Following the announcement last month of these long-awaited final regulations, many employers have been trying to get a clearer understanding of what they need to do (and when) to be in compliance with the employer shared responsibility (“pay or play”) provisions of the ACA. In addition to delaying certain parts of the provisions as discussed in our related February blog, the final regulations provide additional transition relief and clarification in response to comments received by the agencies, though decline to provide relief in others (for the time being). In this post we want to share a summary of the key points from the final regulations and next steps; but to begin with here is a brief overview of how the pay or play provisions could affect an employer:

  • For plan years beginning on or after January 1, 2015, employers with a certain number of full time equivalents (FTEs) must provide a "safe offer" of health coverage to all full time employees* and their eligible dependent children to age 26 in order to avoid creating the potential for a penalty. A safe offer is one that meets both the affordable and minimum value conditions established by the ACA.
  • If such an employer elects not to provide this coverage to substantially all full time employees (and eligible children) and at least one full time employee receives a premium tax credit in the exchange, the employer is subject to an annual penalty of $2,000 per full time employee (minus a certain number of employees, see below for further explanation). This is commonly referred to as Penalty A.
  • If the employer does provide a safe offer of coverage to substantially all full time employees (and eligible children), however any full time employee applies for coverage in the exchange and is eligible for a premium tax credit, the employer will be subject to the lesser of the above penalty or a penalty of $3,000 (annualized) per employee who receives a subsidy. This is commonly referred to as Penalty B.
For 2015 plan years employers with 100 or more FTEs will be considered an applicable large employer (ALE) and therefore subject to the pay or play provisions. Employers with between 50 and 99 FTEs have a reprieve until their 2016 plan year for meeting the pay or play provisions, as long as they certify they have not materially reduced their health coverage or reduced their headcount for the sole purpose of staying below 100 FTEs. Employers with less than 50 FTEs are not subject to the pay or play provisions now or in the future, however those that may be close to 50 will want to make sure they are counting carefully. *(For ACA purposes, full time is an average or 30 or more hours per week or 130 hours per month.)


Even though no ALE would receive a notice of penalty assessment earlier than April 2016, employers need to be able to accurately determine their FTE count in calendar year 2014, (especially if they may be hovering near one of the cutoff points), because an employer's status for any given calendar year (e.g. 2015) will be based on their prior year's FTE count. By doing so, employers will be able to make safe offers of coverage to those that should receive them (assuming the intent is to avoid penalties). For 2014 only, most employers may establish their FTE count by using a six month period versus the twelve month period that will be required in future years, (employers who want to take advantage of an exception for seasonal workers need to use the full calendar year). Employers near or over 100 full time employees should establish their timeframe soon and no later than July 1, 2014.


If an employer determines they have ALE status for the 2015 plan year, they will need to decide which measurement method to use for determining who needs to be made an offer of coverage. For employers who can easily categorize their employees into either clearly full time or clearly part time, the monthly measurement period may suffice. It requires that an employee who was full time during a particular month to have been offered coverage for that month.  Obviously this means that the employer must know everyone's eligibility in advance in order to avoid the potential of a penalty for any particular month, however this method also has the appeal of relative administrative ease. On the other hand, employers may have variable hour employees for whom they cannot determine in advance whether they will meet the 30 hour threshold for a particular month until it is past. In this case, employers will likely want to rely on the look-back measurement method which allows for an employee's full or part time status to be locked-in for a stability period which the employer may rely on as a safe harbor. This method includes a measurement period during which hours are tracked in advance of the stability period, as well as an administrative period to allow time for completing the determination of eligibility and making an offer of coverage if applicable. Once an employee's eligibility status has been determined, that status, whether full or part time, will be locked in for the following stability period. ALEs may use different measurement methods for distinct control groups and categories such as collectively bargained versus non-collectively bargained, salaried versus hourly, and for employees located in different states, however specifically may not use separate methods for categories based solely on expected work patterns such as variable versus fixed schedules. In addition, special rules exist for status changes, rehires, leaves of absence, educational institutions, seasonal employees, and on-call/layover hours, among others. ALEs are not required to count hours for bona fide volunteers (for tax-exempt and government organizations only), students in government-subsidized work study programs, or for religious order members who have taken a vow of poverty. Clearly the guidelines for applying the look-back method are complex and an employer should consult with their benefit advisor to help them determine the most ideal process for their organization.


Other clarifications and transition relief in the final regulations include:
  • Foster and step children are not included in the final ACA definition of dependents who are required to be offered coverage.
  • Employers who do not currently offer coverage to eligible dependent children will have until their 2016 plan year as long as they are taking steps to add such coverage to their plans.
  • In 2015, "substantially all" (as used above) will mean at least 70% of full time employees. In 2016, it will revert to its original meaning from the proposed regulations of 95%.
  • For 2015 and any months in 2016 that are part of a plan year that began in 2015, the 30-employee reduction allowance in Penalty A has been increased to 80.
  • Allowance of a bona fide orientation period not to exceed one-month which could be used to bridge a 90 day waiting period limit to the first of the fourth full calendar month following date of hire.


  1. Determine whether your organization will have ALE status for the 2015 plan year based on the number of FTEs during the 2014 calendar year.
  2. If your organization falls between 50 and 99 FTEs, be sure that you are clearly able to certify that you meet the transition relief guidelines before claiming non-ALE status for 2015.
  3. If your organization will have ALE status in 2015, determine whether to use the look-back or monthly measurement system and that sufficient processes are in place for appropriately tracking hours.
  4. Review health plan offerings to ensure they provide an offer of coverage to eligible dependents, and if necessary take steps under the transitional relief to amend plans to meet this requirement by the 2016 plan year.
  5. Clearly communicate to employees about any decisions that will affect their health coverage with your organization.
The final regulations declined to incorporate the suggestion made by some commentors that the definition of full time be changed to 40 hours per week, but also left the door open to extending the transition rules beyond the timeframes already provided. More details are available at the IRS Q&A and the Treasury Department fact sheet and i2 benefits is available to assist you with working through this process for your organization.


Finally, there were yet more ACA-related developments late last week including final rules for reporting by large employers and insurers; announcement of the exchange open enrollment period for 2015 coverage; a second extension for certain individual non-ACA compliant plans; and a reduction to the reinsurance cap for 2014. We will bring you further details about these and other developments in a future post.