IRS Guidance Addresses Cafeteria Plan Elections, Employer Mandate Measurement Periods and PCOR Fees

Practical Law Legal Update 4-581-9079 (Approx. 7 pages)

IRS Guidance Addresses Cafeteria Plan Elections, Employer Mandate Measurement Periods and PCOR Fees

by Practical Law Employee Benefits & Executive Compensation

Employer Mandate

Notice 2014-49 includes a proposed approach to applying the look-back measurement method, for use in determining who is a full-time employee under the employer mandate, in situations when the measurement period applicable to an employee changes (see Employer Mandate Toolkit and Practice Notes, Employer Mandate under the ACA: Overview and Employer Mandate under the ACA: Determining Full-time Employees for Employer Payments). This may occur if:

An employee transfers with the same large employer (or large employer member) to a position for which a different measurement period applies.
A large employer member changes the measurement period applicable to an employee's position.

Notice 2014-49 addresses these situations for employees who are:

In a stability period at the time of transfer.
Not yet in a stability period as of the transfer.

A large employer for employer mandate purposes generally is one that employed at least 50 full-time employees (including full-time equivalent employees) on business days during the prior calendar year.

The proposed approach in Notice 2014-49 may be relied on:

Until further guidance is issued.
At a minimum through the end of the 2016 calendar year.

Employee Transfer to Position Subject to Different Measurement Period

Following a transfer to a position for which a different measurement period applies, an employer generally reflects the employee's hours of service (HOS) earned in the first position by either:

Counting the HOS using the method that applied to the employee in the first position (for example, using a weekly equivalency method for non-hourly employees).
Recalculating the HOS earned in the first position using the HOS counting method that applies to the employee in the second position, provided that the employer treats all similarly situated employees consistently.

Notice 2014-49 includes separate rules for employees who were either:

In a stability period or administrative period applicable to their first position on the date of transfer.
Not in a stability period.

For employees in the first category, the employee retains his full-time or non-full-time status (as to the first position) until the end of that stability period. For a new employee who is in the administrative period that immediately follows the end of the initial measurement period as of the transfer date, the employee's status (that is, full-time or non-full-time) based on HOS in the initial measurement period under the first position applies:

From the start of the associated stability period following the end of that administrative period.
Through the end of that stability period.

After the stability period during which the transfer occurs, the employee assumes the status that would have applied under the look-back measurement period applicable to the second position, but including HOS from the first position when applying that measurement method.

The guidance includes additional rules for an employee who is not, as of the transfer date, in a stability or administrative period immediately following the end of the initial measurement period under the look-back measurement method applicable to the first position. In general, the employee's status is determined solely under the look-back measurement method for the second position as of the date of transfer, but including all HOS in the first position.

Notice 2014-49 also addresses transfers involving new non-variable-hour and non-seasonal employees who are expected to average at least 30 HOS per week at hire in their first position.

Employer Changes to Measurement Periods

Notice 2014-49 also addresses how employers may change the measurement method applicable to a category of employees. For example, this could include a change:

From the look-back to the monthly measurement method (or vice versa).
In the length or start date of an applicable measurement period under the look-back measurement method.

In particular, the notice addresses whether (and under what conditions) an employer using a measurement method for a category of employees may subsequently change that method. For an employee whose applicable measurement method is changed by the employer, the employee's status is determined as though the employee had transferred, as of the change's effective date:

From a position to which the original measurement method applied.
To a position to which the revised measurement method applies.

Mergers and Acquisitions

Until further guidance is issued, and at least through the end of 2016, employers involved in a corporate transaction in which the parties use different measurement methods may rely on the Notice 2014-49 approach for determining an employee's status as full-time. For example, assume that:

One corporation (the target company) merges into another corporation (the acquiring company).
Both corporations use the look-back measurement method, but with different measurement periods.

The corporations may apply Notice 2014-49 by treating the target company's employees as having transferred at the date of the merger:

From one position (that is, at the target company).
To another position (at the acquiring company) with a different measurement period.

The IRS invited comment on its proposed approach in the context of corporate transactions, such as a merger or acquisition involving employers that use different measurement methods.

