Healthcare.jpgThis blog post was authored by Heather DeBlanc

On February 10, 2014, the Department of the Treasury issued final regulations on the Employer Shared Responsibility Payment that would require large employers to face tax penalties for not offering affordable health coverage to full-time employees. For a summary of the proposed regulations, see  The following is a summary of the major changes made by the final regulations:

Employers With 50 To 99 Full-Time Employees (Including Full-Time Equivalents) 

If the employer meets the following conditions, the IRS will not assess penalties during 2015 and, in the case of a non-calendar plan year, for the portion of the 2015 plan year that falls into the 2016 calendar year:

  1. Employer has at least 50 but fewer than 100 full-time employees using the rules relating to the large employer determination;
  2. From February 9, 2014, to December 31, 2014, the employer must not reduce the size of its workforce or the overall hours of employees to satisfy condition (1);
  3. Employer does not eliminate or materially reduce health coverage it offered as of February 9, 2014; and
  4. Employer must certify, on a form filed with the IRS, that it meets these eligibility requirements.

Employers With 100 Or More Full-Time Employees (Including Full-Time Equivalents) For 2015 Only 

Employers with at least 100 full-time employees (including full-time equivalents, and using the rules relating to the large employer determination) are still subject to the mandate starting January 1, 2015, but can avoid the larger penalty (for failure to offer coverage to “substantially all” full-time employees) by offering coverage to at least 70 percent of their full-time employees.   The “substantially all” requirement will increase to 95 percent in 2016. 

The 70 percent threshold will also apply to each calendar month during 2016 to the extent that a non-calendar plan year starting in 2015 falls into the 2016 calendar year.  This relief will not apply if the employer modifies its plan year after February 9, 2014, to begin on a later calendar date.

The IRS will calculate a penalty for failure to offer coverage to at least 70% of full-time employees as follows:  $166.67 multiplied by total number of full-time employees less 80.  After 2015, the calculation will revert to the general rule which reduces the total number of full-time employees by 30 rather than 80.

Note:  These employers still may be subject to a penalty for failure to offer affordable coverage during this time.

Transition Relief For Employers With Non-Calendar Year Plans 

The preamble to the final regulations offers three variations of transition relief for employers with non-calendar year plans.  All of this transition relief applies for the period before the first day of the first non-calendar year plan year beginning in 2015 (the 2015 plan year) but only for employers that maintained non-calendar year plans as of Dec. 27, 2012, and only if the plan year was not modified after Dec. 27, 2012, to begin at a later calendar date.

Transition Relief For Dependent Coverage 

An employer that takes steps during its 2014 plan year toward offering dependent coverage will not be subject to the penalties during 2015.   This transition relief applies for plans under which (1) dependent coverage is not offered, (2) dependent coverage that does not constitute minimum essential coverage is offered, or (3) dependent coverage is offered for some, but not all, dependents.  The transition relief is not available if the employer had offered dependent coverage during 2013 or 2014 and dropped that coverage.

The final regulations exclude foster children and stepchildren from the definition of dependents for the employer mandate.  A child will be considered a dependent for the entire calendar month during which he or she turns 26 years old. 

Transition Relief For Employers Adopting Look Back Measurement Method Safe Harbor

An employer may adopt a transitional measurement period that is at least 6 months and begins no later than July 1, 2014.  The transitional measurement period must end no earlier than 90 days before the stability period.  Employers with plan years beginning on July 1 must use a measurement period longer than 6 months to comply.

Transition Relief For Large Employer Determination

An employer may determine its status as an applicable large employer based on data from at least six consecutive calendar months (selected by the employer) during the 2014 calendar year, rather than the entire year.

An employer, who becomes an applicable large employer for the first time, will not be subject to penalties for failure to offer coverage to an employee for January through March of the first year in which the employer is an applicable large employer, as long as it offers the employee coverage by April 1 of that year.

Transition Relief For Offers Of Coverage During January Of 2015 Only

If an employer offers coverage to a full-time employee no later than the first day of the first payroll period that begins in January 2015, the employee will be treated as having been offered coverage for January 2015.


Hours of service do not include hours worked by “bona fide volunteers.”  The definition of “bona fide volunteer” includes any volunteer who is an employee of a government entity or an organization described in 501(c) that is exempt under section 501(a) whose only compensation is reimbursement or reasonable benefits and nominal fees.

Adjunct Faculty

For adjunct faculty who are compensated based on the number of courses or credit hours assigned, employers must determine a reasonable method of calculating hours of service. 

One method that is reasonable would credit the adjunct faculty member with 2 ¼ hours of service (for preparation and grading per week for each hour of teaching or classroom time).  In other words, in addition to the teaching hour, this method credits an additional 1 ¼ hours for preparation and grading. 

For example, an adjunct faculty member who performs no ancillary duties and has no office hours or stipend work, but has a lecture hour equivalent of 13.33 would be considered full-time under this method.  (13.33 x 2.25 = 30 hours)

Based on the language of the regulations, we recommend that office hours, ancillary duties, and stipend work, whether required or actually performed, must also be added to the total hours of service.

Student Employees

Hours of service for students in the federal work study program or similar state program are exempt from the full-time determination.  However, there is no general exception for student employees or students working as paid interns or externs. 

Seasonal Employees Defined

A seasonal employee means an employee in a position for which the customary annual employment is 6 months or less.  These employees will not be considered full-time.

