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Final Play-Or-Pay Regulations Include Significant Transition Rules

From a large employer’s standpoint, one of the key provisions of the Affordable Care Act (“ACA”) is the employer “shared responsibility” provision. Also known as the “play-or-pay” rule, this provision requires that such employers (generally, those with 50 or more full-time employees) either “play” (by offering health coverage to their full-time employees) or “pay” (in the form of a substantial excise tax).

After proposing regulations on this rule in December of 2012, the IRS later delayed its implementation. Notice 2013-45 granted a one-year reprieve ‒ from 2014 to 2015 ‒ leading many employers to shelve their compliance efforts. With the February 12th issuance of final play-or-pay regulations, the IRS has put this issue back on the front burner.

For a summary of the proposed regulations, refer to our January 7, 2013, article. The final regulations generally confirm that earlier guidance, though with some important clarifications. Moreover, these regulations include a number of transition rules ‒ one of which should effectively delay this requirement for yet another year for any employer having fewer than 100 full-time employees.


Aside from the transition rules (which are discussed near the end of this article), the most important aspect of the final regulations involves the clarification of rules for determining which employees fall into the “full-time” category. The basic definition of “full-time” remains 30 hours per week (or 130 hours per month).  As explained in our January 2013 article, the prior guidance had spoken at length on a safe-harbor “look-back measurement method” for determining which “variable-hour” or “seasonal” employees satisfy this full-time definition.

Perhaps recognizing, however, that most employees do not fall within either of these two categories, the IRS has now formalized the only other permissible method for identifying full-time employees. This is known as the “monthly measurement method.” Any employer that is subject to these play-or-pay rules must use one of these two methods for identifying its full-time employees.

Look-Back Measurement Method

Under the look-back measurement method, an employer may count an employee’s hours of service over a “measurement period” of 3 to 12 months. Depending on whether the employee averaged 30 or more hours per week (or 130 or more per month) during that measurement period, he or she would be considered either full-time or not full-time during a subsequent “stability period.” An employer may also insert a brief “administrative period” between each measurement period and its related stability period. By selecting a 12-month measurement period, an employer using this look-back measurement method could defer offering coverage to certain newly hired employees for a period of over 12 months. Recognizing that this could lead to abuse, the IRS makes clear in the final regulations that this look-back measurement method may be applied to only the following three categories of employees:

  • Variable-hour employees;
  • Seasonal employees; and
  • Part-time employees.

All other employees must be tested for full-time status under the monthly measurement method described below. (An employer is also free to use the monthly measurement method with any or all of the above three categories of employees.)

Variable-Hour Employees. As under the prior guidance, an employee may be classified as a variable-hour employee only if, at the time the employee is hired, an employer cannot determine whether the employee will be reasonably expected to work an average of 30 or more hours per week. The final regulations shed some additional light on how this determination may be made.

For instance, starting in 2015, an employer cannot take into account that an employee has been hired for a relatively fixed term of employment ‒ even though this would cause the employee’s average weekly hours over a 12-month measurement period to fall below the 30-hour threshold. (The only exception to this rule is if the employee can be properly characterized as a “seasonal employee.”) Nor may an employer consider that, due to the high turnover of employees filling a particular type of position, a particular new employee is unlikely to work long enough to exceed the 30-hour weekly average over a 12-month measurement period.

Seasonal Employees. The final regulations also limit an employer’s ability to characterize an individual as a “seasonal employee.” While the proposed regulations essentially allowed an employer to use any good-faith definition of this term, the final regulations limit this category to employees who are hired into a position for which the customary annual employment is six months or less. Thus, an employer could not characterize as a seasonal employee an individual who regularly works all but the winter months. Instead, such an employee would have to be tested for full-time status under the monthly measurement method ‒ likely resulting in the employee having full-time status during his or her actual months of employment.

Part-Time Employees. Finally, a “part-time employee” is defined as a new employee that an employer reasonably expects to work an average of fewer than 30 hours per week during his or her initial measurement period. The final regulations list a number of factors to be considered when determining this reasonable expectation. These include such things as whether the employee is replacing a full-time or part-time employee, the extent to which employees in the same or comparable positions have been working 30 or more hours per week during recent measurement periods, and whether the job was advertised or otherwise documented (for instance, through a contract or job description) as requiring 30 or more hours of service per week.

