- Under §4980H(a) , large employers that don’t offer coverage to substantially all their full-time employees and their dependents may face an annual nondeductible excise tax of $2,000 times the total number of full-time employees. Even if other full-time employees receive coverage, the tax under §4980H(a) is measured by all full-time employees of the employer (including those that have coverage from the employer.)
- Under §4980H(b) , large employers offering coverage to full-time employees that doesn’t meet the ACA’s affordability or minimum value standards may face an annual nondeductible excise tax of $3,000, times the number of full-time employees who actually receive tax credits for Exchange coverage. Thus, this excise tax is calculated on the basis of the actual number of full-time employees who don’t have ACA-compliant coverage from the employer and actually receive premium tax credits. However, the §4980H(b) excise tax may never be greater than the amount of the §4980H(a) excise tax.
The §4980H excise taxes are expressed as an annual amount but determined on a monthly basis; thus, the per-month excise tax would be one-twelfth of the $2,000 or $3,000 number above. (The excise taxes likely will be assessed annually.)
Section 4980H technically doesn’t impose a tax penalty that employers must operate to avoid or that may be waived by the IRS for “reasonable cause” like some other penalties in the code. Employers may decide that paying the excise tax in certain situations is financially prudent or the right business decision for particular employees. Paying an excise tax under §4980H doesn’t mean that an employer has failed to comply with the ACA; rather, §4980H raises revenue via the excise taxes that help offset the premium tax credits that are provided to lower-income individuals without employer coverage.
Part II: Application of the Section 4980H Definitions and Rules to Employers
When is an employer subject to the §4980H excise tax?
Smaller employers on the cusp of employing 50 full-time equivalent employees have been particularly interested in understanding the rules to determine whether they are subject to the potential excise taxes. Smaller businesses, in particular, need to know whether they are subject to the requirements to determine whether to budget for increased employee benefit costs.
Does a small employer that has fewer than 50 full-time equivalent employees in one year and then increases in size the next become immediately subject to the excise tax?
The final regulations provide some helpful temporary transitional relief for employers with fewer than 100 employees, which is discussed later. The regulations also provide permanent transition relief for employers for the first year that they grow to a size of 50 or more full-time equivalent employees and become a large employer for purposes of §4980H .
What are the basic rules for determining a large employer?
To determine whether an employer is considered to be a large employer employing 50 or more full-time equivalent employees and, therefore, subject to the employer mandate requirements, the employer for each calendar month of the preceding calendar year, must:
- Count the number of full-time employees (including seasonal workers) who work on average 30 hours per week per month.
- Calculate the number of full-time equivalent employees by aggregating the number of actual hours worked by non-full-time employees (including seasonal workers) in the month, but not in excess of 120 for any individual.
- Divide the latter number by 120.
- Add the number of full-time employees and full-time equivalents calculated in the first three steps above for each of the 12 months in the preceding calendar year.
- Add the monthly totals and divide by 12.
If the average from following these steps results in 50 or more, the business is a “large employer” subject to the employer mandate and the §4980H excise taxes. There is a further exception, however, if there are seasonal workers. Under these rules, a business isn’t a “large employer” to the extent that it exceeds 50 full-time employees for no more than 120 days or four calendar months during a calendar year if the employees exceeding 50 who were employed during that period were “seasonal workers.”
What are the transition rules for determining large employer status?
The final regulations provide temporary transition relief for employers with at least 50 but fewer than 100 full-time equivalent employees. Employers in this category aren’t subject to the excise taxes under §4980H for all of 2015; additionally, if these employers maintain non-calendar year health plans, the transition relief applies for all of 2015 plus the portion of the 2015 plan year that falls in 2016.
To be eligible for this transition relief, employers must have fewer than 100 employees, the employer may not reduce the size of its workforce or the aggregate hours of service of its employees, except for bona fide business reasons, and the employer may not materially reduce its existing employee health care coverage. The employer must also certify to the IRS that it meets the eligibility requirements for this transition relief. The forthcoming §6056 final regulations will address the IRS certification process.
What is the permanent transition rule for the first year as a large employer?
The final regulations provide a permanent transition rule for an employer’s first year as a large employer. Under the rule, employers that didn’t offer coverage on any day in the preceding year won’t face excise taxes under §4980H for January through March on their first year as a large employer, provided that the employer offers coverage to full-time employees by April 1. However, the employer could face excise taxes for January through March under §4980H(b) if the employer on April 1 offers coverage that doesn’t meet the law’s minimum value standard.
