Proposed reliance regs issued on shared responsibility rules for employers
Preamble to Prop Reg12/28/2012, Prop Reg § 1.1361-4, Prop Reg § 54.4980H-0, Prop Reg § 54.4980H-1 , Prop Reg § 54.4980H-2, Prop Reg § 54.4980H-3, Prop Reg § 54.4980H-4 , Prop Reg § 54.4980H-5, Prop Reg § 54.4980H-6
IRS has issued proposed reliance regs, along with Questions and Answers (Q&As), that provide guidance under Code Sec. 4980H on the shared responsibility provisions for employers for employee health coverage. The proposed regs only affect employers that are “applicable large employers,” as described in the proposed regs. Employers may rely on these proposed regs for guidance pending the issuance of final regs or other applicable guidance.
A more detailed article on the proposed reliance regs is forthcoming.
Background. For months beginning after Dec. 31, 2013, an applicable large employer is liable for an annual assessable payment if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction and either the employer:
- (1) fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan (Code Sec. 4980H(a) liability); or
- (2) offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan that, with respect to a full-time employee who has been certified for the advance payment of an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value as these terms are defined in Code Sec. 36B(c)(2)(C) (Code Sec. 4980H(b) liability).
The payment under Code Sec. 4980H(a) is based on all (excluding the first 30) full-time employees, while the payment under Code Sec. 4980H(b) is based on the number of full-time employees who are certified to receive an advance payment of an applicable premium tax credit or cost-sharing reduction. A full-time employee for any month is an employee who is employed on average at least 30 hours of service per week.
An applicable large employer for a calendar year is as an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year. For determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs), which are determined based on the hours of service of employees who are not full-time, are taken into account. (Code Sec. 4980H(c)(2))
Code Sec. 4980H ties into Code Sec. 36B, which is designed to use a subsidy/tax credit mechanism to make health insurance affordable for individuals with modest incomes. Under Code Sec. 36B(c)(2)(B), a coverage month for an individual (i.e., a month for which the health care subsidy is available) does not include a month in which he is eligible for MEC, as defined in Code Sec. 5000A(f), other than coverage offered in the individual market. MEC may be government-sponsored coverage, such as Medicare or Medicaid, or certain employer-sponsored plans. An individual is eligible for employer-sponsored MEC only if the employee's share of the premiums is “affordable” and the coverage provides “minimum value.” In general, under Code Sec. 36B(c)(2)(C)(i), an employer-sponsored plan is not affordable if the employee's required contribution with respect to the plan exceeds 9.5% of his household income for the tax year. This percentage may be adjusted after 2014.
Previous guidance on Code Sec. 4980H includes:
- Notice 2011-36, 2011-21 IRB 792, which floated an optional “look-back/stability period safe harbor” to determine whether ongoing (rather than newly-hired) employees are full-time employees for Code Sec. 4980H purposes. Under this safe harbor, an employer would determine each employee's full-time status by looking back at a defined period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer (the measurement period), to determine whether during the measurement period the employee averaged at least 30 hours of service per week.
- Notice 2011-73, 2011-40 IRB 474, which described a safe harbor under which employers would not be subject to an assessable payment under Code Sec. 4980H(b), for an employee if the coverage offered to him was affordable based on the employee's Form W-2 wages (as reported in Box 1) instead of household income. Under the safe harbor, an employer would not be subject to the penalty with respect to an employee if the required contribution for that employee was no more than 9.5% of his Form W-2 wages. The proposed affordability safe harbor would apply only for purposes of determining whether an employer is subject to the assessable payment under Code Sec. 4980H(b).
- Notice 2012-17, 2012-9 IRB 430, which described and requested comments on a potential approach for determining the full-time status of new employees for purposes of Code Sec. 4980H, if, based on the facts and circumstances at the start date, it cannot reasonably be determined whether the new employee is expected to work full-time because his hours are variable or otherwise uncertain. Under the potential approach, employers would be given three months or, in certain cases, six months, without incurring a payment under Code Sec. 4980H, to determine whether a variable hour new employee is a full-time employee.
- Notice 2012-58, 2012-41 IRB 436, which gave employers the option to use a look-back measurement period of up to 12 months to determine whether new variable hour employees or seasonal employees are full-time employees, without being subject to a Code Sec. 4980H payment for this period with respect to those employees. An employee is a variable hour employee if, based on the facts and circumstances at the date he begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week. Through at least 2014, employers were permitted to use a reasonable, good faith interpretation of the term “seasonal employee” for purposes of Notice 2012-58. Notice 2012-58 also facilitated a transition for new employees from the determination method the employer chooses to use for them to the determination method the employer chooses to use for ongoing employees.
Proposed regs. The proposed regs generally incorporate the provisions of previous guidance under Code Sec. 4980H inNotice 2012-58, 2012-41 IRB 436, as well as many of the provisions of Notice 2011-36, 2011-21 IRB 792, Notice 2011-73, 2011-40 IRB 474, and Notice 2012-17, 2012-9 IRB 430, with some modifications in response to comments. The proposed regs also propose guidance on additional issues.
The proposed regs are organized as follows:
- ... definitions (Prop Reg § 54.4980H-1),
- ... rules for determining status as an applicable large employer and applicable large employer member (Prop Reg § 54.4980H-2),
- ... rules for determining full-time employees (Prop Reg § 54.4980H-3),
- ... rules for determining assessable payments under Code Sec. 4980H(a) (Prop Reg § 54.4980H-4),
- ... rules for determining whether an employer is subject to assessable payments under Code Sec. 4980H(b) (Prop Reg § 54.4980H-5), and
- ... rules relating to the administration and assessment of assessable payments under Code Sec. 4980H. (Prop Reg § 54.4980H-6)
Only applicable large employers may be liable for an assessable payment under Code Sec. 4980H. The proposed regs adopt the position outlined in Notice 2011-36 under which an employee is an individual who is an employee under the common law standard, and an employer is the person that is the employer of an employee under the common law standard. Under the common law standard, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. Under the common law standard, an employment relationship exists if an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. It is not necessary that the employer actually direct or control the manner in which the services are performed. It is sufficient if the employer has the right to do so.
Preamble to Prop Reg12/28/2012 notes that the identification of full-time employees for purposes of determining status as an applicable large employer under Code Sec. 4980H is, by statute, performed on a look-back basis using data from the prior year, taking into account the hours of service of all employees employed in the prior year (full-time employees and non-full-time employees). Therefore, the look-back measurement method that may be used to identify full-time employees for purposes of determining potential Code Sec. 4980H(a) or Code Sec. 4980H(b) liability does not apply for purposes of determining status as an applicable large employer. Instead, the determination of whether an employer is an applicable large employer for a year is based upon the actual hours of service of employees in the prior year. Transition relief allows use of a shorter look-back period in 2013 for purposes of determining applicable large employer status for 2014.
Employers may rely on the proposed regs pending the issuance of final regs or other guidance. Final regs will be effective as of a date not earlier than the date the final regs are published. If and to the extent future guidance is more restrictive than the guidance in the proposed regs, the future guidance will be applied without retroactive effect and employers will be provided with sufficient time to come into compliance with the final regs. (Preamble to Prop Reg12/28/2012, Section X)
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