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IRS Issues Final Regulations on the Employer Mandate Under ACA

February 21, 2014

February 12, 2014, the IRS published final regulations applicable to the employer “Shared Responsibility” taxes often referred to as the Employer Mandate. The regulations and explanation are 227 pages and affirmed most of the proposed regulations they published a year ago and relaxed some rules, but added and expanded several. The headline was that employers with 50 to 99 full-time equivalent average employees in 2014 are not subject to the mandate in 2015. However, there were a variety of important items applicable to contractors.

  1. Employers with 50 – 99 full time employees in calendar year 2014 will not be subject to either the 4980H(a) $2,000 tax or the 4980H(b) $3,000 tax penalties in 2015. To qualify for this change, the employer may not terminate employees or reduce hours for any employees during the period 2/9/2014 to 12/31/2014 for the purpose of avoiding the employer mandates. The employer may not eliminate or reduce any health coverage offered on 2/9/2014 through 12/31/2014 (or the last day of the plan year beginning in 2014).  The employer must certify to the IRS to that they meet these requirements to be exempt for 2015.
  2. Reintroduced the transition rule for determining Large Employer status. For the 2015 coverage year, only employers with 100 or more full time employees in calendar year 2014 are subject to the 4980H tax penalties.  During 2014, employers may choose any six-consecutive month period to determine whether they meet the 100 full-time equivalent employee threshold, rather than the full year 2014. The IRS indicated this rule may be extended to future years.
  3. Provided details on who must be covered, and explains application if the employer doesn’t use the safe-harbor look-back method.  The look back method evaluates which employees historically worked more than 30 hours per week on average (“full-time employees” – the employees who subject coverage and the tax for noncompliance.) If those employees are considered full-time employees in the historical measurement period, they must be covered during the following stability period (vice-versa, do not need to be covered), generally without regard to the number of hours they work during the stability period. The IRS introduced a new method of determining who is considered a full time employee of a large employer subject to coverage. This is called the Monthly Measurement Method. Generally employees who work more than 30 hours per week on average during a month must be covered by the health plan or the employer is subject to both the 4080H(a) and (b) tax penalties. This rule says that the first full month an employee would otherwise become eligible for the health plan (i.e. an employee who previously worked 20 hours per week moved to full time status), and for the following two months, the employee does not need to be covered by the health plan, and the employer is not subject to 4980H(a) $2,000 penalty during that 3 months. If the coverage then offered meets the minimum value requirements, they would also not be subject to the 4980H(b) $3,000 tax penalties during that 3 month period. Employers may use different methods for different groups of employees and may change their methods for the determination.
  4.  Large employers generally must cover 95% of full time employees to avoid the 4980H(a) $2,000 and 4980H(b) $3,000 penalties in a year. However, for 2015, employers must only cover 70% of full time employees to avoid the 4980H(a) penalty. This relief does not apply to the $3,000 4980H(b) penalty.
  5.  Calculation of 4980H(a) $2,000 penalty for 2015 (and for months in 2016 covered by plan years beginning in 2015). For employers with 100 or more full time employees in 2014 that are subject to the penalties in 2015, the calculation of the $2,000 penalty only applies after the first 80 (rather than 30) full-time employees.
  6. do not need to cover dependents in 2015. If dependents were covered in either plan year 2013 or 2014, then this transition relief is not available (cannot step back). First Year as a Large Employer. The first year an employer becomes a large employer they are not subject to tax penalties if they offer coverage to their full time employees by April 1 (rather than January 1) to those employees who did not previously have employer health coverage.
  7. Taft-Hartley coverage – during a month an employer contributes to a union plan they will be considered as offering coverage for that employee. The final regulation’s preamble provides “interim” guidance on union plans that may be relied upon until final rules are issued.