Must all related businesses be considered in determining which are large employers?
A business owner generally is required to aggregate all businesses in which the owners hold a controlling interest to determine whether all businesses in the aggregate constitute a large employer. The standards for common ownership are found in the tax “controlled group rules” of §414(b) , (c) , (m) , or (o) .
These rules can be complicated to apply in particular factual scenarios and business owners will need professional tax advice to determine how the aggregation rule applies to entities owned by other family members and related parties. The more straightforward controlled group rule requires the aggregation of all subsidiary businesses that are owned 80% or more by a parent company. Many small businesses may also be required to be aggregated if five or fewer persons own 50% or more of the interests in two or more businesses. Aggregation rules may also require testing various partnership entities together.
If, in total, the businesses in a controlled group have 50 or more full-time equivalent employees, then each entity in the controlled group is treated as a large employer subject to the employer mandate and the §4980H excise taxes. This is the result regardless of whether any single entity in the controlled group has 50 or more employees and regardless of whether the business operations are connected in any other way besides the controlling ownership rules.
When Is a Larger Employer Subject
to the §4980H Excise Taxes?
Large employers generally become subject to the §4980H excise tax provisions beginning Jan. 1, 2015. The final regulations provide large employers with some helpful transition relief to assist employers to phase into compliance. This section summarizes the more important transition rules.
Do the excise taxes apply if full-time employees don’t receive an offer of coverage effective Jan. 1, 2015?
The final regulations provide large employers with permanent limited relief from the §4980H excise tax in certain circumstances (referred to in the regulations as a limited non-assessment period). Most importantly, under the “limited non-assessment period relief,” large employers aren’t subject to the §4980H excise taxes for the first three full calendar months after a full-time employee is first hired.
The limited non-assessment period relief also applies in other more limited circumstances, such as for the three-month period after an employee experiences a change to full-time status during an initial measurement period, and for the months of January through March for an employer that first becomes a large employer.
The limited non-assessment period relief is available only if the large employer offers the full-time employees coverage meeting the minimum value standard as of the first day of the month following the end of the applicable period. If the employer fails to offer minimum value coverage to a full-time employee, the employer may become subject to the §4980H(b) excise tax with respect to that full-time employee during the three-month limited non-assessment period.
The Departments of Treasury, Labor, and Health and Human Services recently issued final regulations (T.D. 9656 , RIN 1545-BL50) under §2708 of the Public Health Service Act (incorporated by reference into the Employee Retirement Income Security Act and the Internal Revenue Code) prohibiting a group health plan from applying a health care coverage waiting period that exceeds 90 days from the date that the employee is otherwise eligible for coverage. Large employers subject to §4980H will need to coordinate the waiting period limitation with the three-month limited non-assessment period.
Is it true that large employers are entitled to temporary 2015 transition relief that requires an offer of coverage to only 70% of their full-time employees to avoid the §4980H excise taxes?
The final regulations provide large employers with limited transition relief under §4980H(a) ‘s excise tax, but no transition relief is provided from the §4980H(b) excise tax.
Under this limited transition relief, if a large employer offers coverage to at least 70% of its full-time employees (and, to the extent required under the rules, their dependents), the employer won’t face excise taxes under §4980H(a) in 2015 or, in the case of a non-calendar year plan, the portion of the 2015 plan year that falls in 2016.
Large employers may face excise taxes under §4980H(b) , however, if a full-time employee purchases coverage on the Exchange and is certified for the premium tax credit. The amount of the §4980H(b) excise tax may never be greater than the amount of the §4980H(a) excise tax.
In calculating the §4980H(a) excise tax, there is a statutory rule allowing the number of employees to be reduced by 30 (which reduces the excise tax, since it is calculated annually at $2,000 × all full-time employees). For 2015, the final regulations increase the 30 employee rule to 80.
When do the employer mandate and the §4980H excise tax apply if an employer maintains a non-calendar year health care plan?
Notwithstanding the Jan. 1, 2015, effective date, the final rules adopt two basic transition rules for employers that maintain a non-calendar year health plan that was in place on Dec. 27, 2012 (the day before the release date of the §4980H proposed rules), and that hasn’t been modified after that date. These transition rules generally provide that no §4980H excise taxes will be assessed for the calendar months in 2015 that precede the first day of the health plan’s year beginning after Jan. 1, 2015. For example, the transition rules, if satisfied, would protect an employer that maintains a health plan with a plan year beginning July 1, 2015, from excise taxes for January through June of 2015.
