The 95% Rule – The Critical Details You Are Missing

The 95 Percent Rule – The Critical Details You Are Missing

For employers subject to the Play or Pay Mandate, there is no more important rule in the Employer Shared Responsibility final regulations than the 95 percent rule. If the rule is not properly applied, an employer could be subject to a §4980H(a) penalty and stuck with the tab for covering a large percentage of its workforce’s health care expenses. For this reason, it is important employers understand how the 95 percent rule works as compliance with it is essential.

Despite the importance of the 95 percent rule, the final regulations only have two sentences explaining its intricacies. The first sentence discussing the 95 percent rule explains an employer will be treated as offering qualifying coverage to all of its full-time employees (and their dependents) for a calendar month, if the employer offers coverage to all but five percent (or, if greater, five full-time employees) of its full-time employees. The second sentence explains that employees in a limited non-assessment period are not included when calculating the 95 percent rule. The goal of this white paper is to explain what these two sentences mean and to discuss the cross-referenced sections quietly lurking within the rule.

The first important detail about the 95 percent rule is that the rule includes all full-time employees unless the employee qualifies for one of the non-assessment periods. Several critical conclusions can be drawn from the 95 percent rule’s use of full-time employee without any additional adjectives. First, full-time employees receiving Medicare, Medicaid, or insurance from a spouse’s or parent’s employer are included when calculating the 95 percent rule. Second, employees who are not full-time employees are not included when calculating the 95 percent rule even if the employer is more generous than the ACA requires and offers part-time employees coverage. Thus, properly labeling an employer’s full-time employees is the first step to calculating the 95 percent rule.

A full-time employee is an employee who accumulates 30 or more hours of service per week in a calendar month. The final regulations allow an employer to use 130 hours of service in a calendar month as the monthly equivalent to 30 hours of service per week. The ACA’s definition of full-time employee uses the word “employee” which the ACA defines separately as an individual who is an employee under the common-law standard. However, the ACA’s definition of an employee excludes leased employees, sole proprietors, partners, 2-percent S corporation shareholders, and workers described in IRC §3508 (real estate agents and certain sales people). Therefore, individuals classified under one of these five categories are not included when calculating the 95 percent rule unless the individual also serves in an additional role as an employee with the employer.

The next step in calculating the 95 percent rule is to determine if any of the full-time employees discussed above fall into a non-assessment period. For simplicity, the non-assessment periods are only discussed in the context of the §4980H(a) penalty as the non-assessment periods for §4980H(b) are irrelevant for the calculation of the 95 percent rule. There are six different ways an employee can be considered an employee in a non-assessment period. These employees are not included when calculating the 95 percent rule.

First Three Months After an Employer is an Applicable Large Employer for the First Time

The first way an employee can be classified as being in a non-assessment period and thus not count for purposes of the 95 percent rule is if the employer qualifies for the transition rule when the employer first becomes an applicable large employer. This transition rule allows an employer to exclude an employee from the 95 percent rule calculation who was not offered coverage at any point during the prior calendar year so long as coverage is offered to the employee by April 1. The provision is intended to allow an employer who learns it is an applicable large employer for the first time late in the calendar year to have three months, January, February, and March, to select a plan to cover its full-time employees who were not offered insurance in the previous calendar year.

If the employer does not offer coverage to the employee by April 1, the employee will count as not being offered coverage for purposes of the 95 percent rule for January, February, and March in addition to any other calendar month for which coverage is not offered. This would increase the likelihood the employer would fail the 95 percent rule for those months.

This non-assessment period, along with most of the other non-assessment periods, demonstrate the complications of the 95 percent rule as an employer will not know if an employee qualifies for a non-assessment period until after the fact. For example, if an employer first becomes an applicable large employer in 2017 and intends to offer coverage to a group of 40 employees who were not offered coverage in 2016 by the April 1, 2017 deadline, but fails to for some unexpected reason the 95 percent rule calculation would change for the months of January, February, and March after April 1. A portion of the 95 percent rule is calculated ex post facto which is scary for employers. This ex post facto calculation is a theme for most of the non-assessment periods. Consequently, employers must know which employees are in a non-assessment period and make sure coverage is timely and properly offered to ensure compliance with the 95 percent rule.

First Three Months of Eligibility under the Monthly Measurement Method

The next scenario an employer can exclude an employee from the 95 percent rule calculation as a result of a non-assessment period occurs when the employer is using the monthly measurement method for its workforce. Beginning with the first calendar month when an employee first becomes otherwise eligible to be offered coverage under the employer’s group health plan, the employee can be excluded from the 95 percent rule calculation for up to three calendar months so long as the employee is offered coverage no later than the first day of the first calendar month following the three calendar month period (the ugly ex post facto part of the rule). To meet the qualifications for this non-assessment period the employee must not have been eligible for an offer of coverage by the employer during the employee’s current employment period.

A key phrase to this non-assessment period is the “otherwise eligible to be offered coverage” language (the “otherwise eligible” test). Under the “otherwise eligible” test, an employee is “otherwise eligible to be offered coverage” if the employee meets all conditions to be offered coverage under the plan for that calendar month, other than the completion of a waiting period. The first part of the “otherwise eligible” test, meeting all of the conditions of the plan, include but is not limited to being in an eligible job classification, fulfilling a job-related license requirement or satisfying a reasonable and bona fide employment based orientation period. What is troublesome is the orientation period is included as an eligibility condition of the plan and not part of or some form of extension of the 90-day waiting period.

