The IRS has requested comments to possible approaches that it may include in regulations administering the "shared responsibility" penalty on "applicable large employers" that fail to offer affordable health coverage to employees after 2013. IRS Notice 2011-36 (May 3, 2011) (the "Notice"). The Notice cautions that the approaches described in the Notice are not intended as "guidance" regarding the shared responsibility penalty. Instead, the Notice "is intended to initiate and inform the process of developing regulatory guidance."
Background. The Patient Protection and Affordable Care Act of 2010 (the "Act") requires "applicable large employers" to offer affordable health care to all full-time employees (and their dependents) through an employer sponsored health plan or pay a "shared responsibility" penalty (the "Penalty"). The Penalty for failing to offer coverage is a monthly amount that equals $2,000 per year, per full-time employee. The Act allows the employer to exclude 30 such employees from this calculation. An applicable large employer is also subject to the Penalty if it offers coverage, but at least one employee is certified as (i) having enrolled for individual health insurance through a state insurance exchange, and (ii) being eligible for an insurance premium tax credit or cost-sharing subsidy with respect to such coverage. In that case, the Penalty is a monthly amount that equals $3,000 per year, for each such employee. Internal Revenue Code Section 4980H.
The Act defines an "applicable large employer" as any employer who employed an average of 50 full-time employees "on business days during the preceding year." The Act defines a "full-time employee" as any employee who, during a given month, is employed for an average of at least 30 hours of service per week. The Act also requires employers to treat "full-time equivalencies" ("FTEs") as full-time employees. For this purpose, an FTE is determined by adding the hours of service of all employees who are not full-time employees in a given month and dividing the result by 120. The Act includes a limited exception for employers who exceed the 50 full-time employee threshold because of the employment of seasonal employees who worked fewer than 120 days during the year. The Act authorizes the IRS, in consultation with the Department of Labor, to develop rules for counting hours.
Our Observation. Although there have been several court challenges to the Act's mandate that individuals carry health coverage (the "individual mandate"), to date no litigant has challenged the mandate on large employers to offer affordable coverage to full-time employees. Therefore, it appears that regardless of the outcome of the current pending litigation, the employer mandate will take effect in 2014 unless repealed.
Notice 2011-36. The Notice suggests approaches for determining which employers will be considered an "applicable large employer" and suggests a method for determining who is a "full-time employee" for purposes of calculating the Penalty.
The Notice suggests that the Service would treat an employee as a full-time employee if the employee has 130 hours of service during the month. This would allow employers to count hours of service on a monthly rather than weekly basis. The Notice also provides that an "hour of service" would mean an hour for which the employee is paid or entitled to payment, thereby counting vacation, sick and holiday time towards the 130 hour per month standard.
The Notice suggests that hours of service for hourly employees be based on actual hours worked. For employees who are not paid on an hourly basis, the Notice suggests the use of daily, weekly or monthly equivalencies similar to those contained in Department of Labor regulations for qualified retirement plans.
The Notice requests comments on the counting of full-time employees on an annual basis under the following methodology: (1) counting all full-time employees in each month of the preceding year (using the 130 hours-per-month standard), (2) counting all FTEs for the same periods, (3) adding all full-time employees and FTEs in each month, and (4) dividing the result by 12 to arrive at a monthly average. If the resulting average is less than 50, the employer would not be an "applicable large employer" for the current year. If the average is 50 or greater, the employer would be an "applicable large employer" for the current year unless the employer qualified for the seasonal worker exception.
The Notice states that the IRS recognizes that the Act's requirement to calculate the Penalty on a month-by-month basis creates difficulties for employers, including "inability to identify which employees are considered full-time [for Penalty purposes] and, consequently, inability to forecast or avoid "¦ liability [for the Penalty]." To address this uncertainty, the Notice suggests and seeks comments regarding a "look-back period/stability period safe harbor" to determine whether an employee is a full-time employee for purposes of calculating the Penalty.
Under this safe harbor, the employer would be allowed to select any period in the preceding year between three and twelve consecutive months (the "measurement period"). If the employee's hours of service averaged less than 130 hours per month during the measurement period selected by the employer, the employer would not be required to treat the employee as a full-time employee in the current year (regardless of the employee's actual hours of service during the current year) throughout a "stability period." This "stability period" would last no longer than the measurement period selected by the employer. If the employee's hours of service averaged at least 130 hours per month during the stability period, the employer would be required to treat the employee as a full-time employee for a stability period equal to the measurement period, or if longer, six months.
The Notice also requests comments regarding how to integrate the eligibility provisions of employer group health plans with provisions of the Act that limit the waiting period for group health plans to provide coverage to no more than 90 days. (Act Section 1201) The Notice explains that the final regulations under this provision define "waiting period" as the period that must pass before coverage for an employee or dependent, who is "otherwise eligible to enroll" under the terms of the group health plan, becomes effective. The IRS is seeking comment how to coordinate this provision with "common employer eligibility and enrollment practices." Among the situations that the IRS has requested comment is enrollment of new hires upon completing a probationary period of between three and six months following the employee's date of hire.
The Notice sets a deadline of June 17, 2011 to provide comments to the IRS.
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