Mystery and Pitfalls Surround 95 Percent Rule

Mystery and Pitfalls Surround 95 Percent Rule

On January 1, 2015 employers will need to accurately track their workforces’ hours of service in order to comply with the Play or Pay Mandate.  The Mandate and the rules associated with counting an employee’s hours of service have been written about ad nauseam.  However, little attention has been paid to the 95 percent rule accompanying the Play or Pay Mandate.

The 95 percent rule allows an employer to be treated as offering qualifying coverage to all of its full-time employees (and their dependents) for a calendar month, if the employer offers coverage to all but five percent (or, if greater, five full-time employees) of its full-time employees (and their dependents).  The preamble to the proposed regulations makes it clear an employer can utilize the 95 percent rule even if the failure to offer coverage is intentional.  As a result, many employers have been looking for ways to exploit this rule to minimize their healthcare expenses.  Unfortunately, only one sentence is dedicated to the 95 percent rule in the proposed regulations and the preamble does not provide additional guidance on how the rule will work in practice.  Below is a list of thoughts and concerns I have with certain strategies I have seen in software trying to assist employers.  The paper concludes by discussing when and if certain employees are included in the calculation of the 95 percent rule.

Employees Under the Age of 26

One of the hallmark provisions of the ACA was the requirement placed on health insurers to extend dependent coverage to all adult children until the child turns 26 years of age if the plan was already offering dependent coverage.  As the Play or Pay Mandate publication explains, an employee can only subject an employer to a penalty under §4980H if the employee is eligible for a premium tax credit.  Among other conditions, an individual is only eligible for a premium tax credit if the individual is not eligible for minimum essential coverage through a different medium other than eligibility through coverage in the individual market.  Knowing this, some consultants and employers have determined they won’t offer coverage to employees under the age of 26 as those employees can never subject the employer to a §4980H penalty.   This is not true.

First, and importantly, a parent’s health coverage only makes an individual ineligible for a premium tax credit if at least one parent is claiming a §151 deduction for the individual.  Consequently, a parent’s health coverage can only absolve an employer from offering an employee health insurance if the employee is being claimed as a dependent by a parent.  However, a parent can only claim a child who is a student as a dependent until the age of 23.  If the child is not a student, the parent can typically only claim the child as a dependent until the age of 18.

Additionally, not all employees under the age of 26 will be eligible for coverage through their parents or some other means.  If such an employee met the other conditions to receive a premium tax credit, the employee could trigger a §4980H penalty.  In 2014 the likelihood of an employee under the age of 26 not being eligible for coverage through their parents will be at its highest as transition relief allows employers who did not offer dependent coverage prior to 2014 to not be liable under §4980H for not offering dependent coverage until 2015.  Consequently, in 2014 not all employers will be required to offer dependent coverage to employees in order to satisfy §4980H.

The final concern is a common theme for all of the strategies discussed in the paper.  The proposed regulations when explaining the 95 percent rule do not condition a full-time employee being included in the calculation on any additional factor besides being a full-time employee (averaging 30 or more hours of service per week during the month).  Consequently, even if an employer is able to successfully implement a strategy taking advantage of employees under the age of 26, those employees would count against the employer when calculating the 95 percent rule.  This could leave an employer with little or no margin for error.  As a result even an inadvertent error could subject the employer to the harsh §4980H(a) penalty.

Medicare

Similar to the strategy for employees under the age of 26, some employers are trying to take advantage of employees who are eligible for Medicare.  Employees who are 65 years of age or older will not meet all of the conditions to be eligible for a premium tax credit as they will be eligible for Medicare.  Thus these employees will not be able to trigger a §4980H penalty.  The Medicare strategy is sound and does not have the weaknesses of the under the age of 26 strategy.  However, it appears all full-time employees are included when calculating the 95 percent rule.  Consequently, if employees eligible for Medicare are not offered the opportunity to enroll in qualifying employer coverage, they will count against the employer when calculating the 95 percent rule.  Similar to the first strategy this could leave the employer with little to no margin for error when implementing its healthcare strategy.