The transition rules apply to:
- any full-time employee who is eligible for affordable coverage meeting the minimum value standard as of the first day of the 2015 plan year in accordance with the eligibility provision of the plan in effect on Feb. 9, 2014 (the release date of the final regulations); or
- any employee who is eligible for affordable coverage meeting the minimum value standard as of the first day of the 2015 plan year, even if the employee wasn’t eligible for coverage in accordance with the plan’s eligibility provisions in effect on Feb. 9, 2014. (To take advantage of this transition rule, at least one-quarter of all employees (including part-time and seasonal employees) must be enrolled in the plan on any date in the 12 months preceding Feb. 9, 2014, or at least one-third of all employees must be offered coverage under the plan in the open enrollment period that ended most recently before Feb. 9, 2014).
Importantly, the final regulations clarify that the second of these transition rules may be applied taking into account only full-time employees and disregarding part-time or seasonal employees. Thus, under this transition rule, a large employer won’t be liable for excise taxes under §4980H for months prior to the first day of the 2015 plan year if at least one-third of all full-time employees enrolled in the plan on any date in the 12 months preceding Feb. 9, 2014, or at least one-third of all full-time employees were offered coverage under the plan in the open enrollment period that ended most recently before Feb. 9, 2014.
Are there any other 2015 transition rules that are particularly helpful for employers with calendar-year plans?
The final regulations incorporate from the proposed rules a favorable transition rule for employers with calendar-year plans that intend to determine employees’ full-time status based on a look-back measurement period of up to 12 months with an equivalent stability period (see discussion about the look-back measurement method below).
Large employers utilizing the look-back measurement method for 2015 must begin measuring employees’ hours in 2014 to have a corresponding stability period for 2015. For stability periods beginning in 2015, the final regulations provide that large employers may adopt a transitional measurement period that:
- is shorter than 12 months but is no less than six months long; and
- begins no later than July 1, 2014, and ends no earlier than 90 days before the first day of the plan year beginning on or after Jan. 1, 2014.
Is there transition relief for large employers that contribute to a multiemployer plan on behalf of their collectively bargained employees?
The final regulations continue the interim guidance for employers contributing to a multiemployer plan that was provided in the proposed rules. The guidance states that an employer won’t be subject to the §4980H excise tax if:
- the employer is required to make a contribution to a multiemployer plan with respect to an employee pursuant to a collective bargaining agreement or appropriate related participation agreement,
- coverage under the multiemployer plan is offered to the employee (and the employee’s dependents), and
- the coverage offered to the full-time employee is affordable and provides minimum value.
Notwithstanding this transition relief, any waiting period for coverage under the plan must separately comply with the 90-day limitation on waiting periods in §2708 of the Public Health Service Act. 4
The Departments of Treasury, Labor, and Health and Human Services recently issued final regulations under §2708 of the Public Health Service Act (incorporated by reference into ERISA and the Internal Revenue Code).
When Is an Employee Considered a `Full-Time Employee’ Who May Cause a Large Employer to Be Subject to the §4980H Excise Tax?
A large employer is subject to the §4980H excise taxes only with respect to a full-time employee. As discussed above, a full-time employee is an employee who was employed on average at least 30 hours of service per week per month. The final regulations adopt a standard of 130 hours of service per calendar month for purposes of determining whether an employee has full-time status. (The 130-hour standard for full-time employee status contrasts with the 120-hour standard used to determine whether an employer is a large employer with 50 or more full-time employees or equivalents.)
The full-time employee definition is distinct from the “full-time equivalent” concept. Full-time equivalents refer to employees whose hours of service are less than 30 per week per month but whose hours, when aggregated, equal one actual full-time employee. Full-time equivalents are taken into account only in determining whether a business is an “applicable large employer” that is subject to the employer mandate and the §4980H taxes, as discussed above.
Once it is determined that a business is a large employer (or part of a controlled group that is in the aggregate a large employer), the analysis under §4980H focuses solely on employees who are actually working 30 or more hours per week. Employees who work less than an average of 30 hours a week per month don’t generate an excise tax and they aren’t taken into account under §4980H even if they are employed by a large employer subject to the employer mandate.
