IRS maximum waiting period rules are in effect and employer mandate taxes will begin accruing January 1, 2015. Much has been written, here and elsewhere, about how to administer group health plan eligibility for both purposes. Briefly, here are the options we have covered in prior posts.
- Treat all employees as eligible, eliminating the full-time / part-time distinction, with insurer consent, and observe the maximum waiting period rules for new hires;
- Create a DMZ between employees who are very part-time and those who are very full-time; allow no one near the border and observe the maximum waiting period rules for new hires;
- Track full-time eligibility manually, using the look-back measurement method for all but full-time new hires;
- Acquire and use ACA employer compliance software to do the same, either with or without associated benefit administration services.
We saved this deep dive into the cumulative hours of service (“CHOS”) option because of a difficult ambiguity, hoping for clarification that hasn’t arrived. The question is whether a CHOS requirement (up to 1,200 hours) that complies with the PHS Act § 2708 waiting period rules also avoids employer mandate tax assessments under Code § 4980H.
The math is simple. An employee averaging 30 weekly hours of service would reach 1,200 hours in 40 weeks – about three times the maximum waiting period for someone hired full-time. One would have to exceed 90 weekly hours to hit 1,200 within the 90-day waiting period. So, we doubt that the IRS will waive § 4980H assessments because an employer applied a CHOS eligibility test to an employee hired to work full-time. But does the IRS consider the CHOS test a § 4980H alternative to the look-back measurement period for part-time, variable hour and seasonal employees? If you need simplicity, stop reading now.
The look-back measurement method is discussed in the employer mandate rules and in the waiting period rules, but only the waiting period rules discuss the CHOS option expressly.
(ii) Cumulative service requirements. If a group health plan or health insurance issuer conditions eligibility on an employee’s having completed a number of cumulative hours of service, the eligibility condition is not considered to be designed to avoid compliance with the 90-day waiting period limitation if the cumulative hours-of-service requirement does not exceed 1,200 hours.
See 79 Fed. Reg. 10,307, 311-12, 316-17 (Feb. 24, 2014), codified at 26 CFR § 54.9815-2708(c)(3)(ii) (Example 8); 29 CFR § 2590.715-2708(c)(3)(ii) (Example 8) and 45 CFR § 147.116(c)(3)(ii) (Example 8). The reader is warned that waiting period compliance won’t necessarily avoid employer mandate tax assessments.
(h) No effect on other laws. Compliance with this section is not determinative of compliance with any other provision of State or Federal law (including ERISA, the Code, or other provisions of the Patient Protection and Affordable Care Act). See e.g., § 54.9802-1, which prohibits discrimination in eligibility for coverage based on a health factor and section 4980H, which generally requires applicable large employers to offer coverage to full-time employees and their dependents or make an assessable payment.
79 Fed. Reg. 10,308, 312, 317. So far, it’s not looking good for the CHOS test as a § 4980H tax avoidance maneuver.
To determine the § 4980H tax exposure, employers must consult the employer mandate final rule, § 54.4980H-3(c)(2) of which, describing full-time employees under the monthly measurement method, states:
(2) Employee first otherwise eligible for an offer of coverage. The rule in this paragraph (c)(2) applies with respect to an employee who, in a calendar month, first becomes otherwise eligible to be offered coverage under a group health plan of an employer using the monthly measurement method with respect to that employee. For purposes of this paragraph (c)(2), an employee is otherwise eligible to be offered coverage under a group health plan for a calendar month if, pursuant to the terms of the plan as in effect for that calendar month, the employee meets all conditions to be offered coverage under the plan for that calendar month, other than the completion of a waiting period, within the meaning of § 54.9801-2, and an employee is first otherwise eligible if the employee has not previously been eligible or otherwise eligible for an offer of coverage under a group health plan of the employer during the employee’s period of employment. An employer is not subject to an assessable payment under section 4980H(a) with respect to an employee for each calendar month during the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible for an offer of coverage under a group health plan of the employer, provided that the employee is offered coverage no later than the first day of the first calendar month immediately following the three-month period if the employee is still employed on that day. If the coverage for which the employee is otherwise eligible during the three-month period, and which the employee actually is offered on the day following that three-month period if still employed, provides minimum value, the employer also will not be subject to an assessable payment under section 4980H(b) with respect to that employee for the three-month period. This rule cannot apply more than once per period of employment of an employee. If an employee terminates employment and returns under circumstances that would constitute a rehire as set forth in paragraph (c)(4) of this section, the rule in this paragraph (c)(2) may apply again.
79 Fed. Reg. 8584 (Feb. 12, 2014) (emphasis ours.) Section 54.9801-2 takes us back to the waiting period rules, where we read that “[w]aiting period means waiting period within the meaning of § 54.9815-2708(b).” Flipping there, we learn that it “is the period that must pass before coverage for an individual who is otherwise eligible to enroll under the terms of a group health plan can become effective.”
We’ve now come full circle, back to the place in the waiting period rules where we read that a CHOS test isn’t one. Indeed, the maximum waiting period may be added to the CHOS. See 26 CFR § 54.9815-2708(c)(3)(ii) (Example 8). In short, intertwined sets of rules suggest that a lawful CHOS requirement may delay both the accrual of waiting period penalties and employer mandate tax assessments. But can that be squared with the “no effect on other laws” language quoted above?
IRS Notice 2012-59 (August 2012), the immediate predecessor to the waiting period proposed rules, approved by example an employee working from January 3 until December 15 before reaching the 1,200 CHOS eligibility threshold, without comment regarding the § 4980H consequences. The proposed rules, issued seven months later, added this footnote on the same point:
While a cumulative hours-of-service eligibility condition up to 1,200 hours may be permissible under PHS Act section 2708, an applicable large employer’s denial of coverage to a full-time employee may, nonetheless, give rise to an assessable payment under section 4980H of the Code and its implementing regulations.
78 Fed. Reg. 17,316, n. 8 (March 21, 2013). Eleven months later, that footnote was dropped from the relevant section of the final rules’ preamble. See 79 Fed. Reg. 10,298 (Feb. 24, 2014). Three months after that, the CHOS portion was omitted entirely from the preamble to the final rule amendment adding a one-month orientation period See 79 Fed. Reg. 35,944 (June 25, 2014). Is the IRS telling employers that a CHOS test has no relevance to § 4980H assessments or only that a CHOS test, like the look-back measurement method, cannot be imposed on full-time new hires so as to delay their coverage offers longer than 90 days? The implications are anything but clear.
Two ACA employer compliance issues – automatic enrollment and plan discrimination – are puzzles because the rules have not been published. Others are difficult because their complex rules require careful study. This is a regulatory encounter of the third kind. Close study actually augments the confusion. The IRS Chief Counsel’s office referred us to the PR staff. If we get a helpful response, we’ll update this post.