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Blue Book, IRS website shed light on complex employer shared responsibility rules

IRS webpage titled “Determining if an Employer is an Applicable Large Employer.”

General Explanation of Tax Legislation Enacted in 2015,” prepared by the Staff of the Joint Committee on Taxation” (JCS-1-16, March 2016).

This year, employers generally are subject to the full force of the Affordable Care Act (ACA)’s employer shared responsibility (ESR) provisions, as transition rules that were in effect last year weren’t extended. The Joint Committee on Taxation (JCT)’s General Explanation of Tax Legislation Enacted in 2015, also known as the “Blue Book,” includes examples and other information on how the ESR provisions apply for 2016 and beyond. So does a recently updated IRS website page devoted to figuring out when an employer is an applicable large employer (ALE) — that is, one that is subject to the ESR provisions.

Background on ESR penalty rules for 2016. The ESR provisions apply only to an ALE, defined for 2016 as an employer that employed an average of at least 50 full-time employees (including full-time equivalent (FTE) employees) on business days during 2015. (Code Sec. 4980H(c)(2)) A full-time employee for any calendar month is an employee who has on average at least 30 hours of service per week during the calendar month, or at least 130 hours of service during the calendar month. (Code Sec. 4980H(c)(4)(A), Reg. § 54.4980H-1(a)(21)(iii) ) In general, an employer determines its number of FTE employees for a month by:

  1. Combining the number of hours of service of all non-full-time employees for the month (but the employer doesn’t include more than 120 hours of service per employee); and
  2. Dividing the total by 120. (Reg. § 54.4980H-1(a)(22), Reg. § 54.4980H-2(c)(2))

An employer’s number of FTE employees (or part-time employees) is only relevant to determining whether an employer is an ALE. An ALE need not offer minimum essential coverage to its part-time employees to avoid an ESR payment. A part-time employee’s receipt of the premium tax credit for purchasing coverage through the Marketplace cannot trigger an ESR payment. (IRS website page, “Determining in an Employer is an Applicable Large Employer”)

Note that, under a PATH Act change, effective for months beginning after Dec. 31, 2013, solely for purposes of determining whether an employer is an ALE (and possibly subject to an ESR payment), an individual is not taken into account as an employee for the month if he or she has medical coverage for the month under (1) a program for members of the armed forces, including coverage under the TRICARE program, or (2) under a Veterans Health Administration health care program. (Code Sec. 4980H(c)(2)(F)) Note that the change affects only the determination of ALE status, and not whether an employer that is an ALE, after application of the change, is subject to an assessable payment or the amount of any assessable payment. (JCS-1-16, March 2016)

For 2016, an ALE is liable for an ESR payment only if:

    1. The employer does not offer health coverage or offers coverage to fewer than 95% of its full-time employees and, generally, the dependents of those employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on a Marketplace. (This is referred to as Code Sec. 4980H(a) liability.) A company liable under Code Sec. 4980H(a) must, for each month, make an ESR payment equal to the number of full-time employees the employer employed for the month (minus 30) multiplied by 1/12 of $2,160 for calendar year 2016. (Code Sec. 4980H(a), Code Sec. 4980H(c)(1), Notice 2015-87, 13, 2015-52 IRB, Sec. III)

Illustration 1: For all of 2016, Employer A fails to offer minimum essential coverage and has 100 full-time employees, 10 of whom receive premium assistance credits for the entire year. The employer’s assessable payment is $2,160 for each full-time employee over the 30-employee threshold, for a total of $151,200 ($2,160 ×70 (100 – 30)). (JCS-1-16, March 2016, page 38 (example adjusted for inflation)).

  1. The employer offers health coverage to at least 95% of its full-time employees and, generally, the dependents of those employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on a Marketplace. This may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value. (This is referred to as Code Sec. 4980H(b) liability.) The Code Sec. 4980H(b) ESR payment equals the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,240 for calendar year 2016. (Code Sec. 4980H(b)(1), Reg. § 54.4980H-5(a), Notice 2015-87, 13, 2015-52 IRB, Sec. III) For 2016, the amount of the payment for any calendar month is capped at the number of the employer’s full-time employees for the month (minus 30) multiplied by 1/12 of $2,160. (Code Sec. 4980H(b)(2)) The Blue Book explains that the effect of the preceding rule is to cap the assessable payment at the amount that would apply if the employer failed to offer its full-time employees and their dependents minimum essential coverage. (JCS-1-16, March 2016, page 39)
Illustration 2: In 2016, Employer A offers minimum essential coverage and has 100 full-time employees, 20 of whom receive premium assistance credits for the entire year. The employer’s assessable payment [under Code Sec. 4980H(b)] before consideration of the cap is $3,240 for each full-time employee receiving a credit, for a total of $64,800 ($3,240 multiplied by 20). The cap on the assessable payment is the amount that would have applied if the employer failed to offer coverage, or $151,200 ($2,160 × 70 (100 – 30)). In this example, the cap therefore does not affect the amount of the assessable payment, which remains at $64,800. (JCS-1-16, March 2016, page 39 (example adjusted for inflation)).