The implication of the 30-hour, full-time employee definition is that large employers must track their employees’ actual work hours to determine who is full time and then ensure that those employees and their dependents either receive an appropriate offer of coverage or that financial plans and reserves are established to pay the potential §4980H excise taxes that may be due (assuming there is at least one full-time employee who is eligible for and receives a premium tax credit for coverage purchased through an Exchange). It is theoretically possible that a large employer that doesn’t offer coverage to full-time employees won’t have any excise tax liability under §4980H , but that would occur only in the situation in which there are no full-time employees who actually purchase coverage in a state Exchange with a premium tax credit.
For most large employers, identifying the full-time employees will be critical to determine how to address the potential for excise taxes under §4980H . Employers with large populations of workers who don’t perform services on fixed schedules—such as seasonal employees, hourly employees and other variable hour workers in retail, hospitality and staffing businesses—face particular challenges. It is possible for these categories of workers to be full-time employees in one month but not in another depending upon their actual work schedules during the year.
What counts as “service” for the 30-hour rule?
An employee’s “hours of service” include each hour for which an employee is paid for actually working or is entitled to be paid even though no actual work is performed, such as vacation, holiday, illness, incapacity, layoff, jury duty or paid leave of absence. (Importantly, the final regulations don’t limit the number of hours that must be counted for an employee who is entitled to payment but no actual work is performed.)
If employees are paid on an hourly basis, then employers must count the hours of service worked in determining whether they are full time. For salaried and other nonhourly employees, employers may calculate hours using actual hours of service or a days-worked or weeks-worked equivalency, provided the equivalency generally reflects the hours the employees actually worked.
What rules affect educational organizations and “volunteers”?
The final regulations acknowledge that educational organizations face particular challenges in counting hours for their adjunct professors and student workers. Counting hours for adjunct faculty is challenging because they typically are compensated according to credit hours. Until further guidance is provided, educational organizations may use any reasonable method for crediting hours of service.
The final regulations provide that one method that is considered reasonable would be to apply a two and one-quarter multiplier to each hour of classroom time. That is, one hour of classroom time would equal two and one-quarter hours of service. In addition to these multiplied classroom hours, additional actual hours of service would be counted for time spent on required duties, such as office hours or faculty meetings.
The final regulations address issues related to student workers by providing that hours worked on a federally subsidized work study program don’t count as hours of service for purposes of determining the student worker’s full-time status. The exception doesn’t include other student employment, internships or externships.
The preamble to the final regulations states that Treasury and the IRS will continue to consider additional hours counting rules for certain other categories of employees, including commissioned salespeople and airline employees. Special rules are also provided for “bona fide volunteers” (including certain firefighters) who aren’t treated as having hours of service for purposes of §4980H .
What about service performed outside the U.S.?
Only hours of service that otherwise generate U.S.-source income are counted for purposes of determining an employee’s full-time status. This rule is of particular importance for employees working outside of the U.S.
Because the final regulations clarify that hours of service don’t include hours for which the compensation is foreign-source income (using applicable code standards), employees working exclusively outside of the U.S. generally won’t qualify as full-time employees either for purposes of determining whether an employer is a large employer or for purposes of determining and calculating potential §4980H liability.
What are the Methods
For Identifying Full-Time Employees?
The final regulations set forth two basic methods to determine an employee’s full-time status:
- the monthly measurement method; and
- the look-back measurement method.
The rules under both methods can be complex in certain fact patterns and they require significant coordination of payroll information across the different employers in a controlled group and consistency among the different categories of employees within a controlled group.
The monthly measurement method, which tracks employees’ service hours on a month-by-month basis is, in essence, the default rule under §4980H . The look-back measurement method may be used by employers to determine the full-time status of newly hired variable hour, seasonal and part-time employees and also to determine the full-time status of ongoing employees.
Employers with a workforce that includes both variable hour and fixed schedule hourly employees will have a key decision to make as to which method to adopt. The two methodologies may present planning opportunities, but they also present record keeping and associated technology configuration requirements. The application of the rules is highly fact-specific and without detailed review may contain potential traps for the unprepared. The discussion below highlights some of the key operational challenges the rules present.
How does an employer determine an employee’s full-time status based on the monthly measurement method and when would an employer use this method?
