact the Schwabe attorney with whom you work or Wally Miller at 541-686-3299 or

IRS rules of practice require us to inform you that any federal tax advice contained in this correspondence is not intended or written to be used, and cannot be used, by the recipient or any taxpayer for the purpose of avoiding tax penalties under the Internal Revenue Code.