Monthly Measurement Method

If an employee does not fall within any of the three categories for which the look-back measurement method may be used, he or she must be tested for full-time status under the monthly measurement method.  As the name suggests, this method requires that an employee’s actual monthly hours be compared to the 130-hour full-time threshold.

A new employee whose hours equal or exceed the 130-hour threshold must be treated as full-time by the end of the third full calendar month after the employee’s date of hire.  To avoid being subject to a play-or-pay penalty with respect to such an employee, his or her employer must then make an offer of health coverage by the following day (i.e., the first day of the fourth full calendar month after employment).

Note, however, that this deadline applies only for purposes of the play-or-pay provision.  If an employee is hired into a position that is otherwise eligible to participate in the employer’s health plan, the employer must allow that employee to enroll in the plan within 90 days after being hired.  Otherwise, the employer will face a different ACA penalty. Employers will want to keep both of these requirements in mind when structuring their health plans.

Moving Between Measurement Methods. The final regulations also go into some detail on the consequences of an employee transferring between a position for which the look-back measurement method may be used and a position that is subject to the monthly measurement method. For instance, an employee who is hired into a full-time position might move to a part-time position, or a seasonal employee might be promoted into a more permanent slot.

Although generally consistent with the guidance provided in the proposed regulations, the final regulations ‒ and particularly the lengthy preamble to those regulations ‒ provides more detailed guidance on the permissible and required employer actions following such a transfer.  Any employer that is subject to these play-or-pay rules will want to become acquainted with these special transfer rules.

Weekly Hours-Counting Alternative. Although the monthly measurement method is based on the counting of monthly hours, it does offer the option of counting employees’ hours on a weekly basis.  Under this weekly counting alternative, each month must be treated as either a four-week month or a five-week month. This is done by consistently assigning any week that overlaps two different months to either the month in which it begins or the month in which it ends. Then for any four-week month, employees with at least 120 hours of service will be considered full-time, while 150 hours of service will be required to meet the full-time threshold during any five-week month.

Break-in-Service Rules

The proposed regulations also included “break-in-service” rules, under which employees having no hours of service for a certain period of time could be treated as new employees upon being rehired.  The final regulations modify these rules only slightly.

For instance, rather than requiring a break of 26 weeks, the final regulations allow an employer to treat an employee who is gone for as few as 13 weeks as an entirely new employee.  Note, however, that this change does not apply to employees of educational organizations ‒ thereby precluding a summer break from being treated as a break in service for teachers and other school employees.

The final regulations also retain the alternative “rule of parity” for identifying a break in service, although it may now be applied to any employee having no hours of service for a period of four to thirteen weeks.  Under this alternative, an employee may be treated as a new employee if the length of a break in service exceeds the employee’s period of employment immediately before that break.

Special Rules for Educational Organizations

Educational organizations face a number of unique challenges when attempting to identify their full-time employees. Responding to comments from colleges and universities, the IRS has provided a bit more guidance in this area.

For instance, colleges have difficulty counting hours worked by adjunct professors.  Although the final regulations continue to allow for the use of any reasonable method of counting such hours, they also provide a method that will be deemed to be reasonable. Under this method, a college or university must credit an adjunct faculty member with 2 1/4 hours of service for each actual hour of class time (effectively crediting 1¼ hours of preparation time for each teaching hour), plus any additional hours of service attributable to such things as office hours, attendance at faculty meetings, and the like.

Colleges and universities had also asked for permission to disregard all hours worked by their students.  Here, the IRS granted only partial relief ‒ allowing “Work-Study” hours to be disregarded, but not other hours worked by student-employees.  The theory for this distinction is that Work-Study is a federally subsidized financial aid program ‒ the primary purpose of which is advancing education ‒ while the same cannot be said of other student employment.

Other Special Situations

A variety of other employment situations are also addressed in the final regulations.  For instance, hours worked by “bona fide volunteers” may be disregarded. This phrase is defined to include any employee of a government entity or Code Section 501(c) tax-exempt entity whose only compensation is in the form of (i) reimbursement for reasonable expenses, or (ii) reasonable benefits (including length-of-service awards) and nominal fees customarily paid by similar entities in connection with the performance of services by volunteers.

Other situations for which at least minimal guidance is provided include travel time by salespersons, layover hours by airline employees, and on-call hours.  As a general rule, the regulations state that any method of crediting hours in these circumstances “is not reasonable if it takes into account only a portion of an employee’s hours of service with the effect of characterizing, as a non-full-time employee, an employee in a position that traditionally involves at least 30 hours of service per week.”