Under the monthly measurement method, an employee is a full-time employee for the month if he or she works the requisite number of hours (and therefore, could generate a §4980H excise tax for that month) even if the employee works less than 30 hours for all other months during the year.
The final regulations permit an employer to determine an employee’s full-time status under the monthly measurement method based on hours worked either in a calendar month or using successive one-week periods (referred to in the regulations as the weekly rule). Thus, for certain calendar months, hours of service are counted over four-week periods and, for other calendar months, hours of service are counted over five-week periods. In general, the period measured for the month must contain either the week that includes the first day of the month or the week that includes the last day of the month, but not both.
For calendar months using four-week periods, an employee with at least 120 hours of service is considered full-time; for calendar months using five-week periods, an employee with at least 150 hours of service is considered full-time. This monthly measurement method along with the weekly rule for counting hours present helpful clarifications compared to the proposed regulations, which required counting only on a strict calendar month basis.
To ensure that they won’t be subject to an assessment of the §4980H excise tax, employers using the monthly measurement method must have offered affordable, minimum value coverage to any employee working 30 hours or more per week on average during that month for the entire calendar month. Employers that decide to count employees’ hours under the weekly rule based on a four-week or five-week period are still required by the regulations to make the offer of coverage available every day of the applicable calendar month in order to avoid the Section 4980H excise tax.
How does an employer determine an employee’s full-time status based on a look-back measurement method and what is the benefit from using this method?
The final regulations generally incorporate the guidance provided in the proposed regulations to permit large employers to determine the full-time status of new “variable hour employees,” new “seasonal employees,” new part-time employees and “ongoing employees” in the same employment category by applying a three- to 12-month “look-back measurement period.” The look-back measurement method is designed to permit employers to test newly hired variable hour and seasonal employees over a period of up to 12 consecutive months beginning on the employee’s date of hire or a date up to the first of the month thereafter (referred to in the regulations as the initial measurement period).
Under this testing method, the employer must provide the employee with a stability period of equal length to the look-back measurement period (but no less than six months) during which the employee retains the employment status determined during the measurement period. For example, an employee who is determined to be a full-time employee during the look-back measurement period will retain full-time status for the entire stability period, with limited exceptions.
The benefit of using the look-back measurement method to test the full-time status of a variable hour or seasonal employee is that large employers aren’t subject to the §4980H excise taxes during the entire initial measurement period with respect to those employees even if they actually work enough hours to be treated as a full-time employee for purposes of §4980H . Rather, the employer can wait and treat such employees as full time as of the start and through the end of the stability period (provided that the employee continues to be employed through the stability period.) This gives employers with variable hour and seasonal employee populations administrative certainty and mitigates against employees “coming in and out” of full-time status.
A disadvantage of the look-back measurement method is that all ongoing employees (i.e., an employee who was employed for at least one complete measurement period) in the same employment category as the new variable hour employees must also be tested based on the look-back measurement with the application of the corresponding stability period. This means that an employer may not adopt the look-back measurement approach to determine the full-time status of variable hour employees, but use the monthly measurement method to determine the full-status of employees in the same employment category with a fixed-hour or more predictable schedule. (See discussion of the special rule regarding an employee’s change in status from a full-time to a part-time employee.)
The final regulations define the permissible employment categories as:
- salaried and hourly employees;
- employees whose primary places of employment are in different states; and
- collectively bargained employees and noncollectively bargained employees.
In addition, different employers in the same large employer controlled group may apply different methods to test full-time employee status.
What do large employers need to consider before adopting the look-back measurement method in lieu of the monthly measurement method?
The look-back measurement method rules may provide substantial benefits, but they are complex and may present challenges if an employer tries to implement these rules using its existing human resource hours tracking and data collection systems. Employers that intend to use this method to determine variable hour and seasonal employees’ full-time status will need to verify compliance with the numerous and detailed rules.
The monthly measurement method, rather than the look-back method, may require the least change in process even for some employers with a significant population of employees on a variable hour work schedule, particularly if the employer has already changed its full-time or part-time work rules in response to the ACA. If employers are comfortable that they can predict with relative certainty the variable hour employees who are full-time under the monthly measurement period and, therefore, would generate an excise tax if not offered coverage, they may not need the administrative certainty and stability that the look-back measurement method is designed to provide.
