Recently, the Internal Revenue Service ("IRS") published final regulations regarding the employer shared responsibility requirements of the Affordable Care Act (the "ACA") commonly called the "employer mandate" or "pay or play" rules. In addition to the final regulations, the IRS issued a press release, fact sheet, and a series of Questions and Answers that address the pay or play rules.

A. The Pay or Play Rules. The pay or play rules impose penalties on large employers, defined as those with 50 or more full-time equivalent employees ("FTEs"), that do not offer affordable health insurance to their full-time employees.

In general, the pay or play rules provide that, for each month that, (1) a large employer does not offer health insurance to at least 95% percent of its full-time employees, and (2) at least one full-time employee receives a premium tax credit or subsidy for coverage purchased through an ACA health insurance exchange, the employer will be subject to a penalty equal to $166.67¹ times its number of full-time employees (not counting the first 30 full-time employees) (the "No Offer Penalty"). For each month that a large employer offers health insurance to full-time employees, but such coverage is unaffordable or not "minimum value" coverage (as defined under regulations), the employer will be required to pay a penalty equal to $250² times the number of full-time employees who purchase coverage on an ACA exchange and receive a premium tax credit or subsidy (the "Unaffordable Coverage Penalty"). In no event will the amount of the Unaffordable Coverage Penalty exceed the amount of the No Offer Penalty if the No Offer Penalty had applied. The No Offer Penalty and Unaffordable Coverage Penalty increase over time based on a statutory inflation adjustment.

Pursuant to transition relief previously issued by the IRS, the pay or play rules will become effective January 1, 2015.

B. The Final Pay or Play Regulations Provide Additional Relief and Guidance.

1. Transition Relief. The final pay or play regulations (the "Final Rules") provide certain transition relief, including the following:

   • Transition Relief for Employers with Fewer Than 100 FTEs. Provided certain requirements are satisfied, employers with more than 50 but fewer than 100 FTEs will not be considered "large employers" subject to the pay or play rules until January 1, 2016.

   • Transition Relief from the No Offer Penalty. In general, a large employer will not be subject to the No Offer Penalty if it offers health coverage to at least 95% of its full-time employees. Effective for 2015, however, the final regulations provide that a large employer generally will not be subject to the No Offer Penalty if the employer offers health coverage to at least 70% of its full-time employees.

   • Transition Relief for Non-Calendar Year Plans. As under the previously issued proposed pay or play regulations, the Final Rules also state that, provided certain requirements are met, an employer with a non-calendar year group health plan will not be subject to the No Offer Penalty or the Unaffordable Coverage Penalty for the months in 2015 preceding the first day of the 2015 plan year.

2. Other Guidance. Other significant areas addressed in the Final Rules include among others:

• Determining Full-Time Employee Status: In determining full-time employees, the Final Rules clarify that an employer can use either thelook-back measurement/stability period method described in the regulations or the monthly measurement method described under the statute. The Final Rules describe how the monthly measurement method is applied. The Final Rules also provide transition relief under the look-back measurement/stability period method for the look-back measurement period that begins in 2015. These rules are complex and a detailed summary of these rules is beyond the scope of this Update.

• Dependent Coverage: An employer that previously did not offer dependent coverage does not have to offer coverage to dependents during 2015 if it can show it is taking steps to arrange for such coverage to begin in 2016.

• Various Employee Categories: For purposes of determining whether an employer is an applicable large employer, the Final Rules address the following employee categories:

  • Volunteers: Hours contributed by bona fide volunteers for a government or tax-exempt entity, such as volunteer firefighters and emergency responders, will not cause them to be considered in an employer's FTE total, even if such volunteers receive compensation in the form of: (i) reimbursement for reasonable expenses, or (ii) reasonable benefits, and nominal fees, customarily paid in connection with their services;

  • Educational Employees: Teachers and other educational employees will not be treated as part-time for the year simply because their school is closed or operating on a limited schedule during the summer;

  • Seasonal Employees: Individuals in positions for which the customary annual employment is six months or less generally will not be counted towards an employer's FTE total;

  • Student work-study programs: Service performed by students under federal or state-sponsored work-study programs will not be counted in determining an employer's FTE total;

  • Adjunct Faculty: Until further guidance is issued, employers of adjunct faculty may credit an adjunct faculty member with 2-1/4 hours of service per week for each hour of teaching or classroom time; and

  • On-call Employees: For more information about the treatment of on-call employees, please visit here.