Commenters Focus on Worker Classification, Key Definitions of Proposed ACA Tax Rules

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By Florence Olsen  


A concern that employee classification could broadside employers with health care excise taxes was among the dozens of complaints commenters made about a proposed Treasury Department and Internal Revenue Service regulation on employer shared responsibility provisions under the Affordable Care Act.

By the close of the March 18 comment deadline, Treasury and IRS had received more than 100 comments from employers and various groups interested in the proposed regulation under tax code Section 4980H. Treasury and IRS released the proposed regulation (REG-138006-12) Dec. 28, 2012 (31 HRR 8, 1/14/13).

Starting in 2014, Section 4980H(a) and Section 4980H(b), added by the ACA, will require employers with at least 50 full-time and/or full-time-equivalent employees to offer affordable health insurance that provides a minimum level of coverage or pay an excise tax penalty. The ACA defines a full-time employee as someone who performs an average of 30 or more hours of service per week. An employer is liable for paying an excise tax penalty if one or more of its full-time employees receives subsidized coverage in a health plan offered through a state or federal exchange established under the ACA.

Section 530 Concerns

Commenting March 18, the ERISA [Employee Retirement Income Security Act] Industry Committee (ERIC) requested revisions that would exclude from calculations used to determine an employer's potential Section 4980H liability any workers whose employment was based on a safe-harbor arrangement described under Section 530 of the Revenue Act.

When an employer, “in good faith,” classifies workers as independent contractors under Section 530, the employer is not liable for employment taxes, but it may be liable for a large excise tax penalty for failing to offer health care coverage to the employees it treats as independent contractors, according to ERIC.

“The shared responsibility rules should incorporate the safe harbor under section 530 of the Revenue Act of 1978, as amended (“section 530”), to protect employers from section 4980H liability for workers who are inadvertently misclassified,” ERIC said in its letter.

Employers have struggled for decades to classify their workers correctly under federal employment tax law, but the shared responsibility provisions significantly increased the financial consequences of worker misclassification, ERIC said.

For example, if an employer misclassifies a common law employee as an independent contractor and fails to offer that employee minimum essential coverage for a year, the employer is potentially liable for an excise tax penalty under Section 4980H(a), for that year, ERIC said.

Its letter urged Treasury and IRS “to revise the definition of 'employee' for purposes of section 4980H to exclude workers whose employment qualifies under a section 530 safe harbor arrangement.”

Temporary Staffing

The common law standard that defines an “employee” under Section 4980H is a fact-and-circumstances standard that will be disruptive and create uncertainty for temporary staffing agencies, the law firm Hanson Bridgett in San Francisco, said in a March 15 comment letter.

Temporary staffing agency workers are especially difficult to track because typically they are paid through the employer's accounts payable system rather than the employer's payroll system, Hanson Bridgett said. Reclassifying them as common law employees could cause “substantial disruption of business and worker relationships” and increase employers' exposure to Section 4980H liability, the law firm said.

Hanson Bridgett asked that Treasury and IRS revise the regulation to shield employers from the Section 4980H(a) penalty if the temporary staffing agency that an employer hires offers minimum essential coverage to the workers.

Hanson Bridgett also requested that the agencies revise the regulation to shield employers from the Section 4980H(b) penalty if the temporary staffing agency that an employer hires offers health care coverage that satisfies the minimum value and affordability rules under Section 4980H(b).

Another commenter recommended against a “safe harbor” for employees of temporary staffing agencies out of concern that creating a safe harbor would increase the incentive for employers to use temporary staffing agencies to avoid their employer responsibilities under Section 4980H.

“We support the incorporation of an anti-abuse rule under which employees who perform the same or similar services for an employer through direct employment and through employment through a staffing agency would have all hours of service attributed to the employer,” the Center for Labor Research and Education at the University of California at Berkeley said in a March 15 comment letter.

Negotiable Liability for Merger or Acquisitions

The U.S. Chamber of Commerce, in comments submitted March 18, recommended that, under a revised regulation, businesses involved in a merger or acquisition be permitted to negotiate the entity responsible for any potential or actual Section 4980H liability.

“Businesses should be able to decide whether the 4980H liability transfers to the buyer in a stock acquisition of an entity or whether it stays with the seller in an asset acquisition,” according to the business group.

Affordable Dependent Coverage

The American Federation of State, County, and Municipal Employees expressed concern in its March 15 letter that the proposed regulation would require employers to offer minimum essential coverage to dependents without requiring that the coverage be affordable.

“Without the actual cost of dependent coverage playing a role in the affordability determination, many families will face the situation where they cannot afford the dependent coverage being offered through an employer and they will not be eligible for a premium tax credit to help purchase coverage on an exchange, leaving them without access to affordable coverage,” AFSCME said. The omission “directly conflicts with the central goal of the ACA to make affordable health care coverage available to all and must be remedied,” it said.

A public hearing on the proposed regulation is scheduled for 10 a.m. April 23 at IRS headquarters in Washington. IRS must receive outlines of discussion topics for the hearing by April 3, according to the proposed regulation.

By Florence Olsen  

Text of comment letters are available from the American Federation of State, County, and Municipal Employees,; the ERISA Industry Committee,; Hanson Bridgett,; the University of California at Berkeley Center for Labor Research and Education,; and the U.S. Chamber of Commerce,

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