IRS Information Letter Addresses Employer Shared Responsibility and Coordination With Prevailing Wage Laws

The IRS’s Office of Chief Counsel has released an information letter on employer shared responsibility under Code § 4980H in response to an inquiry from a legislator on behalf of a constituent who owns a small business. The constituent’s company is subject to federal prevailing wage laws under the Service Contract Act (SCA) and has grown to become an applicable large employer (ALE) for purposes of employer shared responsibility. As background, ALEs may be subject to penalties under Code § 4980H if they fail to offer adequate health insurance to full-time employees and their dependents.

The letter explains the requirements for offering affordable health coverage under employer shared responsibility and coordination of those rules with the SCA. The SCA requires certain employers to pay workers specified wage rates and fringe benefits, and it allows for cash payments in lieu of health benefits. In general, for purposes of determining whether coverage is affordable under employer shared responsibility, employer contributions reduce employees’ required contributions so long as they can be used exclusively for medical expenses (including coverage under an employer-sponsored health plan)—but not if they can be received as cash or other taxable benefits, or used to purchase non-health benefits. There is, however, a special rule for employers subject to the SCA. Transition relief allows these employers to treat certain employer contributions not satisfying the general principle as reducing an employee’s required contribution for purposes of the Code § 4980H(b) penalty until the applicability date of any further guidance (and, in any event, for plan years beginning before 2017) if certain requirements are met (see our Checkpoint article). [EBIA comment: Further guidance has yet to be issued relating to payments in lieu of benefits that may be available to employees due to prevailing wage laws.]

Responding to concerns that insurers may not be willing to offer health coverage if too many employees decline to enroll and the participation rate drops below certain levels, the letter notes that insurers in the large group market may not impose minimum participation rules. Thus, minimum participation does not act as an impediment to ALEs in allowing them to offer coverage to reduce or avoid employer shared responsibility penalties.

EBIA Comment: While the information letter does not break any new ground, it may be of interest to certain employers in understanding the interaction between an ALE’s responsibilities under employer shared responsibility and under prevailing wage laws. In addition, it serves as a reminder that the IRS is continuing to enforce the requirements of employer shared responsibility—including penalty assessments under Code § 4980H (see our Checkpoint article). For more information, see EBIA’s Health Care Reform manual at Sections XIV.B (“Guaranteed-Availability and Guaranteed-Renewability Rules”) and XXVIII (“Shared Responsibility for Employers (Play or Pay Penalty Tax)”). See also HIPAA’s Portability, Privacy & Security manual at Section XVIII.B (“Guaranteed-Availability Rules”).

Contributing Editors: EBIA Staff.