Although identifying full-time employees is integral to complying with these play-or-pay rules, avoiding the potential penalty involves other considerations, as well.  For instance, to avoid the “4980H(a) penalty” ($2,000 per full-time employee in excess of 30), an employer must offer substantially all of its full-time employees at least a minimal level of health coverage.; And to avoid the “4980H(b) penalty” ($3,000 for any full-time employee who receives a federal tax credit to purchase coverage through an Exchange), an employer must offer coverage that is both “affordable” and of “minimum value.”  The final regulations further clarify what it means to “offer coverage” in this context, while also modifying two of the three affordability safe harbors set forth in prior guidance.

Offers Made in Collective Bargaining

For instance, merely offering to provide health coverage to collectively bargained employees during the course of negotiations with a bargaining representative will not be deemed to constitute an “offer of coverage.”  In order to avoid the potential play-or-pay penalties, an offer of coverage must be made to each individual employee. In other words, there is no “collectively bargained exception” to these rules.

Offers Made by Third Parties

On the other hand, an offer of coverage under a health plan sponsored by a Taft-Hartley trust fund (whether multiemployer or single-employer) will count as an offer of coverage by the plan’s contributing employers.  The same will be true of an offer made by a multiple employer welfare arrangement (a “MEWA” ) to which an employer contributes.

A similar rule will apply to coverage offers made by a professional employer organization (“PEO”) or other staffing firm placing employees with client organizations.  Of course, a PEO will often be the common-law employer or co-employer of these employees.  But even if the employees are common-law employees of the client organizations, the PEO’s offer of coverage will be attributed to the client organizations, thereby allowing them to avoid or minimize any play-or-pay penalties.

Offers of Dependent Coverage

As under the proposed regulations, an employer that is subject to these play-or-pay rules must offer coverage not only to its full-time employees, but also the “dependents” of those employees. The final regulations follow the proposed regulations in excluding spouses from this dependent definition.

But the final regulations go even further ‒ by narrowing the category of children who must receive a coverage offer.  Given the other coverage options often available to foster and stepchildren, those children need not be offered coverage under these play-or-pay rules.

A note of caution is in order here, however. A separate ACA provision mandates that any dependent children coverage be made available through a child’s 26th birthday.  That provision does not seem to allow for a distinction between natural or adopted children, on the one hand, and foster or stepchildren, on the other.  Additional IRS guidance on this point would be helpful.


W-2 Safe Harbor

Of the three affordability safe harbors developed in prior guidance, the final regulations make no change to the W-2 safe harbor. Coverage will be deemed affordable under this safe harbor if an employee’s monthly premium for employee-only coverage does not exceed 9.5% of 1/12 of the amount shown as Box 1 wages on the employee’s IRS Form W-2. The IRS specifically rejected calls to allow this Box 1 amount to be increased by the amount of any pre-tax contributions made under a cafeteria plan, or any pre-tax salary deferrals under a 401(k), 403(b), or 457(b) plan.

Rate-of-Pay Safe Harbor

The rate-of-pay safe harbor has been modified in one important respect.  As under the proposed regulations, an employee-only premium is deemed to be affordable under this safe harbor if it does not exceed 9.5% of an amount equal to an employee’s hourly rate of pay as of the first day of the plan year, multiplied by 130 (i.e., the number of hours needed for full-time status). In the case of a salaried employee, the cap is simply 9.5% of the employee’s monthly salary. In either event, however, the proposed regulations did not allow this safe harbor to be used if an employer reduced an employee’s hourly wages or monthly salary during the course of a year.

The final regulations remove this restriction on pay reductions. It does so, however, by requiring that this safe harbor be applied on a monthly basis. Thus, if an employee’s hourly wage (or monthly salary) is reduced during the course of a year, the applicable safe-harbor amount for a particular month is 9.5% of 130 times the lowest hourly rate paid during that month (or 9.5% of the salary actually received during that month).

Federal Poverty Level Safe Harbor

The final affordability safe harbor, which is based on the federal poverty level, has been modified only slightly. As before, this safe harbor is satisfied if an employee-only premium does not exceed 9.5% of 1/12 of the annual federal poverty level for a single-member household. Rather than requiring that the applicable poverty level be determined as of the first day of the plan year, however, the final regulations allow that level to be determined as of any date during the six months preceding the plan year. This change is designed to give employers time to calculate the monthly premium cap needed to fall within this safe harbor.


