IRS Describes Potential Approaches To Health Legislation's “Shared Responsibility” Provisions

Notice 2011-36, 2011-21 IRB; IR 2011-50

In a new Notice, IRS gives large employers an advance look at how it plans to formulate guidance on the “shared responsibility” provisions of Code Sec. 4980H. Added by the Patient Protection and Affordable Care Act of 2010, these provisions will after 2013 impose a penalty on applicable large employers that fail to provide affordable health coverage to their full-time employees. IRS asks employers and other interested parties for comments on its proposed approach.

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))

General definitions. An “employer” would mean the entity that is the employer of a worker treated as an employee under the common-law test. And 130 hours of service in a calendar month would be treated as the monthly equivalent of at least 30 hours of service per week.

Hours of service. Hours of service for hourly employees would be actual hours of service from records of hours worked and hours for which payment is made or due (payment is made or due for vacation, holiday, illness, incapacity, etc.).

For non-hourly employees, employers could calculate the number of hours of service under any of the following three methods: (1) actual hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity, etc.; (2) using a days-worked equivalency method where the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service; or (3) using a weeks-worked equivalency of 40 hours of service per week for each week for which the employee would be required to be credited with at least one hour of service.

An employer wouldn't have to use the same method for all non-hourly employees, but could apply different methods for different classifications of non-hourly employees, if the classifications are reasonable and consistently applied. In addition, an employer could change the method of calculating non-hourly employees' hours of service for each calendar year.

Applicable large employer. For purposes of determining large employer status, the number of FTEs for each calendar month in the preceding calendar year would be determined by:

1. calculating the aggregate number of hours of service (but not more than 120 hours of service for any employee) for all employees who were not full-time employees for that month; and

2. dividing the total hours of service in step (A) by 120. The result is the number of FTEs for the calendar month.

In determining the number of FTEs for each calendar month, fractions would be taken into account.

Special rules would apply to seasonal employees and a complex, six-step process would be used to determine the number of full-time employees in the preceding calendar year.

An applicable large employer's potential Code Sec. 4980H(b) liability generally is determined by reference to the number of full-time employees with respect to whom an applicable premium tax credit or cost-sharing reduction is allowed or paid for a given month. However, IRS is considering proposing possible alternatives to a month-by-month determination of full-time employee status for purposes of calculating an applicable large employer's potential assessable payment. One possible alternative would permit applicable large employers, at their option, to use a look-back/stability period safe harbor, as described in Notice 2011-36.

Comments requested. IRS requests input from employers and other stakeholders on the proposed look-back/stability period safe harbor and several other aspects of Code Sec. 4980H. The next step, after considering the comments, would be publication of proposed regs.

References: For overview of excise tax imposed on large employers not offering affordable health insurance coverage—after 2013, see FTC 2d/FIN ¶H-1175; United States Tax Reporter ¶49,80H4; TaxDesk ¶812,301; TG ¶7318.