IRS Guides Employers on 'Play-or-Pay' Rules

By Ken Berry 

In the wake of the US Supreme Court ruling upholding the 2010 health care legislation - the Patient Protection and Affordable Care Act (PPACA) - it's time for employers to get down to work. In particular, business clients must soon establish which employees will be covered under the "play-or-pay rules" for affordable health care coverage.
Now the IRS has just issued a ruling describing safe harbor methods that may be used to determine "full-time employees" for this purpose (IRS Notice 2012-58, Determining Full-Time Employees for Purposes of Shared Responsibility for Employers Regarding Health Coverage). Under the new guidance, an employer can take up to twelve months to make a determination.
A quick recap: Under the PPACA, employers with fifty or more full-time employees are subject to the play-or-pay rules, with a few exceptions, beginning in 2014. If an employer reaches the fifty-employee level, it must offer full-time employees and their dependents the opportunity to receive minimum essential coverage or else pay a nondeductible penalty (characterized by the Supreme Court as a "tax"). Throughout the law, "full-time employees" are generally described as those working thirty or more hours per week. 

IRS Asks for More Input

This is hardly the last word on the subject. The IRS has asked for comments on the following issues:

  • Safe harbor methods that may be used for temps and other employees who work in jobs with high turnover rates.
  • Ways in which an employer can determine if a new employee is reasonably expected to work an average of at least thirty hours per week.
  • Rules involving mergers of employers that use different rules for counting full-time employees.
  • Application of the play-or-pay rules for seasonal workers.


Comments to the IRS are due on September 30, 2012. Stay tuned.

The penalty is generally equal to the applicable payment amount (one-twelfth of $2,000 for any month) multiplied by the number of full-time employees for the month. But the first thirty workers are excluded from the payment calculation.
Some business owners have claimed that the play-or-pay rules will boost costs, impose extra administrative burdens, and force them to trim their workforce. They also point to confusion over how to measure full-time employees over an extended period of time. In Notice 2012-58, the IRS attempts to provide some clarity.
Specifically, the new ruling creates a "standard measurement period" and an "initial measurement period" of three to twelve months. An employer may use the hours worked during the measurement period to classify its employees. The guidance also establishes a "stability period" that must be at least as long as the measurement period and could last from to six to twelve months.
An employer may look at new employees after the initial measurement period and current employees after the standard measurement period. If the employer determines that a particular employee is a full-time employee, it must treat the employee as a full-time employee under the play-or-pay rules throughout the stability period. For current employees, the employer has the flexibility to determine the months in which the standard measurement period starts and ends, as long as the employer is consistent in its treatment of all employees.
Employers may use a ninety-day administrative period to determine if an employee is eligible for coverage and to enroll an employee in coverage. But this administrative period can't reduce or increase the length of the measurement period or the stability period.
These safe harbor rules will protect an employer only if it meets the requirements for minimum essential coverage under the PPACA. Also, an employer can keep new full-time employees out of its health insurance plan for a ninety-day waiting period without triggering a penalty for the employee.
Note that use of the safe harbor methods allowed under the new ruling is optional. But doing so will protect employers from complying with more restrictive interpretations until at least January 1, 2015.
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