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IRS Releases Info Letters on Employer Shared Responsibility and Repayment of Exchange Subsidies

The IRS has released two information letters on health care reform issues. These letters are provided by the IRS Office of Chief Counsel—one of them responds to an inquiry regarding employer shared responsibility under Code § 4980H, and the other relates to repayment of advance payments of premium tax credits.

  • Limiting Number of Full Time Employees for Purposes of Code § 4980H. Information Letter 2016-0030 describes an employer’s policy that restricts part-time and seasonal employees from working more than 29 hours in any week. An employee included in this policy and enrolled in Medicare inquired whether the employer could face potential liability under Code § 4980H if employees worked more than 29 hours in a week. (An employee is considered full-time for purposes of Code § 4980H if the employee averages at least 30 hours per week during a given month.) The letter explains that if the employer is an “applicable large employer” (i.e., it employed an average of 50 or more full-time employees in the preceding calendar year), its failure to offer minimum essential coverage to enough full-time employees (and dependents) for any month could trigger (or increase the amount of) employer penalties under Code § 4980H(a) for that month if even one full-time employee enrolled in subsidized Exchange coverage. All full-time employees are counted for purposes of the Code § 4980H(a) penalty regardless of whether they are enrolled in Medicare or another source of coverage. In contrast, for purposes of the Code § 4980H(b) liability (which generally results from an offer of coverage that does not meet minimum value or affordability standards), a penalty is triggered only for full-time employees who actually enroll in subsidized Exchange coverage. Full-time employees who are eligible for Medicare are ineligible for subsidized Exchange coverage (i.e., they may not receive premium tax credits) and cannot trigger theCode § 4980H(b) penalty.
  • Excess Advance Premium Tax Credit Payments. Information Letter 2016-0035 responds to an inquiry from an individual concerning repayments of advance payments of premium tax credits. The individual was deemed eligible for advance payment of premium tax credits based on the Exchange’s estimate of projected household income. However, a retirement account distribution taken by the individual was not included in the estimate to compute advance credit payments. (Because retirement distributions are included in adjusted gross income, failure to take this distribution into account understated the individual’s household income, resulting in excess advance payments of the premium tax credit.) The letter explains that taxpayers are required to reconcile advance payments of the premium tax credit against the actual credit allowed. If a taxpayer’s advance credit payments are more than the allowed credit amount, the excess must be repaid (although the amount of the repayment may be limited for some taxpayers with household income below a certain percentage of the federal poverty line).

EBIA Comment: While Information Letter 2016-0030 does not mention other concerns with respect to managing the number of full-time employees for purposes of Code § 4980H liability, it is important to note that the approach described in the letter carries some legal risk for employers subject to ERISA. A court may find that an exercise of an employer’s discretion in setting work hours crosses the line into prohibited discrimination under ERISA § 510. Until the scope of ERISA § 510 liability becomes clearer, employers will want to proceed cautiously if part of their plan for compliance with Code § 4980H involves managing the number of full-time employees by limiting employee work hours. For more information, see EBIA’s Health Care Reform manual at Sections XXVIII (“Shared Responsibility for Employers (Play or Pay Penalty Tax)”) and XXIX.F (“Premium Tax Credits for Lower-Income Individuals”).

Contributing Editors: EBIA Staff.

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