DOL Says No Fine for Not Providing Exchange Notices

Employers told they “should” provide notices, despite no penalty

By Stephen Miller, CEBS September 13, 2013

U.S. employers were again surprised by another unexpected suspension of a provision of the Patient Protection and Affordable Care Act (PPACA or ACA) when, on Sept. 11, 2013, the Department of Labor (DOL) announced there will be no penalty imposed on employers that fail to distribute to workers a notice about available coverage under state- and federal-government-run health insurance exchanges (collectively referred to by the government as the "health insurance marketplace"), scheduled to launch in October 2013.

Fair Labor Standards Act (FLSA) Section 18B, added to the labor statute by the ACA, requires employers that are subject to the FLSA to provide all their employees by Oct. 1, 2013 (the traditional start of the annual open enrollment season for employee health plans), and thereafter to all new employees at the time of hiring, a written notice informing them of the following:

  • The existence of the government-run health care exchanges/the marketplace, including a description of the services provided and the manner in which employees may contact an exchange to request assistance.
  • If the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, workers may be eligible for a premium tax credit under Section 36B of the Internal Revenue Code if they purchase a qualified health plan through an exchange.
  • Employees who purchase a qualified health plan through an exchange may lose their employer’s contribution to any health benefits plan the organization offers. All or a portion of this contribution may be excluded from income for federal income tax purposes.

According to the ACA and subsequent guidance, the notice must initially be provided to each employee, regardless of plan-enrollment status or part-time or full-time status. Employers are not required to provide a separate notice to dependents or retirees, but an employer's obligation to provide notice may extend to its independent contractors and leased workers, depending on the nature of their relationship with the employer as determined under the FLSA's "economic reality" test.

The ACA has a $100-a-day penalty for noncompliance with its provisions (unless otherwise specified in the statute), and it had generally been assumed this penalty would apply to employers that fail to distribute the exchange notice, possibly with additional penalties for failure to comply with a provision of the FLSA. However, the penalty provision had not been made explicit in any previous guidance, nor had the regulators described how the penalty would be implemented and enforced.

Then, on Sept. 11, 2013, the DOL posted on its website a new FAQ on Notice of Coverage Options, which states:

Q: Can an employer be fined for failing to provide employees with notice about the Affordable Care Act’s new Health Insurance Marketplace?

A: No. If your company is covered by the Fair Labor Standards Act, it should provide a written notice to its employees about the Health Insurance Marketplace by Oct. 1, 2013, but there is no fine or penalty under the law for failing to provide the notice.

The U.S. Small Business Administration repeated this point in a Sept. 12 online posting that stated:

If your company is covered by the Fair Labor Standards Act, you must provide a written notice to your employees about the Health Insurance Marketplace by Oct.1, 2013. However, there is no fine or penalty under the law for failing to provide the notice.

Compliance: Prudent or Optional?

Keith R. McMurdy, a partner at law firm Fox Rothschild LLP, commented in a posting on his firm’s Employee Benefits Legal Blog that Section 18B of the FLSA clearly states that any employer subject to the FLSA “shall provide” written notice to current and future employees and that the DOL’s Technical Release No. 2013-02, issued in May 2013, states that Section 18B of the FLSA generally holds that an applicable employer “must provide” each employee with a notice. McMurdy wrote:

My experience with the federal laws and the enforcement of said laws by federal agencies is that when things say “shall” and “must,” there are penalties when you don’t do them. So when the DOL now takes the position that it is not a “shall” or “must” scenario, but rather only a “should” and “even if you don’t we won’t punish you” proposition, I get suspicious. But I also think this confirms what I have said since the beginning about PPACA compliance for employers. It is all about your risk tolerance.” …

So, if you don’t want to send the Oct. 1, 2013 Notice, apparently the DOL “FAQ” says you have no penalties and thus no risk. Me? My risk tolerance is a little lower than that and my experience with regulatory agencies is such that I don’t trust informal “FAQs” posted on the web as much as I trust the clear language of the statutes and prior technical releases. Words like “shall” and “must” usually mean that if I don’t do it I get burned. So I am still recommending that employers comply with the notice requirement. Why? I can almost guarantee that if you send the notice, you won’t face a penalty for not sending it. But if you don’t send one, well, I still say all bets are off.

Christine P. Roberts, a benefits attorney at law firm Mullen & Henzell LLP, commented on her “E is for ERISA” blog, "This information, at this late date, is more confusing than it is helpful to employers who have already invested significant resources in preparing to deliver the Notice of Exchange.” She added this cautionary note:

“Particularly for employers with pre-existing group health plans, the Notice of Exchange potentially could be viewed by the DOL as within the scope of the employer’s required disclosures to participants and thus within the scope of an ERISA audit, or separate penalties could be imposed through amendment to the FLSA or the ACA.”

"A blatant disregard of the requirement to provide the Exchange Notice could expose an employer to lawsuits if one or more employees are unhappy with their coverage situations," cautions an alert from law firm Mazursky Constantine LLC. "These lawsuits would likely not be preempted by ERISA and could, for example, be brought in state court based on tort or general common law theories. A purposeful and total failure to provide Exchange Notices would likely be viewed by a court as different from the situation in which an employer makes a good faith effort and just misses a few employees."

"Health care reform involves so many inter-related statutes, pages of guidance, government agencies and interested parties that we encourage employers to comply to demonstrate good faith, and to avoid potential alternative theories of liability," an alert from law firm Porter Wright Morris & Arthur LLP concurs.

However, some benefits specialists said the DOL announcement renders the exchange notice optional. “Employers who haven’t yet provided the notice may either distribute the notice or not, as they prefer,” commented Linda Rowings, chief compliance officer for United Benefit Advisors, an alliance of more than 140 independent benefit advisory firms, in an online posting.

“Employers who want to increase awareness of the exchange marketplace—perhaps because they expect some of their employees will need or want to purchase from the marketplace—may still want to provide the notice,” Rowings added. “Employers with complicated distribution situations, or that are concerned that the notices may generate questions the employer is not staffed to answer, may prefer to not distribute the notice.”

Model Notices

The DOL’s Sept. 11 FAQ reiterated that the department has two model notices to help employers comply with the Oct. 1 exchange/marketplace notice deadline (which they are strongly encouraged to meet):

Employers may use one of these models, as applicable, or a modified version. The model notices are also available in Spanish and MS Word format at

Most Big Employers Will Meet Exchange Notice Deadline

Most large employers plan to send out exchange notices by Oct. 1, in compliance with the Patient Protection and Affordable Care Act, according to findings from a poll conducted Sept. 13-18, 2013. The ERISA Industry Committee (ERIC) polled its members and found 94 percent of respondents were planning to provide an exchange notice to employees by the October 1 deadline. Only 6 percent said they would not meet the deadline or were undecided, and most of those companies planned to provide the notice later in 2013.

The poll also found that 92 percent of the companies planned to use the model notice created by the Department of Labor for exchange-reporting purposes. Thirty-six percent of companies were planning to make few changes to the notice, while 56 percent were planning to omit the “optional” information.

Stephen Miller
, CEBS, is an online editor/manager for SHRM.

Related SHRM Articles:

On Notice: Upcoming ACA Notice Requirements, SHRM Online Legal Issues, August 2013

DOL Issues Model Exchange and COBRA Election Notices, SHRM Online Benefits, May 2013

Related External Articles:

Quick Links:

SHRM Online Benefits page

SHRM Online Health Care Reform Resource Page

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