Are You an “Applicable Large Employer” Required to “Play or Pay” Under the ACA’s Employer Mandate and the IRS’ Proposed Shared Responsibility Regulations?

In addition to the controversial and much-litigated Individual Mandate, the Patient Protection and Affordable Care Act of 2010 (“ACA”) includes an equally controversial (though not quite as heavily litigated) “Employer Mandate.” The Employer Mandate can be found in new section 4980H of the Internal Revenue Code. Effective for plan years beginning in 2014, “applicable large employers” will face a choice. They must either (i) offer substantially all (at least 95%) of their full-time employees (employees working on average 30 or more hours per week) and their non-spousal dependants “affordable” health insurance providing “minimum essential coverage” and “minimum [actuarial] value” or face potential penalties. If such coverage is not offered penalties apply if any of their full-time employees qualify under the ACA for a premium tax credit or cost-sharing reduction in connection with the purchase of health insurance.

To implement the Employer Mandate, on January 2, 2013, the IRS published its proposed regulations concerning Shared Responsibility for Employers Regarding Health Coverage (“Large Employer Regulations”) in the Federal Register. Those regulations affect only those “employers constituting applicable large employers.” For 2014, an “applicable large employer” will be one who employed an average of at least 50 full-time equivalent employees on business days during calendar year 2013. This means that employers must now start keeping the records necessary to determine whether they will be considered “applicable large employers” in 2014 for purposes of the Employer Mandate.

A determination of the number of employees is crucial to determining whether an employer is an “applicable large employer,” and, therefore, subject to the Employer Mandate. That determination is not simple. The regulations are complex. This article will address (i) how to determine the number of full-time equivalent employees an employer has for purposes of the Employer Mandate; and (ii) what an employer might do to prepare for the 2014 effective date of the Employer Mandate.

Determining the Number of Employees. In calculating the number of its employees for purposes of the Employer Mandate, the employer must use the common law definition of an employee. IRS expressly rejected the use of any other definition, such as the definition of employee under the Fair Labor Standards Act. Expressly excluded from the calculation of the number of employees, however, are those whose roles vis-à-vis the employer are limited to that of (i) sole proprietor, (ii) partner in a partnership; and (iii) 2-percent (or more) S-corporation shareholder. However, to the extent that a sole proprietor, partner or shareholder provides services as an employee to the employer, he or she is an employee with respect to his or her hours of service as an employee.

To determine whether it constitutes an “applicable large employer” in 2014, the employer must calculate the actual hours worked by all (both full- and part-time) employees during 2013. More information on determining the number of employees can be found in the complete article here.

Controlled Groups and Aggregation Issues
. All entities treated as a controlled group under IRC § 414 will be treated as a single employer for purposes of the “applicable large employer” determination. In other words, the full-time equivalent employees of all members of the controlled group are aggregated to determine whether the group constitutes a single “applicable large employer.” IRS has reserved on the applicability of the controlled group aggregation rules to government entities, churches or convention associations of churches. Pending the issuance of regulations, those employers may rely on reasonable good faith interpretations of IRC § 414 in determining whether a person or a related group of persons is an “applicable large employer” for purposes of the Employer Mandate.

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