Changes to Patient Protection and Affordable Care Act (PPACA)

On December 28, the Internal Revenue Service (IRS) released a long anticipated proposed regulation that clarifies the employer shared responsibility provisions created by the Patient Protection and Affordable Care Act (PPACA). The proposed rule, which is based upon Section 1513 of PPACA and is now codified in Section 4980H of the Internal Revenue Code, has emerged as a cause of concern for many large employers.

Under Section 4980H, many large employers must provide minimum essential coverage to their employees or pay a tax/penalty. The tax/penalty kicks in if:

    • The employer fails to offer minimum essential coverage and an employee is certified as having received a premium tax credit; or
    • The employer does offer minimum essential coverage but one or more employees have to pay more than 9.5% of their salary for the coverage and are certified as having received a premium tax credit.

The new rule outlines the long-awaited rules relating to the administration and assessment of tax/penalties. In addition, the new proposed regulation clarifies several outstanding issues covering how a large employer:

    • Determines who qualifies as a full-time employee;
    • Determines assessable payments; and
    • Verifies whether an employer is subject to tax/penalties pursuant to Section 4980H(b).

Determining Applicable Large Employers

Several questions have arisen in terms of calculating whether an employer is a large employer under the statute. The proposed regulation clarifies that the common law definition of an employer will be used, where an employment relationship exists “when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.” This definition will be used in place of the definition used in the Fair Labor Standards Act.

In terms of determining whether a large employer has over 50 full-time equivalent employees, the proposed rule bases the calculation on a “look-back” basis, using data from the prior year. Specifically, the employer will include the hours of services of all employees during the prior year to calculate the number of full-time equivalents. Employers will also be permitted to use any six-consecutive-month period in 2013 in determining whether they have 50 full-time equivalent employees.

The rule also provides some clarification on seasonal workers. Under Section 4980H(c)(2)(B)(ii), if an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year, and if the employees over the 50 threshold who were employed during that year worked no more than 120 days, the employer will not be qualified as a large employer. The proposed rule clarifies that for the seasonal worker exception, an employer may utilize either the 120-day period or the four-month period, whether or not either time frame is consecutive.

The proposed rule also provides guidance in determining whether an employee is a full-time employee. The rule clarifies that a full-time employee is employed on average at least 30 hours of service per week. The original regulation had defined a full-time employee based on number of hours worked, whereas the proposed regulation adopts the term hours of service that includes time where an employee is entitled to payment even when no work is performed.

Regulatory Framework

If an employer fails to provide coverage under an employer-sponsored plan, liability is incurred under Section 4980H(a); if an employer fails to provide coverage that is affordable or fulfills minimum value requirements, liability is incurred under Section 4980H(b).

The calculation of the tax/penalty depends on whether liability has arisen due to a violation of Section 4980H(a) or (b). Under Section 4980H(a), the penalty will be assessed based on all full-time employees, excluding the first 30, while under Section (b), the penalty is based on the number of full-time employees who are certified as receiving a premium tax credit.

Additional Clarifications

The proposed rule has ruffled some feathers in regards to an employer’s liability for penalties. Whereas PPACA calls for large employers to offer coverage to all its employees, the rule states that the tax/penalty will be triggered if:

  1. The employer does not offer health coverage or offers coverage to less than 95% of its full-time employees, and at least one of the full-time employees receives a premium tax credit; or
  2. The employer offers health coverage to at least 95% of its full-time employees, but at least one full-time employee receives the tax credit due to the coverage being unaffordable, not satisfying minimum value requirements, or was not offered to the employee.

Coverage must be offered to 95% of full-time employees and their dependents in order to avoid paying the tax/penalty. The proposed rule differs from industry norms in that a dependent is defined as a child under the age of 26, but does not include spouses.

If an employer offers multiple coverage options, the affordability test will be applied to the lowest-cost option available to that employee. The rule incorporates various safe harbor methods for determining affordability that were set forth in previous guidance.

The amount of the tax/penalty is also clarified in the rule. For employers that do not offer health care coverage to their full-time employees, and their dependents, the penalty will be $2,000 per full-time employee (excluding the first 30 employees). For employers that offer coverage that does not satisfy minimum value or affordability requirements, the amount of the penalty will be $3,000 per employee that receives a premium tax credit.

The proposed rule also specifies that the IRS will contact employers directly to inform them of their potential liability and afford the employer a chance to respond. Any payments assessed against an employer will not need to be included on a tax return.

Finally, the proposed rule provides transition relief for some employers that already offer health coverage through a fiscal year plan. If an employee is eligible to participate in the plan as of December 27, 2012, the employer will not be subject to a potential payment until the first day of the fiscal plan year beginning in 2014. Also, if the fiscal year plan was offered to at least one third of the employer’s employees at the most recent open season or the fiscal year plan covered at least one quarter of the employees, the employer will not be subject to any payments until the first day of the fiscal plan year in 2014.

Final Thoughts

These regulations provide some much-needed clarification for large employers to assist them in complying with shared responsibility requirements under PPACA. There will likely be additional clarification guidance issued by HHS as the January 1, 2014, individual mandate implementation date comes closer.

If you need additional resources to help you better understand the changes to PPACA, reach our President and CEO, Lori Sottilotta directly by clicking on this link.