IRS Releases Proposed ACA Regulations On Employer ‘Shared Responsibility'

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The Internal Revenue Service Dec. 28 released long-awaited proposed regulations on the “shared responsibility” provisions under the Affordable Care Act on employer-provided health coverage (REG-138006-12).

Starting in 2014, tax code Section 4980H, added by ACA, will require employers with at least 50 full-time and/or full-time equivalent employees (FTEs) to offer affordable health care coverage that provides a minimum level of coverage or pay a penalty.

According to Section 4980H, an employee is considered to be full time if he or she works at least 30 hours per week, and the proposed regulations “would treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week.”

Defining FTEs.

To determine the number of FTEs, the proposed regulations direct employers to use the calculation IRS provided in Notice 2011-36 (86 PBD, 5/4/11; 38 BPR 905, 5/10/11). To calculate the number of FTEs for a given month under that method, the regulations said, “all employees (including seasonal workers) who were not full-time employees for any month in the preceding calendar year are included in calculating the employer's FTEs for that month 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 employed on average at least 30 hours of service per week for that month, and (2) dividing the total hours of service in step (1) by 120.”

For employees who are paid on an hourly basis, the proposed regulations require employers to “calculate actual hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.”

The proposed regulations provide three methods of calculating hours for employees not paid on an hourly basis: using the same method as for hourly employees; using a days-worked equivalency method, whereby each employee would be credited with eight hours of service for each day the employee worked; or using a weeks-worked equivalency, whereby each employee would be credited 40 hours of service for each week the employee worked.

Employers “need not use the same method for all non-hourly employees. Rather, an employer may apply different methods for different classifications of non-hourly employees, so long as the classifications are reasonable and consistently applied,” the proposed regulations said.

“However, consistent with Notice 2011-36, these proposed regulations prohibit the use of the days-worked or weeks-worked equivalency method if the result would be to substantially understate an employee's hours of service in a manner that would cause that employee not to be treated as a full-time employee,” IRS said in the proposed regulations.

“The proposed regulations are consistent with IRS notices that have previously been issued and describe approaches that can be used for various circumstances, such as for employees who work variable hour schedules, seasonal employees, and teachers who have time off between school years,” IRS said in a fact sheet about the employer shared responsibility provisions.

Changes in Employment Status.

The proposed regulations also included rules for determining the employment status of new hires and employees whose status changes during the initial measurement period.

For a new employee “who is reasonably expected at his or her start date to be employed on average 30 hours of service per week (and who is not a seasonal employee), an employer that sponsors a group health plan that offers coverage to the employee at or before the conclusion of the employee's initial three calendar months of employment will not be subject to an assessable payment under section 4980H by reason of its failure to offer coverage to the employee for up to the initial three calendar months of employment,” the proposed regulations said.

To determine after an initial measurement period whether an employee worked an average of at least 30 hours per week, employers may use a look-back measurement that gives “employers flexible and workable options and greater predictability,” the proposed regulations said. Under the look-back measurement, an “applicable large employer member has the option to determine each ongoing employee's full-time status by looking back at a measurement period (a defined time period of not less than three but not more than 12 consecutive months, as chosen by the employer). The measurement period that the employer chooses to apply to ongoing employees is referred to as the standard measurement period. If the employer determines that an employee was employed on average at least 30 hours of service per week during the standard measurement period, then the employer treats the employee as a full-time employee during a subsequent stability period, regardless of the employee's number of hours of service during the stability period, so long as he or she remains an employee.”

If a variable hour or seasonal employee has a change in employment status during the initial measurement period that causes him or her to be expected to work at least 30 hours per week, he or she will be treated as a full-time employee under Section 4980H “as of the first day of the fourth month following the change in employment status or, if earlier and the employee averages more than 30 hours of service per week during the initial measurement period, the first day of the first month following the end of the initial measurement period (including any optional administrative period applicable to the initial measurement period),” the proposed regulations said.

However, a “change in employment status for an ongoing employee does not change the employee's status as a full-time employee or non full-time employee during the stability period,” they said.

Section 4980H Coverage for Dependents.

In response to commenters' questions regarding who would qualify as a dependent for coverage under Section 4980H, the proposed regulations define “dependents” for purposes of Section 4980H as “an employee's child (as defined in section 152(f)(1)) who is under 26 years of age.”

“Thus, an offer of coverage to an employee's spouse is not required for purposes of section 4980H because section 4980H refers only to dependents,” the proposed regulations said.

Because employers that currently do not offer dependent coverage “will require substantial revisions to their plans and to their procedures for administration of the plans,” IRS said in the proposed rule that it will provide transitional relief with respect to dependent coverage for plan years that begin in 2014.

“Accordingly, any employer that takes steps during its plan year that begins in 2014 toward satisfying the section 4980H provisions relating to the offering of coverage to full-time employees' dependents will not be liable for any assessable payment under section 4980H solely on account of a failure to offer coverage to the dependents for that plan year,” the proposed rule said.

In addition to incorporating Notice 2011-36, the proposed rules address the comments received on some prior guidance: Notice 2011-73, on a safe harbor for affordable coverage (178 PBD, 9/14/11; 38 BPR 1717, 9/20/11); Notice 2012-17, asking for comments on determination of full-time employee (27 PBD, 2/10/12; 39 BPR 299, 2/14/12); and Notice 2012-58, offering reliance on various determination methods (170 PBD, 9/4/12; 39 BPR 1676, 9/4/12).

Comments on the proposed regulations are due by March 18. Outlines of topics for discussion at an April 23 public hearing on the rules are due April 3, IRS said.

By Stefanie Trilling  

The full text of the proposed regulations is at The fact sheet on the shared responsibility provisions is at


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