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Final regs delay employer mandate for midsize employers & phase in coverage for large firms

February 12, 2014

T.D. 9655, 02/10/2014, Reg. § 54.4980H-1, Reg. § 54.4980H-2, Reg. § 54.4980H-3, Reg. § 54.4980H-4, Reg. § 54.4980H-5 , Reg. § 54.4980H-6

IRS has issued final regs that provide guidance to employers that are subject to the shared responsibility provisions for employee health coverage under Code Sec. 4980H, which was enacted by the Affordable Care Act (ACA).The most significant provisions in the regs are a one-year delay of the employer mandate for midsize employers and a phased-in coverage requirement for large employers.

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 the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, 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, see below) 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, for a full-time employee who has been certified as having enrolled in qualified health plan for which 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).


Together, Code Sec. 4980H(a) and Code Sec. 4980H(b) are called “employer shared responsibility” provisions or the “employer mandate.”

The payment under Code Sec. 4980H(a) is equal to the number of all (excluding the first 30) full-time employees multiplied by one-twelfth of $2,000 for each calendar month, while the payment under Code Sec. 4980H(b) is equal to the number of full-time employees who are certified to receive an applicable premium tax credit or cost-sharing reduction multiplied by one-twelfth of $3,000 for each calendar month.In no case, however, may the Code Sec. 4980H(b) liability exceed the maximum potential liability under Code Sec. 4980H(a).

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 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) are also taken into account.To do so, the employer includes a number of employees determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.(Code Sec. 4980H(c)(2))

Code Sec. 4980H ties into Code Sec. 36B, which provides 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) doesn’t 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.For more details on the premium tax credit, see Weekly Alert ¶  29  09/26/2013.

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” (i.e., at least 60% of the plan’s total allowed cost of benefits provided).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.

In late December of 2012, IRS issued proposed reliance regs, along with Questions and Answers (Q&As), that provided guidance on Code Sec. 4980H’s employer mandate.For more details, see Weekly Alert ¶  17  01/03/2013, Weekly Alert ¶  20  01/10/2013 , and Weekly Alert ¶  17  01/17/2013.

Earlier transition relief.In July of 2013, IRS issued Notice 2013-45, 2013-31 IRB 116, which delayed the employer mandate until 2015 and provided transition relief for 2014 from certain related information reporting requirements.For more details, see Weekly Alert ¶  4  07/18/2013.

New guidance.The new final regs delay the applicability of the employer mandate to mid-sized employers (i.e., those with between 50 and 99 full-time employees) until 2016, provided that the employer meets certain requirements (see 38).

They also provide a “phase-in” rule for large employers (i.e., with 100 or more full-time employees) under which an employer won’t owe a penalty for failing to offer health coverage so long as it offers coverage to at least 70% of its full-time employees in 2015, and 95% in 2016.

In addition, the final regs provide a number of clarifications on whether certain types of employees are considered full-time employees for purposes of determining whether the employer is an applicable large employer.


Volunteers.Bona fide volunteers for a government or tax-exempt entity (e.g., volunteer firefighters) won’t be considered full-time employees.
Educational employees.Teachers and other educational employees will be treated as full-time employees even if their school closes or operates only on a limited schedule during the summer.
Seasonal employees.Seasonal employees (i.e., with a customary annual employment of six months or less) generally won’t count as full-time employees.
Student work-study programs.Service performed by students under federal or state-sponsored work-study programs won’t be counted in determining whether they are full-time employees.
Adjunct faculty.In general, employers of adjunct faculty are instructed to use a method of crediting hours of service for those employees that is reasonable in the circumstances and consistent with the employer responsibility provisions. For this purpose, the regs specify that crediting an adjunct faculty member with 2 — hours of service per week for each hour of teaching or classroom time is reasonable.


The final regs also retain rules in the 2012 proposed regs that allow employers to use an “optional look-back measurement method” to make it easier to determine whether employees with varying hours and seasonal employees are full-time.The final regs clarify the application of this method and the alternative monthly method of determining full-time status.

Also, like the 2012 proposed regs, the final regs provide safe harbors for employers to determine whether the coverage they offer is affordable.As noted above, coverage under an employer-sponsored plan is considered affordable to a particular employee if the employee’s required contribution to the plan doesn’t exceed 9.5% of the employee’s household income for the tax year.The safe harbors, however, let employers use the wages they pay, their employees’ hourly rates, or the federal poverty level (i.e., information more readily available to the employer than the employee’s household income) to determine whether the coverage is affordable.

A number of other transition rules that applied to 2014 under the 2012 proposed regs were extended to 2015 by the final regs, including:


Shortened reference period.Employers can determine whether they had at least 100 full-time employees or FTEs in the previous year by reference to a period of at least six consecutive months, instead of a full year.
Non-calendar year plans.Employers with non-calendar year plans (i.e., with years that do not start on January 1) will be able to begin compliance with employer responsibility provisions at the start of their plan years in 2015 rather than on Jan. 1, 2015. The conditions for this relief are also expanded to include more plan sponsors.
Dependent coverage.The policy that employers offer coverage to their full-time employees’ dependents will not apply in 2015 to employers that are taking steps to arrange for such coverage to begin in 2016.
6-month measurement period.On a one-time basis, in 2014 preparing for 2015, plans may use a measurement period of six months even with respect to a stability period—i.e., the time during which an employee with variable hours must be offered coverage—of up to 12 months. (This rule is intended to reduce the burdens of month-to-month determinations of whether a particular employee is a full-time employee.)


Information reporting regs coming soon.The Fact Sheet also indicated that IRS will soon issue final regs that “aim to substantially simplify and streamline the employer reporting requirements.”

Political and business response.The final regs were generally well received by employer groups.In a statement titled “Retailers Applaud Announcement on the Affordable Care Act,” Neil Trautwein of the National Retail Federation, said “[t]he Administration should receive a gold medal for recognizing the enormous complexities of the Affordable Care Act, and its agility and flexibility in working with retailers and others in crafting these much-needed and commonsense reforms and revisions.”He added that “[c]ontinued simplicity, streamlining and clarification of the Affordable Care Act are in the best interest of employers and employees and the Administration and Congress.”

The other prominent response to the regs has been a re-energized call by Republicans to postpone the individual mandate or repeal the Affordable Care Act altogether. “Much like the individual mandate, the business mandate is bad for middle-class families and it will harm economic growth.But the answer to this problem is not random unilateral changes, stoking uncertainty,” House Majority Leader Eric Cantor (R-VA) said in a statement.”It’s time to stop creating more chaos and delay Obamacare for all Americans.”Said House Speaker John Boehner (R-OH), “[o]nce again, the president is giving a break to corporations while individuals and families are still stuck under the mandates of his health care law.”

Not surprisingly, Rep. Nancy Pelosi (D-CA) offered a different take on the regs. “These final rules reflect the Administration’s commitment to smoothly implement the Affordable Care Act, offering increased transitional flexibility for some of the four percent of employers covered by the employer responsibility requirement.This common sense approach will protect employers already providing quality insurance, while helping to ensure that larger employers are prepared to meet their responsibility to their hard-working employees.”