The Affordable Care Act s Employer Mandate: Guidance for Educational Organizations

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1 March 4, 2014 Practice Group(s): Employee Benefits Benefits, ESOPs, and Executive Compensation The Affordable Care Act s Employer Mandate: Guidance for Educational By Lynne Shore Wakefield and Emily D. Zimmer The U.S. Department of Treasury recently issued final regulations regarding the Affordable Care Act s employer shared responsibility provisions under Internal Revenue Code ( Code ) Section 4980H, sometimes referred to as the employer mandate. The final regulations address some concerns raised by educational organizations by providing guidance on the identification of full-time employees, including special rules for student employees and adjunct faculty. This article provides an overview of the employer mandate coverage requirement and highlights key provisions of these final regulations specifically targeted to educational organizations. Employer Mandate Coverage Requirement Beginning in 2015, large employers (as determined under Code Section 4980H) may become subject to a penalty tax under Code Section 4980H for failing to offer minimum essential coverage to at least 95% 1 of full-time employees and their dependent children, or for offering minimum essential coverage that is either unaffordable or does not provide minimum value. The penalty tax under Code Section 4980H only applies if a full-time employee of a large employer purchases individual health insurance through a federal or state Marketplace and the employer receives certification that a premium tax credit or cost sharing reduction has been allowed or paid with respect to the employee. For purposes of the employer mandate: a large employer is an employer that employed an average of at least 50 2 full-time employees (including full-time equivalent employees 3 ) on business days during the preceding calendar year; and a full-time employee for any month is a common-law employee employed on average at least 30 hours of service per week (or 130 hours of service per month). Educational Government entities and tax-exempt organizations, such as many educational organizations, may be large employers. To determine large employer status, the organization must identify its full-time and full-time equivalent employees. To avoid penalty taxes under Code Section 4980H, educational organizations that are large employers must identify the full-time 1 70% for the 2015 plan year only, under a special transition rule. 2 For the 2015 plan year only, under a special transition rule, no penalty tax will apply to an employer with fewer than 100 full-time employees (including full-time equivalent employees) on business days during 2014 if certain conditions are met. 3 Part-time employees are converted to full-time equivalent employees by adding all hours of service in a month for all employees (including seasonal workers, student employees and adjunct faculty) who are not full-time and dividing by 120 to determine the number of full-time equivalent employees for a month. Full-time equivalent employees are only taken into account for purposes of determining large employer status and not for purposes of assessing any penalty tax under Code Section 4980H.

2 employees who must be offered employer-sponsored coverage. All common-law employees of the educational organization must be taken into account for these purposes, including employees who are also students of the educational organization and adjunct faculty. Student Employees Student employees of an educational organization usually are not considered to have the same status as regular, non-student employees of the organization. As such, student employees usually are not offered the same health coverage as regular, non-student employees. In the context of the employer mandate, educational organizations have been concerned about how to count hours of service for student employees in order to determine which such employees might be full-time employees to whom affordable minimum value minimum essential coverage must be offered in order to avoid the imposition of a penalty tax under Code Section 4980H. In response to these concerns, the final regulations provide some relief with respect to student employees. Under the final regulations, in determining whether student employees are full-time employees 4, hours of service performed in positions subsidized through the federal work study program or a substantially similar program of a state or political subdivision of a state may be excluded. However, there is no general exclusion for student employees in determining full-time employees. Therefore, all hours of service for which a student employee of an educational organization is paid or entitled to payment in a capacity other than through the federal work study program (or a state or local government s equivalent) are required to be counted as hours of service for purposes of identifying full-time employees. In the preamble to the final regulations, the IRS makes it clear that hours of service performed for an outside employer by a student through an internship or externship program sponsored by an educational organization are counted as hours of service for the outside employer if the student receives, or is entitled to receive, compensation from the outside employer. Service for an outside employer as part of an internship or externship does not count as hours of service for the outside employer if the student does not receive, and is not entitled to, payment in connection with that service. The final regulations do not explicitly address graduate students or other students who may be employed by an educational organization as teaching assistants, research assistants or resident advisors or in similar positions. To the extent such students receive, or are entitled to receive, payment from the educational organization for services rendered in such positions and such positions are not subsidized through the federal work study program (or a state or local government s equivalent), it appears that such student employees and the hours of service they perform in such positions should be taken into account for purposes of determining full-time employee status. Adjunct Faculty Adjunct faculty of an educational organization typically receive compensation for teaching a certain number of classes (or credits), and such compensation is not usually based on the 4 The rules in this section and in the Adjunct Faculty section below also apply for purposes of counting hours of service when converting part-time employees to full-time equivalent employees to determine large employer status. 2