Regulators will probably say their hands were tied because of the language in the text of PPACA which, while true, does not solve the potential problem. The orientation period is theoretically intended to be used by employers and employees to evaluate whether the employment situation is satisfactory to each party. The orientation period can last no more than one month. For example if the orientation begins on January 14, 2016, the orientation period must end February 13, 2016 and then the 90-day waiting period would have to begin. The real reason the orientation period was created was to try to assist employers bridge the gap between the incompatible 90-day waiting period rule and the §4980H rules allowing employers to offer certain employees coverage by the first day of the fourth calendar month following the employee’s start date or eligibility day. The §4980H rules will almost always be more than 90 days as they include three full calendar months plus the possibility of a partial calendar month. The orientation period helps, but it does not solve everything.

The problem employers could run into if they do not plan properly is making an employee not meet all of the conditions for the plan in the second partial month of the orientation period which would make the employee ineligible for the non-assessment period in the first calendar month. This would lead to the employee being counted for the 95 percent rule calculation as no non-assessment period would apply. There are plan design opportunities that could correct this problem, but extreme caution must be taken when piecing together your plan design strategy.

The second part of the “otherwise eligible” test allows employers to have a waiting period apply to an employee in a non-assessment period. The general rule is a waiting period is limited to a period of 90-days. There are several provisions in the 90-day waiting period final regulations that the government will not consider to be designed to avoid compliance with the 90-day waiting period such as a 12 month measurement period for new variable hour employees or an employee accumulating 1,200 hours of service before plan eligibility. However, and importantly, these are eligibility conditions to the plan and not an extension of the 90-day waiting period.

This discussion shows how complicated plan design decisions will need to be in order to comply with the ACA. Many of you reading this are probably wondering if the government is trying to make it as difficult as possible to comply and, trust me, I wonder that sometimes, but the rules are the rules. The government is going to need money to fund the various ACA provisions so I would plan for strict enforcement. Therefore, compliance and careful planning should be taken by all applicable large employers.

First Three Calendar Months under the Look-Back Measurement Method

Similar to the non-assessment period above, an employer using the look-back measurement method can exclude a full-time employee for purposes of the 95 percent rule for the first three calendar months beginning with the first day of the first full calendar month following the employee’s start date so long as the employee is otherwise eligible for coverage under the employer’s group health plan. As discussed extensively above, an employee is eligible for an offer of coverage by the employer if pursuant to the plan’s terms in effect for that month, the employee meets all of the conditions to be offered coverage for that month other than the completion of a waiting period. All of the issues discussed above regarding the “otherwise eligible” test also apply to this non-assessment period. The employer must offer the employee coverage no later than the first day of the fourth calendar month of employment if the employee is still employed on that day for the employee to be excluded for the calculation of the 95 percent rule for the three calendar months (the ugly ex post facto part of the rule).

Employees during the Initial Measurement Period

Variable hour employees who averaged at least 30 hours of service during the initial measurement period will be excluded from the 95 percent rule calculation so long as the employee is otherwise eligible for an offer of coverage and the employee is offered coverage by the employer no later than the first day of the corresponding stability period if the employee is still employed. The common themes of the non-assessment period can be seen in this scenario as the employee must satisfy the “otherwise eligible” test and, again, the ex post facto nature of the 95 percent rule rears its ugly head.

At this time it is important to review in detail a portion of the language explaining the “otherwise eligible” test. The final regulations state that the only requirement that can be holding up an employee’s eligibility is “…a waiting period, within the meaning of §54.9801-2…” That section references §54.9815-2708(b) for the definition of waiting period which defines the phrase as “the period that must pass before coverage for an individual who is otherwise eligible to enroll under the terms of a group health plan can become effective.” The problem is the exception for variable hour employees allowing for a 12 month grace period to measure an employee’s hours of service (technically 13 months plus a partial calendar month) to offer coverage and not violate the 90-day waiting period is listed under a regulation subparagraph heading “Eligibility conditions based solely on the lapse of time.”

The government could ignore the inconsistent language and make an exception to the “otherwise eligible” test for variable hour employees. However, if that is the case, why would a subdivision in the same subparagraph, the 1,200 cumulative hours-of-service exception, be treated differently from the variable hour employees? It does not make sense.

The government has overthought the non-assessment periods. This puts employers in a difficult (if not impossible in the case of variable hour employees) position to comply with the letter of the law. A simpler rule is necessary for this non-assessment period to be able to mesh with the 90-day waiting period rules. Dropping the “otherwise eligible” language is a course of action the government should strongly consider for all of the non-assessment periods to simplify the process.

Employees Transitioning to Full-Time Employees After a Change in Employment Status During the Initial Measurement Period

If a new variable hour employee (or a new seasonal employee or a new part-time employee) experiences a change in employment status before the end of the initial measurement period such that the employee is reasonably expected to average more than 30 hours of service per week, the employee can be excluded from the 95 percent rule calculation so long as the employee is offered coverage by or before the earlier of the fourth full calendar month following the change in employment status or the first day of the corresponding stability period (the ugly ex post facto part of the rule). For the non-assessment period to apply, the employee must otherwise be eligible for an offer of coverage under the group health plan during the calendar month. This is really just a combination of the two non-assessment period discussed above. All of the issues discussed and cross-referenced for those two non-assessment periods would apply to this non-assessment period as well.

Partial Calendar Months

If an employee’s start date is not on the first day of a calendar month, the employee cannot subject the employer to any §4980H penalty for that calendar month. Unlike the non-assessment periods discussed above there are no conditions associated with this non-assessment period making it the most straight forward to apply. This non-assessment period can be combined with the non-assessment periods discussed above.

Conclusion

As you can see, despite only having two sentences, the 95 percent rule is far more complicated and spans several regulations. In part, it speaks to the failures of the government to make a rule that is simple (and in certain situations even possible) to comply with the letter of the law. Regardless, employers must have a process in place to ensure compliance with the 95 percent rule. Additionally, employers must use extreme caution with plan design to ensure that it complies with the various ACA provisions.

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