Medicaid

Like the strategies discussed above, some employers are trying to take advantage of another condition required for an employee to be eligible for a premium tax credit.  There are two ways employers can implement this strategy.  The more popular strategy is not offering qualifying coverage to full-time employees who are eligible for Medicaid (meaning an individual who has a household income of less than 100 percent of the federal poverty line or 138 percent of the federal poverty line in States that have elected to expand Medicaid).

One risk with this strategy is the employer will have to make income assumptions about the employee’s other sources of income and the income of other individuals who could impact the employee’s household income.  Even though the employer may be paying the employee less than the applicable Medicaid amount, other income from different sources could push the employee over the Medicaid threshold.  Regardless, if Medicaid employees are not offered the opportunity to enroll in qualifying employer coverage, they will count against the employer when calculating the 95 percent rule.  Consistent with the strategies discussed above this could leave an employer with little or no margin for error.

Household Income of More Than 400 Percent of the Federal Poverty Line

The other way to implement the strategy discussed in the paragraph above is to not offer coverage to employees who have a household income of more than 400 percent of the federal poverty line.  This strategy is less pervasive because these employees typically are more skilled and have greater value to an employer.  The same concerns discussed in each of the scenarios above would apply to employees who have a household income of more than 400 percent of the federal poverty line.  If these employees are not offered the opportunity to enroll in qualifying employer coverage, they will count against the employer when calculating the 95 percent rule.

Who Counts When Calculating the 95 Percent Rule

It is also important for employers implementing the strategies discussed above or trying to take advantage of the 95 percent rule to understand when an employee is included when calculating the 95 percent rule.  The 95 percent rule makes no distinction in full-time employees when calculating the 95 percent rule.  Therefore, an employee from any of the four strategies discussed above would need to be included when calculating the 95 percent rule.  The rest of the paper discusses what other employees need to be included when calculating the 95 percent rule.

Leased Employees, Sole Proprietors, Partners, and 2-Percent S Corporation Shareholders

It is important for employers to remember that leased employees, sole proprietors, partners in a partnership, and 2-percent S corporation shareholders are not considered employees under the proposed regulations.  As a result these individuals can only be considered full-time employees if they are wearing a different hat within the business.  With that as the lone exception, these individuals will not be included when calculating the 95 percent rule.

Part-Time Employees

As the phrase is used in this paper a “part-time employee” refers to an employee who will clearly average less than 30 hours of service per week during a month.  If a part-time employee is offered qualifying health coverage, the employee is not included when calculating the 95 percent rule.  Similarly, if a part-time employee is not offered qualifying coverage, the employee is not included when calculating the 95 percent rule.  The reason is only full-time employees, those employees averaging 30 or more hours of service per week, are included when calculating the 95 percent rule.  Employers will need to be careful with things such as phased retirements.  An employee who is no longer averaging 30 hours of service per week cannot be included when calculating the 95 percent rule.

New Non-Variable Hour Employees

A new non-variable hour employee is an employee who the employer reasonably expects to accumulate more than 30 hours of service per week.  As discussed extensively in The Affordable Care Act Creates a New High Stakes Game of Counting Hours and Days publication, an employer must offer a new non-variable hour employee coverage by the conclusion of the employee’s third full calendar month of employment.

The proposed regulations make it clear what months are included in the calculation for the 95 percent rule if coverage is not timely to a new non-variable hour employee.  If a new employee (who the employer knows will work 40 hours a week) is hired on March 15, 2014 that particular employee’s initial three full calendar months will be April 2014, May 2014, and June 2014.  If the employer does not offer the employee coverage by June 30, 2014, the employee would count as a full-time employee who did not have coverage made available to him/her for April 2014, May 2014, and June 2014 as well as any subsequent month until coverage is offered for the entire calendar month when calculating the 95 percent rule.  It appears the partial month of March 2014 would not be included in the calculation of the 95 percent rule.