3 actual time spent on non-classroom activities such as class preparation, grading papers and exams and counseling students. As a result, educational organizations expressed concerns in response to the proposed regulations that the hours of service equivalencies for nonhourly employees (eight hours per day or 40 hours per week) would significantly overstate the hours of service performed by adjunct faculty. In addition, concerns were expressed that counting actual hours of service for adjunct faculty would be administratively burdensome. In response to these concerns, the preamble to the final regulations provides that, until further guidance is issued, employers of adjunct faculty (and of employees in other positions that raise analogous issues with respect to the crediting of hours of service) must use a reasonable method for crediting hours of service with respect to those employees that is consistent with Code Section 4980H. Specifically with respect to adjunct faculty, the preamble provides that one (but not the only) reasonable method credits an adjunct faculty member of an institution of higher education with: 2.25 hours of service (representing a combination of teaching or classroom time and time performing related tasks such as class preparation and grading of exams or papers) per week for each hour of teaching or classroom time (this method credits one hour of service for each hour teaching in the classroom and an additional 1.25 hours of service for activities such as class preparation and grading); PLUS 1.00 hour of service per week for each additional hour outside of the classroom the adjunct faculty member spends performing duties he or she is required to perform (such as required office hours or required attendance at faculty meetings). Although further guidance may be issued regarding these matters, the method described above may be relied upon at least through the end of Employment Break Periods The final regulations define an employment break period as a period of at least four consecutive weeks (disregarding special unpaid leave 5 ) during which an employee of an educational organization is not credited with hours of service for a large employer. An employment break period can impact an educational organization s determination of whether an employee is full-time in several different ways. Reasonable Expectations at Date of Hire If an employer reasonably expects at a new employee s start date that the new employee will be a full-time employee, then in order to avoid the penalty tax under Code Section 4980H with respect to that employee, the employer must offer the employee minimum essential coverage that provides minimum value no later than the first day of the fourth full month following the employee s date of hire. In determining expectations of future hours of service, educational organizations cannot take into account the potential for, or likelihood of, an employment break period. 5 Under the final regulations, a special unpaid leave is unpaid leave subject to the Family and Medical Leave Act of 1993 (FMLA) or to the Uniformed Services Employment and Reemployment Act of 1994 (USERRA), or on account of jury duty. 3

4 Look-back Measurement Method Averaging 6 To determine the full-time status of their employees, large employers can use a look-back measurement method described in the final regulations under which the status of an employee as a full-time employee during a future period (referred to as the stability period) is based upon the employee s hours of service in a prior period (referred to as the measurement period). In order for employees of educational organizations to avoid the adverse impact of regular employment break periods during which no hours of service are performed, the final regulations provide that educational organizations can either: determine the employee's average hours of service by excluding any employment break period occurring during the measurement period and applying that average for the entire measurement period, or credit hours of service for the employment break period at a rate equal to the average weekly hours of service for weeks that are not part of the employment break period. No more than 501 hours of service for all employment break periods occurring in a single calendar year have to be taken into account by an educational organization under this averaging rule. Rehire and Break in Service Rules Solely for purposes of Code Section 4980H, an employee who resumes providing service to an educational organization after a period during which the employee was not credited with any hours of service may be treated as having terminated employment and having been rehired. This permits the educational organization to treat the employee as a new employee upon the resumption of services only if the employee did not have an hour of service for the educational organization for a period that was either (1) at least 26 consecutive weeks, or (2) a shorter period of at least four weeks that exceeds the number of weeks of employment immediately preceding the period during which the employee was not credited with any hours of service. An employee with a shorter period during which the employee was not credited with any hours of service must be treated as a continuing employee upon resumption of service. As a result, the employee would retain the employee s most recently determined status as either a full-time employee or not a full-time employee. Conclusion Educational organizations will need to become familiar with the provisions in the final regulations that are unique to educational organizations and apply these rules in an analysis of the educational organization s workforce in order to assess potential application of and liability for the penalty tax under Code Section 4980H. 6 The averaging methods described in this section apply in the case of special unpaid leaves taken by any employee of any employer, including educational organization employers, except that the 501 hours of service limit described in this section does not apply for special unpaid leaves. 4

5 Authors: Lynne Shore Wakefield Emily D. Zimmer Anchorage Austin Beijing Berlin Boston Brisbane Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt Harrisburg Hong Kong Houston London Los Angeles Melbourne Miami Milan Moscow Newark New York Orange County Palo Alto Paris Perth Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco São Paulo Seattle Seoul Shanghai Singapore Spokane Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington K&L Gates practices out of 48 fully integrated offices located in the United States, Asia, Australia, Europe, the Middle East and South America and represents leading global corporations, growth and middle-market companies, capital markets participants and entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations, practices and registrations, visit This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer K&L Gates LLP. All Rights Reserved. 5