The look-back measurement method also may bring with it the need to further change employment and benefit plan policies and potential changes to human resource technology systems. In addition, there is a significant drawback of using the look-back measurement method for employers with both variable hour and fixed schedule workers in the same employment category. Employers using the look-back measurement method to determine the full-time status of their variable hour employees must generally apply that same look-back method for all employees in the same employment category. As a result, an employee who works a fixed full-time schedule during the measurement period must be treated as a full-time employee during the entire stability period, even if the employee moves to a fixed part-time schedule during the stability period.
Employers will also need to focus attention to the following rules, among others:
- requirement to coordinate the initial look-back measurement period with the standard look-back measurement period for ongoing employees;
- requirements applicable to a look-back measurement period (e.g., three-month look-back measurement period) that is shorter than the required stability period (e.g., six-month stability period);
- limitation on the length of an administrative period;
- limitation on a permissive adjustment of the measurement period based on payroll periods;
- rules relating to a gap between the end of the initial look-back measurement and stability period and the beginning of the standard look-back measurement period; and
- requirements related to an employee’s change in employment status during an initial look-back measurement period.
Who is a new variable hour or seasonal employee for purposes of the look-back measurement period?
A variable hour employee is an employee who, as of the date of hire, isn’t reasonably expected to work 30 hours or more per week on average.
A seasonal employee, for purposes of determining full-time employee status, is “an employee in a position for which the customary annual employment is six months or less.” To be a seasonal employee, the nature of the employment position must typically be for six months or less and the period should begin each calendar year in approximately the same part of the year.
When is a new employee “reasonably expected” to be full-time and when does a large employer become subject to the §4980H excise tax with respect to this employee?
A new employee who on his or her date of hire is “reasonably expected” to work on average 30 hours or more per week is a full-time employee for purposes of the §4980H excise tax regardless of which measurement method the employer uses. Unless the exception for seasonal employees applies, any new hire who is reasonably expected to work 30 or more hours per week is a full-time employee and the employer can’t utilize a look-back with respect to this employee at the time he or she is hired.
If, however, the employer uses the look-back measurement method for variable hour employees in the same categories as the new hire who is reasonably expected be a full-time employee working 30 hours or more per week (or a part-time employee working less than 30 hours per week), then once the new hire works for an entire measurement period, he or she becomes an “ongoing employee” and must be included in the look-back measurement method.
This rule may seem somewhat confusing because the employee in this example isn’t a variable hour or seasonal employee yet the employee’s status must be determined using the look-back measurement period. If the employee continues working at least 30 hours per week, there is no apparent effect of including him or her in the look-back measurement period because the employee remains a full-time employee at all times. If, instead, the employee changes status to work a reduced schedule, the employer cannot immediately change the employee’s status to part-time for purposes of §4980H under the look-back measurement method. Except as provided in the special change in status rule discussed in the next paragraph, the employee retains his or her status through the entire stability period. In contrast, if only the monthly measurement period is being utilized, then changes in status are taken into account as they occur and the employee ceases to be full-time for any month in which he or she doesn’t average 30 hours per week.
The final regulations respond to employer concerns about this scenario by providing a special change in status rule. Under this rule, an employer is permitted to apply the monthly measurement method to the employee who changed to part-time status within three months of the change, only if the employee actually averages less than 30 hours of service per week for each of the three months and the employer has offered the employee continuous coverage that provides minimum value from at least the fourth month of the employee’s employment. If the preceding requirements aren’t met, the employer presumably would have to wait until the end of the measurement period and change the employee’s status during the corresponding stability period.
What are the factors for determining when an employee is “reasonably expected” to be full time?
Employers will need to understand what factors they may take into account in determining whether a new hire is reasonably expected to work an average of 30 hours per week in order to determine how to categorize new hires. The final regulations identify the following factors:
- whether the employee is replacing an employee who was a full-time employee or a variable hour employee;
- the extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods; and
- whether the job was advertised or otherwise communicated to the new employee as full-time, part-time or variable hours.
How do the rules for determining an employee’s full-time status apply to employers in high-turnover industries and employers with short-assignment employees?
The final regulations don’t adopt comments requesting the ability to treat short-term workers as variable hour employees. Employers had raised concerns about the application of §4980H for employees who are hired to work 30 hours or more per week but who aren’t expected to remain employed for the entire measurement period. No exception is provided in the final regulations.