Additional Revocations of Cafeteria Plan Elections Permitted

Under Notice 2014-55, employees may prospectively revoke elections for group health plan coverage under a cafeteria plan in two situations, each involving the ACA's health insurance exchanges, if certain conditions are met. The guidance assumes the group health plan coverage provides minimum essential coverage (MEC) and is not a health flexible spending arrangement (see Practice Note, Cafeteria Plans). Under current regulations, cafeteria plans may not allow employees to revoke an election under a group health plan during a coverage period solely to enroll in a qualified health plan (QHP) through an exchange. As a result, individuals enrolled through a cafeteria plan in a non-calendar year group health plan might not be able to coordinate a change in coverage to avoid either overlapping coverage (or time without coverage) because the exchanges' open enrollment rules do not permit the purchase of coverage that begins on the end of a non-calendar cafeteria plan year.

The first situation involves an employee whose HOS are reduced so that the employee is expected to average less than 30 HOS per week. However, the reduction does not affect the employee's eligibility for plan coverage. According to the IRS, this could occur under certain plan designs intended to avoid employer mandate liability (see Employer Mandate Toolkit).

The second situation involves employees who wish to cease coverage under an employer's group health plan, and buy coverage under an exchange, without incurring duplicative coverage or a period without coverage.

First Situation: Conditions for Revocations Due to Reductions in HOS

As a first condition for this election change:

The employee must be in an employment status under which he was reasonably expected to average at least 30 HOS per week.
There is a change in the employee's status so that he will reasonably be expected to average less than 30 HOS per week after the change (even if the reduction does not result in the employee's ceasing to be eligible under the group health plan).

Under a second condition, the revocation of the plan's coverage election must correspond to the employee's intended enrollment (and that of any related individuals who cease coverage due to the revocation), in another plan that provides MEC with the new coverage effective by the first day of the second month after the month that includes the date the original coverage is revoked.

The plan may rely on an employee's representation that the employee and related individuals have enrolled (or intend to enroll) in another plan providing MEC for new coverage that is effective by the deadline required under the second condition.

Second Situation: Conditions for Revocations Due to Enrollment in a Qualified Health Plan

As a first condition for this election change, an employee must either:

Be eligible for a special enrollment period to enroll in an exchange's QHP under governing HHS guidance.
Seek to enroll in a QHP through an exchange during the exchange's annual open enrollment period.

In addition, under a second condition, the revocation of the election of plan coverage must correspond to the intended enrollment of the employee (and any related individuals who cease coverage due to the revocation) in an exchange QHP for new coverage that is effective beginning by the day immediately following the last day of the original coverage that is revoked.

The plan may rely on an employee's reasonable representation that he and related individuals have enrolled (or intend to enroll) in a QHP for new coverage that is effective by the deadline required under the second condition.

Reliance

The IRS plans to modify its cafeteria plan regulations to be consistent with Notice 2014-55, but the guidance may be relied upon immediately.

Adjusted Dollar Amount for PCOR Fees

The ACA established the Patient-centered Outcomes Research (PCOR) Institute, a private, nonprofit corporation to research the clinical effectiveness of medical treatments, procedures and drugs (see Practice Note, Patient-centered Outcomes Research (PCOR) Fees under the ACA) (26 U.S.C. § 4375; 26 U.S.C. § 4376). To finance the Institute, the ACA imposes fees on:

Plan sponsors of certain self-insured health plans, for plan years ending after September 30, 2012 and before October 1, 2019.
Insurers of specified health insurance policies, for policy years ending after September 30, 2012 and before October 1, 2019.

The fee is calculated using the average number of lives covered under the plan or policy and the applicable dollar amount for the plan or policy year. For plan and policy years ending on or after October 1, 2013 and before October 1, 2014, the applicable dollar amount is $2. For subsequent years, the applicable dollar amount is adjusted based on the increase in the projected per capita amount of National Health Expenditures. Under Notice 2014-56, the adjusted applicable dollar amount for use in calculating PCOR fees for plan and policy years that end on or after October 1, 2014 and before October 1, 2015 is $2.08.

According to the IRS, for plan and policy years ending on or after October 1, 2015 and before October 1, 2019, the adjusted applicable dollar amount will be published in guidance of general applicability published in the Internal Revenue Bulletin.

Practical Impact

The additional permitted mid-year election changes under Notice 2014-55 will provide greater flexibility for employees whose HOS are reduced (and who otherwise satisfy the conditions under the guidance). In its proposed employer mandate regulations (January 2013), the IRS previously provided transition relief for health coverage under non-calendar year plans, applicable for cafeteria plan years beginning in 2013.

IRS Guidance Addresses Cafeteria Plan Elections, Employer Mandate Measurement Periods and PCOR Fees | Practical Law