On February 10, 2014, the Internal Revenue Service (IRS) issued final regulations for the employer play-or-pay mandate under the health care reform law. The final regulations, which include both clarifications and changes to those proposed in 2012, address the extension of the transition rules, full-time employees, hours-of-service determinations, affordability safe harbors, applicable large employer status and more.

Although many large employers generally must comply with the play-or-pay mandate as of January 1, 2015, transition rules in the final regulations will serve to delay full compliance.


Under the Patient Protection and Affordable Care Act (PPACA), large employers must offer full-time employees (and dependents) affordable minimum essential coverage (MEC) that meets minimum value requirements. If an employer fails to do so and a full-time employee receives a premium tax credit or cost-sharing reduction on a public exchange, the employer is subject to a penalty. In July 2013, government regulators gave employers some transition relief for 2014. These final regulations respond to comments on the proposed regulations.

Extending the transition rules to 2015

  • Limited relief from coverage penalty in 2015: The regulations exempt employers from the failure-to-offer-coverage penalty if they offer coverage to at least 70% of their full-time employees (and dependents, if applicable). The proposed regulations excluded the first 30 employees for penalty calculation purposes, and the final regulations increase that exclusion to 80 for 2015.
  • Dependent coverage: Employers need not offer coverage to their full-time employees’ dependents in 2015 as long as they are arranging such coverage for 2016. This relief only applies to plans that (1) did not offer dependent coverage in 2013 or 2014, (2) offer dependent coverage that is not MEC, or (3) offer dependent coverage to some but not all dependents.
  • Non-calendar-year plans: Certain employers with non-calendar-year plans will not be subject to the play-or-pay penalties until the first day of the 2015 plan year.
  • One-time shorter measurement period permitted: For stability periods starting in 2015, employers may use a transition measurement period of at least six consecutive months that begins by July 1, 2014, and ends no more than 90 days before the 2015 plan year starts.
  • Shorter period allowed for applicable large employer status determination: For 2015, employers may base their determination of applicable large employer status on a period of at least six consecutive months in 2014.
  • Offer of coverage in January 2015: Large employers that offer coverage to full-time employees by the first payroll period beginning in January 2015 will be deemed to have offered coverage for January 2015.
  • Employers with less than 100 full-time employees: Employers with at least 50 but less than 100 full-time employees (including full-time equivalents) in 2014 are exempt from the play-or-pay mandate for the 2015 plan year.
  • Multiemployer arrangements: A multiemployer arrangement will not be subject to the play-or-pay penalty if the employer is required by a collective bargaining agreement to contribute to a multiemployer plan providing affordable coverage that satisfies the minimum value requirements.

Identifying full-time employees

For purposes of the employer mandate, the tax code defines a full-time employee as one who averages at least 30 hours per week and a part-time employee is reasonably expected to average less than 30 hours per week. The final regulations establish 130 hours per month as the monthly equivalent of 30 hours a week. For controlled groups, hours of service must be counted across all applicable large employer members, such as combining hours of service at two subsidiaries of the same parent company.

One of two measurement methods is typically used to determine full-time status: the monthly measurement method or the look-back measurement method. The monthly method counts the employee’s hours of service for each month. An employer will not be subject to a play-or-pay penalty for a new hire as long as coverage is offered by the first day of the fourth month following the employee’s hire date. This rule may be applied only once during an employee’s period of employment, after which he or she is treated as a continuing employee rather than a new hire.

The final regulations also include an optional method, referred to as the weekly rule, which permits employers to base full-time status on hours over four-week periods (five weeks for certain months), as long as the measurement period contains either the week with the first day of the month or the week with the last day, but not both. As measured by four weeks, an employee with at least 120 hours of service would be deemed full time, and for five weeks, it would be 150 hours.

The final regulations make some changes to the look-back measurement method:

  • In determining full-time status as of an employee’s start date, employers may consider three factors: (1) whether the employee replaces a full-time employee, (2) the extent to which employees in the same or comparable positions are full-time employees, and (3) whether the job was communicated to the new hire as averaging 30 or more hours a week.
  • The final regulations clarify how to determine full-time status for new employees who are not variable-hour or seasonal employees before the employee has worked for a complete measurement period. Where a new employee is reasonably expected to work full time (i.e., at least 30 hours per week), full-time status is based on hours of service each month. There will be no employer penalty for the first three months of employment if the employee is otherwise eligible for coverage and is offered coverage by the first day after the three-month period (and the coverage is affordable and provides minimum value).
  • The definition of administrative period includes periods before the initial measurement period for variable-hour and seasonal employees. So, the 90-day limit on the administrative period includes both the time before and the time after the initial measurement period.
  • The final regulations retain the rule from the proposed regulations that a stability period must be at least six months in length.
  • If a full-time employee’s stability period exceeds the measurement period, the next measurement period must be soon enough to avert a gap between the first and second stability periods. For example, if a three-month measurement period goes from January through March of Year 1, followed by a one-month administrative period, the stability period for employees who averaged 30 hours a week during the measurement period would run from May to October of Year 1. The next measurement period would run from July to September of Year 1, followed by a one-month administrative period in October of Year 1, and the next stability period would run from November of Year 1 through April of Year 2.
  • Employers may use different measurement and stability periods for different categories of employees: salaried and hourly employees, employees with primary places of employment in different states, collectively bargained employees and non-collectively bargained employees, and each group of collectively bargained employees covered by a separate collective bargaining agreement.
  • Different applicable large employer members within a controlled group may use different measurement periods and stability periods, as well as different starting and ending dates and durations of measurement and stability periods.
  • For temporary staffing firms, an employee’s full-time status determination may be based on the firm’s reasonable expectations at the employee’s start date. The final regulations include factors to help temporary staffing firms determine whether a new employee is a variable-hour employee.
  • Employers must treat seasonal employees the same way they treat variable-hour employees. Under the final regulations, a “seasonal employee” is one in a position that customarily lasts six months or less. Employers should be aware that the six-month time limit alone does not make an employee “seasonal”; rather, the nature of the position should be such that an employee typically works during the same period each year, such as winter or summer. This new definition may narrow the scope of employees that some employers will be able to categorize as seasonal.
  • When an employee switches from full-time status to part-time status, an employer who used the look-back measurement method may apply the monthly measurement method beginning on the first day of the fourth month after the employee’s status change, as long as certain conditions are met.
  • The initial measurement period may be based on calendar months or on a period beginning any time after the first day of the calendar month and ending the day before the next month (e.g., from March 15 to April 14). However, a stability period must be based on calendar months.
  • Where there is a gap between the stability period linked to the initial measurement period and the stability period linked to the first full standard measurement period, a new employee’s status during the former continues to apply until the start of the stability period associated with the latter.

Determining employees’ hours of service

Full-time status is based on an employee’s hours of service. The final regulations adopt the general definition of hours of service in the proposed regulations: an hour for which an employee is paid or entitled to payment, which includes vacation, holiday, illness, disability, layoff, jury duty, military duty and leave of absence. They also make the following clarifications and modifications:

  • Days-worked and weeks-worked equivalency methods: For non-hourly employees, employers may use different methods of calculating hours of service for different years and need not use more than one method for any particular employee.
  • Volunteers: Hours of service do not include those worked as a “bona fide volunteer,” nor do they include hours worked by students in positions subsidized through the federal work study program or a similar state program.
  • Adjunct faculty members: For now, employers of adjunct faculty may use any method of crediting service hours that is reasonable and consistent with the employer shared responsibility provisions. However, the final regulations also specify that employers may credit an adjunct faculty member with (1) 2¼ hours of service per week for each hour of teaching or classroom time and, separately, (2) an hour of service per week for each additional hour outside the classroom spent performing required duties.
  • Layover hours for airline industry employees: For now, employers may use any reasonable method of crediting layover hours for airline industry employees.
  • On-call hours: Where employees have on-call hours, employers must use a reasonable method to credit them. However, it would be unreasonable not to credit an hour of service for any on-call hour for which the employee is paid, where he or she must remain on the employer’s premises, or where his or her activities are subject to substantial restrictions that prevent the employee from using the time for his or her own purposes.

Rehire and break-in-service rules

Although the final regulations generally retain the proposed rehire and break-in-service rules, they reduce the required duration of the break in service before treating a returning employee as a new employee from 26 weeks to 13 weeks (except for educational organizations). The final regulations also retain the proposed parity and averaging rules for special unpaid leaves of absence and employment breaks. The averaging rules for special unpaid leaves of absence and employment breaks do not apply under the monthly measurement method.

Affordability safe harbors

The final regulations retain the three affordability safe harbors — W-2, rate of pay and federal poverty line — that are used to determine whether employer coverage is affordable. The regulations also make the following clarifications:

  • Different safe harbors may be used for reasonable categories of employees, as long as such usage is uniform and consistent for all employees in a category. Acceptable categories generally include specific job categories, nature of compensation (hourly/salaried), geographic location and similar bona fide business criteria.
  • Employers may use the rate-of-pay safe harbor even if an hourly employee’s rate of pay is reduced during the year, in which case the pay rate is applied separately to each month, rather than to the entire year. The employee’s required contribution must be affordable based on the lowest rate of pay for the month multiplied by 130 hours.
  • For the federal poverty line safe harbor, employers may use the federal guidelines in effect six months before the plan year starts. This should give employers sufficient time to set premium amounts before open enrollment begins.