Specifically, the final regulations provide that in determining whether an employee is a variable hour employee, the employer may not take into account the likelihood that the employee’s employment will terminate before the end of the initial measurement period. (However, see the discussion below regarding additional guidance for temporary staffing employers.)
When is a terminated and rehired employee treated as a new employee for purposes of determining the employee’s full-time status?
Because different rules apply to new hires versus ongoing employees, it is important to be able to identify whether an employee who has a break in service is still an ongoing employee or a new hire. The final regulations reduce the break-in-service rule’s period of service for which no hours of service are credited to 13 weeks from the 26 weeks that was provided in the proposed regulations. (Educational organization employers must still use a 26-week break-in-service rule.).
For a continuing employee who hasn’t had a break in service, the final regulations provide a method for averaging hours during a look-back measurement period in which a special unpaid leave of absence occurs. Special unpaid leaves of absence include periods of leave under the Family and Medical Leave Act of 1993, unpaid leave subject to the Uniformed Services Employment and Reemployment Rights Act of 1994 and unpaid leave on account of jury duty.
Under the averaging method for these special unpaid leaves of absence, the employer determines the average hours of service per week for the employee during the measurement period, excluding the special unpaid leave period, and either uses that average as the average for the entire measurement period, or credits hours during the special unpaid leave at the average weekly rate for the weeks that weren’t special unpaid leave.
How Does §4980H Apply to Contingent Workers or Temporary Staffing Employees?
The employer mandate and §4980H apply to the employer’s common law employees. A business that utilizes temporary staffing or other contingent workers may have concerns as to whether a subsequent reclassification of these workers as common law employees raises risks under §4980H . The final regulations acknowledge the issue but don’t provide any special rules for employee reclassification.
The final regulations provide, however, that a third-party staffing firm offer of coverage to a worker in connection with the performance of the services for the client employer is treated as an offer of coverage by the client. For example, if coverage is provided by a staffing firm, even if there was a later question about the workers’ status as common law employees, a staffing firm’s offer of coverage that is affordable and meets minimum value should protect the business client from potential §4980H excise taxes with respect to these workers. This protection applies for the business client only if the fees to the temporary staffing firm are higher when coverage is provided.
From a staffing firm’s perspective, the rules requiring a “reasonable expectation” of the employee’s hours of work may raise some particular questions as to whether it classifies its new hires as variable hour or seasonal employees whose full-time employee status may be determined based on the look-back measurement method. The final regulations don’t carry over a one-year transition rule that was originally included in the proposed regulations allowing for the workers to be treated as variable hour employees on account of a short assignment.
However, the examples in the final regulations specifically allow staffing firms to include a number of factors in the determination of whether an employee is reasonably expected to be full time, including whether the position an employee is filling has historically not been full time, whether there are expected to be significant gaps between assignments and whether typical assignments don’t extend beyond 13 weeks.
Part III: Application of the Excise Taxes
Are Members of a Large Employer Controlled Group Jointly and Severally Liable for the §4980H Excise Taxes?
The final regulations incorporate the proposed rule that each member of a large employer controlled group is liable for its §4980H excise tax assessment and isn’t liable for the §4980H excise tax assessed on any other entity in the large employer controlled group.
Although employers within a controlled group aren’t jointly and severally liable for the §4980H excise tax, employers were concerned that a full-time employee who is employed by more than one member in the controlled group could cause each member of the controlled group for whom the employee provided services to be liable for the excise tax. The final regulations clarify that only the member of the controlled group for whom the employee has the greatest number of hours of service may be assessed the §4980H(a) penalty, rather than each member of the group.
What Are the Particular Rules Applicable to the §4980H(a) Assessed Excise Tax?
Must a large employer offer coverage to all of its full-time employees and their dependents to avoid being subject to the §4980H(a) excise tax?
A large employer that is a single entity or a large employer member won’t face a §4980H(a) assessed excise tax if it offers coverage to at least 95% of its full-time employees. This standard generally applies beginning in 2016 as a result of transition relief providing for a lower standard for large employers in 2015. The transition relief states that a large employer who offers coverage to at least 70% of its full-time employees (and, to the extent required under the rules, their dependents) won’t face excise taxes under §4980H(a) in 2015 or, in the case of certain non-calendar year plans, the portion of the 2015 plan year that falls in 2016.
