Employers have new transition relief and more time to comply with the requirements related to employee health care coverage. The changes were included in the IRS’s final regulations on excise taxes that employers must pay for failure to meet certain health care coverage requirements.
Two alternative excise taxes were originally set to take effect in 2014 and apply to employers with 50 or more full-time and full-time equivalent employees. Earlier transition relief (Notice 2013-45) delayed the excise taxes until 2015. Under the final regulations (T.D. 9655), employers with 50 to 99 full-time and full-time equivalent employees generally will not be subject to either excise tax until 2016. Employers with at least 100 full-time and full-time equivalent employees will be subject to the excise taxes in 2015, but with additional transition relief to ease compliance.
The final regulations also extend several other transition rules, clarify which employees are considered full time and make many other rule changes.
Section 4980H was added to the Internal Revenue Code by the Affordable Care Act and applies to only employers with 50 or more full-time and full-time equivalent employees. There are two possible excise taxes, also called shared-responsibility payments, which apply depending on whether employers offer coverage and whether the coverage meets affordability and minimum value requirements:
- Coverage not offered to at least 95% of employees — Monthly excise tax equates to $2,000 per year, per full-time employee (minus the first 30 employees).
- Coverage offered to 95% of employees, but it does not meet minimum value and affordability requirements — Monthly excise tax equates to $3,000 per year, per employee who actually purchases coverage from a federal or state exchange and whose income is low enough to qualify for a credit.
Delay of excise taxes
The excise taxes under Section 4980H were initially set to apply beginning in 2014. The original transition relief offered in Notice 2013-45 provided that no excise taxes would be imposed until 2015.
The final rules now provide that employers with 50 to 99 full-time and full-time equivalent employees will not be subject to either excise tax for any month in 2015 (or for noncalendar plan years, for any month in 2016 that falls within a plan year that begins in 2015). To be eligible for relief, employers must certify that they have not reduced the size of their workforce to fall below the penalty threshold, or eliminated or materially reduced health coverage.
The excise taxes generally will apply to employers with 100 or more full-time and full-time equivalent employees in 2015, but with significant relief. Employers will not be subject to the excise tax for failure to offer coverage to at least 95% employees if coverage is offered to at least 70% of employees. In addition, if employers fail to meet the 70% threshold, they will be able to reduce the number of employees used to calculate the excise tax by 80 (the figure is 30 without the transition rules). If employers meet the 70% coverage threshold, but the coverage does not meet affordability and minimum value requirements, they will still be subject to the second excise tax.
Other transition rules
The final rules also extend the additional transition relief that was offered for 2014 under Notice 2013-45. This relief allows employers to:
- Calculate the number of employees based on a period of six or more consecutive months instead of a full year
- Delay compliance until the start of the plan year instead of the calendar year if using noncalendar plan years
- Delay offering coverage to employee dependents if taking steps in 2015 to start dependent coverage in 2016
Other important rule changes
The final regulations also make several important changes to the general rules. The IRS clarified the treatment of several specific types of employees, including rules that provide:
- Hours of service contributed by volunteers for a government or tax-exempt entity will not cause them to be considered full-time employees.
- Educational employees will not be treated as part-time simply because of limited summer operations.
Those employed in a position for which the customary annual employment is six months or less are generally not considered full-time (i.e., seasonal employees).
- Services performed by students on federal or state work study programs will not be considered in determinations of the number of full-time employees.
- Employers can calculate adjunct faculty hours by any reasonable and consistent method or use a safe harbor to credit 2¼ hours of service per week for each hour spent in the classroom to account for classroom time and time performing related tasks such as class preparation and grading.
The final rules, like the earlier proposed rules, allow employers to use an optional look-back measurement method to determine whether employees are full-time. This may be especially helpful for employees whose hours vary and seasonal employees.
The final rules retain the proposed rules’ safe harbors for determining whether the coverage an employer offers is affordable to employees. These safe harbors permit employers to use the wages they pay, employee hourly rates or the federal poverty level to determine whether employer coverage is affordable.
Significant reporting requirements are likely to be imposed for 2015.
Sections 6056 and 6055 impose reporting requirements on employers to assist in the implementation of Section 4980H and other health care provisions. These reporting requirements were set to begin in 2014, but Notice 2013-45 included transition relief delaying these requirements until 2015. The final rules under Section 4980H do not provide any additional relief, but the IRS said it planned to soon release final regulations under Sections 6056 and 6055 that will simplify reporting requirements.
The delayed effective date gives some employers more time to make decisions regarding whether to offer coverage to at least 95% of full-time employees. However, employers with at least 100 full-time or full-time equivalent employees will still have to perform calculations to see if they will owe an excise tax under the relaxed 2015 standard, and coverage still must meet requirements for minimum value and affordability. In addition, significant reporting requirements are likely to be imposed for 2015. Large employers should continue to consider whether changes in health care coverage are needed in order to avoid the excise taxes and, if so, whether to pay the excise taxes or make the changes to avoid the excise taxes.
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