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Affordable Care Act: Final Rules on Coverage for Adjuncts and Students

February 18, 2014

On February 10, the Internal Revenue Service published final regulations on employer obligations to provide full-time employees with health coverage under the Affordable Care Act (ACA). The long-awaited rules address the so-called "shared responsibility" provisions for employers. Of most interest to colleges and universities is guidance related to the application of the employer obligations to adjunct faculty and student employees. IRS has also provided a fact sheet, highlighting key changes in employer's responsibilities under the ACA for 2015.

Treatment of Adjunct Faculty. Section 4980H of the Internal Revenue Code (added by the ACA) requires employers with 50 or more employees to provide full-time workers with health insurance coverage or face tax penalties. Under the ACA, a "full-time employee" is defined as an individual who works 30 or more hours per week.

This ACA definition for full-time has been a concern for college and university employers contemplating its application to adjunct faculty who, rather than being paid on an hourly basis, are usually compensated for each course taught during an academic term. Generally, institutions do not track faculty work hours, regular or adjunct.

Proposed Rules

On December 28, 2012, IRS issued a notice of proposed rulemaking (NPRM) and a related question-and-answer document on section 4980H. In the NPRM, the agencies acknowledged concerns raised by CUPA-HR, NACUBO, and other higher education associations (p. 225) but did not provide any specific guidance on adjuncts, stating simply that employers with such employees "must use a reasonable method for crediting hours of service that is consistent with the purposes of section 4980H."

The NPRM, however, provided little guidance as to what is reasonable, noting that it would not be reasonable to "take into account only classroom or other instruction time and not other hours necessary to perform the employee's duties, such as class preparation time." NACUBO endorsed the comments on the NPRM submitted by the higher education community.

Final Rules

The final rules solidify proposed definitions and requirements for employer-offered health plans, including minimum essential coverage, minimum value, and affordability. New in the final regulations are safe harbors for the affordability standard.

Adjunct Faculty. The preamble to the final regulations provides additional guidance on reasonable methods for determining adjunct faculty hours, as follows:

...one (but not the only) method that is reasonable for this purpose would credit an adjunct faculty member of an institution of higher education with (a) 2 1/4 hours of service (representing a combination of teaching or classroom time and time performing related tasks such as class preparation and grading of examinations or papers) per week for each hour of teaching or classroom time (in other words, in addition to crediting an hour of service for each hour teaching in the classroom, this method would credit an additional 1 1/4 hours for activities such as class preparation and grading) and, separately, (b) an hour of service per week for each additional hour outside of the classroom the faculty member spends performing duties he or she is required to perform (such as required office hours or required attendance at faculty meetings). [p.8552]

According to this guidance, a college or university could deem an adjunct faculty member who teaches 12 credits as having worked 27 hours a week (12 x 2.25). If the institution required the adjunct to hold office hours for 2 hours per week, it would need to credit that adjunct with 29 hours (27 for the 12 credits and 2 for the office hours). If the institution also required an adjunct to attend a one-hour faculty meeting each week, it would need to credit that adjunct with 30 hours (27 for the 12 credits, 2 for the office hours, and 1 for the faculty meeting).

Institutions should carefully assess all required work outside of the classroom. IRS may issue further guidance in the future, but the preamble promises that higher education employers may rely on this formula for calculating adjunct hours at least through the end of 2015. IRS also states, "Employers may credit more hours of service than would result under the method described in the preceding paragraph and also may offer coverage to additional employees beyond those identified as full-time employees under that method."
Employers are permitted to use other "reasonable methods" for crediting hours of service for adjunct faculty. IRS specifies that the example it provides is not the only reasonable method of crediting hours of service and "whether another method ... is reasonable is based on the relevant facts and circumstances."

Student Employees. In meetings and comments to the proposed rule, NACUBO and other higher education associations expressed concern to Treasury and IRS about the application of ACA to student employees. IRS acknowledges these comments in the final regulations and argues that the "federal work-study program, as a federally subsidized financial aid program, is distinct from traditional employment in that its primary purpose is to advance education" and therefore should be distinguished from other student employment.

In the final regulations, the definition of "hour of service" at §54.4980H-1(a)(24) specifically excludes "any hour of services to the extent those services are performed as part of a Federal Work-Study Program as defined under 34 CFR 675 or a substantially similar program of a State or political subdivision thereof."

Colleges and universities have specifically expressed concern about the treatment of "on call" hours by resident assistants. The preamble to the final rules states:

"Until further guidance is issued, employers of employees who have on-call hours are required to use a reasonable method for crediting hours of service that is consistent with section 4980H. It is not reasonable for an employer to fail to credit an employee with an hour of service for any on-call hour for which payment is made or due by the employer, for which the employee is required to remain on-call on the employer's premises, or for which the employee's activities while remaining on-call are subject to substantial restrictions that prevent the employee from using the time effectively for the employee's own purposes."

The regulations do not address or exempt graduate research and teaching assistantships, so institutions will have to carefully manage expectations of work hours to determine whether these positions will qualify as "full time" in accordance with the ACA.

With respect to internships and externships, IRS states, "Services by an intern or extern would not count as hours of service for section 4980H purposes ... to the extent that the student does not receive, and is not entitled to, payment in connection with those hours." Some paid interns or externs, however, may nonetheless qualify for exemption from the 4980H requirements as seasonal employees. The rule has a full section detailing the various factors used to determine whether an employee qualifies as seasonal.

Affordability Safe Harbors for Employers. Another key section of the final rules addresses affordability of employee coverage, which is tied to the employee's household income. The rules set forth three safe harbors available to employers for determining affordability based on readily available information:

  • The Form W-2 Wages Safe Harbor—The employer may calculate the affordability of the coverage based solely on the wages paid to the employee by that employer, as reported in Box 1 of the Form W-2.
  • The Rate of Pay Safe Harbor
    • Coverage to an hourly employee is treated as affordable for a calendar month if the employee's required contribution for the month for the lowest cost, self-only coverage does not exceed 9.5 percent of an amount equal to 130 hours multiplied by the lower of the employee's hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) or the employee's lowest hourly rate of pay during the calendar month.
    • Coverage to a non-hourly employee will be affordable if the employee's required contribution for the calendar month for the lowest cost, self-only coverage does not exceed 9.5 percent of the employee's monthly salary, as of the first day of the coverage period (instead of 130 multiplied by the hourly rate of pay); provided that if the monthly salary is reduced, including due to a reduction in work hours, the safe harbor is not available.
    • The Federal Poverty Line Safe Harbor—An employer's offer of coverage to an employee is treated as affordable if the employee's required contribution for the calendar month for the lowest cost, self-only coverage does not exceed 9.5 percent of a monthly amount determined as the federal poverty line for a single individual for the applicable calendar year, divided by 12. This safe harbor is intended to provide employers a predetermined maximum amount of employee contribution that in all cases will result in the coverage being deemed affordable. Employers may use the most recently published poverty guidelines as of the first day of the health plan year.

NACUBO continues to work with the higher education associations in tracking these issues and submitting additional comments to IRS.
NACUBO Contact: Mary

Contact

Mary Bachinger
Director, Tax Policy
202.861.2581
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