Note that more liberal transition rules applied for 2015 (and, for employers with non-calendar-year plans, any calendar months during the 2015 plan year that fall in 2016).

An ALE may be subject to only one (and not both) of the two potential ESR payments depending on its decisions about offering minimum essential coverage to its full-time employees (and their dependents).

On its webpage for determining when an employer is an ALE, IRS provides the following examples of when an employer is and is not an ALE.

Note: These examples are not found in Reg. § 54.4980H-2.

Illustration 3: Company X has 40 full-time employees for each calendar month during 2016. It also has 15 part-time employees for each calendar month during 2016, each of whom have 60 hours of service per month.

  1. When combined, the hours of service of the part-time employees for a month totals 900 [15 x 60 = 900].
  2. Dividing the combined hours of service of the part-time employees by 120 equals 7.5 [900/120 = 7.5]. This number, 7.5, represents the number of Company X’s FTE employees for each month during 2016.
  3. Company X adds up the total number of full-time employees based on its full-time employees for each calendar month of 2016, which is 480 [40 x 12 = 480 ].
  4. Company X adds up the total number of FTE employees based on its FTE employes for each calendar month of 2016, which is 90 [7.5 x 12 = 90].
  5. Company X adds the two numbers found in (3) and (4) and divides the total by 12, which equals 47.5 [(480 + 90 = 570)/12 = 47.5]. Because the result is not a whole number, it is rounded to the next lowest whole number, so 47 is the result.
Result: Although Company X has 55 employees in total [40 full-time and 15 part-time] for each month of 2016, it has 47 full-time employees (including FTE employees) for purposes of ALE determination. Because 47 is less than 50, Company X is not an ALE for 2017.

Illustration 4: Company Y has 40 full-time employees for each calendar month during 2016. It also has 20 part-time employees for each calendar month during 2016, each of whom has 60 hours of service per month.

  1. When combined, the hours of service of the part-time employees for a month totals 1,200 [20 × 60 = 1,200 ].
  2. Dividing the combined hours of service of the part-time employees by 120 equals 10 [1,200/120 = 10 ]. This number, 10, represents the number of Company Y’s FTE employees for each month during 2016.
  3. Company Y adds up the total number of full-time employees based on its full-time employees for each calendar month of 2016, which is 480 [40 × 12 = 480].
  4. Company Y adds up the total number of FTE employees based on its FTE employees for each calendar month of 2016, which is 120 [10 × 12 = 120 ].
  5. Company Y adds the two numbers found in (3) and (4) and divides the total by 12, which equals 50 [(480 + 120 = 600)/12 = 50 ].
Result: Although Company Y only has 40 full-time employees, it is an ALE for 2017 due to the hours of service of its FTE employees.

Employer aggregation. Companies with a common owner or that are otherwise related under certain Code Sec. 414 rules generally are combined and treated as a single employer for determining ALE status. If the combined number of full-time employees and FTE employees for the group is large enough to meet the definition of an ALE, then each employer in the group (called an ALE member) is part of an ALE and is subject to the ESR provisions, even if separately the employer would not be an ALE. (Reg. § 54.4980H-1(a)(16), Reg. § 54.4980H-2(a) ) The Blue Book adds that, in addition, in determining assessable payments, only one 30-employee reduction in full-time employees applies to the group and is allocated among the members ratably based on the number of full-time employees employed by each member. (JCS-1-16, March 2016, page 38, footnote 130)

On its webpage for determining when an employer is an ALE, IRS provides the following example of when companies are aggregated for determining ALE status.

Illustration 5: Corporation X owns 100% of all classes of stock of Corporation Y and Corporation Z. Corporation X has no employees at any time in 2015. For every calendar month in 2015, Corporation Y has 40 full-time employees, and Corporation Z has 60 full-time employees. Neither Corporation Y nor Corporation Z has any FTE employees. Corporations X, Y, and Z are considered a controlled group of corporations. Because Corporations X, Y and Z have a combined total of 100 full-time employees for each month during 2015, the three corporations together are an ALE for 2016. Corporation Y and Z are each an ALE member for 2016. But Corporation X is not an ALE member for 2016 because it does not have any employees during 2015.
Note: This third example is substantially similar to Example (1) of Reg. § 54.4980H-2(d), except that the example in the regs concludes that each of the corporations is an ALE member for 2016.

IRS’s website adds that there is an important distinction for employers to keep in mind regarding the aggregation rules. Although employers with a common owner or that are otherwise related generally are combined and treated as a single employer for determining whether an employer is an ALE, potential liability under the employer shared responsibility provisions is determined separately for each ALE member.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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