As noted above, these final regulations include a number of transition rules.  Some of these rules apply only for calendar-year 2015, while others will continue to apply during any months of 2016 that fall within the plan year beginning in 2015. And although many of these transition rules simply extend relief that had been granted in the proposed regulations, at least the following three are entirely new:

One-Year Delay for Employers Having Fewer than 100 Full-Time Employees

For “small, large employers” (i.e., those with 50 to 99 full-time employees, including full-time equivalents), the most significant transition rule will allow for an additional year’s delay in complying with the play-or-pay provision. An employer meeting all of the following four conditions need not comply with these rules until 2016:

  • The employer has an average of 50 to 99 full-time employees (including full-time equivalents) during 2014;
  • During the period from February 9, 2014, through December 31, 2014, the employer does not reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the immediately preceding condition (reductions for “bona fide business reasons” will still be acceptable);
  • The employer does not eliminate or materially reduce the health coverage, if any, it offered its employees as of February 9, 2014; and
  • The employer certifies, on a prescribed form, that it meets the preceding three conditions.

For an employer maintaining a non-calendar-year plan, this transition relief will apply not only during 2015, but also those months of 2016 that fall within the 2015 plan year. For instance, if the employer’s plan year runs from July 1 to June 30, the employer could defer compliance with these rules until July 1, 2016. However, this extended transition relief is available only if the employer does not modify its plan year after February 9, 2014.

Reduction in the 95% “Substantially All” Threshold

Larger employers (i.e., those with 100 or more full-time employees) will also enjoy important transition relief. For 2015, such an employer may avoid the 4980H(a) penalty by offering minimum essential coverage to at least 70% of its full-time employees.  This is a substantial liberalization of the usual rule ‒ which will apply starting in 2016 ‒ under which coverage must be offered to at least 95% of all full-time employees (or all but 5 such employees).

As with the preceding transition rule, this relief will also apply during the portion of 2016 that falls within a non-calendar-year plan’s 2015 plan year ‒ but only so long as the employer does not modify its plan year.

The IRS takes pains to note, however, that this transition relief does not apply for purposes of the 4980H(b) penalty ‒ i.e., the $3,000 annual penalty for any full-time employee who receives a federal subsidy to purchase coverage through an Exchange. Thus, any employer wishing to minimize its exposure to this $3,000 penalty may wish to forgo reliance on this transition rule, instead offering affordable, minimum-value coverage to all of its full-time employees.

Increase in the 30-Employee Offset

The final regulations also include a second transition rule for the benefit of these larger employers. When calculating the penalty assessable under Code Section 4980H(a) ‒ as well as the overall cap on an employer’s 4980H(b) penalty ‒ an employer is usually allowed to disregard 30 full-time employees. For 2015, however, the IRS will allow an employer to disregard 80 full-time employees. The 30-employee offset will then apply starting in 2016.

The IRS notes that the intent of this transition rule is to retain the 20-employee spread between the effective threshold for being subject to the play-or-pay rules (which, due to the first transition rule described above, will be 100 employees during 2015) and the number of employees who are subject to this offset. As with the first two transition rules, this relief will also apply during any portion of 2016 that falls within a 2015 plan year ‒ so long as the employer does not modify its plan year.

Status of Prior Transition Rules

The proposed regulations had included a number of transition rules that were to apply only for 2014. When the effective date of the play-or-pay provision was deferred to 2015, the IRS did not address the continued viability of those transition rules. The final regulations make clear that virtually all of those rules will apply for 2015, as well. In fact, at least one of those rules has been slightly broadened.

Use of a 6-Month Measurement Period with a 12-Month Stability Period. For instance, under the look-back measurement method, an employer wishing to have a 12-month stability period during 2015 may use a measurement period of as few as 6 months during 2014. (Normally, a stability period may not be longer than its associated measurement period.) Such an abbreviated measurement period must begin no later than July 1, 2014; it must include six or more consecutive months; and it must end within 90 days before the first day of the plan year beginning in 2015. This transition rule could prove helpful to those employers that have not yet begun counting the hours worked by their variable-hour, seasonal, or part-time employees.

Use of a 6-Month Period for Counting Full-Time Employees. Similarly, the final regulations allow an employer to select any consecutive, six-month period during 2014 when determining the employer’s average number of full-time employees. This rule will apply for purposes of both the usual 50-employee threshold and the special transition rule allowing for the substitution of a 100-employee threshold.

