Employer Mandate—2015 Transition Rules

Earlier this year, the IRS and Treasury Department issued final regulations and an FAQ on the employer portion of the shared responsibility (“pay-or-play”) mandate under the Affordable Care Act (“ACA”).  The final regulations adopt many of the concepts that were described in previously published guidance, however they also contain several significant modifications as well as a few explanations intended to give employers more concrete direction for their compliance efforts.

At over 200 pages, the volume and complexity of the information contained in the regulations can be overwhelming, so we are going to attempt to break down what employers need to know about the mandate into bite-size chucks with a series of articles.  First up, who does the mandate apply to and when does it go into effect?

Applicable Large Employer (ALE)

Among the final regulation’s hidden gems is a new acronym—“ALE.” (Perhaps an acknowledgement that the current deluge of regulations is enough to make a person want to seek solace in an alcoholic beverage?)  In IRS nomenclature, “ALE” means “applicable large employer” and although the acronym is new, the concept of which employers are subject to the shared responsibility requirements is basically unchanged from previous guidance—public and private sector employers with 50 or more full-time employees, including full-time equivalent employees (FTEs).

Transition Relief

Although the employer mandate was originally intended to go into effect on January 1, 2014, it was previously delayed until 2015 and the final regulations contain further additional changes to the applicability dates based on an employer’s workforce size and health plan year as well as other transitional provisions designed to make the first year’s compliance a bit easier (at least in theory).

Recognizing that it may take more than a bit of effort for employers to get up to speed on all of the mandate’s requirements, the final regulations contain several transitional rules:

“Smaller” ALEs—Employers with 50-99 full-time/equivalent employees on business days during 2014 have been given an additional year, until the beginning of their 2016 plan year, before they will be subject to potential penalties.  This relief is not absolute or automatic however. An eligible ALE will still have to file the required Section 6056 return form in early 2016 and certify that during the 2014 calendar year it had:

  • between 50 and 99 full-time employees (including full-time equivalents);
  • not reduced its workforce or employees’ hours of service in order to qualify for the mandate’s delayed enforcement (although reductions due to bona fide business reasons are permitted); and
  • not altered the health coverage it offered as of February 9, 2014.

ALEs taking advantage of this delay may not be eligible for some of the other transition relief offered for 2015, including shortened measurement periods and dependent coverage (described below).

Non-Calendar Year Plans—An ALE with a non-calendar year health plan or policy year will generally not be subject to potential penalties for failing to offer minimum essential coverage until the first day of its 2015 plan year, provided that the plan year has not been changed after December 27, 2012 to begin on a later calendar date.  The employer will not be subject to a potential penalty until the first day of its 2015 plan year for any employees who are eligible for affordable, minimum value coverage (whether or not they take the coverage) as of that date, under the eligibility terms of the plan as of February 9, 2014.  This relief may be extended to those employees that have not been previously eligible to participate in the plan, provided that at least one quarter of the ALE’s employees were covered under the plan as of any date in the 12 months ending on February 9, 2014 or at least one-third of employees were offered coverage at the most recent open enrollment period prior to February 9, 2014.

Please note that employers failing to offer “affordable” or “minimum value coverage” to all full-time employees may still be subject to potential penalties for those employees who obtain subsidized Exchange coverage.

Even an employer that qualifies for transition relief until the beginning of its 2015 plan year, will be required to file the required returns including information for the entire 2015 calendar year.

Calendar-Year Plans—ALEs with calendar year plans will need to comply with the mandate by January 1, 2015, however they will be considered in compliance for the month of January if coverage is offered no later than the first day of the first payroll period that begins in January 2015.

Shortened Determination/Measurement Periods for 2014

ALE status—An employer’s status as an “applicable large employer” subject to the mandate for any calendar year is generally made based on whether the employer had at least 50 full-time and equivalent employees during the preceding calendar year.  For 2015, an employer may choose a period of at least six consecutive calendar months during 2014 which to make the determination of its number of full-time/equivalent employees.

Full-time employees are still defined as those with an average of 30 or more hours of service (including hours worked and any paid time off) per week or 130 hours per month.  Full-time equivalent employees are calculated by totaling number of hours of service (up to 120) for all non-full-time employees and dividing that number by 120.  {I presume that the number 120 used for equivalency is based on 4 weeks at 30 hours per week, whereas the 130-hour number for monthly full-time status is based on 52 weeks at 30 hours divided by 12 months, but no explanation is given for the usage of the different numbers.}

2014 Measurement Periods—For stability (coverage) periods beginning in 2015, ALEs may use a shortened measurement period to calculate employee hours of service used for determination of full-time status.  This measurement period must be at least six consecutive (but no more than twelve) months, must begin no later than July 1, 2014 and end no earlier than 90 days before the first day of the 2015 plan year.

Dependent Coverage

In order to avoid the penalty for failing to offer minimum essential coverage, an ALE must offer coverage to full-time employees and their dependent children.  Spouses, stepchildren and foster children are not included in the definition of “dependent” for purposes of the employer mandate.  An ALE that does not currently provide coverage to a full-time employee’s natural and adopted children will not be subject to penalties for this failure during the 2015 plan year, provided it is taking steps during that year to offer required dependent coverage by the beginning of its 2016 plan year.


Failure to offer health coverage or offering covering coverage that does not meet certain standards will subject an ALE to one of two penalties if one of its full-time employees receives an Exchange (Marketplace) subsidy.  Here is a brief rundown of those penalties, including the transitional relief for 2015:

(a) For each month an ALE fails to offer health coverage to “substantially all” of its full-time employees and their dependents, it is subject to a potential penalty of 1/12 of $2,000* multiplied by the ALE’s total number of full-time employees (less 80 in 2015 and 30 in 2016 and beyond).  In order to avoid this penalty, coverage must be offered to at least 70% of full-time employees in 2015 and 95% in 2016 and subsequent years).

(b) Even ALEs who offer coverage to the required percentage of their full-time employees/dependents to avoid the (a) penalty can still be subject to a penalty under the mandate’s subsection (b).  This penalty is 1/12 of $3,000* per month for each full-time employee who receives an Exchange subsidy if that employee was not offered health coverage that is “affordable” (i.e., employee cost for single coverage is less than 9.5% of the employee’s household income) and has “minimum value” (i.e., covers at least 60% of benefit costs).

An ALE may be subject to a penalty under subsection (a) or (b), but not both during the same month.

*The annual penalty amounts were statutorily defined and will be adjusted for inflation in calendar years after 2014, so penalties assessed in 2015 will be slightly higher.

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About Dawn Kramer

Dawn is an attorney and Certified Employee Benefit Specialist (CEBS) in J.W. Terrill’s Consulting Services department. She advises clients on legal and regulatory issues affecting their employee benefit plans.

View all posts by Dawn Kramer

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