On August 31, 2012, the Internal Revenue Service (IRS), along with the Department of the Treasury, Department of Labor (DOL) and Department of Health and Human Services (HHS), issued guidance under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act”) on the application of the employer responsibility standards to large employers (the employer “play or pay” mandate), IRS Notice 2012-58 , and the 90-day limit on waiting periods for group health coverage, IRS Notice 2012-59, DOL Technical Release 2012-02, HHS Bulletin.  This guidance provides important safe harbors for employers in determining whether the employer is a “large employer” subject to the “play or pay” mandate and, if so, how to calculate the amount of the tax penalties that could be assessed.  These rules overlap with the requirement that group health plans may not impose a waiting period of more than 90 days.

The guidance appears complicated, but with careful planning, employers will be in a position to assess and address the impact on the employer and the employer’s workforce of the most important of the Affordable Care Act’s employer mandates.  The new safe harbor guidance is effective now and can be relied upon through the end of 2014.


The Affordable Care Act requires that large employers provide minimum essential coverage under an employer-sponsored group health plan or pay a penalty based on the number of full-time employees that are not offered coverage (the “play or pay” mandate). For employers, “minimum essential coverage” means group health coverage under an eligible employer-sponsored group health plan, defined as a plan offered to employees of an employer that is a governmental plan or a plan or coverage available in the individual or group market in a State (including a grandfathered health plan).

Penalty Calculations.  A large employer will be subject to tax penalties if:  (1) the employer does not offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an employer-sponsored plan and an employee is eligible for health coverage assistance and enrolls in a State insurance exchange (1/12 of $2,000 per full-time employee in excess of 30 assessed monthly); or (2) the employer does offer minimum essential coverage under an employer-sponsored plan, the coverage is unaffordable relative to the employee’s income or does not offer minimum value and is eligible for health coverage assistance and enrolls in a State insurance exchange (1/12 of $3,000 per full-time employee with health coverage assistance assessed monthly, but not to exceed penalties under clause (1) above).

Large Employer.  Small employers are not subject to the “play or pay” penalties and thus the determination of whether an employer is a “large employer” under the Act is critical.  A large employer is defined as an employer employing 50 or more full-time employees or “full-time equivalent” employees in the prior calendar year.  Full-time employees are defined for any month as employees who are employed on average at least 30 hours of service per week.  Regulators informally indicated this could be calculated as 130 hours of service per month.  Full-time equivalent employees generally are counted by adding the number of hours of service performed in a month by part-time employees up to 120 hours of service per employee (divided by 120).  Seasonal employees are not counted if they are employed for 120 days or less.

New Safe Harbor Guidance.  The new guidance expands on prior guidance, IRS Notice 2011-36; DOL Technical Release 2012-01, establishing certain safe harbors for an employer in determining whether the employer is a “large employer” and subject to the employer penalties.  The safe harbors allow an employer to look back to prior periods to determine the number of full-time employees today.  For ongoing employees, employers are permitted to use measurement periods (measuring full-time status looking back) and stability periods (counting full-time employees) of up to 12 months.  Employers are permitted to use an administrative period of up to 90 days following a measurement period and apply a three month grace period for new employees.  There also is a special safe harbor for determining whether variable-hour and seasonal employees are full-time.  Finally, the guidance clarifies that an employer may rely on the employee’s Form W-2 wages for purposes of determining whether employer health coverage is affordable.


The Affordable Care Act prohibits a group health plan from imposing a waiting period for enrollment in group health coverage of more than 90 days.  The new guidance clarifies that the definition of waiting period is the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll in the plan can become effective.  The plan may impose other substantive eligibility conditions as long as the condition is not designed to avoid the 90-day waiting period limitation.

To prepare for the employer mandates and avoid costly penalties under the Affordable Care Act, the new guidance makes clear that employers should review the composition of their workforce and make decisions on employer group health coverage today.  Preparation is key.