The Internal Revenue Service has released proposed regulations and FAQs on the shared responsibility provisions of the Affordable Care Act (ACA). These rules require large employers to offer full-time employees and their dependents the opportunity to enroll in meaningful, affordable coverage under an employer-sponsored plan or pay a penalty. The rules are often referred to as the employer mandate or pay-or-play requirement.

With a few new twists and clarifications, the proposed regulations, released on December 28, 2012, follow guidance issued in four earlier IRS notices on minimum value and reporting requirements and methods for determining employee status. Highlights include:


To avoid the penalty, a large employer must extend affordable coverage that meets certain standards (minimum essential coverage) to employees and their dependents. An employee is defined under common-law rules, which generally examine the employer’s level of control over how the employee performs his or her job. Leased employees, sole proprietors, partners, and 2-percent shareholders in an S corporation are not employees for this purpose. The rules confirm that an employer must offer coverage to an employee’s dependents. For these purposes, a “dependent” is a child younger than age 26.

Large Employer

The mandate to offer coverage applies only to employers with an average of at least 50 full-time employees, based on the prior year’s data. This calculation takes into account both full-time employees and full-time equivalent employees—a number based on part-time employees’ hours. The regulations address various details for making these determinations. For example, periods of paid leave are treated as hours worked, and seasonal workers are taken into account, but are subject to special rules.

To determine whether the threshold of 50 full-time employees is met, employees of affiliated employers within a controlled group of corporations will be counted as if they were employed by a single employer. If the threshold is reached, the rules will then apply separately to each employer.

Meeting the Mandate

Although the full-time equivalency of part-time workers affects whether an employer is subject to the shared responsibility rules, only full-time employees must be offered coverage under the requirement. A full-time employee is defined as an individual who works at least 30 hours per week, and the proposed regulations detail how to determine whether an employee meets that standard. In particular, employers may measure an employee’s hours in advance over a “measurement period” of three to 12 months and then treat that employee as full-time or part-time for a defined “stability” period.

The rules distinguish new employees from ongoing employees and include numerous examples that illustrate how an employee’s full-time status is determined. Significantly, the regulations introduce a substantial compliance provision that allows employers to meet the standard if no more than 5 percent of their full-time employees (or, if greater, no more than five full-time employees) are not offered affordable, minimum essential coverage.

Affordable Coverage

The coverage offered by a large employer is deemed affordable if an employee’s contribution for individual coverage does not exceed 9.5 percent of modified adjusted gross income of the employee’s household. Because employers typically do not have access to household income information, the rules propose three safe harbors for determining affordability based on information that employers would have. A plan is deemed affordable if any one of these conditions is met for individual coverage under the lowest-cost plan the employer offers that meets the minimum value standard described in other regulations:

  • W-2 Safe Harbor: The employee’s annual contribution does not exceed 9.5 percent of the employee’s wages, as reported in Box 1 of the W-2.
  • Rate of Pay Safe Harbor: The employee’s monthly contribution does not exceed 9.5 percent of the employee’s hourly rate of pay multiplied by 130 or, for a salaried employee, the employee’s monthly salary.
  • Federal Poverty Limit (FPL) Safe Harbor: The employee’s annual contribution does not exceed 9.5 percent of the most recently published FPL as of the first day of the plan year.

Assessable penalties

The ACA penalizes a large employer that fails to meet the shared responsibility requirement.

  • For an employer that does not offer its employees (and their dependents) minimum essential coverage, an annual penalty of $2,000 (indexed) is imposed per full-time employee. This penalty applies only if at least one full-time employee is certified as obtaining subsidized coverage through one of the insurance marketplaces (Exchanges) that will become available under the ACA in 2014. The first 30 employees will not be counted in the penalty calculation.
  • For an employer that fails to provide employees (and their dependents) minimum essential coverage that is affordable, an annual penalty of $3,000 (indexed) is imposed per employee who is certified as having enrolled in subsidized coverage through an Exchange. This penalty applies only for employees who receive the subsidy, not dependents.

Before issuing any penalty notice, the government will inform employers about employees receiving a subsidy through an Exchange and will give employers an opportunity to respond. Employers are required to meet applicable recordkeeping requirements to be able to respond to assessments.

Although the regulations refer to the rule that limits waiting periods to no more than 90 days, it does not offer new guidance on the subject. Previously issued guidance on these waiting period rules will be in effect at least through the end of 2014.

The proposed regulations establish various transitional rules to ease implementation of these rules for employers and employees. For example:

  • The employer mandate will not apply for dependent coverage until 2015 (although an employee must take measures in 2014 toward that end).
  • Plans operating on plan years other than the calendar year may delay compliance with certain requirements. Employees in such plans will be allowed to treat the January 1, 2014, effective date of certain requirements (such as the individual mandate) as an event that allows for a mid-year change in coverage under a cafeteria plan, provided the plan is amended to provide for such a change before January 1, 2015.
  • An employer may determine whether it crosses the 50-employee threshold for 2014 by looking at any six-consecutive-month period in 2013.
  • Certain other transitional rules apply to measurement periods in 2013 (provided they begin before July 1), multiemployer plans, and the status of new, variable-hour employees.

As the federal health care reform effect gained steam, Ballard Spahr attorneys established the Health Care Reform Initiative to monitor and analyze legislative developments. With federal health care reform now a reality, our attorneys are assisting health care entities and employers in understanding the relevant changes and planning for the future. They also have launched the Health Care Reform Dashboard, an online resource center for news and analysis on developments under the Affordable Care Act.

If you have questions about the shared responsibility provisions of the ACA or any other implications of the law, contact Jean C. Hemphill at 215.864.8539 or, or Edward I. Leeds at 215.864.8419 or