Final Rules on Employer Mandate Under ACA Include Transition Relief Until 2016

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

Compensation Planning

The IRS, February 10, 2014, released highly anticipated final regulations regarding the Affordable Care Act’s employer mandate requiring certain-sized employers to pay a penalty if minimal health insurance is not provided to employees.  

Employers with fewer than 100 workers have an extra year to begin providing health insurance under the Affordable Care Act (ACA), as final regulations under §4980H1 adopt a gradual phase in of the ‘‘employer mandate.’’ As a result, companies with 50 to 99 employees have until 2016 to begin compliance. Small employers with fewer than 50 workers are exempt. Larger firms were also given more breathing room: Employers with 100 or more workers have to offer coverage to at least 70% of the workforce for 2015, rather than 95%. Originally, employers were supposed to begin complying with the ACA beginning January 1, 2014, but this deadline was pushed back to 2015 by Notice 2013-45.2 In addition to transition relief, the final rules provide guidance on tracking hours of service, identifying fulltime employee status and full-time equivalents, and affordability safe harbors.


Section 4980H, added by ACA,3 does not require employers to provide employees with health insurance coverage; however, it provides for a penalty that may be imposed on an employer that employed at least 50 fulltime employees and/or full-time equivalent employees (FTEs) in the preceding year if:

  • that employer either does not offer coverage to its full-time employees and their dependents or offers coverage that is not affordable or does not provide minimum value; and
  • at least one full-time employee enrolled in a qualified health plan and received a premium tax credit under §36B or a cost-sharing reduction.

The penalty under §4980H(a) is assessed for no offer of minimum essential coverage. The monthly payment is the product of the number of the employer’s full-time employees multiplied by one-twelfth of $2,000, with the number of employees reduced by 30. The penalty under §4980H(b) is assessed when the employer offers coverage. The monthly payment is the product of the number of full-time employees qualifying for the premium tax credit or cost-sharing reduction multiplied by onetwelfth of $3,000 but cannot exceed the penalty due if no coverage were offered. Proposed regulations under §4980H,4 once finalized, would have applied for periods after December 31, 2013, and provided transition relief for 2014. Notice 2013-45, issued seven months later, delayed compliance with the employer shared responsibility provisions and stated that the provisions would be ‘‘fully effective for 2015.’’

Transition Relief

In the preamble to the final regulations, the IRS provided transition relief that may delay payments under §4980H through 2015.

The final rules will apply to employers with at least 50 but fewer than 100 full-time employees (including full-time equivalents (FTEs)) beginning January 1, 2016.5 The number of employees is based on 2014, using the requirements for determining status as a large employer.6 To qualify for the transition relief, the employer must certify that it has not laid off employees or reduced hours in order to come under the 100- employee threshold or materially reduced its previously offered health coverage. The certification is to be submitted with the information filing required under §6056, which the IRS requires for 2015.

Employers that are required to comply with §4980H in 2015 may avoid an assessable payment by offering coverage to at least 70% of full-time employees, rather than the 95% threshold that will be required in 2016, the IRS continued. Employers that satisfy the terms of this transition relief avoid a penalty under §4980H(a) but may still be liable for a payment under §4980H(b).7 For employers that do have to make an assessable payment under §4980H(a), the IRS will reduce the penalty for 2015, plus any calendar months of 2016 that fall within the 2015 plan year. For this period, the assessable payment under §4980H(a) will be calculated by subtracting 80 from the number of full-time employees, rather than 30, as called for in the statute.

Additional transition relief is available for the following situations:

  • non-calendar plan years;8
  • failure to offer coverage for January 2015;9
  • failure to offer coverage for dependents;10
  • shorter measurement periods for stability periods starting during 2015;11
  • shorter periods in 2014 for determining applicable large employer status for 2015;12 and
  • multiemployer plans (extended from 2014).13
Large Employer Status

The final regulations provide rules for counting fulltime employees and FTEs to determine whether the employer is a large employer under §4980H.14 The number of FTEs for a given month is calculated by adding up the number of hours of service for all employees (including seasonal workers) who were not full-time employees for any month in the preceding calendar year (but not more than 120 hours of service for any employee) and dividing the total by 120.

Employers generally must be aggregated for purposes of determining large employer status under the final rules, including for purposes of the transition relief. However, the final regulations continue to reserve on how to apply aggregation rules to government entities, and churches or conventions or associations of churches. These organizations may apply a reasonable, good faith interpretation of the aggregation rules.15

There is an exception under the final regulations for seasonal workers (as defined by Department of Labor (DOL) regulations) who work no more than 120 days per year, which generally allows them to be excluded from the large employer determination.

The final regulations address issues for new large employers, including employers that were not in existence in the previous year and existing small businesses that have grown over time. An employer that did not previously offer coverage generally may wait to offer coverage until April 1 of the first year in which it determines that it is a large employer.16 This transition rule may be used only once per employer. The IRS may release additional guidance on determining large employer status.17

Identifying Full-Time Employees

The IRS addressed comments and questions about certain occupations and types of employment in the final regulations. Specifically, the final regulations exclude from the definition of ‘‘hours of service’’ hours contributed as a volunteer at a government entity or tax-exempt organization (for example, as a volunteer fire fighter or emergency responder), hours spent performing services in a student work/study program, hours of work performed by certain members of religious orders, and hours spent working if compensation is not considered U.S. income.18

Teachers and other educational employees will not be treated as part-time under the final rules just because their school maintains a limited schedule in the summer. The IRS also provided an approach, which may be used until further guidance is issued, to credit adjunct faculty members with 2.25 hours of service per week for each hour of teaching or classroom time, plus an hour for each hour of service spent performing other duties.

The IRS declined to offer relief from §4980H liability for independent contractors who are reclassified as employees for past periods. Section 530 of the Revenue Act of 1978, which allows employers to avoid paying employment taxes on behalf of certain employees who were mistakenly treated as independent contractors, does not apply to §4980H liability, according to the IRS.19

Request Transfer Pricing Report