The Obama administration said Tuesday it would delay enforcing a provision of the new health-care law that requires large employers to provide coverage for workers or pay a penalty in 2014, the biggest revision so far to the federal health-care overhaul.
The law, passed in 2010, requires companies with the equivalent of 50 or more full-time workers to offer health benefits starting on Jan. 1-or pay a penalty of at least $2,000 per employee. The delay, announced by the Treasury Department in a blog post Tuesday, means that penalty won't kick in until 2015.
The decision reflects pressure from companies in such lower-wage industries as restaurants, retail and agriculture, which had cited a host of practical difficulties posed by the law's requirements. Most large companies in the U.S. already provide health coverage to their employees.
Some companies had bet the law was going to be overturned by the Supreme Court last year, or by a new presidential administration after the 2012 election. After it withstood those legal and political challenges, some firms said there was too little time remaining before the provision was due to kick in.
"They realized they were not ready, and we were not ready," said Neil Trautwein, vice president at the National Retail Federation, an employer trade group. "At the very least, this will give retailers and chain restaurants a chance to breathe."
The decision follows media reports that companies had already cut back on some workers' hours to avoid exposure to penalties under the new health-care law. Those who work fewer than 30 hours a week aren't counted as full-time employees, according to the law.
Many of the same companies were also grappling with the refusal of states to expand their Medicaid programs to cover millions of minimum-wage workers who would otherwise become the responsibility of their employers.
The provision of the law that requires individuals to carry health coverage or pay a fine, starting in 2014, remains in effect, the Treasury Department said. The delay only applies to the business penalties, but some experts predicted more changes could come.
Jim Napoli, senior counsel in the employee benefits practice at Proskauer Rose LLP, said that since the employer mandate was intended to support individuals' health coverage, there may be a delay in the individual mandate as well. "I would not be surprised if that's the next shoe to fall," he said.
Workers who don't get coverage through their employer will still be eligible for tax subsidies toward the cost of buying their own insurance.
The delay is the latest snag to hit the Affordable Care Act, the biggest transformation in U.S. health care since the introduction of Medicare in the 1960s. New insurance exchanges designed to allow smaller businesses with as many as 100 workers to shop for coverage have faced difficulties getting off the ground in time for open-enrollment season this fall.
The employer requirements are just one of several unpopular parts of the law that will test the administration's resolve. The law is also expected to raise premiums for some workers, mostly younger, healthy employees, and small businesses that hire them. It will cut funding for safety-net hospitals, impose taxes on medical device firms and other health care businesses, and tax individuals who opt not to buy coverage.
The Government Accountability Office, Congress's watchdog, has expressed concern that the exchanges selling coverage to individuals may not be ready in time to open on Oct. 1.
The Obama administration said it was holding off on business penalties to give companies more time to adjust to the law's provision but hoped that companies would still comply with the intent of the law during 2014.
"We have heard concerns about the complexity of the requirements and the need for more time to implement them effectively," Mark Mazur, assistant secretary for tax policy at the Treasury Department, said in the blog post. "We recognize that the vast majority of businesses that will need to do this reporting already provide health insurance to their workers, and we want to make sure it is easy for others to do so."
Mr. Mazur said additional time would be used "to consider ways to simplify the new reporting requirements consistent with the law." He said formal guidance would come next week.
"Given where they are in the timelines and the reality of what this would mean for employers and insurers, I think there was recognition that this might not be practical," said Catherine Livingston, a partner at the law firm Jones Day.
Ms. Livingston, who until February was an Internal Revenue Service official overseeing the drafting of health law regulations, said the agency was working on the rules when she left. The obstacles to implementing the law likely became more apparent in the past few months, she said.
"I would expect some employers who are looking at expanding coverage and the cost of expanding coverage will take advantage of the additional time before doing so," Ms. Livingston said.
Companies and employer trade groups that had criticized implementation of the requirement praised the delay but signaled they would continue to try to chip away at the rule.
"A delay for even a year is a positive thing from my perspective," said Rick Levi, chief executive of Consolidated Management in Des Moines, Iowa, which runs cafeterias at schools, offices and jails. "If it gives the insurance industry a better opportunity to determine the cost to small businesses, we as business people can better plan on how we can approach this."
White Castle Management Co., a closely held fast-food chain that currently offers health insurance to employees who work 35 hours or more per week, said it wanted to see changes to the requirement that workers be classified as "full-time," and entitled to coverage, if they work 30 hours a week.
"More time will be welcome for those racing to comply with the provisions, but the whole definition of 30 hours as full-time still needs to be addressed," said White Castle spokesman Jamie Richardson.
Republicans were swift to use the announcement to criticize the health law more broadly.
"Obamacare costs too much and it isn't working the way the administration promised," said Senate Minority Leader Mitch McConnell (R., Ky.). "The White House seems to slowly be admitting what Americans already know."
But Adam Jentleson, a spokesman for Senate Majority Leader Harry Reid (D., Nev.) praised the shift, saying, "Flexibility is a good thing."
"Both the administration and Senate Democrats have shown, and continue to show, a willingness to be flexible and work with all interested parties to make sure that implementation of the Affordable Care Act is as beneficial as possible to all involve," he said. "It is better to do this right than fast."