When the Patient Protection and Affordable Care Act was enacted, the
exact requirements and regulations were left vague. The PPACA states
that “applicable large employers” are to offer their full-time employees
(and their dependents) the opportunity to enroll in an
employer-sponsored health insurance plan. This plan must provide
employees with “minimum essential coverage” with “minimum value” at an
affordable cost. The PPACA also states that if an employer fails to
provide the required coverage then the company will face “assessable
payments” that function like a penalty.

The PPACA required the IRS, along with the U.S. Department of Labor
and the U.S. Department of Health and Human Services, to provide
guidance on many of its vague provisions.

The IRS has now issued
proposed regulations (referred to as the “play-or-pay” rule) to address
the many questions that had not been previously answered and to provide
important transitional relief.

The AICPA (American Institute of CPAs), explains the IRS’s proposed regulations in a recent article.
We’ll examine these in a series of two posts. This post will look at
the proposed regulations that define applicable large employers and
employees, those that explain how to determine full-time employee
status, and those that define dependents. In a second post, we’ll look
at the proposed regulations that outline the assessable payment rules,
those that define affordability, those that define controlled-group
issues, and those that outline transition rules.

Employers and Employees
The proposed regulations define
“applicable large employers,” as employers that in the prior calendar
year employed on average at least 50 full-time employees and/or their
equivalent in part-time, temporary, seasonal, or other non-full-time
employees. For each month in the prior calendar year, the employer would
add the number of full-time employees (employed an average of at least
30 hours per week or 130 hours per month) plus full-time equivalent
employees (FTEs). To obtain the number of FTEs, the employer determines
the total number of hours of service performed in each calendar month by
all non-full-time employees (up to 120 hours for any employee) and
divides that number by 120 (retaining any fraction for the month but,
after adding to full-time employees for each month and averaging the
monthly totals for the year, rounding down to a whole number).

For 2015 and on, this determination would be made on a lookback
basis. Under the proposed regulations’ transitional rule for 2014,
employers may use a period of at least six consecutive months in
calendar 2013. An employer is not considered an applicable large
employer if its full-time employees and FTEs exceeded 50 for no more
than 120 days during the calendar year and the employees in excess of 50
who were employed during that period were seasonal workers.

Sec. 4980H applies to all common law employers, including government
entities, tax-exempt organizations, and churches. The proposed
regulations define an employee under the common law standard described
at Regs. Sec. 31.3401(c)-1(b) and an employer under the common law
standard described at Regs. Sec. 31.3121(d)-1(c). So, a sole proprietor,
a partner in a partnership, and a 2% S corporation shareholder are not
considered employees.

Most employee-benefit-related items in the Code include leased
employees, as defined in Sec. 414(n), within the definition of employee.
However, Sec. 4980H does not cross-reference Sec. 414(n). So, leased
employees who are not common law employees of the recipient employer are
not employees for the purposes of defining an applicable large employer
or determining the number of employees when computing a recipient
employer’s assessable payment. Of course, if these individuals are not
employees of the recipient employer, that means the leased employees
will be the employees of the employee leasing company.

In the cases of foreign employers with a U.S. presence and foreign
employees of U.S. entities, hours of service generally do not include
those worked outside the United States. This rule applies regardless of
the residency or citizenship status of the individual.

Determining Full-Time Employee Status
Most employees are
easily categorized as either full-time or not full-time. Some are not so
easily categorized, however: those employees with variable work hours,
rehired employees, seasonal employees, and employees who had a change in
employment status. The regulations instructing how to determine
full-time employee status are complex, but generally provide that an
employer may adopt a measurement period of no less than three and no
more than 12 months to determine whether a variable-hour employee is a
full-time employee. The definition of seasonal employees will be
addressed in the future. In the meantime, employers may apply
reasonable, good-faith interpretations of the definition of seasonal
workers under Sec. 4980H(c)(2)(B)(ii).

Dependents
The proposed regulations define an employee’s
dependent as the employee’s child (as defined in Sec. 152(f)(1)) who is
under 26 years old. So, the term “dependent” does not include an
employee’s spouse or any other person.