Short Term Employees & Employees In High Turnover Positions

The final regulations do not adopt any special provisions for these employees.  The Treasury Department and IRS expressed concern for potential abuse of any exception.

On-Call Employees & Employees Whose Hours Of Service Are Challenging To Identify Or Track

Employers must credit the following on-call hours of service:

  • Each hour for which payment is made or due;
  • Each hour for which the employee is required to remain on-call on the employer’s premises;
  • Each hour for which the employee’s activities while remaining on-call are subject to substantial restrictions that prevent the employee from using the time effectively for the employee’s own purposes.

Employers Using Monthly Measurement Rather Than Look Back Safe Harbor

  • Break in Service:  An employee with a period of at least 13 weeks of no service (26 weeks for educational organizations) will be treated as a new hire upon return.
  • 3 Month Relief:  Employer will not be subject to penalty during first 3 full first calendar months of the employee’s eligibility for coverage if that employee is offered coverage no later than the day after the end of the 3 month period.
  • Weekly Rule:  An employer may use payroll periods to determine full-time status on a monthly basis using payroll periods.  The hours of service calculation will depend on the number of weeks in the payroll period.  For example, for months using 4 week periods, an employee with at least 120 hours of service is full-time; for months using 5 week periods, an employee with at least 150 hours of service is full-time.  The penalty will still be assessed on a monthly basis even if the calculation is based on payroll periods.

Employers Using The Look Back Measurement Method Safe Harbor

  • Application to New Employee Reasonably Expected To Be Full-Time:  The determination of whether a new hire is reasonably expected to be full-time is based on the facts and circumstances at the employee’s start date.  Factors to consider include, but are not limited to:
    • Whether the employee is replacing an employee who was full-time;
    • Extent to which employees in same or comparable positions are full-time;
    • How the job was advertised
    • What the job description states
    • Educational organizations may not consider employment break periods when determining expectation for future hours of service.
  • New Term – “Part-Time Employee”:  The IRS added a definition for “part-time employee” to mean a new employee who is reasonably expected, at the employee’s start date, not to be a full-time employee (and who is not variable hour or seasonal).  The same rules that apply to variable hour and seasonal employees apply to part-time employees. 
  • Initial Measurement Periods:  An initial measurement period can be based on a period that begins on any date and ends on the immediately preceding date of the following calendar month (i.e. April 15 to May 14) rather than calendar months. 
  • Re-Hire Rules:  The final regulations reduce the length of the break in service required before a returning employee may be treated as a new employee from 26 weeks to 13 weeks (except for educational organizations in which the 26 week rule remains).
  • Employment Break Periods (educational organizations):  The proposed regulations referenced two alternative averaging methods to account for hours of service during an employment break period (a period of no service for at least 4 weeks).  The two alternative methods were to exclude the break period (up to 501 hours) or credit hours to the break period (up to 501 hours).  The final regulations clarified that these two methods were “intended to be different expressions of an equivalent calculation, therefore having the same results.”  

New Term – “Limited Non-Assessment Period For Certain Employees” 

This definition was added to provide the limited period during which an employer will not be subject to a failure to offer coverage penalty (and in certain cases an unaffordable coverage penalty) relating to the following:

  • An employer’s first year as a large employer;
  • During the initial 3 months from the start date of an employee who is reasonably expected to be full-time under the Look Back Safe Harbor;
  • During the initial 3 months of an employee reasonably expected to be full-time at the start date under the Look Back Safe Harbor;
  • During the initial measurement period of a new variable hour employee, seasonal employee, or part-time employee determined to be employed on average at least 30 hours of service per week under the Look Back Safe Harbor;
  • Following an employee’s change in employment status to a full-time employee during the initial measurement period; and
  • Calendar month in which an employee’s start date occurs on a day other than the first day of the calendar month.

Affordability Safe Harbors

The final regulations clarify how an employer may use an affordability safe harbor for any reasonable category of employee.  The affordability safe harbor must be applied on a uniform and consistent basis for all employees in a category.  Reasonable categories include the following:  specified job categories, nature of compensation, geographic location, or similar bona fide business criteria.  An enumeration of employees by name is not a reasonable category.

Rate of Pay Safe Harbor:  The final regulations permit an employer to use this safe harbor even if an hourly employee’s hourly rate of pay is reduced during the year.  If the hourly rate of pay is reduced, the rate of pay is applied separately to each calendar month, rather than to the entire year and the employee’s required contribution may be treated as affordable if it is affordable based on the lowest rate of pay for the calendar month multiplied by 130 hours.

Federal Poverty Line Safe Harbor:  Employers may use the published poverty guidelines in effect 6 months prior to the beginning of the plan year.

Employers Providing Mandatory Coverage

If an employer does not allow an employee to opt out and the coverage provided does not meet the minimum value standard or is not affordable, the employer will not escape potential penalties.

Opt Out Requirements

The final regulations clarify that it constitutes an offer of coverage if an employee’s election of coverage from a prior year continues for every succeeding plan year unless the employee affirmatively elects to opt out of the plan.  Note:  An employer should still offer coverage every year to those employees who elect to opt out, as they are not receiving continued coverage.

The final regulations are available at this link:

Additional information regarding the Employer Shared Responsibility Provisions is located on the IRS website at

A summary fact sheet may be viewed at this link: