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Final IRS Regulations on Employer Shared Responsibility

Brady McDaniel
Joanne C. Youn
Caplin & Drysdale, Chartered - Washington Office

February 19, 2014

Previously published on February 12, 2014

On February 10, 2014, the IRS issued final regulations on the employer shared responsibility provisions of the Patient Protection and Affordable Care Act of 2010, as amended ("PPACA").  The regulations are applicable for periods after December 31, 2014.  The preamble to the regulations provides transition relief for employers, including a one-year delay in the application to medium-sized employers of penalties for failure to offer affordable health coverage meeting minimum value requirements.  In this client alert, we describe that relief as well as other new or modified provisions in the final regulations.


For purposes of PPACA's employer shared responsibility provisions, an "applicable large employer" (hereinafter, "ALE") is an employer who employs 50 or more full-time employees (including full-time equivalents, based on the hours of non-full-time employees) during the preceding calendar year.  PPACA imposes penalties on an ALE that fails to offer affordable health coverage meeting minimum value requirements to its full-time employees and their "dependents", if its full-time employees get subsidized health coverage through an Exchange.   The term "dependents" does not include spouses.  ALE status is determined at the controlled group level, but penalties are assessed on an employer-by-employer basis.  Each related employer that makes up an ALE is an "ALE member."

There are two separate penalties for which an ALE member may be liable.  Under the first penalty, an ALE member who fails to offer health coverage to substantially all of its full-time employees and their dependents is subject to a penalty equal to a certain dollar amount multiplied by the total number of full-time employees (with certain adjustments).  This penalty is payable if even one full-time employee gets subsidized health coverage through an Exchange.  Under the second penalty, an ALE member who offers health coverage to substantially all of its full-time employees and their dependents is still subject to a penalty with respect to each full-time employee that gets subsidized health coverage through an Exchange (for example, because the ALE member's health coverage is unaffordable or does not meet minimum value requirements).  However, unlike the first penalty, this second penalty is payable only with respect to each individual full-time employee who actually gets subsidized coverage through an Exchange.

The penalties imposed on ALE members will be enforced, in part, through an information reporting requirement.  Pursuant to IRS Notice 2013-45, the employer shared responsibility penalties and the associated information reporting requirements will not take effect until the 2015 calendar year.  (See our July 2013 client alert "PPACA 2014: The Implications for Employers" for more information on Notice 2013-45.)

Transition Relief for Medium-Sized ALEs

The preamble to the final regulations provides a further delay of the requirement to offer affordable coverage meeting minimum value requirements for ALEs who employ on average at least 50 but fewer than 100 full-time employees (including full-time equivalents) during 2014 ("medium-sized ALE").  These employers will not be subject to penalties until 2016 if they meet certain eligibility criteria.  Specifically, an employer taking advantage of this relief may not reduce the size of its workforce or the overall hours of service of its employees in order to meet the size requirement.  Additionally, the employer will not be eligible for this transition relief if, at any time from February 9, 2014 through the end of the transitional relief period, the employer eliminates or materially reduces the health coverage it offered as of February 9, 2014.

Pending further guidance, it appears that employers eligible for the transition relief will still be subject to the information reporting requirements for ALEs effective in 2015.  Employers will be required to certify their eligibility for the transition relief on the transmittal form required to be filed with the IRS for such information reporting. 

Transition Relief Generally Available for ALEs

ALEs who are not medium-sized ALEs may nonetheless be able to take advantage of other kinds of transition relief described in the preamble to the final regulations, some of which had previously been provided in the preamble to the proposed regulations.  Such relief includes the following:

  • For 2015, ALE members that offer coverage to at least 70% of full-time employees and their dependents will not be subject to the penalty for failure to offer any coverage to full-time employees and their dependents.  Such ALE members may still be subject to a penalty with respect to full-time employees who are not offered coverage if they obtain subsidized coverage through an Exchange.  After 2015, ALE members may be subject to the penalty for failure to offer any coverage to full-time employees and their dependents if coverage is not offered to at least 95% of full-time employees (or all but five full-time employees, if fewer) and their dependents.

  • As noted above, the penalty for failure to offer coverage to full-time employees and their dependents is based on the number of full-time employees.  Under the final regulations, each ALE may, for purposes of calculating liability for this penalty, subtract 30 from the number of full-time employees. Under the transition relief, ALEs may subtract 80 from the number of full-time employees for this purpose for 2015.  The 80 full-time employee reduction is allocated ratably among all ALE members that constitute an ALE.

  • Certain ALE members maintaining non-calendar year plans will not be subject to penalties if they comply with the employer shared responsibility requirements as of the first day of the 2015 plan year, rather than January 1, 2015.  Additionally, the other transition relief described in this client alert may apply for different time periods with respect to ALE members with non-calendar year plans.

  • Generally, employers must look at their number of full-time employees during the entire preceding calendar year to determine ALE status.  Under the transition relief, employers may use any period of at least six consecutive calendar months during the 2014 calendar year for determining ALE status in 2015.

  • If an ALE member using the look-back measurement method to determine full-time employee status would like determinations of full-time employee status to remain stable for a period of 12 months, the ALE member generally must also use a 12-month measurement period.  However, a shorter transition measurement period of at least 6 consecutive months is permitted to be used in 2014 for determining full-time employee status in 2015.

  • Generally, if an ALE member fails to offer coverage to a full-time employee for any day of a calendar month, that employee is treated as not receiving an offer of coverage for the entire month.  Solely for January 2015, employees who are offered coverage no later than the first day of the first payroll period will be treated as having been offered coverage for January 2015.

Through the end of 2015, certain ALE members who take steps to offer coverage to the dependents of full-time employees, but fail to offer such coverage, may not be subject to penalties solely because of failure to offer dependent coverage.

Other Changes

The final regulations also add or clarify a number of rules, including exclusion of hours worked as a "bona fide volunteer" from definition of "hour of service," addition of definitions of "seasonal employee" and "part-time employee," and clarification regarding how employers not using the look-back measurement method can determine full-time employee status.  Because ALE members may not have enough information to determine whether the coverage they offer is affordable for full-time employees, the proposed regulations provided affordability safe harbors.  Even if coverage turns out to be unaffordable for a full-time employee, an employer who satisfies one of the safe harbors will not be subject to the penalty for offering unaffordable coverage with respect to such employee.  The final regulations continue to provide such safe harbors, with minor changes.

While many employers will welcome the transition relief provided by the IRS, it is important to understand its limited scope.  Although no employers will be subject to penalties before January 1, 2015, employers may need to begin establishing systems for compliance now.  For example, an employer that is uncertain of its eligibility for the transition relief for medium-sized ALEs will need to begin collecting data by July 1, 2014 in order to determine eligibility for such relief in 2015.  If an employer planning to use the look-back measurement method has not yet established periods for determining and applying determinations of full-time employee status, such employer should begin that process as soon as possible.  Even employers who plan to take advantage of the transition relief for medium-sized ALEs may wish to begin preparing now for compliance in 2016, especially since the other transition rules designed to provide relief for 2015 will not be available for 2016 unless extended by future guidance.

This client alert has focused on the transition relief provided to ALEs in the preamble to the final regulations.  The final regulations themselves provide extensive guidance on employer shared responsibility more generally.  The IRS has also published a series of questions and answers addressing employer shared responsibility on its website, and the Treasury Department has published a fact sheet addressing the final regulations.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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