Notice 2012-58, 2012-41 IRB
IRS has provided interim guidance on key aspects of the “shared responsibility” provisions of Code Sec. 4980H. Added by the Patient Protection and Affordable Care Act of 2010, these provisions will after 2013 impose a penalty on applicable large employers that fail to provide affordable health coverage to their full-time employees. In general, the Notice allows employers to rely on the approaches described in earlier guidance, and allows employers to use a look-back measurement period for variable hour and seasonal employees.
Background. For months beginning after Dec. 31, 2013, an applicable large employer is liable for an annual assessable payment if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction and either the employer:
(1) fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan (Code Sec. 4980H(a) liability); or(2) offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan that, with respect to a full-time employee who has been certified for the advance payment of an applicable premium tax credit or cost-sharing reduction, either is unaffordable or does not provide minimum value as these terms are defined in Code Sec. 36B(c)(2)(C) (Code Sec. 4980H(b) liability).
The payment under Code Sec. 4980H(a) is based on all (excluding the first 30) full-time employees, while the payment under Code Sec. 4980H(b) is based on the number of full-time employees who are certified to receive an advance payment of an applicable premium tax credit or cost-sharing reduction. A full-time employee for any month is an employee who is employed on average at least 30 hours of service per week.
An applicable large employer for a calendar year is as an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year. For determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs), which are determined based on the hours of service of employees who are not full-time, are taken into account. (Code Sec. 4980H(c)(2))
Code Sec. 4980H ties into Code Sec. 36B, which is designed to use a subsidy/tax credit mechanism to make health insurance affordable for individuals with modest incomes. Under Code Sec. 36B(c)(2)(B), a coverage month for an individual (i.e., a month for which the health care subsidy is available) does not include a month in which he is eligible for MEC, as defined in Code Sec. 5000A(f), other than coverage offered in the individual market. MEC may be government-sponsored coverage, such as Medicare or Medicaid, or certain employer-sponsored plans. An individual is eligible for employer-sponsored MEC only if the employee’s share of the premiums is “affordable” and the coverage provides “minimum value.” In general, under Code Sec. 36B(c)(2)(C)(i), an employer-sponsored plan is not affordable if the employee’s required contribution with respect to the plan exceeds 9.5% of his household income for the tax year. This percentage may be adjusted after 2014.
IRS has given a great deal of attention to Code Sec. 4980H, particularly in:
•Notice 2011-36, 2011-21 IRB 792, which floated an optional “look-back/stability period safe harbor” to determine whether ongoing (rather than newly-hired) employees are full-time employees for Code Sec. 4980H purposes. Under this safe harbor, an employer would determine each employee’s full-time status by looking back at a defined period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer (the measurement period), to determine whether during the measurement period the employee averaged at least 30 hours of service per week.
•Notice 2011-73, 2011-40 IRB 474, which described a safe harbor under which employers would not be subject to an assessable payment under Code Sec. 4980H(b), for an employee if the coverage offered to him was affordable based on the employee’s Form W-2 wages (as reported in Box 1) instead of household income. Under the safe harbor, an employer would not be subject to the penalty with respect to an employee if the required contribution for that employee was no more than 9.5% of his Form W-2 wages. The proposed affordability safe harbor would apply only for purposes of determining whether an employer is subject to the assessable payment under Code Sec. 4980H(b).
•Notice 2012-17, 2012-9 IRB 430, which described and requested comments on a potential approach for determining the full-time status of new employees for purposes of Code Sec. 4980H, if, based on the facts and circumstances at the start date, it cannot reasonably be determined whether the new employee is expected to work full-time because his hours are variable or otherwise uncertain. Under the potential approach, employers would be given three months or, in certain cases, six months, without incurring a payment under Code Sec. 4980H, to determine whether a variable hour new employee is a full-time employee.
In response to Notice 2012-17, commenters asked that employers be allowed to use a look-back measurement period of up to 12 months to determine the status of new variable hour employees, similar to the method permitted to determine the status of ongoing employees.
New guidance. Notice 2012-58, provides the following guidance on the shared-responsibility rules of Code Sec. 4980H.
Expanded use of look-back measurement period. In response to commenters, IRS has given employers the option to use a look-back measurement period of up to 12 months to determine whether new variable hour employees or seasonal employees are full-time employees, without being subject to a Code Sec. 4980H payment for this period with respect to those employees. An employee is a variable hour employee if, based on the facts and circumstances at the date he begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week. Through at least 2014, employers are permitted to use a reasonable, good faith interpretation of the term “seasonal employee” for purposes of Notice 2012-58.
Other guidance. Notice 2012-58, facilitates a transition for new employees from the determination method the employer chooses to use for them to the determination method the employer chooses to use for ongoing employees.
Also, at least through the end of 2014, employers will be able to rely on the guidance in Notice 2012-58, and on the following approaches described in prior notices:
(1) For ongoing employees, an employer will be permitted to use measurement and stability periods of up to 12 months. Under the measurement period, an employer determines each employee’s full-time status by looking back at a defined period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer, to determine whether during the measurement period the employee averaged at least 30 hours of service per week. If the employee were determined to be a full-time employee during the measurement period, then the employee would be treated 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 remained an employee. For an employee determined to be a full-time employee during the measurement period, the stability period is a period of at least six consecutive calendar months that follows the measurement period and is no shorter in duration than the measurement period. (2) For new employees who are reasonably expected to work full-time, an employer that maintains a group health plan that meets certain requirements will not be subject to an assessable payment under Code Sec. 4980H for failing to offer coverage to the employee for the initial three months of employment.(3) For all employees, an employer will not be subject to an assessable payment under Code Sec. 4980H for an employee if the coverage offered to that employee was affordable based on the employee’s Form W-2 wages reported in Box 1 (often referred to as the affordability safe harbor).
IRS says the guidance in Notice 2012-58 is intended to encourage employers to continue providing and potentially to expand group health plan coverage for their employees by permitting employers to adopt reasonable procedures to determine which employees are full-time employees without becoming liable for a payment under Code Sec. 4980H, to protect employees from unnecessary cost, confusion, and disruption of coverage, and to minimize administrative burdens on the Affordable Insurance Exchanges (Exchanges).
Also, simultaneously with the issuance of Notice 2012-58, the Department of the Treasury, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) (the Departments) are jointly providing administrative guidance under § 2708 of the Public Health Service Act (PHSA). This section of the PHSA provides that for plan years beginning on or after Jan. 1, 2014, a group health plan or group health insurance issuer shall not apply any waiting period that exceeds 90 days. See ¶ 15 for details.
References: For overview of excise tax imposed on large employers not offering affordable health insurance coverage—after 2013, see FTC 2d/FIN ¶ H-1175 ; United States Tax Reporter ¶ 49,80H4 ; TaxDesk ¶ 812,301 ; TG ¶ 7318 .