On August 31, the IRS in conjunction with the Departments of Labor and Health and Human Services, issued guidance to help employers apply the Patient Protection and Affordable Care Act ("PPACA") "pay or play" provisions. The "pay or play" provisions, which go into effect in 2014, will require employers with 50 or more full-time employees to either provide "affordable health coverage" or pay a penalty, called a "shared responsibility payment." These notices provide guidance on how to determine whether employees are full-time employees for purposes of the PPACA and how to use Form W-2 wages to measure affordability, as well as set limits on coverage eligibility waiting periods.

Notice 2012-58 describes and expands upon safe harbor methods that employers may use to determine whether an employee should be classified as full-time, while Notice 2012-59 addresses how the 90-day waiting period limitation applies to employer-sponsored group health plans. The application of the safe harbor and waiting period is relatively simple for employees reasonably expected to work 30 or more hours per week. A large employer (more than 50 employees) must offer group health insurance to all full-time employees no later than 90 days after the start of employment or pay the applicable penalty. 

The guidance also addresses the application of the safe harbor and waiting periods to more complicated employment arrangements, such as seasonal employees and employees who work variable hours. Specifically, new employees who are not expected to work full time can be employed without health insurance for an "initial measurement period," determined by the employer, of between three and 12 months, during which the employee's hours are tracked. If at the end of that period it becomes clear that an employee has been working an average of 30 hours or more a week, the employer must offer health insurance to the employee for a "stability period" of at least six months or for the length of the initial measurement period, whichever is longer, or choose to pay the penalty. The employer has a 90-day "administrative period" following a determination of eligibility to enroll a full-time employee. The combined measurement and administrative periods, however, cannot exceed one year. Ongoing employees are subject to similar rules.

In addition, under Notice 2012-58, coverage is deemed affordable so long as the employee's contributions for premiums do not exceed 9.5% of the employee's W-2 wages, regardless of the total household income of the employee. The Notice, however, does not address whether affordability is to be calculated based on the employee's share of the premiums for self-only coverage or for family coverage.

This guidance may aid employers with 50 or more employees in weighing the costs of providing affordable health coverage versus paying a penalty and allowing employees to purchase their own insurance. Employers may rely on this and previous guidance through the end of 2014. The guidance may be modified or amended shortly after the "pay or play" provisions go into effect.