The Obama Administration announced on Tuesday that it will postpone the implementation of two key components of the Affordable Care Act until 2015. Notably, however, this one-year reprieve on the employer mandate penalties and reporting obligations does not apply to the other provisions of the ACA that are scheduled to take effect in 2014.
In a July 2 blog post on the Treasury Department’s website, Assistant Treasury Secretary Mark Mazur said that the ACA’s new reporting requirements on employers and insurers will not be enforced in 2014, as previously scheduled. Those reports will be used by the government to determine whether employers provide affordable, minimum health coverage to their full-time employees, and to assess “shared responsibility” penalties on those who do not. Because the postponement of the reporting obligation means that information about employer-provided coverage will not be available, the Administration also will delay implementation of the employer penalties. This means that employers who were wrestling with complicated “play or pay” decisions will have more time to consider their options.
Practical Difficulties. Under the ACA’s employer shared responsibility rules (sometimes referred to as the “play or pay” directive or “employer mandate”), large employers (i.e., those with 50 or more full-time equivalent employees) must either offer affordable, qualifying health coverage to substantially all of their full-time employees, or pay a penalty if they fail to do so. (Our January 7, 2013, Client Alert offers more information about the employer shared responsibility rules.) Those penalties generally were set to apply as of January 1, 2014. In order for the IRS to determine which employers fail to offer minimum affordable coverage – and thus which may be subject to the shared responsibility penalties – the ACA also requires employers and insurers to report coverage information to federal and state authorities. However, this kind of multi-party reporting presents many technical challenges. Those challenges, and the Treasury Department’s inability to issue timely, formal guidance about the reporting requirements, prompted the Administration’s decision to postpone implementation of both the reporting requirement and the employer shared responsibility penalties until 2015.
Perhaps not coincidentally, the July 2 Treasury Department announcement comes on the heels of the U.S. Supreme Court’s June 26 ruling on the constitutionality of the federal Defense of Marriage Act (“DOMA”). That ruling (which is summarized in our June 27, 2013 Client Alert), affects the enforcement and interpretation of over 1,000 federal statutes and regulations, a majority of which involve Treasury and the IRS. There is significant pressure on those agencies to issue prompt guidance on the implications of the Court’s DOMA decision. With its resources already stretched by this task (not to mention the constraints on staffing imposed by the federal sequester), it is possible that the Administration realized that it simply would not have sufficient time to provide the kind of guidance needed on the ACA’s reporting obligations in time to implement them.
Although most large employers are already providing the kind of coverage required by the ACA, many others – particularly in the restaurant, retail, and hospitality industries – have lobbied hard in recent months for a reprieve. Thin profit margins and the practical difficulties inherent in tracking the hours of a variable hour workforce make it extremely difficult for employers in these industries to comply with the ACA’s employer mandate. Some have publicly announced that they intend to reduce the number of hours they allow employees to work in order to minimize the cost of providing benefits (or paying penalties), even though such workforce realignment strategies pose significant risks of employee-initiated litigation. The July 2 announcement should give such employers more time to evaluate their play-or-pay options.
Other ACA Rules Unaffected. The Administration has promised that it will issue formal guidance next week concerning the postponed reporting and penalty rules. Until that guidance is issued, employers can relax a little – but only a little. At this point, the relief announced on Tuesday is limited to:
- The employer and insurer reporting obligations under Code Sections 6055 and 6056; and
- Imposition of the employer shared responsibility penalties under Code Section 4980H.
Implementation of those rules is postponed until 2015.
This temporary relief does not extend to other provisions of the ACA that are scheduled to take effect in 2014. These include:
- The requirement that employers distribute notices concerning the public exchanges by October 1, 2013;
- The obligation of self-funded plans to pay the Patient-Centered Outcomes Research Institute (“PCORI”) fee (generally, by July 31, 2013);
- Benefit mandates, such as the 90-day limit on waiting periods, the ban on preexisting condition restrictions, and the cap on out-of-pocket expenses for nongrandfathered plans;
- The individual mandate (requiring each individual to obtain minimum essential coverage or pay an individual penalty); and
- The public exchanges.
Many Open Issues. As we have come to expect in this area, the July 2 announcement by the Treasury Department leaves in its wake more questions than answers. Technically, the announcement does not delay the effective date of the employer mandate itself (i.e., the requirement to offer affordable, qualified coverage or pay a penalty). Instead, it merely postpones the date as of which penalties will be assessed. Although the delay in the assessment of the penalties may effectively result in a postponement of the requirement to offer affordable, qualified coverage, the contours of the July 2 relief cannot be determined until formal guidance is issued next week. It is possible, for instance, that the IRS will require employers to make a good faith effort to comply with the shared responsibility rules in 2014 in order to avoid imposition of the penalties.
It is also unclear how this transition relief will affect the transition relief already granted by the IRS. For instance, will the special transition rules for non-calendar year plans be extended to 2015 (or later)? Will the special counting rules for temporary employees that apply in 2013 also apply in 2014? Moreover, will employers still be required to report whether they offer minimum affordable coverage on the summaries of benefits and coverage (“SBCs”) issued for the 2014 plan year?
Delayed implementation of the employer mandate may force a similar delay in the enforcement of the individual mandate. Just as the reporting requirements are essential to the enforcement of the employer shared responsibility provisions, they also play a key role in enforcing the individual mandate. The government will use information on these reports to determine whether individuals qualify for subsidized coverage on the exchange. For that reason, we would not be surprised to see a one-year postponement of the individual mandate, as well. But such a postponement – particularly when combined with the postponement of the play-or-pay provisions – could significantly reduce the number of uninsured individuals who obtain health insurance during 2014. And that, in turn, could exacerbate the extent to which those individuals who do obtain coverage are less healthy than average. Because insurers will no longer be able to protect themselves against such adverse selection through either medical underwriting or preexisting condition limitations (which are prohibited under the ACA after 2013), they may well view this postponement as denying them the one thing they hoped to gain from Obamacare – a greater number of policyholders.
Until the IRS issues additional guidance on the July 2 announcement, employers should keep health care reform on their “to-do” lists.