It is unclear how a new non-variable hour employee would count for the 95 percent rule if the employer offers coverage to the employee by the §4980H deadline.  For example, suppose a new employee (who the employer knows will work 40 hours a week) is hired on March 15, 2014.  The employer makes coverage available to the new employee by June 30, 2014.  As in the example in the paragraph above it appears the partial month of March 2014 would not be included in the calculation of the 95 percent rule.  What is unclear is how the months of April 2014, May 2014, and June 2014 factor into the calculation of the 95 percent rule.  There are three possibilities:

    1. The first possibility would be to include the employee as a full-time employee who was not offered coverage for the calendar months of April 2014, May 2014, and June 2014.  The employee would only count as a full-time employee who was offered coverage by the employer in the first full calendar month coverage was made available to the employee (in this example July 2014).  A plain reading of the proposed regulations discussed at the beginning of the paper would lend credibility to this interpretation as it makes no exceptions but simply mentions full-time employees being offered coverage.

    2. A second possibility would include the employee as a full-time employee who was offered coverage for the calendar months of April 2014, May 2014, and June 2014 when calculating the 95 percent rule.  The argument for this interpretation is, as discussed above, if the employer does not make coverage available by the conclusion of the initial three full calendar months, then April 2014, May 2014, and June 2014 would count as months the employer did not make coverage available to the employee when calculating the 95 percent rule.  This is the inverse argument.

    3. The third possibility is the months of April 2014, May 2014, and June 2014 are not factored into the calculation of the 95 percent rule.  The employee would begin to be included in the calculation of the 95 percent rule in July 2014.

Variable Hour Employees

A variable hour employee, a term discussed extensively in The Affordable Care Act Creates a New High Stakes Game of Counting Hours and Days, is an employee that based on the facts and circumstances at the employee’s start date the employer cannot determine if the employee is reasonably expected to average at least 30 hours of service per week.  The proposed regulations allow an employer to use the safe harbor measurement method if an employee can be classified as a variable hour employee.

The safe harbor measurement method which is described in great detail in The Affordable Care Act Creates a New High Stakes Game of Counting Hours and Days has various periods with multiple rules.  The proposed regulations provide no guidance on how the periods associated with the safe harbor interact with calculating the 95 percent rule.  Below is my best guess on how the rules interact.

All employees during the initial measurement period are excluded from the calculation of the 95 percent rule.  If an employee is determined to be a full-time employee during the initial measurement period, the employee would be included in the calculation of the 95 percent rule during the entire corresponding stability period regardless of whether the employee was offered coverage during that time period.  However, if an employee is determined to not be a full-time employee during the initial measurement period, the employee would not be included in the calculation of the 95 percent rule during the entire corresponding stability period regardless of whether the employee was offered coverage during that time period.

If an employee is determined to be a full-time employee during the standard measurement period, the employee would be included in the calculation of the 95 percent rule during the entire corresponding stability period regardless of whether the employee was offered coverage during that time period.  However, if an employee is determined to not be a full-time employee during the standard measurement period, the employee would not be included in the calculation of the 95 percent rule during the entire corresponding stability period regardless of whether the employee was offered coverage during that time period.

In the case of overlapping stability periods, the employee being included as a full-time employee will always trump the employee not being included as a full-time employee for purposes of calculating the 95 percent rule.  In no case should overlapping stability periods make a single employee be included twice when calculating the 95 percent rule.  This seems to be a logical approach, but there is not guidance to indicate whether it is the correct approach.

Conclusion

Employers have been left in the dark on calculating the 95 percent rule.  This paper examined some strategies employers may be considering and discusses their impact on calculating the 95 percent rule.  Until there is additional guidance, employers would be wise to take a conservative approach when utilizing the 95 percent rule leaving plenty of room for error.  This will make it more likely an employer can avoid a §4980H penalty because of an inadvertent error.


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