Definition of dependent

The proposed regulations defined a dependent as an employee’s child under age 26, and the final regulations modify the definition to exclude foster children and stepchildren. (Spouses are not considered dependents.) The final regulations further clarify that a child remains a dependent for the entire month of his or her 26th birthday, and that dependents do not include children who are not U.S. citizens or nationals, unless the children reside in a country contiguous to the United States or were adopted.

Determination of applicable large employer status

The final regulations generally adopt the proposed rules for identifying applicable large employers subject to the play-or-pay mandate, with the following clarifications: 

  • New employers: An employer that existed for at least one business day in the previous calendar year is considered to have been in business that year. Moreover, the determination of whether a new employer is an applicable large employer during its first year is based on the employer’s reasonable expectations at the start, even if later events affect the actual number of full-time employees.
  • Seasonal worker exception for new employers: The final regulations do not change the seasonal-worker exception for purposes of meeting the applicable large employer definition. Even if a new employer did not exist on any business day during the preceding calendar year, the seasonal worker exception would continue to apply. In that way, an employer will not be deemed an applicable large employer if it reasonably expects (1) its workforce to exceed 50 full-time employees (including FTEs) for 120 days or less during the current year, and (2) the employees making up the excess are seasonal workers.

Offer of coverage

As proposed, an employee who has not been offered an effective opportunity to accept or decline coverage will not be considered to have been offered coverage. However, the final regulations clarify the following points:

  • An opportunity to decline coverage is not required if the coverage provides minimum value and is offered either at no cost or at a cost of no more than 9.5% of the federal poverty level for a single person, divided by 12.
  • If an employee is employed by more than one applicable large employer member of a controlled group for a month, he or she will be treated as having been offered coverage by the entire controlled group for that month.
  • An “evergreen” election (i.e., an employee’s election from a prior year that continues until the employee opts out) is considered an offer of coverage.
  • An offer of coverage made on behalf of an employer constitutes an offer of coverage, including offers made by a multiemployer or single-employer Taft-Hartley plan or a multiple employer welfare arrangement (MEWA) on behalf of a contributing employer.

Assessment of penalty

Although the final regulations generally adopt the proposed rules for the play-or-pay penalty, they clarify a few matters. If a full-time employee performs services for two or more members of the same controlled group in a month, the employer is the member for whom the employee works the most hours for purposes of the penalty. If the employee works the same number of hours for multiple controlled group members, then the controlled group members can make the decision.

International issues

The final regulations do not exempt agricultural workers and temporary non-agricultural workers from the definition of employee. They clarify that hours of service for cruise ship employees do not include hours compensated by sources outside the United States.

If an employee transfers employment from a domestic applicable large employer to a foreign applicable large employer, he or she may be considered to have terminated employment only if the new job is expected to last for at least 12 months and substantially all income from the foreign employer is considered foreign-source income. Where an employee transfers from a foreign employer to a domestic employer, he or she is treated as a new hire as long as there are no prior hours of service with the foreign employer. If the employee logged hours of service with the foreign employer, employment with the foreign employer may be treated as a period for which no hours of service were earned under the rehire rules discussed above.

Worker classification

As proposed, the final regulations continue to define an employee for purposes of the play-or-pay mandate using the common law standard. As such, employers will not be required to offer coverage to independent contractors, even if they average more than 30 hours a week. However, temporary employees’ hours will have to be monitored to the extent a temporary employee is considered a common-law employee of the employer.

Particular positions of employment

The final regulations decline to provide exceptions for employers in specific industries, such as the home care industry, and also clarify that real estate agents and direct sellers do not constitute employees for purposes of the play-or-pay mandate.


Large employers can avoid the $2,000 per employee penalty in 2015 by offering minimum essential coverage to at least 70% of their full-time employees. Nonetheless, employers may be still be subject to the $3,000 per employee penalty in 2015 for each full-time employee who is not offered coverage and who obtains a premium tax credit on a public exchange.

Employers in certain industries should be aware of the special rules in the final regulations applicable to them, such as educational institutions employing adjunct faculty, airline industry employers and employers whose employees work on-call hours.

Employers subject to the play-or-pay mandate should continue planning and implementing their compliance strategy. This includes deciding whether to offer health coverage to employees, which employees to provide coverage to, and the proper allocation of health coverage costs between the employer and employees.