In this case, however, the final regulations include a wrinkle that did not appear in the proposed regulations. The “seasonal worker” exception to the “large employer” definition must still be applied on a full, 12-month basis. Under this exception, an employer whose average workforce exceeded 50 full-time employees on 120 or fewer days (or four or fewer months) during the prior calendar year need not comply with the play-or-pay rules if the only reason the average number of full-time employees exceeded 50 was due to seasonal workers.

Requiring that this exception take into account all twelve months of 2014 may undermine the utility of this transition rule. For instance, it appears that an employer with a large seasonal workforce could not simply select the six-month period during which it employed the fewest seasonal workers.

Non-Calendar-Year Plans. As with the proposed regulations, the final regulations include special transition rules for non-calendar-year plans. Although the play-or-pay provisions are generally effective as of January 1, 2015, employers sponsoring non-calendar-year plans may be able to defer compliance until the first day of the plan year beginning in 2015. At a minimum, this transition rule applies to all employees who would be eligible for coverage under such a non-calendar-year plan under the terms of the plan in effect on December 27, 2012 (i.e., when the proposed regulations were issued).

Moreover, if an employer sponsored at least one non-calendar-year plan on December 27, 2012, participants in that employer’s calendar-year plans may be transferred to the non-calendar-year plan (thereby also qualifying for this deferred effective date) ‒ so long as a “significant percentage” of the employer’s employees were covered under the non-calendar-year plan. This “significant percentage” requirement will be satisfied if (i) at least 25% of the employer’s employees were actually covered under a non-calendar-year plan during the 12 months ending on February 9, 2014, or (ii) at least one-third of its employees were offered coverage under those plans during the last open enrollment period that ended before February 9, 2014.

This “significant percentage” transition rule has actually been broadened for 2015. The final regulations specify alternative percentages that are based solely on full-time employees. If at least one-third of an employer’s full-time employees were actually covered under a non-calendar-year plan during the 12 months ending on February 9, 2014, or if at least one-half of the employer’s full-time employees were offered coverage under such a plan during the most recent open enrollment period, the employer may defer all compliance with the play-or-pay rules until the first day of the plan year beginning in 2015.

Because employers having fewer than 100 full-time employees already have an additional year to comply with the play-or-pay rules (under the first transition rule described above), they may not rely on any of these transition rules for non-calendar-year plans. Instead, they must comply by no later than January 1, 2016.

Failure to Offer Dependent Coverage.  The final transition rule again builds on a rule announced in the proposed regulations. It applies to those employers that did not offer dependent coverage to some or all of their full-time employees during the 2013 or 2014 plan years.  Such an employer will not be held to violate the play-or-pay rules simply because no coverage is offered to such dependents during the 2015 plan year ‒ but only “if the employer takes steps during the 2014 or 2015 plan year (or both) to extend coverage under the plan to dependents not offered coverage during the 2013 or 2014 plan year (or both).”

As with many of the transition rules discussed above, this relief is also available for any portion of 2016 falling within the 2015 plan year ‒ but only if the employer does not change its plan year.


Now that the IRS has finalized these play-or-pay regulations, employers that may meet or exceed the 50-employee threshold will want to move into full compliance mode. Among the steps they should be taking are the following:

  • Identify any affiliated employers that must be considered when counting full-time employees (under the Tax Code’s “controlled group” rules);
  • Determine whether to take advantage of the transition rule allowing full-time employees to be counted over any 6-month period during 2014;
  • If the total full-time employees (including full-time equivalents) during this period will average between 50 and 99, determine whether to take advantage of the available 1-year delay in the effective date of this provision (and, if so, take the steps needed to claim that delay);
  • If these rules will apply in 2015, determine whether to apply the look-back measurement method or the monthly measurement method (or both) when identifying full-time employees;
  • If relying on the look-back measurement method, select the optimal measurement, stability, and administrative periods for both new and ongoing employees;
  • Determine which, if any, of the affordability safe harbors are most suited to various groups of employees;
  • Coordinate with any insurer, third-party administrator, or payroll-service provider that might be involved in the administrative or reporting aspects of these play-or-pay rules; and
  • Prepare to communicate any changes to plan participants as the next open enrollment period approaches.

For assistance with these play-or-pay provisions, or with any other aspect of the Affordable Care Act, please contact any member of Spencer Fane’s Employee Benefits Practice Group.