Large employers who qualify for the limited transition relief under §4980H(a) still could face excise taxes under §4980H(b) in 2015 and for plan years that begin in 2015. For example, if full-time employees who are part of the 30 percent group who aren’t offered coverage actually purchase their own coverage in an Exchange and receive a premium tax credit, then the employer would be subject to the §4980H(b) tax for these employees.
Large employers are required to offer coverage to dependents to avoid the §4980H(a) excise tax; what is the definition of a “dependent”?
The final rules define a “dependent” as a child (as defined in §152(f)(1) ) of an employee who hasn’t attained age 26. The final rules remove stepchildren and foster children from the proposed regulations’ definition of “dependent.” Employers won’t face tax excise taxes for not offering coverage to spouses, who will be able to seek a federal premium tax credit to purchase health insurance in an Exchange if other minimum essential coverage isn’t available.
Recognizing the challenges that many employers offering coverage only to their employees (and not to their dependents) will face, the preamble to the final regulations states that employers won’t face an excise tax under §4980H relating to the offering of coverage to dependents, provided that employers take steps during plan years beginning in 2015 toward satisfying the law’s requirements for offering dependent coverage. The transition relief isn’t available if the employer offered dependent coverage in either the plan year that began in 2013 or 2014 and subsequently dropped the offer of coverage.
When is a large employer treated as offering coverage?
The final regulations require that employees be given an effective opportunity to accept coverage, as well as an opportunity to decline an offer of coverage that doesn’t meet the law’s standards of affordability or minimum value.
The final regulations confirm that an offer of coverage made to an employee on behalf of a contributing employer by a multiemployer plan or a multiple employer welfare arrangement (MEWA) is treated as made on behalf of the employer. As discussed above in the section addressing the application of §4980H to contingent workers or temporary staffing employees, a third-party staffing firm offer of coverage to a worker in connection with the performance of the services for the client employer may also treated as an offer of coverage by the client in certain circumstances.
The final regulations provide that a large employer won’t be treated as failing to offer a full-time employee (and his or her dependents) the opportunity to enroll in coverage if the coverage is terminated solely due to the employee’s failure to pay his or her share of premiums on a timely basis. The final regulations adopt the Consolidated Omnibus Budget Reconciliation Act rule providing a 30-day grace period for payment of premiums.
For Purposes of the §4980H(b) Assessed Excise Tax How Does a Large Employer Determine Whether It Has Offered a Full-Time Employee Affordable Coverage?
Section 4980H(b) and the final regulations provide that an employer plan is considered affordable if the employee’s required contribution for self-only coverage doesn’t exceed 9.5% of the employee’s household income for the taxable year. Large employers can demonstrate that they offer coverage that meets the affordability standard by showing that the employee premium share for self-only coverage under their lowest-cost plan meets the minimum value standard under the following safe harbors:
- Form W-2 Safe Harbor (employee premium share doesn’t exceed 9.5% of the amount required to be reported in Box 1 of Form W-2). The final regulations provide guidance for using the W-2 safe harbor for an employee who wasn’t a full-time employee for the entire calendar year. Application of this safe harbor is determined after the end of the calendar year and on an employee-by-employee basis, taking into account the employee’s Form W-2 wages from the employer and the employee contribution.
- Rate of Pay Safe Harbor (employee premium share doesn’t exceed 9.5% of the product of multiplying the hourly rate of pay (either each employee’s individual rate of pay or the lowest rate of pay paid by a large employer that is a single entity or a large employer member) by 130 hours per month (the benchmark for full-time status for a month under §4980H) ). The final regulations permit employers to apply the rate of pay safe harbor on a monthly basis, even if an employee’s rate of pay is reduced in certain cases.
- Federal Poverty Line Safe Harbor (employee premium share doesn’t exceed 9.5% of the federal poverty line for one person). The calculation could be done using the most recently published federal poverty guidelines in effect within six months before the first day of the plan year for the plan offered by a large employer that is a single entity or a large employer member.
How Is the §4980H Excise Tax Assessed?
The final regulations provide that the §4980H assessed excise tax is payable upon notice and demand and will be assessed and collected in the same manner as an assessable penalty under Subchapter B of Chapter 68 of the Internal Revenue Code. In addition, the preamble to the final regulations state that, under regulations to be issued by HHS, the IRS will follow procedures ensuring employers receive certification if one or more employees have received premium tax credits and are provided an opportunity to respond before the issuance of any notice and demand for payment of a tax penalty.
