ACA Pay or Play: Is Your Dependent Coverage Compliant?
Now that the IRS has issued final regulations under Section 4980H, the so-called “pay or play” provision of the Affordable Care Act, employers are deciding how to determine whether employees are full-time (30 hours or more a week on average), whether the coverage the employer offers is affordable (generally no more than 9½% of the participant’s income for single coverage) and whether it provides minimum essential coverage (based upon actuarial formulas or calculations). One requirement for adequate coverage is that the offer must include coverage for both the employee and the employee’s dependents. The employer is not required to offer coverage to the employee’s spouse.
The final regulations state that “dependents” include biological children and adopted children. Step-children and foster children do not need to be covered. Coverage must be provided through the end of the month in which a child attains age 26. Generally speaking, if an employer subject to these rules fails to offer coverage to a full-time employee for any day of the calendar month, the employer is treated as not having been offered coverage during that entire month and could be subject to a penalty for that month.
Under these rules, a cautious employer must now embrace plan designs that continue coverage to dependent children until the last day of the month in which they attain age 26. If they do not, the failure to cover the dependent during the entire birthday month would result in a failure to provide dependent coverage at least for that dependent and at least for that month. There is a risk, however, that the IRS could consider the offer insufficient on its face for all employees because the coverage was not offered for all dependents through age 26. Although the IRS has not formally issued guidance on this point, I have heard at least one IRS official suggest in informal comments that the failure to provide coverage to the end of the month would be viewed as an inadequate offer of coverage.
If an employer does not offer at least some coverage to at least 95% of its full-time employees (70% for 2015), the employer is subject to a penalty equal to $2,000 multiplied by the number of full-time employees, less the first 30 employees, if any employee receives subsidized coverage on the exchange. If the failure to offer coverage to dependents through the end of the month in which the dependent attains age 26 is considered an inadequate offer of coverage, the employer could be subject to this large penalty even though it was offering coverage to many of its employees.
Minnesota law requires that coverage in place at the beginning of a month continue through the end of the month in which an event occurs that would result in loss of coverage. Therefore, any employer with a Minnesota insured policy will meet the requirement to continue coverage for a dependent through the end of the birthday month. Employers in other states and employers with self-funded plans may wish to rethink their plan design if at present they terminate coverage on a dependent’s 26th birthday.
For 2015, there are a number of transition rules for the pay or play regulation, some of which are discussed in my partner Jewelie Grape’s blog. Among those rules is one that allows employers who are taking steps in 2015 to add dependent coverage to avoid penalties if such coverage is not in place until 2016. Possibly this plan design glitch will be permitted in 2015 under the transition rule.
Employers whose coverage for dependents ends on the dependent’s birthday may wish to consider changing that design at least by the beginning of the 2016 plan year.
Contact Benefits Notes for more information.